Beyond Paycheck to Paycheck

at May 18, 2009 in Carnivals, Cash Flow, Debt management, Investing, Media, Ranting, Retirement, Saving Strategies, Tax and Uncategorized. 3 Comments

One of the best parts of the weekly personal finance carnivals, including this week’s carnival hosted by WiseBread, it the wide variety of personal finance topics covered. In addition, I always take the time to enjoy an article or two that I’ve been meaning to write myself but just haven’t gotten to. This week was no exception, even if my post about The New Frugality made the cut. Here are my three favorites of the week:

J. Money from Budgets Are Sexy presents Paying extra towards your loans now, goes a long way later! This is so true it hurts. How much pain? As J. Money says, “It’s like kickin’ compound interest in its head and getting away with it :)” How could you not enjoy?

Another favorite: Save Money By Buying the “Good” Toilet Paper by That One Caveman. Two very important lessons from this title. First, you can never go wrong putting “toilet paper” in a blog posting title, something I learned a while back when I wrote Toilet Paper As an Economic Indicator last fall - still is a bizarre way to look at the world. Second, sometimes paying for quality is actually cheaper than paying for quantity. (Amazingly, this was also the theme of the toast my brother gave for my wife and I at our wedding, but that’s another story for another day.)

Money Lessons from Monopoly is another wonderful article. Free Money Finance reminds us that Monopoly is a great teacher not only of the importance of cash-flow (how much fun is it to mortgage our properties?) but also of luck (the frustration of your opponent consistently missing your hotels as he marches around the board).

Quick FYI: The Total Candor web site was featured in the Philadelphia Inquirer over the weekend for savings help. Did you see it? If not, see it now.

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No RMD in 2009 - have you told your ancestory?

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at April 22, 2009 in Retirement and Tax. 0 Comments

In response to the market turmoil Congress recently passed a one-year waiver on RMDs.

You: What are RMDs?

Required minimum distributions.

You: That didn’t help.

Shortly after you reach 70 1/2, you must begin to take a proportion of your money out of your qualified retirement plans annually.

You: Or?

You pay a penalty.

You: What if I don’t want to take the money out, since it’s better to save my money longer? Can I just pay the penalty?

The penalty is a 50% extra tax, so it’s never a good idea to ignore the RMD. Still, you are only required to take the money out of the account, not to actually spend it.

However, retirees can skip their 2009 RMDs thanks to the previously mentioned Congressional action. While the waiver sounds simple, in practice it’s not. I wrote a summary article about the 2009 RMD waiver implications and opportunities at the About.com web site, where I guide the Retirement Planning channel and blog. If you or your loved ones are 70 1/2 or older, make sure you take a good read.

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Friday Q & A: First Time Home Buyer Tax Credit

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at April 10, 2009 in Housing, Q & A and Tax. 2 Comments

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

I was wondering if we qualify for a first time home buyer credit. We just bought our first house in Nov 2008. My husband purchased a home with his ex-wife more than 3 yrs ago, (his name is still on that one) but has not lived there in 4 yrs.

Thank you for your help,
Donna

I have been living in a trailer for 11 years. I co-own the trailer with my spouse. Can we take the first time homeowner credit?

-TMC

Straightforward Answers: Donna: Yes. TMC: No.

Detailed Explanation:

Both the 2008 version of the first time home buyer tax credit and the credit for 2009 first time home buyers have raised a ton of interesting questions (By far, they are the most widely read and commented on posts in the history of this blog.) Let’s take these two questions one at a time.

Impact of A Spouse’s Current of Former Home Ownership

One of the key constraints of this credit is that if either spouse is disqualified for any reason, than both spouses are disqualified. (The same is not true of unmarried taxpayers who jointly purchase a home. This is why engaged couples have an enormous tax planning opportunity. For example, if one fiancé owns a condo but they both plan to move in together into a home in the suburbs after the wedding, it’s best to buy the home before they get married. Details available throughout the comment section of the 2009 article.) In Donna’s case, the question is whether her husband’s previous ownership of a home with his ex-wife disqualified him and his current wife.

If he still owns the home with his ex-wife, you’re Donna and her husband are out of luck. However, if he moved out of that home more than three years ago and it became his ex’s home exclusively at that time, you’re in the clear. Take the credit.

The answer to TMC’s question is less a happy one. In Congress’ desire to be generous, the credit specifically applies if you are to purchase a trailer home as your first home. As such, a reasonable interpretation of the law says that previous (or current) ownership of a trailer similarly disqualifies you. So if you’re going to buy your first home and it is a trailer, you’re in good shape to take the credit. If you currently own a trailer and then seek to buy a first home on a permanent foundation, you’re apparently out of luck.

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First Time Home Buyer Credit - Your options if you buy after April 15

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at March 25, 2009 in Housing and Tax. 96 Comments

The IRS released a notice recently concerning an obvious contradiction:

The deadline to purchase a home and potentially qualify for the 2009 first time home buyer tax credit is November 30, 2009.
You can claim this $8,000 refundable tax credit on your 2008 tax return.
Your 2008 tax return is due April 15, 2009.

