Free Money Finance

Dorothy in Taxland: Overview

The following is a guest post from Marotta Wealth Management. Many issues discussed here are reasons I use a CPA.

Many people who use tax computation software don't understand the changing structure of the U.S. tax code. They fill in the blanks, click Compute and pay the tax. Then they forget about the torture until next year.

Into this dark forest of the tax code, we throw college students and recent graduates. It is almost a rite of passage, better likened to a fraternity hazing than a step into adulthood.

The byzantine rules and regulations of the tax code are carefully crafted to cover up just how much we pay each year. In other words, tax laws are obscure by design. While you are busy trying to translate word problems written in Taxglish, you don't realize the IRS is asking all the wrong questions. Like Dorothy in the field of poppies, you can't seem to stay awake long enough to realize the danger.

A professional tax expert can help you get the correct deductions. But he or she likely won't motivate you to keep the right records unless you understand the benefits for yourself.

The three basic ways to reduce your tax burden are above-the-line deductions, below-the-line deductions and credits. The line in this case is your adjusted gross income (AGI).

Each method is used in one of the four general formulas on the 1040 tax form.

The first formula is "Gross income minus above-the-line deductions equals your adjusted gross income (AGI)."

Above-the-line deductions are subtracted from your gross income to compute your AGI. Therefore, they reduce your AGI, which also lowers your taxable income.

Above-the-line deductions are more common if you are self-employed. But if you are not a small business owner, there are still above-the-line deductions you can take such as stock losses up to $3,000, IRA contributions, student loan interest, moving expenses, alimony and several other items.

Payments to your Health Savings Account (HSA) can also be deducted above the line. In 2010, the family limit is $6,150 in tax-free contributions. One of every 10 patients consumes 69% of health-care costs. The other nine would benefit from an HSA.

The second formula is "AGI minus deductions equals your taxable income."

Below-the-line deductions are more uncertain. Like many items in the tax code, whether they will reduce your taxes depends on many factors.

You can either itemize your deductions or you can take the standard deduction, whichever is greater. For 2010 the standard deduction is $5,700 if you are single and $11,400 if you are married. And whether you itemize or not, you can take additional personal exemptions of $3,650 each.

Home ownership is the most common way to boost your deductions above the standard deduction. The IRS allows home owners to deduct their interest payments each year. If your home mortgage is at 6% and your payments are mostly interest, most of your mortgage is tax deductible. If your marginal tax rate is near a third, the government is paying 2% of your interest, and you are only paying 4% of your interest. For most middle-class families that results in a large tax savings.

If home ownership alone doesn't make itemizing worthwhile, your state and local taxes (including personal property taxes) along with any charitable deductions may push you over the top. Alternatively, if you have high medical expenses that exceed 7.5% of your AGI, you can deduct them as well.

In the third formula, after looking up your taxable income, you compute your total tax. Two different methods are used, and the higher of the two must be paid.

The first method uses the traditional tax tables. The second uses the Alternative Minimum Tax (AMT).

The AMT method of computing tax owed undoes many of the deductions you took in previous steps and turns much of traditional tax planning upside down. Increasingly middle-class families are hit by the AMT, whereas upper-class families pay such a high tax rate already, they are unaffected.

The fourth and final formula is "Total tax minus payments equals the amount you owe or have overpaid."

The critical part of this formula is that payments include not only the money you have given the government but also any tax credits you are eligible to receive.

Deductions only reduce the amount you are taxed on. One dollar of deduction might only be worth 35 cents in tax savings. In contrast, tax credits are a dollar-for-dollar reduction in your tax bill. And some tax credits are refundable. That could mean the government ends up owing you money you never paid in the first place!

Thus tax credits are much more valuable than tax deductions. But most people fail to claim all their legal tax credits and miss opportunities to gain some real wealth redistribution.

Investment management is central to building wealth. But comprehensive wealth management includes tax management as well. A proactive CPA is another essential component of the team. CPAs do more than just fill out your taxes. They may charge a little more, but they can earn their fee multiple times over.

Money Math: Tax Impact

Money magazine has five short money math tips in its January issue and I'll be sharing/commenting on them over the next few days. Here's one for today:

How much do I need to earn, before taxes, to buy what I want?

The math: Multiply the cost by 1.4. (That assumes a 28% federal tax rate.) To pay for a $10,000 home theater, you must earn $14,000.

Ouch! The tax man certainly has an impact here!!!

I also like to look at this question from a "how much time did it take me to earn this?" For instance, if you make $20 per hour, it takes you five hours to buy something worth $100. Whether or not purchasing something specific is or isn't worth five hours of your life is then for you to decide.

What the Presidential Candidates Want to Do with Income Taxes

Following up on my post titled Taxes and the Leading Presidential Candidates, I wanted to share this CNN Money story on what the candidates have to say specifically about income taxes. I can't include all the things each one is proposing, but here are the highlights:

• Clinton: Has proposed allowing portions of the Bush tax cuts expire for those making more than $250,000 while preserving them for everyone else. In addition, she would reduce certain tax exemptions for those making more than $250,000. Has also suggested limiting the amount of tax-free compensation high-income employees receive from their employers to help pay for health insurance.

• Obama: Wants to eliminate income taxes for seniors making less than $50,000. Favors letting the Bush tax cuts expire for those making more than $250,000.

• Edwards: Would repeal the Bush tax cuts for households with more than $200,000 in income.

• Giuliani: Favors making the Bush tax cuts permanent and lowering corporate tax rates. He has indicated he may like to lower marginal rates further. When it comes to the AMT, Giuliani has said he would index income exemption levels to inflation to protect middle-income families from being subjected to the "wealth" tax, which disallows a number of popular tax breaks that are used under the regular income tax code.

• Romney: Has said he favors making the Bush tax cuts permanent and lowering corporate taxes. He has also promised to oppose any effort to increase taxes as president. He also has proposed eliminating the tax on interest, capital gains and dividends for taxpayers with adjusted gross incomes under $200,000.

• McCain: Has called for a simpler, fairer tax code and favors eliminating the Alternative Minimum Tax. He also has said he will work to keep taxes low and supports making the Bush income and investment tax cuts permanent.

• Thompson: Has proposed making permanent all of the Bush tax cuts, abolishing the alternative minimum tax and the estate tax, and lowering corporate income tax rates. He also has proposed giving taxpayers a choice: to pay under the regular federal income tax code or to opt for an alternate flat-tax system.

• Huckabee: Supports getting rid of the income tax system and replacing it with what's been dubbed the "Fair Tax." That tax would raise federal revenue by way of a national sales tax. That is, you would pay federal tax on what you spend rather than on what you earn, save or invest.

The new information here for me was Thompson's idea of two ways to pay your income taxes. I hadn't heard of that proposal previously.

The piece also contained a few more details on Huckabee's "fair tax" that was discussed so much in the comments of my last post:

All taxpayers would receive a monthly check equal to the amount of tax someone at the poverty line would pay. That would ensure no one pays tax on essentials and protects those living at or below the poverty line from paying taxes. For everything else you purchase, you would end up paying what works out to be a 30 percent tax on top of the price. So for something that costs $1 you would pay $1.30. That extra 30 cents represents 23 percent of the final purchase price ($1.30), which is why you will hear Fair Tax proponents say that the tax rate under the Fair Tax is just 23 percent.

In any case, some analyses of the plan suggest that in order for the Fair Tax to raise as much revenue as the current tax system, the sales tax rate would have to be considerably higher.

For me personally, the "fair tax" would probably be a windfall. I'm a fairly frugal person relative to my income, so my taxes would likely drop by a pretty good measure. Then again, from what I understand, there's no itemizing with the "fair tax" (because their is no filing -- you pay as you buy), so maybe it wouldn't benefit me (I have some decent deductions for charitable giving.) I guess I'd have to see the details before I knew if it was a good deal or not.

But the principle seems fine with me -- tax people on what they buy/spend/consume, not what they make. I know, as we've said before, there's often not much difference between what people make and what they spend, no matter the income level, so maybe it won't matter that much. But I do like the idea that saving (less consumption) is rewarded. In addition, I'd guess we'd get rid of much of the IRS and many accountants/lawyers, saving the taxpayers (IRS) and me (accountant) a good amount of money.

But really, does anyone think this idea has a shot politically? I'm thinking "no way."

How to Calculate What You Should Withhold

I've suggested more than a few times that you shouldn't give the government an interest-free loan but instead should set your W-4 deductions to a level where you get back very little of the federal income tax you've paid in each year. Wondering how to do that? Yahoo has some suggestions for calculating deductions on form W-4:

An allowance on Form W-4 is the equivalent of approximately $3,500 in tax deductions or around $1,000 in tax credits. If you came up with nine allowances, you should be expecting to have around $31,000 in deductions or an equivalent amount in credits (such as credit for a child under age 17). Your deductions and credits may actually be lower if you had excess withholding in the year.

The article also links to a calculator, so if you want a little more help, it's there.

Now is a great time of the year to consider changing your W-4 so you have the correct deductions and only pay the government what you owe them -- no more.

How Shrewd Investors Save on Taxes

This article is courtesy of Marotta Asset Management and discusses saving on taxes by giving appreciated stock. I do this, as I've detailed in A Great Way to Change Your Portfolio.

When you're building wealth, saving a penny on your taxes is just as important as earning a penny in the markets. You can use both investment losses and investment gains to good tax advantage.

For example, in November some U.S. stocks experienced a significant drop. Disciplined investors use these declines to save on their taxes and rebalance their portfolios.

But most people are loss averse. Selling an investment for a loss feels like failure. So they hold on and wait for it to come back up before they sell. It doesn't matter if another investment might appreciate faster and recover the loss more quickly. Their reluctance to sell is even more pronounced when the investment was purchased recently. In taxable accounts, however, investors must overcome this loss aversion and learn to realize capital losses whenever possible.

The stock market normally appreciates over 10% each year. Any investment you hold for a few years will probably have a satisfying capital gain. The only investments you are likely to be able to sell for a loss and deduct on your taxes are recent purchases. Be quick to sell your capital losses in taxable accounts and reinvest the money at a lower cost basis going forward.

The difference between what you paid for an investment and its current worth is called a "capital gain" or a "capital loss." As long as you continue to hold the investment, the gain or loss is "unrealized." Selling the investment means "realizing" the gain or loss, which you must report on your taxes.

Realized capital gains are commonly taxed at a reduced 15%. Realized losses can offset realized gains, but you are also allowed to deduct up to $3,000 of capital losses against other types of income. If you have net losses in excess of $3,000 in one year, you can carry your losses forward to future years.

Now is a good time to review your portfolio for investments you can sell for a loss. Use software to track your investments. Even a simple spreadsheet can compute the current value minus the cost basis of each investment. Consider any significant losses for tax-loss selling.

Ask yourself, "If I did not own that security now, would I buy it at current prices?" If the answer is no, sell. If the answer is yes, sell it anyway. Then wait 31 days and buy it back. That way you "realize" the loss for tax purposes and still hold the security. And you have reduced your tax liability by sharing that loss with Uncle Sam.

Another technique is to double up. First, purchase the same number of shares you currently hold in that security. Wait 31 days. Then sell the original shares for a tax loss. Waiting a month between the sale and the buyback avoids a "wash sale," which would prevent you from taking the tax loss.

Most investments (stocks, bonds, mutual funds) are subject to the same tax rules, but owning individual stocks provides additional tax-loss selling opportunities.

Compare two millionaire investors. The first buys $1 million of a mutual fund that invests in 200 different stocks. No stock represents more than $10,000 of the investment, and the amount invested in each stock is $5,000. Although the mutual fund might have a tame 10% return for the year, one of the underlying stocks in the fund might have doubled and two others lost 50% of their value during the year. But this investor only owns shares in the mutual fund, and he cannot take advantage of any tax-loss selling.

The second millionaire buys all 200 as individual stocks. Her overall portfolio also has a tame 10% annual return, but she has additional choices that help boost her earnings even higher. She can sell the two stocks that have a 50% negative return and take the loss on her taxes. By selling the stocks with losses, she realizes their loss for tax purposes. By not selling her stocks with gains, she avoids realizing those gains and therefore is not required to pay any capital gains taxes.

Selling investments with losses can reduce your taxes, but you can also save on investments that have gone up by using appreciated assets for your charitable gifting.

Many Americans donate to charities in December. No matter what worthy organizations you support, you can contribute up to 15% more if you give appreciated investments instead of cash.

For example, if you sell $1,000 worth of appreciated stock, you most often pay capital gains tax of 15%. If most of the stock's value is appreciation, the tax burden approaches $150, leaving only $850 for charitable giving.

But if you give the stock directly to the charitable organization, you can take the full $1,000 tax deduction, and the organization will not have to pay any taxes when it sells the stock. You could save up to $150 on capital gains taxes, and the gift itself reduces your taxes at your marginal rate. In total, your $1,000 gift could cost you $500 or less if you use appreciated stock!