You: So how can I claim a credit on my 2008 tax return if I haven’t purchased a home by April 15?

Here are your options:

Extend your tax return. File Form 4868 and automatically receive a six-month extension to file. Note, this is not an extension of time to pay your taxes if you think you’ll owe. Then again, will you owe after factoring in that $8,000 tax credit?
File now. Amend later. Another option is to file your return on time and then file an amendment (using Form 1040X) after you close on your home. Presto: up to $8,000 back in your pockets!
Claim it in 2009. You don’t have to take the first time home buyer credit in 2008. Instead, you can choose to take it in 2009. For some people, this may actually be better.

You: But what about the time value of money? Better to receive a dollar today (or 8,000 of them!) than a dollar next year, right?

Absolutely. However, for some people the choice may be $5,000 today or $8,000 in a year.

You: How come?

If your income is too high in 2008 to receive the full credit and you think you might make less money in 2009, it may pay to wait to take the credit until then. Remember, the income limits for the full credit are $75,000 MAGI if filing as a single person and $150,000 if married, filing jointly.

You: What if I already filed my 2008 tax return, subsequently buy my first home before December 1, and want to take the credit on my 2008 tax return? Can I still do that?

Absolutely. See option number two above: amend.

Friday Q & A: Stimulus payments and recovery rebate credits

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at March 6, 2009 in Q & A and Tax. 0 Comments

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

My husband and I have always claimed my daughter and granddaughter on our taxes. She graduated college in 2008 and started a job in Sept of 2008. Since she only worked 4 months of the year, I convinced her to let us claim she and her daughter one last time.

She will file a return, but she will claim 0, since we are claiming she and her daughter.

Will she be able to get a stimulus rebate or tax credit since she is not claiming herself or her daughter?

- Judy

Straightforward Answer: No, she won’t.

Detailed Explanation:

If you can’t claim your own exemption on your tax return, you’re not eligible to receive a stimulus payment or a recovery rebate credit. However, your mere existence may increase the payment received for the person claiming your exemption. (Read more about the most recent economic stimulus payment and recovery rebate credit.)

Some people could conceivably fall into either category (a dependent or able to claim their own exemption). A graduating college student is one example. In such a case, it may make more sense to prepare the tax returns both ways (one where the person is claimed by another and one where she claims herself). In the case where you the individual claims herself, she may qualify for the full $600 (depending on her income level). But you’d have to compare that against the loss of her exemption on her parent’s return.

Yes, that’s something we do as part of Total Candor Tax Prep.

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Economic Stimulus - What’s in it for me?

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at February 23, 2009 in Ranting and Tax. 5 Comments

You: This economic stimulus - what’s in it for me?

There’s something for everyone (almost) in the economic stimulus package. But it probably isn’t much.

You: Well, what is it?

Starting in several weeks, you’ll get about 13 extra bucks in your weekly paycheck (probably.)

You: Just thirteen bucks? Didn’t the stimulus cost nearly a trillion dollars?

Yes and yes.

You: Okay then. Thirteen bucks. For how long?

For the rest of the year.

You: Then what happens?

Your stimulus gets reduced to nine dollars a week.

You: Is this a joke?

Define “joke.”

You: Something meant to evoke laughter through humor.

Intentionally evoke laughter or unintentionally cause laughter?

You: Intentionally evoke.

Then no.

You: Jeez. What else will I get from the stimulus?

That depends.

You: On what? On how I spend my $13?

No. It depends on whether you’re unemployed, needing health insurance as a result, looking to buy a home, or other specific conditions. Here are the highlights of what you may receive.

You: In addition to my thirteen bucks.

Right.

Unemployment Benefits

The first $2,400 of unemployment benefits you receive during 2009 will not be taxable.

You: What if I’m not unemployed?

Then this is not relevant to you.

Health Insurance

If you lose your job between Sept 1, 2008 and December 31, 2009 and want to keep your health insurance, you can select COBRA and the government will chip in 65% of the cost. You pay the remaining 35%.

You: What if my insurance is really expensive and I don’t lose my job?

Then this doesn’t apply to you.

You: What if I hate my job and quit?

No dice.

You: What it I currently have to pay more than 35% of the premium as an employee?

Then try to appreciate the irony.

People on Social Security or Who are Disabled

Many of those collecting Social Security or who are disabled will receive a one-time $250 check.

You: I suppose if I’m not disabled or on Social Security,

Correct. Nothing.

Car Buyer Tax Deduction

If you buy a new car before the end of this year, you can deduct the sales taxes you pay on the new car purchase even if you take the standard deduction.

You: What if I’m more practical and buy a slightly used car?

No tax-break.

You: What if my state has no sales tax?

No tax-break.

You: What if I buy a bicycle instead?

You’ll get better exercise but still no tax break.