Here's how to do it:

1. Ask your financial advisor to choose which stocks are best for charitable giving (probably those that have appreciated the most and you do not want to continue holding in your portfolio).

2. Determine the amount of each charitable contribution. To compute how many shares of stock to give to each charity, divide the current price of the stock into the amount you wish to donate. The number of shares will not work out exactly, so you may need to round up or down.

3. Call the designated charities and ask for their "stock liquidation brokerage account." Nearly every organization has one expressly for this purpose. You may like to give anonymously and without fanfare, but you only have to request this account number once.

4. Instruct your brokerage firm to transfer the correct number of shares from your account into the charity's stock liquidation account. You can fax this request directly and then send the original by mail.

5. Save these letters and account numbers for next year's charitable giving.

6. Report the gifts to your tax accountant. Stock gifting is deductible at the fair market value, that is, the amount the stock was worth at the close of the day it was transferred. The stock may change value after you have transferred the stock but before the charitable organization sells it. These changes do not affect your tax deduction, but it may mean the charity reports a different amount than you must declare on your tax return.

Giving appreciated stock is a great way both to reduce your taxes and to give more generously to worthy charities.

Make Your Charitable Deductions Before the End of the Year

The members of the Money Blog Network are posting their various suggestions on what money-related steps should be taken before the end of the year. Here's mine:

Make your charitable deductions before December 31.

I don't know if it's the holiday season, the looming tax man next year, or a combination of the two, but for some reason, December is a huge month for charitable contributions:

Nationwide, charities draw half their donations during the holiday period, according to Charity Navigator, an online service that evaluates nonprofits.

The piece above seems to indicate that taxes drive a lot of the giving. For instance:

"Typically, I will get a call from a client when they realize they have a big tax liability, and they want to know what they can do," Wolfe said. "There's not a lot you can do in the last few months."

Personally, I have my giving budgeted at the beginning of the year and I'm usually a bit ahead, so I just "top off" in December. But this year I'm way ahead and was done in November (FYI, here are some charities I support and I also like this idea). Why? Because I've been giving in chunks to avoid capital gains taxes and change around my portfolio -- something you can do as well (by giving appreciated stocks.)

But if you still have some to give this year and want to either avoid taxes or simply help out those who are less fortunate, be sure to get those donations in by December 31 so you can claim them on your 2007 tax returns.

Here are some more end-of-year thoughts from the other Money Blog Network members:

• Time to Rebalance Your Portfolio

• Jump Start Your Debt Reduction Using Christmas Gifts and Year End Bonuses

• Paycheck and Withholding Calculators for Year-End Money Moves

• Grab Some Year End Bargains

• Clearing Out Your House For Fun and Profit

• Use Your Flexible Spending Account Before It’s Too Late

• Dumb Year End Money Moves

For more thoughts on giving from me, see these links:

• Spontaneous Versus Planned Giving

• Why Do Poor People Give More?

• Does Giving Help Make You Wealthy or Are You Wealthy in Spite of Giving?

Help a Reader Decrease Real Estate Taxes

Here's a reader question left as a comment on my post titled The Inside Scoop on Getting Your Property Taxes Reduced:

My wife and I purchased a house with a restrictive covenant. Specifically, one of its owners must be employed by the local university (Duke, in Durham, NC) or one of its associated hospitals. Because this leads to a smaller pool of potential buyers, we got the house at a good price for the neighborhood ($325K). However, it has just been appraised by Durham County at $411K. This is a fair price for a similar house in our neighborhood, but we would, of course, not be able to sell it at this price due to the restricted pool of buyers. My question: Is this grounds for an appeal?

I think it would be since the restrictions on the house impact it's value. But I'm not an expert on the subject. Anyone out there with a more informed opinion?

Taxes and the Leading Presidential Candidates

Every time I post about politics and money, I get even more negative comments than I do when I post about religion and money. Maybe it's because many people blow off the latter while there seems to be a special intensity around politics -- especially in the past several years.

Many decry the fact that personal finance has nothing to do with politics. I disagree with that completely. For most Americans, taxes (income, sales, state, real estate, Social Security, and on and on) are their #1 expense,. So, of course, politics and personal finance are related since politics and taxes are related. So with that said, I'm posting on money and politics again -- this time highlighting a CNN Money article (note it's a CNN MONEY story, not just CNN story) on what the leading presidential candidates are proposing regarding various taxes.

You can go to the article itself and sort through it if you like, but I'm just going to leave some general thoughts on what I got out of it. (Note: I am NOT endorsing any particular candidate.) Here goes:

1. There are so many proposals and thoughts on the subject that it's overwhelming -- and difficult to tell the impact of most of these on the country as well as the average citizen. In addition, most (if not all) of the plans are short on details and we know that the devil is in the details. However, it's good to see that there's some creativity going -- at least in some areas.

2. This issue particularly struck me:

Huckabee: Has called for the elimination of the income tax system and for a consumption tax to take its place. Under his plan, you would be taxed on what you buy, not on what you earn or save. So there would be no investment taxes.

Really? This is the first I've read of this proposal -- I must have missed it somehow. Not sure how, but anyway, this seems to be an interesting thought. I've had several readers comment in favor of this sort of tax, but I'm wondering if it's really practical. Could the U.S. ever eliminate the income tax system and go to a consumption tax? Again, the devil is in the details and there are probably more details that need to be worked out with this plan than with any other.

3. I was pleased to see that most of the candidates were addressing the health care insurance issue through tax incentives, not through establishing some sort of national health care program similar to Social Security (where the government runs the show.) I know some of you disagree with me on this one, but I think having the government handle more and more parts of our daily lives is wasteful and inefficient (and in some ways scary.)

4. Looks like they are all in favor of either raising or eliminating the estate/death tax. We were just talking about this issue the other day.

5. My final conclusion is that they all have some sort of idea what they'd like to do, there are many details left to work out, and, in the end, much of it depends on Congress (and its interests), not just what the president wants. It will be interesting to see how things unfold, how much of the winner's plan actually gets implemented, and, of course, how it all impacts our own personal finances.

The Inside Scoop on Getting Your Property Taxes Reduced

Here's a great comment left on my post titled One Positive of the Housing Decline that I thought you all would want to see:

My wife is a property tax assessor for our county, as well as a licensed appraiser at the state level. In our state, residences are reassessed every 3 years. The process is known as a "mass appraisal" because it has to be done at the neighborhood level (note that several "subdivisions" can make up a neighborhood. Quality of construction, square footage, land, and additions are some of the factors taken into account.

I don't recall the exact numbers, but in these mass appraisals, the goal (and state law) is that something like 90% of the homes should be within 10% of their "market value", that is, the price that the market would support if the property were sold in an arms-length transaction. In a year where market values are down over a three year span, the valuations of those homes being reassessed will be down. In a year where the market values are up over a three year span, the assessments will go up.

Also, due to the "average" nature of the mass appraisal, the chances of a property being undervalued are about the same as a property being overvalued. Of course, you don't hear of many people appealing their undervaluation. ;-)

While beastlike is correct about the budget being arrived at before tax rates are set, the assumption that the dollar amount of your taxes remains the same only applies if everyone in the county appealed their valuation when home values in the area drop.

The law is a bit tricky on this point -- Any property owner is required to file a "return" (think income tax return) each year during a certain window. This return simply allows you to state what you believe the property to be worth. The county can either accept your value or reject it. If they reject it, you have the right to appeal. If you do not file a return, the county's previous assessment becomes your automatic return. In essence, by failing to file a return, you are saying that you agree with the previously assessed value.

However, those homes that are up for their three year reassessment will be assigned a new value, and the property owners notified of the new assessment. These owners (one-third of the county each year) have the right to appeal their reassessment.

If you (a) did not file a return or (b) were not reassessed, then you have NO rights to appeal. This is the important part, at least in our state, and I would assume many others. If you believe the value of your home has dropped since your last assessment (or you believe a previous assessment was overvalued), FILE A RETURN. Otherwise you are stuck.

Mistakes made in square footage, additions, land, etc. are pretty much always corrected IF the process above is followed. If you come to an assessor after the windows have passed, their hands are pretty much tied. The values have been passed on to the county board at that point, and the budget will be set based on those values. The assessors cannot modify them after that point unless you filed a return (with a different value) or were reassessed in that year.

If you filed a return or were reassessed, and believe that you could not sell your property for the amount that you are assessed for, then you need to support that with reasonable comparisons of nearby, equivalent, arms-length transactions for the time period being appealed. For every appeal, my wife will research nearby transactions and see if they support the property owner's numbers. If they do, then she will go ahead and modify the assessment accordingly. It's understood that some percentage of the properties will be overvalued due to the nature of mass appraisals, and it's her responsibility to change these when they are brought to her attention.

Do NOT bring comparisons that are unrelated to your property--A father selling to a son, a foreclosed home, homes too far away from yours, vastly different square footages, vastly different acreages, etc. You are looking for comparisons that are "similar" to yours.

You can always sit down with the assessor and ask them for their comparisons. If you disagree with their comparisons, then you can appeal to the next step, in our state the Board of Equalization for the county. I would guess that your chances here depend on the quality of the assessor. If they know what they are doing, it's going to be hard for you to come up with better comparisons that convince the board that your valuation is better. For instance, my wife's valuations have been accepted over the property owner every single time in the last two years of appeals (about 40-50). Of course, she's also one of the few county assessors who is also a licensed appraiser.

If you lose before the Board of Equalization, you still have another option--you can appeal to the Superior Court. At this point there is a filing fee ($80?). My understanding is that the county attorneys do tend to settle a lot rather than go to court.

All said, it's going to take a lot of time and effort to argue an assessment that's close to the real value. If there are obvious mistakes, then you should absolutely appeal to have them corrected (make sure you file a return in order to do so). If you believe there is no way that you could sell the property for what the county's assessed value, then take that case to the assessor -- Chances are good that they will make the modifications if your numbers are reasonable. This is going to be the most likely course of action in this "down" market that we are currently seeing in most areas.

Regardless of what state you are in, now is probably the time to educate yourself on the process you need to follow next year to make sure your value is correct.

Estate Tax or Death Tax?

We've discussed before my hatred for all things tax-related, but let me clarify a bit. It's not so much that I dislike paying taxes. In fact, I'd be totally fine paying taxes if one thing would occur -- the government would spend those taxes wisely without wasting a good percentage of them. Paying taxes is like pouring water down a drain. Yeah, some good happens (the drain gets cleaned and is kept functioning), but so much is wasted. If I had a kid like the government, a child who wasted as much as they do, I'd cut him off. Why give money to someone who's going to blow a ton of it on nothing? But I digress.

Today I'd like to highlight one of my least favorite taxes, the estate tax (that's what people who like it call the tax, most others call it the "death tax.") Anyway, CNN has a piece on how Warren Buffet is in favor of the estate tax. This is a fairly easy position for him to take since 1) he probably has several ways to shelter much of his assets from estate taxes and 2) 50% of ninety ba-zillion dollars still leaves his heirs as ba-zillionaires.

Buffet gives several of his thoughts on estate taxes as follows:

Buffett said he would raise the amount of estate assets exempt from the estate tax from the current level of $2 million to $4 million and end up with a top rate higher than 45 percent.

But, he said, he'd put in a more gradual slope in rates in terms of how heavily assets above that $4 million are taxed. He also indicated he might include an exemption for small family-owned businesses so that they wouldn't be forced to sell off assets to meet their estate tax bill.

Buffett also said it was important that estate-tax laws be clear and consistent rather than having exemption levels and rates change each year. "I wouldn't have the capriciousness of the 1-year this and 1-year that. ... I don't think people should have to guess when they're going to die."

Ok, I'm fairly "ok" with these thoughts, though personally I don't like the death tax. Why? My main issue is that it's double taxation. The government has already taxed the assets (or at least most of them) that are passed on -- why tax them again? I know -- the first tax was on the owner and the second was on the recipient. That's a clever argument, though the point remains the assets themselves are double-taxed.

The piece also includes this little bit:

Committee Chairman Max Baucus (D-Iowa) noted that the committee would be dealing with the issue of tax reform "aggressively" next year and asked Buffett for his views on how the tax code should be reformed.

Buffett noted that he thought the code should be more progressive - meaning those who make more should pay even more than they do now relative to those who make less. "We ought to do more for [low-income Americans] and take more out of the hides of people like me."

Oh yeah, that's a GREAT idea. Let's give even MORE to the government to waste. Let's give even less incentive for people to work hard, get ahead, employ more people and the like. After all, once high earners see that so much of their extra income is going to taxes, what's to keep them motivated to work more? Not much.

Yeah, I guess I'm getting more cynical as I get older. The topic of taxes does that to me -- especially the estate tax.

The reason I started this post was to ask you all what you think of the estate tax. Is it fair? Should it be repealed or maybe increased?

How to Kill a State

Ok, I've had enough. I don't usually get very political, but I'm fed up. I have to vent.

Michigan, the state with the worst senator in the U.S. Senate, now adds the worst governor in the 50 states to its list.

For those of you who haven't been following Michigan politics, let me summarize the past few months for you:

1. The economy isn't that great here. Think "big 3 automakers" and you'll know why.

2. The state was facing a HUGE deficit this coming year and needed to do something about it. The classic "raise taxes" versus "cut spending" debate ensured. I think you can guess which side I was on.

3. The Governor wanted higher taxes and took the state up to (and into for a few hours) a shutdown to get what she wanted. Income taxes went up as well as some taxes on business services. And more business taxes appear to be on the way.

So here's my question: Does our governor really think that raising taxes is making Michigan MORE attractive to workers and employers? If she does, she's certainly smoking something that's probably not legal.

I had a conversation on this issue with the owner of our company the other day. depending on where the business taxes net out, he may decide to move the company to another state. The increased taxes are so much that avoiding them could pay for us to move to another state. I'm sure this isn't the outcome that our Governor is expecting, but it's the one that she'll get as the result of her actions.

Now the Governor and her supporters will argue that there's nothing left to cut/change -- that we HAD to raise taxes. Really? How about thinking creatively, Jennifer? But no, that would cost you votes among state-employed prison workers, wouldn't it?

Ok, so what's my point? Why the rant? A few reasons:

1. I hate it when any government simply solves its problems because it can raise taxes. Do people do this? No. We have to make hard choices with our finances -- cutting spending and doing without things. Why can't governments do this?

2. We're going to face this same issue nationally in less than a year. So which do we want -- higher taxes and more government services (such as health care) or lower taxes and less government involvement and spending? I would like the latter.

3. (Ok, a bit political here.) One of the biggest disappointments I've had with President Bush is his lack of fiscal control. Pull the war out of the equation -- even without it I think he would have been way over budget in most if not all of the years he's served as president. This is contrary to how he portrayed himself and contrary to the principles his party stand for. At least theoretically. I'm beginning to think that ALL politicians are simply in it for themselves. Jaded, I know, but look at the actions of these people. What else am I supposed to think?

One Positive of the Housing Decline

Though it's a hollow consolation, here's the bright side of the housing decline: if your house is worth less, it's likely that you owe less property taxes. That is, if your local government is accurately reflecting market conditions and updating their records. Unfortunately, they aren't too excited about doing this since it will decrease the amount of revenues they earn. So, I'm guessing they'll simply keep most assessments the same or offer a token decrease (like I got last year.) Well, if you think you deserve more of a break (and many people will based on what's happening in the housing market), you can challenge your bill. And while only 2% of people do challenge their assessments, Business Week says that 33% of challengers win their appeals.

Business Week gives some advice on how to challenge your property assessment:

Experts advise taking one of three approaches. The simplest is to find evidence that the local tax assessor made a mistake when evaluating your property. Since many communities rely on drive-by inspections, this isn't a far-fetched argument. Perhaps the assessor assumed your home had more bedrooms, bathrooms, or improvements, such as a finished basement or attic, than it actually does. A second way to get your assessment trimmed is to marshal property-tax records to prove that homes similar to yours carry lower valuations. You may also have grounds for an appeal if you can show that the type of real estate you own--a condo or luxury home, for example--has failed to keep pace with the local market.

I'm not sure what I'll do this year, but I'm keeping a close eye on the issue. I'm thinking of having my real estate agent give me an estimate of what my home will sell for and use that as evidence in a possible tax assessment challenge.

Anyone done this (challenged their property tax levels)? What happened?

Facts on Income Tax Payers

I found this article from Kiplinger's fascinating. It's on taxes and who pays what. here are the parts I found especially interesting:

• New data show that an income of $30,881 or more puts you in the top half of the class. Earning about twice that much -- $62,068 -- earns you a spot among the top 25% of all wage earners. You crack the elite top 10% if you earn more than $103,912.

• And $364,657 buys top bragging rights: Earn that much or more and you're among the top 1% of all American earners. Together, the top 1% earn a full 21% of the income reported to the IRS -- far more than the 13% of total income reported by the bottom 50% of earners.

• Here's another powerful statistic about the top 1% of earners: They pay a whopping 39% of all federal income taxes. The bottom 50% pay just 3% of all income taxes.

A few thoughts here:

1. Wow, $31k puts you in the top half of all earners? Yikes! There are a boatload of people not making very much -- even when you factor out students and those living on Social Security.

2. Earning $100k puts you in a pretty good position still. I remember when a "six-figure-income" was what everyone strived for but I thought it had lost a bit of its glamour just like becoming a millionaire has. It probably has lost a bit of ground, but still, it puts you in the top 10% -- not bad. (And, by the way, being a millionaire, while more common, also puts you among the elite in terms of net worth.)

3. The bottom 50% only earn 13% of the total income. Seems like the gap between rich and poor is growing.

4. 50% of the population lives in the U.S. and gets all the government services for free basically (yeah, they kick in 3% so they do pay some.) That is simply astounding to me -- half of all people pay virtually no taxes whatsoever. I'm starting to see why some people say they don't give because they "give" to help others in the form of taxes. (No, I don't buy this argument, but I can see where it's coming from when looking at these numbers.)

Funny Sayings about Taxes

I recently received a newsletter from a friend and it contained some funny sayings about taxes that I thought many of you would enjoy. Here they are:

• "Worried about an IRS audit? Avoid what's called a 'red flag.' That's something the IRS always looks for. For example, say you have some money left in your bank account after paying taxes. That's a red flag." Jay Leno

• "The Internal Revenue Code is about 10 times the size of the Bible -- and unlike the Bible, contains no good news." Don Rickles

• "We contend that for a nation to try and tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." Sir Winston Churchill

Roth Conversions Can Help Build Wealth

Here's a piece courtesy of Marotta Asset Management that discusses the advantages of converting to a Roth IRA.

If you don't have retirement savings in Roth IRAs, it's time you considered the benefit of these tax-savings accounts. The long-term tax savings opportunities are driving more Americans to rollover various retirement funds into Roth accounts. These so called "Roth conversions" can be performed on traditional IRAs. And, beginning in 2008, it will be easier to roll money from an employer plan into a Roth IRA.

But first, you may be wondering what's so great about Roth IRAs. Roth IRA contributions are always made with after-tax dollars. That's right; you won't get a tax deduction for contributing. However, the principle grows tax-free and the account holder may make tax-free withdrawals at 59 1/2. Furthermore, there are no required minimum distributions for a Roth, which makes them ideal for funding the latter years of retirement.

Conversely, a traditional IRA allows before-tax contributions to grow tax-deferred, but not tax-free. So, although you can usually deduct your contribution to a traditional IRA, you pay ordinary income tax on the withdrawals. Furthermore, the IRS will require you to take minimum distributions, whether you need the money or not.

However, Roth IRAs may not provide tax savings for everyone. Remember, contributions to Roths are made with after-tax dollars whereas traditional IRAs are made with pre-tax dollars.

Roth IRAs provide tax savings for individuals who expect to be in a higher tax bracket later in life. The tax benefits of a Roth are created by the tax disparity between your tax bracket when you put your money in versus your tax bracket in retirement. The lower your tax rate, and the longer you have until retirement, the more likely a Roth conversion will play in your favor.

Imagine John, age 60, owns two traditional IRA accounts. Each is funded with $5,000. Let's assume he keeps the $5,000 in one IRA. But with the other, he uses some of the funds to pay the taxes due and then converts it to a Roth. Assuming John remains in the same tax bracket and the accounts deliver the same return on investment, each account will generate the same spending money in retirement, after taxes are paid on the traditional IRA. If John drops into a lower tax bracket after his retirement, the traditional IRA would have been the better bet. But if John's taxes rise, the Roth IRA proves to be the better option.

Guessing your future tax rates is nearly impossible. Traditionally, it was thought your tax rate in retirement would be less than when you were working, but this is increasingly not the case. Tax rates are not adjusted for inflation, so many retired couples continue to creep into higher tax brackets. Also, tax rates are at a historic low and likely to rise if the political winds change.

If you expect to see your tax bracket increase significantly - from say, 15% to 25% - you will likely benefit from a Roth conversion. This is true for younger workers and also for new retirees. In the early retirement years, many couples dip into a lower tax bracket just after retirement but before Social Security checks start arriving.

Before you rush off to begin your Roth conversions, be sure you have enough money to cover the tax bill. During a conversion, you'll withdraw funds from your traditional IRA, report the funds as income, and roll them over to a Roth IRA account. The tax implications from the conversion will vary based on whether you took a deduction on the principal. If you deducted your IRA contributions, you'll have to pay taxes on both the principal and the earnings. If you didn't, you'll just pay taxes on the earnings. I say 'just,' but either way, this could be a big bill.

The good news is you can withdraw funds from your traditional IRA and convert them to a Roth without incurring the 10% early withdrawal penalty.

You'll also have to pass an income test. Until 2010, income limits do apply. Only joint and single filers with a modified adjusted gross income of $100,000 or less can qualify. After 2010, the income restrictions on converting funds from a traditional IRA to a Roth IRA will disappear completely.

Traditional IRAs, SEP IRAs and SARSEP IRAs are subject to the same conversion rules. Until 2010, you'll have to pass the income test to qualify.

SIMPLE IRAs can also be converted to Roth IRAs, if you participated in the plan for more than two years. SIMPLE IRA account holders are not subject to this rule if they are over 59 1/2. The income test of $100,000 or less (no requirement after beginning in 2010) still applies.

Keep in mind there are more ways than one way to get funds into a Roth IRA. Although conversions from a traditional IRA to a Roth are common, funds in employer sponsored plans – like 401k, 403b and 457 plans - can also be rolled over to a Roth.

In 2007, rollovers from an employer plan cannot go straight to a Roth IRA. Instead, you'll first have to rollover funds into a traditional IRA. Once in the IRA you can immediately do a Roth conversion. But thanks to the Pension Protection Act of 2006, it will soon be easier to convert your retirement savings to a Roth IRA. Beginning in 2008, funds from your employer sponsored plan can be directly rolled over into a Roth IRA.

However, don't Roth conversions with the other Roth plans sponsored by your employer. Currently, you cannot convert a traditional 401k or 403b to its employer-sponsored Roth counterpart such –a Roth 401k, Roth 403b.

Remember, no matter when you do your conversion, it must be done before Dec. 31st of the tax year. Later, if you find you weren't eligible for the Roth conversion, you can undo the damage with a Roth recharacterization before your file your taxes.

Kiddie Tax Loophole Soon to Disappear

Here's a piece courtesy of Marotta Asset Management on the kiddie tax loophole that is soon to expire.

Income-shifting is one of several tax planning tools families have used to lower their tax bill. Historically, parents could save a bundle by transferring highly appreciated investments to their children who are in lower tax brackets. However, this year, Congress has made income-shifting a dream of the past, trapping more kids in the dreaded "kiddie tax." Beginning January 1, 2008, children under 24 will owe taxes on unearned income at their parents' higher tax rates.

The "kiddie tax," or so it has been affectionately named, is a tax on children's unearned investment income or capital gains. Instead of taxing income and capital gains based on the child's tax bracket, the kiddie tax requires unearned income to be taxed at the parents' income and capital gains rates.

Before the expansion of the kiddie tax, parents turned to Uniform Transfer to Minors Accounts (UTMAs) or Uniform Gift to Minors Accounts (UGMAs) to move appreciated investments out of their estate. Once in the child's name, the assets were taxable at the child's - typically much lower - tax rates.

Shifting appreciated assets to a child could save a family 10% in capital gains taxes. Since most children earn little income, they usually fall into the lowest marginal tax brackets of 10% or 15%. Capital gains in these lowest two brackets are taxed at just 5%, compared to the typical 15% rate paid by many parents.

Savings could be even greater on short-term gains and investment income which are taxable at ordinary income tax rates. A child in the 10% bracket would pay 10% tax, instead of rates as high as 35% if mom and dad own the asset.

A once-in-a-lifetime kiddie tax loophole made intergenerational transfers even more appealing. In 2008, 2009, and 2010, capital gains rates are set to drop from 5% to 0% for individuals in 10% and 15% tax brackets. In other words, before the recent changes to the kiddie tax law, children 18 and over in the lowest two tax brackets could expect to pay no capital gains taxes in the next three years.

The new kiddie tax rule closes this loophole forever. If you were waiting for the days of 0% capital gains tax, you can kiss that dream good-bye.

Through 2005, the kiddie tax was limited to kids under 14. Last year, Congress cast the tax net wider, requiring children under age 18 to pay the kiddie tax. And this year, with the passage of the Small Business and Work Opportunity Tax Act of 2007, children under 19, or full-time students up to 24, will be subject to the kiddie tax. The good news is the new kiddie tax law doesn't take effect until January 1, 2008. If your child is between the ages of 18 to 23 this year you can still realize gains at your child's lower rate, if you act now.

After January 1st, children under 19, or full-time students under 24 will be stuck paying income and capital gains at their parents' tax rates. The kiddie tax applies as follows: No tax on the first $850 of earnings. Income between $851 and $1,700 is taxed at your child's tax rate. Any unearned income over $1,700 is taxable at the parents' marginal tax rate. However, children who provide for more than half of their own support will not be subject to the new law.

The expanded kiddie tax law now makes UGMA and UTMA a poor choice for college savings. Instead, 529 college savings accounts provide tax-free growth on contributions, allowing families to reduce their exposure to income and capital gains taxes. Qualified expenses such as college tuition, books, room and board can be withdrawn tax-free. And unlike UGMA and UTMA accounts, the college savings accounts are owned by the parent.

Americans Leave $4 Billion on the Table

The IRS is touting the fact that Americans have left $4 billion unclaimed as part of last year's phone tax refund. The details:

Taxpayers collected only about half the $8 billion the IRS expected to pay them in its phone tax refund, the most far-reaching refund in the agency's history.

Money magazine's report on the issue cites two main reasons for people not claiming their money:

• Many taxpayers, following the advice of the IRS, didn't want to bother searching for old phone bills to calculate exactly how much they were owed, and took the standard $30 to $60 refund instead, refunds that were based on the number of exemptions claimed.

• Despite what the report said were generally good efforts by the IRS to communicate the program to taxpayers, many remained uninformed. As of June 9, about 87.6 million, or 71.5 percent, of the 122.6 million individual income tax returns filed had made a phone tax refund claim.

I look at each of these explanations in different ways:

1. It's not worth it to get the exact amount. I took the standard refund. Was it worth me digging through years of phone records (like I had them anyway) to come up with a number that MAY have earned me a bit more? Probably not. We're looking at hours to get and look through the records, and since we've never talked a lot on the phone, we probably wouldn't be due much anyway.

2. Being uninformed -- consider this another tax on ignorance. BTW, if these people would have used a CPA to do their taxes, they probably wouldn't have missed this one.

Below the Line Tax Deductions

The following is provided courtesy of Marotta Asset Management and offers their thoughts on below the line tax deductions (FYI, here's a link to their piece on above the line tax deductions):

Not all deductions are created equal. Some deductions are more valuable than others. What matters is whether or not the deduction is "above the line" or "below the line". The line in this case is your adjusted gross income (AGI).

Above the line deductions are subtracted from your gross income in order to compute your AGI. Therefore, above the line deductions reduce your AGI which also reduces your taxable income. Reducing your AGI can lower many subsequent calculations which will lower other taxes you may have to pay. As a result, above the line deductions are more advantageous than those taken below the line. They are like Dorothy's ruby slippers, once you have them on the Wicked Witch of Taxland can't touch you.

Below the line deductions are more uncertain. Like many items in the tax code the correct answer to "Will they reduce my taxes?" is: "It depends." They are like Dorothy's first encounter with the Wizard. He promises to grant her requests if she would only bring him the witch's broomstick and she never thinks to challenge the man behind the curtain.

AGI minus your personal exemptions and deductions equals your taxable income. You can claim a personal exemption for you, your spouse, and your dependents. In 2007, you can reduce your AGI by $3,400 for each exemption you claim. These exemptions are subject to phase outs above $234,600 for joint filers ($156,400 for singles).

Below the line deductions are subtracted from your AGI to compute your taxable income. You can either itemize your deductions or you can take a standard deduction, whichever is greater. In order to gain from itemizing, your itemized deductions must exceed your standard deduction. Nearly two out of three taxpayers do not gain and choose to take the standard deduction instead.

Your standard deduction is a fixed dollar amount based on your filing status plus some specific adjustments. For 2007, your standard deductions is $5,350 if you are single, $7,850 if you are the head of household, or $10,700 if you are married filing jointly. You can take an additional standard deduction of up to $1,050 if you are age 65 or older.

Home ownership is the most common way to boost your deductions above the standard deduction. The IRS allows home owners to deduct their interest payments each year. If your home mortgage is at 6% and your payments are mostly interest, then most of your mortgage is tax deductible. If your marginal tax rate is near one third, the government is paying 2% of your interest, and you are only paying 4% of your interest. For most middle class families that results in a huge tax savings.

The benefits of a mortgage are greater when the majority of your payment is interest, not principle. There is no tax deduction for payment of principle. Therefore, you want as many years of interest payments as possible. As a result, 30-year mortgages have much greater tax savings than 15-year mortgages.

When it comes to maximizing your deductions, home owners can also deduct real estate taxes and points paid down on the loan. The cost of the points can be deducted over the price of the loan. So, If you paid $3,600 in points for a 30 year mortgage you can write off $10 a month, or $120 each year. If 10 years into the loan you refinance again, all the remaining points that haven't yet been deducted are deductible in the year you refinance anew. In our example that would be $2,400.

If home ownership alone doesn't make itemizing worthwhile, your state and local taxes (including personal property taxes) along with any charitable deductions may push you over the top. Alternately, if you have high medical expenses which exceed 7.5% of your AGI, you can deduct them as well.

Once you have ensured that your itemized deductions are over your standard deduction there are several smaller deductions that can increase your tax savings.

Miscellaneous itemized expenses can be deducted only when their total exceeds 2% of your AGI. For most people, their deductions are too low or their AGI is too high. But, if your income drops for a year, or you retire, you may qualify.

Deducting miscellaneous expenses is difficult unless you keep good records throughout the year. Qualifying expenses may include work related expenses, legal or accounting fees related to tax preparation, investment advisory fees, estate planning and investment expenses including your safety deposit box, professional dues, and newspaper subscriptions.

Overall, keeping good records is vital to determining whether you can itemize your deductions come tax time. Itemizing your deductions may provide you with some additional tax savings. With an overflowing bucket of deductions and exemptions, your tax burden will soon be melting.

Tax on Marriage

The following is provided courtesy of Marotta Asset Management and provided their thoughts on taxes on marriage:

Few Americans look forward to the idea of filing taxes. At best we feel like Dorothy being dropped into the Land of Oz. At worst, we feel like the Wicked Witch of the East having the house dropped on us.

As Glinda advises us, "It's always best to start at the beginning," and at the beginning of the tax return is determining your filing status. You would think that this is an easy and straight forward question. But since this is the beginning of dangerous journey on the yellow brick road, it is worth understanding the inequities that this section of the code causes.

Two different people with the exact same income and the exact same deductions can end up with very different amounts of tax owed, simply because of their filing status. Married couples -rich and poor alike- often bear the brunt of the inequities created by our current tax system

Every tax system does a certain amount of harm. The more progressive the tax system, the more devastating the unintended consequences. No marriage-neutral tax system can exist given a progressive taxation system.

Most people wrongly assume that the marriage tax penalty was eliminated by some of the tax changes that were enacted and gradually implemented over the past several years. The marriage tax penalty was eliminated in the 10% and 15% brackets by increasing the number of married couples who get special tax breaks.

Let's look at some examples.

Michael and James work in the same business. Each makes the same salary and takes the same deductions. The only difference is that Michael's wife stays home, while James's wife works at the firm.

In this case, the tax code gives Michael and his wife a tax break. Michael gets the benefit of claiming two personal exemptions (one for himself and one for his wife). The tax code favors these provider/dependent marriages like Michael's. They are better off filing jointly since Michael's wife - who is not earning any income - can't put her personal exemption to good use. But by filing jointly, Michael and his wife can use both personal exemptions, thus lowering the taxes on Michael's earnings.

However, James and his wife find themselves paying significantly more tax simply because they are married filing jointly.

If James and his wife are both low-income their filing status will dramatically change their tax status. A low income couple who marries and combines their income can forfeit other programs designed to help the truly needed. The most important of these programs is the Earned Income Tax Credit (EITC).

For 2007, a couple's income must be under $39,783 in order to qualify for EITC, while filing single or head of household must be under $37,783. Imagine a couple where each makes about $20,000 a year and you can see their dilemma.

EITC isn't small change either. In fact it is a much better way of targeting poor working families than raises to the minimum wage. For 2007, the maximum EITC credit is $4,716 which can make a huge difference in a struggling family.

The marriage penalty remains even if James and his wife are well-off. They are taxed as though they represent one very high income taxpayer and must pay more than they would if they were unmarried and just living together.

Most likely, neither Michael nor James will let the tax code determine if they should get married. But you can bet that Michael's wife and James's wife will let the tax code determine how much they are willing to work.

Because James and his wife are taxed at a combined rate, there is very little incentive for James's wife to continue working. Another way to think of it is a tax on families with two earners. In other words, it is a tax on married women whose husband's work, especially on women with high incomes.

James and his wife, by combining their incomes, have pushed each other into the top marginal tax bracket. That means for every dollar that James's wife earns, she is probably taxed at over 50%, including federal, state, and local taxes.

Now compare James's situation with Michael's. If Michael's wife can save a dollar by bargain shopping and preparing homemade meals, they are a dollar richer. James and his wife would have to earn at least two times as much to fare as well. Because of their combined income pushing them into the highest tax brackets, the government will take over half of everything they earn.

They will also have additional expenses as a result of working, and few, if any, of these expenses will reduce their income. Their business clothes, gas, and child care expenses may all have to get paid with after tax dollars making these expenses two times more costly than the income they may generate.

If all of this public policy debate makes your head swim, you are not alone. The bottom line is: The flatter the tax system, the less it matters whether couples combine their incomes or not. If every dollar of income were taxed the same and there were no deductions or credits, it would not matter if James and his wife combined their incomes. The same flat percentage of a combined amount is still the same flat percentage.

Practically speaking, many couples would be better off having either mom or dad stay at home. Having one family member who is working at reducing expenses and improving lifestyle can be the least expensive way to increase family wealth. Saving money by doing more things for yourself is worth two times the income earned by the spouse who winds up in the top brackets. And besides, "There's no place like home."

Above the Line Tax Deductions

The following is provided courtesy of Marotta Asset Management and covers their thoughts on above the line tax deductions:

Those with wealth look ahead and adjust their affairs according to the tax code. But, most Americans look backward and only hope that Uncle Sam will return some of what they have already paid. Living in the moment and only looking backward is a recipe for paying the most tax at the worst time.

If you are like most Americans, you filed your tax return in mid-April and did not look at any of it during the last four months. The tax preparation which seemed so valuable at the time has faded like Dorothy's memories of Oz when she wakes up back in Kansas.

Many people who use tax computation software don't even understand the changing structure of our country's tax code. You fill in the blanks, press compute, pay the tax, and then forget about the torture until next year.

Into this dark forest of the tax code we throw college students and recent graduates. It is almost a rite of passage, better likened to a fraternity hazing than a step into adulthood. We smile a little when the trees grab the apples out of their hands.

The obfuscation of the tax code helps hide the details. Its Byzantine rules and regulations are carefully crafted to cover up just how much we pay each year. In other words, tax laws are stupid by design. While you are busy trying to translate word problems written in 'Taxglish' you don't realize they are asking all the wrong questions. Like Dorothy in the field of poppies, you can't seem to stay awake long enough to realize the danger.

Still, as long as you are so close to the Emerald City, it would be nice to have Glenda send a rain to help you get inside the city's gates. Similarly, a basic understanding of the specific contours of the stupidity of the tax code can help you avoid meaningless extra payments to the government and keep more of your income.

A professional tax expert can help you get the right deductions, but likely won't motivate you to keep the right records unless you understand the benefit for yourself.

There are three basic ways to reduce your tax burden: above the line deductions, below the line deductions, and credits. Each of these deductions is used in one of the three general formulas on the 1040 tax form. The first formula is: Gross income minus above the line deductions equals your adjusted gross income (AGI).

All deductions are not created equal. Some deductions are more valuable than others. What matters is whether or not the deduction is "above the line" or "below the line". The line in this case is your adjusted grow income (AGI).

Above the line deductions are subtracted from your gross income in order to compute your AGI. Therefore, above the line deductions reduce your AGI which also reduces your taxable income. A lot of calculations and limits are computed from your AGI. So, reducing your AGI can lower many subsequent calculations to lower other taxes you may have to pay. As a result, above the line deductions are more advantageous than those taken "below the line."

Above the line deductions will always lower your taxes. Above the line deductions are rare unless you are self-employed because they are mostly business related expenses. If you are self employed, you should have a lot of above the line deductions you are taking advantage of.

Above the line deductions include everything on Schedule C or F business deductions. If you are not a small business owner, you should consider performing some or all of your work under the umbrella of your own small business. If you run a successful business you will be paid twice what you are currently being paid and find yourself on the yellow brick road of accumulating real wealth. Even if you don't get any more pay, you may find more of your expenses are tax deductible and therefore you will pay less tax.

If you are not a small business owner there are still above the line deductions you can take such as: stock losses up to $3,000, IRA contributions, student loan interest, moving expenses, alimony and several other items.

Payments to your Health Savings Account (HSA) can also be deducted above the line. In 2007 the limit is $5,650 in tax free contributions. One out of every ten patients consumes 69 percent of health care costs. The other nine would benefit from an HSA.

With the savings on your insurance premiums, you should be able to accumulate a sizeable nest egg. And, unlike your traditional health care plan, your HSA funds are not subject to a "use it or lose it" policy. Anything you don't spend one year carries over to the next year. After all, it's your money.

In addition to doctor's visits, hospitalizations, lab tests and the like, an HSA can also pay for prescriptions and some over the counter drugs like aspirin with pre tax dollars. HSA accounts can even pay for vision and dental expenses such as contact solution and teeth cleanings.

Another above the line deduction is specifically designed for teachers. If you are a qualified educator you can deduct $250 for books, supplies and computer equipment you purchase. This deduction has been extended through 2007 as well.

These deductions are like Dorothy's ruby slippers, they are adjustments to your income and once adjusted nothing else in the tax code can touch them. Fund your retirement account, start a health savings account and go into business for yourself to take advantage of these incentives in the tax code.

Timeless Money Rules: Taxes, Giving, and Things More Important than Money

Money magazine has a series on 20 timeless money rules that's pretty interesting. This is the last day I'll be sharing a few of their ideas as well as my thoughts on them. The first one for today is to pay only your share of taxes. Money's thoughts:

So take full advantage of tax-deferred benefits at work, like 401(k)s and flexible spending accounts. Stick with tax-efficient investments like index funds. And claim every deduction you're entitled to. According to the Government Accountability Office, taxpayers who could itemize but chose not to ended up overpaying by $450. Don't be one of them.

I hear them loud and clear on this one. I'm willing to pay my fair share of taxes, but I don't want to pay a penny more. that's why I see using a CPA for my tax returns as an investment that's very worthwhile.

Next, Money says to give:

Identify a cause that really speaks to you. Then devote most of your energy and charitable dollars to the organizations that best support it.

And who knows, maybe giving money is the key to prosperity.

Money ends the series by saying we all should keep money in its place. Their thoughts:

People who say they value money highly report that they are less happy in life than those who care more about love and friends. Enough said.

My take on this is that there are a ton of things in life that are more important than money. A few of them:

• Good health

• Sharp mind

• Your kids

• Time

How Would You Change the US Tax Code?

Lots of suggestions on how to change the US tax code on my post titled Is This Right? 60 Million American Adults Don't Pay Taxes? Here's what one commenter suggested:

Simple tax solution:

Get rid of income tax (and property tax - BS!) and increase sales tax to 25-30%. The more people buy, the more they get taxed. People making min. wage shouldn't be buying expensive stuff like Gucci purses (even though they do) and that way, they won't be taxed as much. It may hurt the economy for the first year or so when people see the large costs to buy something, but Americans don't care - they have credit cards. The rich don't care either, they want to look high class with their 200 jeans and beamer.

or

People with incomes under 15k or 20k pay no taxes. People over that pay a straight 20%, no deductions or any need for a tax advisor or software. If you make 1mil/year, you're taxed 200k. You make 100k, you're taxed 20k a year. Seems fair to me.

Another option:

The spending is the problem. A sales tax to replace all income, payroll, and capital gains taxes would be best because it would give people the incentive to work, save and invest, but as long as government keeps spending the money there's no solution. I read a study in college that showed that all the governments in the world spent about 10-15% of GDP on defense, roads, public safety, and law. Right now we spend more than 35% of GDP on all levels of government. I've seen some estimates that the U.S. economy would grow by almost 7% per year if taxes were cut by 25% (to about 27% of GDP) , but to cut total taxes to 10-15% of GDP, we'd have to cut taxes by more than 65%.

There are a lot of idiots who think they paid no taxes when they get a tax refund, but they forget the gas tax, sales taxes, property taxes, hospitality taxes, car taxes, fees, etc. It's still bad that a lot of people don't pay income tax though, because they will obviously vote to increase the tax they don't pay rather than the ones they do pay. The system will become even more unjust, and people with mobility will leave America or never come in the first place. We are in a global economy and the countries that treat entrepreneurs and business as sponges to be squeezed to pay for welfare will soon find their competitiveness decline. Kind of like the U.S. today. India, China, Russia, Eastern Europe and even the socialist EU countries are having to cut or are cutting taxes big time. The U.S. is falling behind.

And another:

I, for one, would like to see a per-capita tax. Take the total annual spending of the US government, divide it by the number of non-disabled working-age adults, and send those people a bill for their share. It's perfectly efficient, because no wealth would be destroyed in the process of trying to avoid it. Also, disenfranchise anyone who doesn't pay their share of the taxes so that the entire electorate clamors for less and less spending each year.

My contention is that we could fix the whole budget deficit if we simply found a sharp businessperson to identify all the waste in government. This commenter agreed:

The real problem is government spending. I work for a government contractor, and I can tell you from firsthand experience that government can't help but use resources stupidly. People deciding how to use other people's money will never do as good of a job as people deciding how to use their own money.

Now, eliminating the income tax in favor of a national sales tax would probably eliminate some waste associated with collection and compliance, but as long as the government decides how to allocate upwards of 40% of our resources, that staggering waste will dwarf whatever changes we make in the tax system.

So, let's say you were made king or queen of the US. How would you change the tax system? (Assuming you wanted to raise enough money to only cover legitimate government expenses -- not just to fund your own kingdom!) ;-)

Americans Are Great at Financial Logic

Ok, I'm not going political on this post since all Americans, Republicans and Democrats, are responsible for how we spend our money as a nation. And now that we have a Republican President and a democratic Congress, I can be an equal-opportunity basher. ;-)

Seriously, to me the most important part of this piece from MSN Money on how Americans suggest we balance the budget uses the same "great" logic many Americans use when it comes to managing their personal finances. Such logic can be summarized in this quote:

An MSN-Zogby poll says most Americans want the next president to make the government live within its means. But they don't support cuts in programs and aren't willing to pay more taxes.

Last time I checked, you either needed to make more or spend less to make a deficit budget balance. (Yes, I know about lowering tax rates to "spur the economy" so total taxes are greater that they would be otherwise, but those still result in a greater absolute level of tax revenues -- or, in other words, making more money.) And while everyone seems to want a balanced budget, they don't want to pay for it or cut any services. Sounds familiar, huh?

I also enjoyed these quotes from the piece:

• Most Americans oppose cuts in major government programs, but 50% also said they wouldn't vote for a candidate who proposed higher taxes to balance the budget. Only 35% said they would be willing to pay more taxes to maintain the current level of spending.

• Social Security is the government's most expensive program, which experts say could soon overwhelm other spending. Yet 80% of Americans said they oppose cuts in it, and 62% said they wouldn't vote for a candidate who proposed cuts. 

• In general, people were more accepting of cuts if they wouldn't be affected.

Can someone please figure this out for me? Is it any wonder politicians say one thing to get elected and do something else once there? What a stinking mess.

Personally, I think the next President should appoint a top-notch business person (someone like Jack Welch) and name him "Waste Control Czar." I'm betting that someone with good business know-how could find enough waste (over-paying for items, inefficient spending, etc.) in the federal government to more than cover the current deficit.

And if I had to take one bad piece of medicine or the other (cut services or increase taxes), I'd take cutting services. Why? Because I'm not convinced the government can spend any tax increases effectively (they'd probably do what many people do when they get a raise -- simply spend more). Besides, cutting Social Security benefits for younger adults (by increasing the retirement age) seems like it alone would solve much of the problem while also be reflective of the true, original purpose of Social Security -- to provide for people in the very late stages of life (not provide for 20 years of income like today's program does.)

Ok, rant over. ;-)

Is This Right? 60 Million American Adults Don't Pay Taxes?

Here's a Yahoo piece on how the Democrats in Congress are raising taxes, where the taxes are hitting, who's paying them, etc. This is not something I want to comment on (I take enough heat for writing about money and religion -- I don't need to add politics to the list!), but there is one sentence in the piece that stood out to me:

Today, some 60 million adults either pay no taxes at all or don't have to file.

According to Wikipedia, there are 219 million Americans aged 20 or more. Therefore, 27% of the population pays no taxes (we're talking income tax here, I'm sure -- it doesn't say but I'm not sure how people can avoid sales taxes). One in four people pay nothing. That seems like a lot to me.

Sure, you have your college students on one end and elderly retirees on the other who are part of that 60 million. Those two alone will take a chunk out of the non-payers. And yet we still have a pretty large segment that pays nada for the privileges we all enjoy.

Think about it this way. You go to the grocery store and see maybe 100 people while there. 27 of them (on average) are not paying income taxes. Or you go to church and see a few hundred people. A hundred or so pay nothing. Or you attend a baseball game with 50,000 people at the stadium. Over 10,000 of them pay nothing.

Wow.

Taxes are Paid, Not Given

Here's a comment I agree with from my post titled Americans Give Record Amounts -- Still Paltry Totals:

Taxes are owed, not given. That's your responsibility as a citizen of a country and you do reap the benefits.

I strongly disbelieve that lower taxes would raise giving in the US. Our consumerist society would just spend the extra money on another advertised quick fix of goods made in Asia or Mexico. The problem is that most people give from what's left over after over satiating themselves with unbudgeted spending - which is, I guess, on average about 2%. Instead we should all give off the top and budget on what's left. Certainly more than half of Americans would not really notice contracting their lifestyles by 10%. As a matter of fact for those rare folks who do give 10% or more, they feel their lifestyle is improved by giving more away (as many entries on this blog have pointed out in the past).

I agree with this comment on several fronts:

1. Taxes are paid, they aren't given. A gift is something you donate of your own free will. Anyone out there "giving" taxes of their own free will? Or maybe a better question -- anyone out there purposely "giving" more taxes than what the law says you owe? I didn't think so.

2. There are arguments both for and against the "lower taxes increases giving" debate, but I do agree that most people spend up to (and often past) their capacity to earn. So if they earn/save more, most will simply spend more.

3. I think we should give off the top too. (Give on gross pay, not net.)

4. I certainly feel that my lifestyle has been improved by giving. And the same holds true for other I know who give often.

How to Adjust Your Withholding

I've suggested several times that everyone should adjust their federal income tax withholding so they do not give the government an interest-free loan each year. You could be earning money on that amount yourself, not to mention putting it to use paying off debts, investing, building an emergency fund, etc.

As such, I've had several people ask me to suggest how they should set their withholding. Until recently, I didn't have a good answer for them. But I ran into this withholding calculator from Kiplinger's and thought I'd pass it along to all of you trying to set your withholding at the right level.

Your House is Foreclosed On -- Congrats, You Now Owe More Taxes!

Here's a real kick-them-while-they're-down note from Kiplinger's. They note that under certain circumstances (ones that are not that unlikely to happen), you may owe additional taxes if your house is foreclosed on. The details:

If the bank sells your home for less than the amount left on your mortgage, any forgiven debt can be treated as taxable income. The IRS even has a special form for reporting this windfall: the 1099-C. The C stands for cancellation of debt and the law says cancelled debt is taxable just the same way salary is.

No one ever said that the IRS played nice, but this seems way below the belt. Talk about piling on when someone is down on their luck!

Just one more reason, I guess, to buy a house you can afford -- which is one of the keys in my formula for buying a house.

60% of Homes Assessed for Too Much, 33% of Property Tax Appeals Succeed

Just a short post here on what I found to be two astonishing facts about home property taxes. It's from a Kiplinger piece titled Cut Your Property Tax:

As many as 60% of homes are assessed for too much, estimates Pete Sepp, of the National Taxpayers Union, and about 33% of property-tax appeals succeed.

Wow! Those are BIG numbers!

The first number isn't as surprising as we all know that local governments are looking for extra revenue wherever they can find it. That said, 60% is still way high.

The second number blows me away -- I would have guessed it was more like 10%. But the fact that 33% of appeals are successful just goes to show that assessors know they are charging too much. And when you really think of it, what I'd call the "effective" rate of appeals is much higher (just take out the people who are poorly prepared and don't know what they are doing and that's probably at least 30-40% of the total.) So you may have numbers in the range of 60-80% of people who come armed with the facts and present them in a polite and positive manner have successful appeals.

Of course I'm speculating here, but I think you can at least agree a bit with my line of thinking.

For more on how to get your property taxes reduced, see these posts:

• Reduce Your Property Taxes

• How to Contest Your Home Assessment

• Property Tax Tip

Top 10 Tax-Friendly Cities

Here's a list from Kiplinger of the top 10 tax friendly cities. They chose them by calculating the total local taxes owed (income, sales, real estate and car/personal property) by a dual-income couple, with one school-age child and a combined gross income of $75,000 in 2005. The list of cities and their overall tax bite:

1. Anchorage, Alaska - 4.1%
2. Cheyenne, Wyoming - 4.3%
3. Jacksonville, Florida - 4.6%
4. Las Vegas, Nevada - 5.4%
5. Honolulu, Hawaii - 5.6%
6. Memphis, Tennessee - 6.1%
7. Sioux Falls, South Dakota - 6.3%
8. Fargo, North Dakota - 6.3%
9. Houston, Texas - 6.3%
10. Billings, Montana - 6.7%

A few thoughts on these:

1. I was surprised such "garden spots" as Jacksonville and Honolulu were on the list.

2. As the piece states, this is tax burden only. Cost-of-living may still be higher in some of these places (such as Honolulu, for example.)

3. Most of the low-cost places are in less desirable areas of the country. I'm sure that has something to do with the results.

4. As the piece says, seven of the top ten cities are in states with no income tax. Makes it a lot easier to be low if your state takes no bite out of your income.

5. Also from the article: "All ten cities have an overall state and local tax burden of about one-half to three-quarters of the national median of 9.1%."

How to Get a Double Tax Deduction When Contributing to an IRA (And Avoiding the Wash Rule)

Here's a tip I found in a recent promotional copy of Bottom Line Personal on how to get a double tax deduction when contributing to an IRA:

Sell a stock that has declined in value...and use that money [to contribute to an IRA.] You'll be able to fund your IRA and write off a capital loss at the same time!

Bonus: If the stock is one you want to hold on to, you can have the IRA buy it back. Since you and your IRA are considered separate entities, the IRS's "wash rule" will not apply.

For those of you wondering what the wash rule is, check out The Wash Sale Rule.

So, there are a couple things to comment on here:

1. Instead of taking cash and putting it into an IRA, you can sell a stock, take the loss, and then contribute, huh? Is there anything "magical" here or are they simply saying you should get as many tax breaks as you can, so if you have a stock loss, take it?

2. Interesting note about the wash sale rule -- that you are a separate entity from your IRA. Is this true? Anyone had experience with it or know the associated legal rules around the issue?

You Probably Owe Use Taxes

Anyone ever heard of the "use tax?" Well, I hadn't until a few years ago when I hired a CPA to do my taxes.  While I was filling out their annual questionnaire, they asked me about my Internet and out-of-state purchases for the tax year and when I got my return I saw that they had accounted for use taxes I owed. So, what's a use tax you may ask? Here's the answer from MarketWatch:

The use tax is the difference between what you would have paid in sales tax if you purchased an item in your own state versus what you actually paid on the purchase. If your state doesn't collect sales tax on a certain item, then you don't owe use tax on it.

And a few details to explain it:

Many taxpayers think that items they buy on the Internet are untaxed. But it's simply that the retailer is not required to collect the tax. Retailers are required to collect sales tax if they have a significant presence in the "ship-to" state, but they're not required to if they don't. The buyer is still supposed to pay state sales tax.

The piece points out that most people simply ignore use taxes (and don't pay them) even if they know that they exist. But you need to be careful, especially if you buy certain items:

If you buy high-priced items, you'll want to think about the use tax. States often target jewelry purchases, said Diane Yetter, president of Yetter Consulting Services in Chicago, which offers sales-tax consulting to businesses.

State revenue departments also work with customs officials to collect tax on purchases made overseas.

Meanwhile, other states, including Ohio and Tennessee, work with retailers to collect unpaid sales taxes, Yetter said.

So, what should you do to make sure you pay the use tax you owe? Here are MarketWatch's suggestions:

Taxpayers eager to follow the letter of the law should record all purchases they make that are sales-tax free -- if those purchases would generally incur sales tax at home. In particular, record the large-ticket items that might garner attention from the state's tax collector.

Look on your state's revenue department Web site for more information on what items are subject to sales tax in your area. But consumers don't need to worry all that much about the questionable items, Yetter said.

Also, check out the instructions that go with your state's "use tax return" -- they should clarify what you need to include and what you don't. In general, "it's what you pay when you walk out the door and buy it," Smith said. In some states, such as Illinois, the use tax rate is lower than the sales tax rates.

I don't track item by item but always do an estimate each year. I'm sure to include the high-ticket items I purchased -- the ones that make up 90% of the use tax I owe and I put in an estimate for the rest.

Taxes on Foreign Income -- You Owe It

Ever wonder if people have to pay taxes earned on foreign income (money earned in another country) or what the rules are regarding it? Well, never fear, you've come to the right place for answers. (And if you're not interested, you can simply ignore this article and another will come up in a couple of hours.) ;-)

Here's a piece from Yahoo that discusses taxes on foreign income. The bottom line: you need to pay income taxes on foreign income earned (though you may get a credit from the US government if you paid taxes in the country where the income was earned.) The highlights:

If you're a U.S. citizen or resident for tax purposes, you have to file and pay taxes in the U.S. on your worldwide income. Worldwide income means income earned from anywhere.

Tax credits for foreign taxes paid are allowed against your U.S. taxes to prevent double taxation. The credit only applies to taxes on foreign source income.

Every once in awhile I get a form from a mutual fund company saying I have income from a foreign source. I take it and give it to my CPA, who handles all my tax issues. But for those tax do-it-yourselfers out there, be sure you include your worldwide income on your tax returns.

Why Would People Give Up Easy Money?

Here's a fact I found in Kiplinger's June issue that I found perplexing:

One-third of all taxpayers failed to claim the credit for the telephone excise on their 2006 returns.

The magazine goes on to say that people can file an amended return to get the savings if they like, but what's the point at this late date? It's not the savings was $1,000 or anything. Still, it's not like $30 to $60 is nothing either.

So what's driving this? Ignorance? Haste? Lack of caring about $30? Everyone seems to want to make extra money, then a large group passes up freebies like this. Makes no sense to me.

I'd be interested in hearing you're thoughts.

Save on Taxes and Give a Bigger Gift by Donating Securities Instead of Cash

In March I mentioned that I wanted to move some money from mutual funds I'd bought years ago to index funds but that the mutual funds would trigger pretty big capital gains taxes if I sold them. Then a reader comment with a great idea -- suggesting I get rid of unwanted securities by donating them to a qualified charity. Since I have charitable commitments throughout the year (thanks to this blog, in part), giving securities was a great way for me to get rid of funds I no longer wanted to hold while avoiding capital gains taxes. Then I replace these funds with savings from this year's income (money that I would have donated but which is now covered by the securities) and invest them in the index funds I want my money in. It's a great plan!

I've taken advantage of this idea twice so far this year and have plans to do so at least once more (I've qualified a new charity -- making sure they can accept gifts this way.) Vanguard makes it pretty simple. All I do is fill out a form, send it to the charity, they complete a section, and the money is transferred. Easy as pie. 

For those of you who want more specifics on how this works and the savings that can be achieved, here's an article from Vanguard on donating securities instead of cash. An overview:

Giving away appreciated securities such as stocks, bonds, or mutual fund shares offers an additional tax benefit: You can generally take a tax deduction for the full market value of the securities donated and also avoid paying tax on the capital gains on the investment. To qualify, you must have owned the security for more than a year and the deduction cannot be more than 30% of your adjusted gross income (AGI) in any given year. (If your deduction would be more than 30% of your AGI, you can spread it out for up to five years.)

Vanguard also gives an example of how much this method can save you in capital gains taxes. They start with a set of assumptions:

For example, suppose that you bought 1,000 shares of a stock mutual fund 15 years ago for $5,000 and those shares are now worth $45,000. Also assume that you are in the 28% marginal tax bracket and are not subject to limitations on deductions.

Now here's what happens if you sell the fund shares yourself and make a cash donation -- you net a $6,600 reduction in taxes:

Sell fund shares and give cash, pay capital gains. If you sell the fund shares and give the cash proceeds to charity, you'll be able to take an itemized deduction on your federal tax return of $45,000, saving you $12,600 in income tax ($45,000 × 28%).

But you'll also owe tax of $6,000 on your long-term capital gain (15% × $40,000), which—since you've donated the proceeds—you'd most likely have to pay out-of-pocket from another source. Therefore, the net reduction in your tax liability is $6,600 ($12,600 – $6,000).

But if you donate shares instead, you avoid capital gains and net a $12,600 reduction in taxes -- saving you $6,000!!!!!! The details:

Donate fund shares, avoid capital gains. If you had given the fund shares directly to charity instead, you would have avoided owing capital gains tax while still being permitted to take the $45,000 deduction. Therefore, the net reduction in your tax liability would be the full $12,600—providing the opportunity to give even more, if you choose.

Now I didn't give $45,000 and I certainly didn't have the $40,000 in capital gains they note above. But once all is said and done this year, I think I'll end up saving a couple thousand dollars. Plus I'll fulfill my charitable commitments AND be able to shift my investments into funds I want to be in. It's a winning idea all the way around!!!!!

The Wash Sale Rule

At the end of every year, I look over my stocks (not many -- most of my investing is done in index funds) and decide whether or not I should sell any. One factor I consider is how much capital gains income I've accumulated during the year and if there are any stocks I want to get out of that are currently at a loss. If there are any, I can offset my capital gains with losses from selling the under-performing stocks.

But what if I still like the stock and want to own it? Can I simply sell the stock for a loss, take the loss this year, then buy it right back again? Well, I can sell the stock at a loss and then buy it back again, but I can't take the loss off my taxes. Why? Because of the wash sale rule. Here are the details on it from Kiplinger's:

There are special rules if you want to buy the stock back again. Under the "wash sale" rule, you can't deduct the loss if you buy the same stock within 30 days before or after you sell it. If you think the stock will eventually rebound, it's a good idea to keep an eye on your calendar before buying it back.

No, you can't deduct the loss now if you sell and buy back in 30 days, but you will eventually get it back:

If you do buy the stock back within 30 days, though, you don't lose the loss forever. A loss denied by the wash sale rule is added to the cost basis of the newly purchased shares. That will lower your tax bill when you finally sell the new shares.

My decisions usually ride on whether or not I like the stock in the long term. If I do, I keep it. If I don't, I sell it and don't plan on re-buying it. As such, the wash sale rule doesn't really impact how I buy and sell stocks. But some of you out there may want to keep it in mind if you come upon a situation where you need to take the loss but still like the stock.

Thoughts on Taxes on Tax Freedom Day

Here's an article courtesy of Marotta Asset Management that gives some interesting thoughts on taxes:

Tax Freedom Day arrives on Monday, April 30th this year. That's when we stop working for the government and start working for ourselves. For the average worker, all of the earnings of the first 119 days go to pay taxes to the federal, state, and local governments. Starting May 1st, we are free -- at last -- to take care of our own family's needs.

The 2007 report, published this month by the non-partisan Tax Foundation based in Washington, D.C., measures the tax burden on Americans. According to the report, the 2007 federal tax freedom day comes more 12 days later than it did in 2003, though it is still five days under its all-time high in the year 2000.

However, the overall Tax Freedom Day falls two days later than it did last year, even with the absence of tax increases. Gross Domestic Product has been strong, growing by at least 6.3% per year for the last three years. More wealth for Americans means an increase in Uncle Sam's share.

Due to our progressive tax system, Uncle Sam actually collects more taxes as inflation rises due to 'bracket creep.' If your pay is adjusted each year to keep up with inflation, the dollar figure you make increases but your net purchasing power remains unchanged. However, inflation may actually drive you into a higher tax bracket despite the fact that your buying power has not increased!

On average, taxes still take nearly 33% of a worker's gross income – 22% for federal taxes and 11% for state and local taxes. Only since 1992 have Americans paid more for government programs than they spend on food, clothing, and medical care combined. For the amount of money we pay in taxes, government should already be able to provide universal health coverage and feed and clothe us as well.

For every eight hour day we work, 2 hours and 35 minutes of our work goes to paying taxes. Without taxes, you could leave work at 2:25pm.

At the state level, tax freedom day varies from state to state. California has the 7th highest taxes with its Tax Freedom Day delayed until May 7th. Virginia places 17th in the race for the highest tax state rate even though its Tax Freedom Day arrives on April 30th, exactly the national average.

The Virginia tax rate continues to climb higher each year despite claims of no new personal taxes because of both bracket creep and the significant increase in state business taxes. This has been a national trend. Business tax receipts have risen more than 20% over the past year.

Most non-economists vastly underestimate the negative impact of tax rates on the U.S. economy. Taxes encourage every American to do things themselves, outside of the taxable economy, even if specializing and working together would have produced higher productivity. If you add the costs of complying with the complex web of regulations, the government costs Americans over 50% of our wealth.

Imagine three builders who, by themselves, could each build a house in a year. Three builders could build three houses working separately. Now image that because of their specializations they could build six houses by working together. It may seem incredible that these builders would not take the opportunity to double their productivity, but with any tax rate higher than 50% they have no incentive to choose the more productive partnership. Just imagine the economic boom if the other half of worker's labor were set free!

Imagine a highly paid and highly skilled doctor whose marginal tax rate is over 50%. Everything that she pays someone else to do costs her twice as much because she pays for that service with after-tax dollars. It may be very inefficient to society for her to waste her time mowing her own lawn, changing her own oil or painting her own house, but specifically because she is in a high tax bracket, she can save more money than the average American by doing those chores herself. Another way to look at it is that without taxes, she could afford to pay those who provided her services twice as much.

Economist Arthur Laffer recognized that the law of diminishing returns applies to tax rates as well. According to Laffer, there comes a point beyond which increased taxation actually yields fewer tax dollars being collected. For example, a 100% tax rate would drive commerce into the ground, resulting in zero taxes being collected.

Many economists believe we are already well beyond that point for the most Americans. In other words, tax cuts would actually result in increased economic growth and more taxes being collected.

Presidents Kennedy and Reagan understood the Laffer Curve well. In 1964, Kennedy reduced the top tax rate from 91% to 70% and, to the surprise of many, tax revenues increased! Seventeen years later, the Reagan tax cuts reduced the top marginal rate from 70% to 50%. Revenues soared again. Between 1980 and 1997 the share of federal income taxes paid by the top 1% rose from 19% to 33%. The share of taxes paid by the top 25% increased from 73% to 82%.

Economists understand that the optimum rate of taxation is zero. The second most optimum rate of taxation is as low as possible. In contrast, many Americans seem to have the attitude that tax rates should be increasingly punitive.

The top 1% pays 35% of the taxes in the United States. The top half pays almost 97% of income taxes. These two statistics have increased despite all the complaints that tax cuts have favored the rich.

Low taxes should not be a political issue that divides us. Every American should agree with the goal of keeping taxes as low as possible. In 2011, all of the federal tax cuts enacted since 2001 are scheduled to expire. In the words of John F. Kennedy, "An economy hampered by restrictive tax rates will never produce enough revenues to balance our budget - just as it will never produce enough jobs or profits."

Who Are Your Dependants?

One of the most enjoyable blogs I read every day is DigitalRichDaily. It's a story-telling blog written by a friend of mine living outside Nashville, Tennessee. He does/has done some of the most stupid/funny things you'll ever read about. It's made even funnier by the fact that I know he's a very successful businessman.

He hardly ever talks about money (another reason I read his blog), but recently he posted Tax Time: Who Are Your Dependants? and shared these two facts:

1. The top 50% of earners in the US pay 96.54% of all Federal Income Tax. N-I-N-E-T-Y S-I-X percent. Look around you. The other person you see is not paying taxes. YOU are.

2. According to a news story released yesterday, economist Gary Shilling’s recent research showed that slightly over half of all Americans – 52.6 percent – now receive significant income from government programs.

Wow. Quite an interesting perspective -- half of us pay taxes and half of us don't.

Not so funny though. But then he puts his usual, funny/sarcastic spin on it with the following ending:

Interesting…funny how those numbers seem to be related somehow.

So, by my figuring, I should be able to list somewhere around 150,000,000 dependants. So, my deductions for dependants should be about $450 billion dollars. Using that figure, I estimate the US Government owes me a refund of about $449+ billion dollars. Stupid? So is the tax code. And so are the politicians that run congress that are at this very moment planning the largest tax increases in the history of the country.

Hold on to your britches. Your pants are about to be ripped off.

;-)

Yeah, that's what I'm kind of expecting too. At least Robin Hood robbed from the rich to give to the poor. Seems like we move closer and closer every year to robbing from anyone that has almost anything to give to those who have less. Now I'm not opposed to having those better off help those less fortunate (in fact, if more people did it on their own, there would be less need for the government to do it), but at some point we get too close to simply splitting everything up equally. And then where is the incentive to work harder, save, start businesses, etc.? And what will happen to our country as a result? When personal incentive to get ahead declines because of government policy and spending, it doesn't usually bode well for the country. Just look at the former Soviet Union and East European countries for examples that aren't pretty.

What's the solution? I'm not sure. But I do think we need to be working on these issues (spending, taxes, etc.) now before they get to the boiling point. But unfortunately the politicians in power (as a group) are too concerned with maintaining that power than with making tough decisions for the good of our country.

Ok, enough ranting about taxes, government policy and the like. What started off as a fun post turned south quickly, didn't it? ;-)

How the Government Spends Our Money

I found this article from MoneyCentral to be very interesting. It details how the federal government spends our tax dollars. The summary:

This year the federal government expects a haul of about $2.7 trillion. About 70% of the annual budget pays for commitments already incurred -- everything from Social Security benefits to interest on the national debt. Neither President Bush nor Congress has much say over that.

Here's how that 70% is spent:

• More than 20% of the total budget is used to pay Social Security benefits to retirees.
• 15% pays the tab for Medicare health benefits.
• 7% goes for Medicaid
• 3% for veterans' benefits
• 1.3% for supplemental security income used to assist the aged, disabled and blind.
• All government payments to individuals, including aid to poor families with children (welfare, which accounts for about 1% of the budget), food stamps (about 1.3%), farm subsidies (1%) and a variety of other government assistance and benefit programs, amount to about 58% of the budget. That's twice the share of the budget such payments claimed 40 years ago. And the percentage continues to climb, giving those pushing reform of such entitlement programs a powerful argument.
• Interest on the debt claims about 10% of the budget.

Now, how the 30% discretionary spending is allocated:

• About two-thirds of this spending (20% of the total budget) pays for the tanks, jets, ships, missiles, rifles and other paraphernalia of defense, not to mention the salaries of our country's soldiers, sailors, airmen and Marines.

• The Department of Homeland Security claims about 1.5% of the budget.

• The last 8.5% of Uncle Sam's budget pays for everything else: transportation (federal highways and bridges, support for Amtrak, funds to help states with other roads, bridges, railroads, airports and so on); science and medical research; food and drug safety; guarding the environment; the Strategic Petroleum Reserve; export promotion and import protections; space exploration; air traffic control; the FBI, the Drug Enforcement Administration and the rest of the Justice Department; federal education funding; and an alphabet soup of federal agencies tasked with helping to keep Americans safe, healthy and, sad to say, honest -- from the CPSC (Consumer Product Safety Commission) to the NLRB (National Labor Relations Board) to the SEC (Securities and Exchange Commission).

A few thoughts from me:

1. Wow, we have a lot committed in non-discretionary spending. I knew it was high, but I thought it was more like 40% -- not 70%. Something's going to have to be done about this or our budget is going to be in a whole lot of trouble.

2. Interest at 10%, huh? That's a killer for me. As a believer in having no debt, paying 10% in interest is a killer. If that was happening to me personally, I'd make some radical changes in my lifestyle to get my budget under control. Another thought: I bet the government wastes 10% of the budget on needless over-spending (paying $100 for something that only costs $50), bureaucracy, and simple mis-management. If we could cut that in half and keep our spending under control, we could eliminate our interest costs.

3. Don't get me started on Social Security.

4. The piece notes that we've spent more on defense in past years than we are now, and to me, providing for the national defense is one of the legitimate reasons for a federal government. Of course we all have different opinions on how much to spend on defense, but somehow I don't mind paying for something that's going to keep me alive. Then again, I'm sure a lot of waste could be found here too -- probably more in equipment than in personnel. I don't think anyone's getting rich by serving in our military.

5. All the "good stuff" gets only 8.5% of our spending. It's still a huge number (any percentage of $2.7 trillion is a big number), but still -- wouldn't you expect it to be more? I know I did.

And just to close on an up note -- all of us give four months of our lives every year to pay for this stuff. Very encouraging, huh? ;-)

Tax Credit Versus Tax Deduction

I know this is tax 101 for many of you, but I wanted to link to this post on the difference between a tax credit and tax deduction for those of you who aren't sure. Here's what Kiplinger's has to say:

A tax credit lowers your tax bill dollar for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. If you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are.

Dollar-for-dollar tax reductions are better than a percentage decrease. That's why I LOVE tax credits -- I wish there were more of them. ;-)

Your Tax Rate is 40%

Check this out. It's an article from Money Central that says your real tax rate is 40%. The details:

Politicians...generally talk about only one tax: the federal income tax, which offers graduated rates from 10% to 35%. Politicians rarely talk about what real people experience: the true maze of taxes and government benefits. If someone put them all together, we could see what our actual tax burden was. We could see who pays at the highest or lowest rates. Discussions of tax policy wouldn't be a waste of time.

Well, two researchers did it.

In a study for the National Bureau of Economic Research, Boston University economists Laurence J. Kotlikoff and David Rapson have found that our all-in marginal tax rate is 40%, give or take a bit. Yes, you read that right: 40%.

Most workers will pay about that much on each dollar of income when all taxes -- federal and state income taxes, sales taxes, taxes for benefit programs, etc. -- are considered.

40%? Yikes! Is it any wonder we hate all these taxes?

I try everything I can to get out of as many taxes as possible. I fully fund my 401k, have IRAs to boot, save for college in 529s, and the like. And, one thing that often goes unnoticed, I don't spend when I don't have to (saving me sales tax in addition to an unneeded purchase.)

Any tips out there for how to get out from under taxes? I'd love to hear some good ones.

Social Security is Robbing Me of $1 Million; You Too?

On my post titled What is the Most Hated Tax in America?, I had a very interesting comment:

I know it isn't the biggest chunk of change, but what if I could have put my 7.5% plus my employers 7.5% into a mutual fund over the past 15 years? It makes me want to tear my hair out.

I thought this was an interesting proposition, so I decided to tackle it -- what would someone have saved if they had put their FICA tax and their employer-paid FICA tax and invested it instead of paying it to the government. Here's what I did:

1. I found a historical listing of FICA rates on the University of Wisconsin website.

2. These rates break down into two groups -- Social Security Tax (6.2% in 2007 and subject to a wage maximum) and Medicare Tax (1.45% in 2007 with no wage maximum -- though there was a limit up through 1993.)

3. I assumed a person started work in 1963 (the first date on the rate schedule I found) and had an income of $50,000 (good pay level, but not super rich) in the middle of their career (at age 44, 1985.)

4. They worked until age 65 in 2006.

5. They got 4% raises per year. I used this number to calculate the salaries back from $50,000 to the start of their work life at age 22 and to calculate it forward from $50,000 to age 65. Using these numbers, they started their career in 1963 earning almost $22,000 a year and ended it in 2006 making almost $114,000.

6. For each year, I calculated what the employee paid, then doubled it to get the employer share as well.

7. I assumed they saved their share as well as the employer's share each year and got an 8% return throughout the years.

Want to make a guess as to how much their nest egg would be worth when they retired in 2006?

$865,690

Yikes!

This, of course, would be in addition to whatever they had saved from other funds for retirement (like most people do now.) But even if the person saved nothing else, they would have a nice little next egg.

Now let's play with the numbers a bit. Here goes:

• If they were only earning $40,000 in 1985, they would have had $837,065. Still a decent amount.

• If they were a high earner and made $75,000 in 1985, they would have $901,305 at retirement. Are you getting the theme here? There's not much difference based on the person's income since many of the taxes max out at the higher rates.

• If they were a low earner in 1985, earning only $10,000, they would have had $296,044 in 2006. Obviously, the higher incomes are paying more into the system and funding it for lower income earners.

• Now let's stay with the original assumptions but say the savers could have earned 10% a year on their investments. They would have had almost $1.3 million saved at 65.

• Now let's say they earn 10% and they grew their salary 6% on average a year (not just 4%.) Still $1.3 million. Why? They're over the maximum each year on the FICA, so no more is being taken out.

So, while this was a bit of fun, what's the conclusion?

My conclusion is that I would rather opt-out of the program, keep my money myself, invest it myself, and count on the government for nothing at retirement. Since I'm already counting on the government for nothing, but I'm having to pay in anyway, my alternative/preferred solution would ultimately net me over $1 million.

I'd take it -- if they'd let me.

How to Make Easy Money

Like to make easy money? Me too. Here's how:

1. Adjust your federal income tax withholding so you owe no taxes at the end of the year and get no return.

2. Take the money each month ($212.33 on average -- more on this later) that would have gone to the government and put it into an interest-bearing account at 5% (you may be able to do better, but I picked 5% for ease of calculating.)

3. At the end of the year, you'll have $58.44 more than you would have otherwise.

If instead you invested that money and it returned 8%, you would have $93.51 more dollars than you would have had otherwise.

Now think about how much extra money this would be over 20, 30 or 40 years of a working career.

Ok, so these amounts aren't fortunes, but you get the idea. And why let free money pass you by.

What's spurring this suggestion from me? I recently saw that income tax refunds are averaging $2,548 so far this year. The details:

With nearly half this year's tax returns filed, the average refund is up more than $100 from last year at $2,548, Internal Revenue Service Commissioner Mark Everson said Tuesday.

Everson, in remarks prepared for a House hearing, said the tax agency had issued 50.5 million refunds out of the 60.9 million returns received as of March 10, for a total of $128.7 billion. He said the average refund was up about $125 from last year.

Why give the government an interest-free loan? Adjust your withholding and get your $58!!!! ;-)

By the way, anyone out there know of any good calculators that help people set their withholding to the correct amounts?

How to Recover Excess FICA Payments

Have you ever switched jobs in the middle of a year? If so, and if you earn a decent salary, you may have over-paid your FICA tax and have a refund due. Here are the details from Yahoo on how to recover excess FICA payments:

In 2006, Social Security was collected on your earnings up to $94,200.

If you earned this much at one job last year, you put in almost $5,840.40 that was matched by your boss. In this situation, the math is straightforward. Once your pay went over the limit, your payroll manager stopped withholding the tax and your take-home pay got a bit bigger.

But if you changed jobs and your combined income from both employers went over the limit, you probably overpaid your Social Security taxes. This is because the second company also withheld the tax, unaware of how much a previous employer had already collected.

You can get back the excess Social Security that was withheld when you file.

If you file Form 1040, line 67 of the form is where you'll get credit for your overpayments. Simply add the amounts of Social Security withholding reported by each employer on your W-2s and subtract $5,840.40. The result goes on this line, to be included in your total tax payments.

You also can claim the overpayment if you file the shorter 1040A. While it's not specifically noted on the return, the form's instructions (Page 53) tell taxpayers to enter their Social Security tax overpayments on line 43.

This has happened to me in the past. I realized it was happening and tried to get my second employer to decrease the rate of FICA payments but was told "we don't do that." (Maybe implying I was trying something illegal?) So I simply jotted it down on my tax notes, handed it to my CPA, and she took care of it at tax time.

Just another advantage of having a CPA do your taxes. ;-)

How to Get the Maximum Tax Deduction for a Donated Car

Here's a piece I found from USA Today that details how to get the maximum tax deduction for a donated car. The summary:

Under a provision in the law, you can deduct the fair market value of a donated vehicle if the charity fixes it up and gives it to a low-income individual or sells it to a needy person at a low cost. Only a handful of charities operate these programs, and not all used cars meet their standards.

In most cases, the charity will simply sell the car at auction, which means your deduction will be limited to the proceeds from the sale.

So here's what you want to have happen:

1. You donate the car.

2. The charity gives it away, uses it for its own purposes, or sells it for a really low price (far below fair market value.)

3. If any of these happens, you can deduct the "fair market value" which you can usually find from Kelly Blue Book. This amount will almost always be higher (and thus a better tax deduction for you) than option #2.

Option #2 is that the charity sells the vehicle (usually at below fair market value) and pockets the cash. You can then claim the amount they sold the car for.

Here are a couple examples:

• Let's say you have a car with a fair market value of $4,000. If the charity keeps the car, gives it to a needy person, or sells it to them at a really low price (let's say $500), then you get a deduction of $4,000. (By the way, I'm unclear what exactly constitutes a "low cost," so you'll want to check into those specifics ahead of time.)

• The other option is that the charity just wants the cash, so they sell it to someone for $3,200. You can claim a $3,200 deduction.

We donated two cars a few years ago under the old law -- where you could deduct the fair market value no matter what the charity did with the car. But before we donate our next car, I'll confirm with the charity that they will give it away, use it for its own purposes, or sell it for a really low price -- just to make sure I can take the full deduction.

Your Hobby and Taxes -- Can You Deduct or Do You Owe?

I've suggested before that a great way to earn some extra income is to turn your hobby into a business.  That said, some of you may prefer to keep your hobby just that -- a hobby (as in non-income producing.) But how the IRS views your hobby -- as a hobby or as a business -- is different than how you may view it.

As you may have guessed, like other things related to the IRS, this can be quite a complicated situation. The Motley Fool tries to explain when your hobby is a hobby, when it's a business, and how you should treat either of these come tax time. Here are their key points:

The IRS has a relatively simple test for determining whether someone is engaged in a hobby or a business. The main issue is whether you are trying to make a profit through your work, which is a goal of businesses but typically not of hobbyists.

However, just because you don't make a profit in a given year, that doesn't mean you didn't intend to make money. The IRS looks at several factors to determine whether you have a profit motive. These include the way in which you operate, how much time and effort you spend on the activity, whether you're financially dependent on the activity for your livelihood, what your level of expertise is, and what actions you take to try to make the activity more profitable. The IRS will also look back to see whether you've made profits in a good number of past years. If you have, you'll more likely be treated as a business for tax purposes. But if you consistently spend more in expenses than you earn in income, the IRS is likely to decide that you don't really have an interest in making money from your labor and will classify what you're doing as a hobby.

Depending on whether your hobby is a business or just a hobby then dictates how you handle it on your taxes. Is it a deduction? If so, what can you deduct? And where? Or did you make money and you owe taxes on it?

I've only had one hobby that was even close to making money (writing magazine articles), and I treated it as a business from the get-go. Why? Because I always intended to earn money doing it and did so from the start. I kept expenses low too, so I always had a profit.

That said, I know many people go from having a hobby for pure fun to developing some income through the years to a point where it's now a business. Just when it goes from being a hobby to a business tax-wise is a tricky question. If you're in this situation, refer to the info above or simply click through and read the full article.

What is the Most Hated Tax in America?

Here's a piece from Money Central that suggests that the real estate tax is the most hated tax in America. It details why the author (and the person he writes about) thinks this is the case, but I'm not buying it.

First of all, let's consider the main candidates for most hated tax:

• Federal income tax
• State income tax
• Sales tax
• Real estate tax
• Inheritance (death) tax
• Social Security tax
• Medicare tax

Yes, there are others (such as taxes on gasoline and cigarettes) but many of these are rolled into the price of the product and thus not readily separated (and hated) as easily as the other types of taxes.

So let's look at this group of taxes. Which is really the most hated?

There are reasons to hate all of the above. Here are some of the potential reasons you might hate any of the above taxes:

• Federal income tax - It costs me the most of any tax and I'm less than sure that the government is spending it in an economical way.

• State income tax - It's a good chunk of change and I'm even less certain Michigan is spending it properly than I am about the spending done by the federal government.

• Sales tax - A thorn in the side every time I buy something.

• Real estate tax - A tax that seems to go no where but up and the services it supports seem to go nowhere but down.

• Inheritance (death) tax - If you've worked a lifetime to build a fortune, this one will really burn you.

• Social Security tax - Nothing makes people madder than paying into something they think they'll never get to use.

• Medicare tax - Again, will I ever use this?

Which one is worst? Here's what I'd suggest: the tax you hate the most is the one that costs you the most.

For me, this means the federal income tax my most-hated tax. It's a big budget-buster and much of it is being wasted by our government officials. Yes, the money does pay for needed services (which can be said for all of these) and I'm willing to pay my fair share, but someone needs to get a handle on the difference between "needs" and "wants" at the federal level. Someone also needs to teach them a bit about spending less than they earn and not over-paying for services.

So what is your most-hated tax?

H&R Block Launches First Virtual Tax Experience in Second Life

Here's a bit of news I received from H&R Block over the weekend:

H&R Block, the world’s largest tax preparation company, is now the first in its industry to open up shop in the fast-growing 3D online universe known as Second Life. 

The company today launched “H&R Block” Island, a new destination for the multitudes of people who spend more than 7 million hours per month as they live, work, and play in Second Life. With digital tax professionals sharing free advice, providing access to the latest tax preparation products, and hosting tax-related events, tax time may never be the same.

Visitors to H&R Block Island will experience a new virtual tax world as they arrive at a landing point dotted with welcome signs, maps and other navigational tools, including:

• A virtual H&R Block tax experience where real life tax professionals will be available in avatar form to answer tax-related questions free of charge. H&R Block’s virtual tax advisor avatars are named Hope Bechir and Rex Philbin. Hope and Rex will hold office hours in Second Life from 6-7 p.m. PDT on Tuesdays and Thursdays starting March 13 through April 17, 2007. 

• A main auditorium where visitors can watch a video describing the development of H&R Block’s revolutionary innovative new tax preparation product, Tango as well as attend other in-world activities. 

• An exclusive H&R Block Tango product bundle that costs 100 Linden Dollars and includes: 1) A special code that provides access to the new Tango product, which retails in the real world for $70, 2) A variety of virtual scooters to tour H&R Block Island, virtual dancing shoes that allow users to do a tango-style dance when worn, and other Tango avatar apparel.

• A program that will enable Second Life residents to earn Linden Dollars by helping to market H&R Block’s Tango product bundle on their own virtual property.

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Ok, a few thoughts on this from me:

1. I applaud Block for innovative marketing. As a marketing professional, I like the fact that a big company is on the cutting edge.

2. Personally, I have no knowledge of or interest in Second Life. I have enough trouble managing/dealing with my first life. ;-)

What does everyone else think? Is this a great idea or simply something that's newsworthy but not worth much?

Good Advice: Be Sure You Don't UNDERPAY Your Taxes

In my post titled Don't Give the Government an Interest-Free Loan, I advocated changing your withholding so that the government doesn't owe you any money (or at least not very much) at the end of the tax year. A reader left a good comment that said you don't want to take this idea too far:

Don't try to 'game the system' by under-withholding such that you owe the government at tax time. Although it's tempting to think that you can deposit the money that you think you're going to owe them and earn even more interest, you can be penalized for under-withholding. (Not to mention the risk of possibly not having the money you owe them at tax time!)

The sensible strategy for most people is to try to be tax-neutral (nothing owed, nothing refunded) come April 15th.

Good point!

I try to set it so that the amount that I get as a refund is as small as possible, but I do hedge my bet a bit by making sure there is at least some that the government owes me. I don't want to guess wrong on my withholding and owe a bunch of tax (not to mention penalties) at the end of the year.

A GREAT Idea for Dealing with Large Capital Gains Taxes

In my post titled Six Investment Pitfalls, I made the following comment:

Yep, I've done all of these in my lifetime. Early on in my investing career, when I knew little about the subject and thought I could pick killer stocks better than anyone on the planet, I did all of these -- several times. Then, when I learned a bit more, I became somewhat smarter, but didn't quite get all the facts right again. Now I have some mutual funds that I should have never been in (and want to get out of) but yet have huge capital gains tax implications if I sell them. Making bad decisions early on can certainly have long-term consequences. Hopefully, someone can learn from my mistakes.

A reader left the following comment:

Your comment about capital gains on the unwanted mutual funds sent me on a 30-minute exploration of irs.gov (courtesy of my employer) and Pub 590 looking for a way to make IRA contributions ('tis the season, you know) in non-cash form. No luck.

You could, however, make charitable contributions in the form of stock or mutual funds. If your level of charitable giving reaches such a level, it could be tax-deductible for you. Your church, for example, might be willing and able to accept shares instead of weekly cash in the plate and you kill two birds with one stone.

What a GREAT idea!!!! It's so simple! And so straight-forward! And so easy (I hope -- I've contacted Vanguard, we'll see what they say)! I can't believe I didn't think of this option myself.

So here's what I did/will do:

1. Select a mutual fund I want to get out of. (Done.)

2. Contact Vanguard about how to gift the shares of this fund to a charity. (Done -- waiting a response.)

3. Arrange with the charity to gift them the shares.

4. Complete the transfer.

5. Take the money I was going to give the charity (which I'm now giving via the mutual fund donation) and put it into savings -- thus replenishing the savings I lost.

6. Re-invest the new savings into the funds I want it to be in!

Sound like a good plan?

Six Simple Mistakes that Slow Down Your Tax Return

Would you rather have your $2,000 tax refund sooner or later? According to the IRS, that’s what the average tax return was in 2006.  Yet millions of returns were delayed not because of complicated issues, but due to simple mistakes in the filing process.  Check for these common errors before completing your tax return this season:

• Bad math – The IRS examines all returns for mathematical errors, so take out those calculators and double-check your arithmetic. Better yet, use tax software that will automatically do the calculations for you.  And be careful when transferring figures from one schedule to another.  Simple math errors, which unbelieveably occur very frequently, will at best slow down your return and at worst will lead to a penalty.

• Incorrect or missing Social Security numbers – Your Social Security Number (SSN) is your identity, according to the government, so carefully print your correct SSN at the top of each page.  Copy the SSN for your spouse and dependents exactly as they appear on their cards. If there have been any name changes, contact the Social Security Administration immediately to correct the information. 

• Incorrect address – You won’t get a return if the government can’t find you! Tens of thousands of refund checks end up back at the IRS annually due to people providing the wrong address or moving without a forwarding address.  Avoid this issue by using the peel-off label provided with your return (making any needed corrections).  And be sure to have your mail forwarded if you move.

• Misusing the tax tables – Be sure to find the correct column for your filing status since the tax rates are different from one status to another.  To manage the small print of the tables, use a piece of paper to “underline” the correct column and use a magnifying lense to highlight the figures.

• Not signing and dating the return – In the rush for timely tax returns, many people simply forget to sign and date their return. An unsigned return won’t be processed and if you miss the April 15th deadline, you could trigger late penalties. If filing a joint return, both spouses must sign and date the return.

• Insufficient postage – Thousands send out their tax returns only to find them back in their own mailbox a few days later – again, a mistake that could result in late fees.  Send it once with the right postage and you’ll save time and money.

You can’t avoid taxes, but you can stop your refund from avoiding you!  Take a few extra minutes to check these important points to help ensure that your return is processed quickly.