First Time Home Buyer Tax Credit

The existing first time home buyer tax credit has been overhauled. The 2009 version of the first time home buyer tax credit was the subject of a recent post.

You: What if I already own my home?

Tell a friend.

You: That I bought a house too soon to qualify for the credit?

No. That your friend could still take advantage of the creidt.

You: Why would I want to do that?

Because you’re trying to be a nice person.

Miscellaneous

There are also some education-related spending and tax breaks for transit accounts.

You: I graduated school a fair bit ago. What’s the deal with the transit accounts?

You can spend up to $230 a month pre-tax for public transportation you take to work.

You: But I drive to work and my spouse works from home.

Then you get nothing.

You: Except the $13.

True.

You: Michael, you know, this conversation wasn’t very, how should I say . .. .

Stimulating?

You: That’s the word.

"financial education"

Rental income as IRA compensation?

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at February 20, 2009 in Retirement and Tax. 0 Comments

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

I will probably not be working in the States during 2009, but I have rented out my condo in Boston, so I will have rental income of about $20,000 in 2009, but I plan to reduce the taxable income by deducting expenses like my condo fee. Can I still say I have earned $20,000, and contribute $5,000 to my Roth IRA?

Hong - somewhere overseas

Straightforward Answer: Could be, if your tax preparer knows what questions to ask.

Detailed Explanation

In order to contribute $5,000 or more to a Roth or regular IRA, you must have earned at least that amount. The types of earnings that count for this purpose are:

compensation as an employee
net-earnings from self-employment
alimony received

It is clear that none of the $20,000 rent you will receive can be considered either employee compensation or alimony. Furthermore, the $20,000 you will receive is not net earnings (profit) but rather gross revenue. As such, your expenses (like condo fees) will be deducted to calculate your net earnings from self-employment. If you had $20,000 or more in expenses, you would have no net earnings and no ability to contribute to an IRA. However, you don’t have to take all of your expenses. You could take $15,000 of expenses and show net earnings of $5,000. Your personal exemption and standard deduction will wipe out any tax you owe on the $5,000 and yet you’d still be able to contribute to a Roth.

Not bad, right?

Keep in mind that in order for net earnings from self-employment to qualify as earnings for the IRA contribution test, you must be actively involved in the business - in your case managing the property - not just an investor.

Great question and another reason why you may very well pay less with a better tax preparer.

More questions about taxes? Two of the most widely read posts in the history of the Beyond Paycheck to Paycheck blog are First Time Homebuyer Tax Credit: When a credit isn’t a credit but it’s still free money and Economic Stimulus Payments are now Recovery Rebate Credits - will you get yours?

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First Time Home Buyer Tax Credit - 2009 Version

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Update: Here are your first time home buyer tax credit options if you buy a home after April 15, 2009.

at February 18, 2009 in Housing and Tax. 365 Comments

After weeks of intense negotiation, the new first time home buyer tax credit of $8,000 was signed into law this week. Here are some first time home buyer tax credit FAQs:

Will I qualify for the credit?

You qualify for the full credit if:

You close on a home between January 1, 2009 and December 1, 2009 AND
You haven’t owned a home in at least three years AND
Your adjusted gross income is less than $75,000 (single) or $150,000 (married).

How much is the first time home buyer tax credit worth?

The credit is for 10% of the purchase price of the home, up to a maximum of $8,000.

What if I wouldn’t owe $8,000 in tax?

Not a problem. The first time home buyer credit is refundable, meaning that you get the money even if it exceeds what your tax liability would have otherwise been.

Do I have to pay back this money?

No. You keep the $8,000.

Really?

Yes, unless you sell the home within three years.

How is this different from the previous version of the home buyer tax credit?

In several ways. Read more about the 2008 version of the first-time home buyer tax credit and note that it

Has a maximum value of $7,500.
Must be paid back over 15 years.
Is applicable to homes purchased after April 9, 2008 and before July 1, 2009.

The new credit seems better. If I qualify for both, why would choose the old one?

You wouldn’t.

What other questions do you have? Comments? Happy to see this credit because you’re about to buy a home? Ticked off because you bought one in late 2008 or even 2007? Do ask. Do tell.

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Recovery Rebate Credit: Friday Q & A

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at February 13, 2009 in Q & A and Tax. 2 Comments

My daughter did not work in 2007, and she had no income. She did not file a 2007 tax return because she did not work. Will she be able to get the recovery rebate check this year. She did work in 2008.

- Lisa S.

Short Answer: If she files a tax return, she will get the credit.

Detailed explanation: Few tax topics are raising more questions and (errors in tax preparation) this year then the recovery rebate credit. It’s a topic I first discussed in January. In theory, it’s very simple: the recovery rebate credit gives you a second shot at last year’s economic stimulus payment. So,

If you got the maximum economic stimulus check last year, you won’t get a recovery rebate credit.
If you got less than the maximum, you might qualify for the recover rebate credit.

You: But what was the maximum economic stimulus payment?

The maximum was $600 for a single individual and $1,200 for a married couple. If you have children, your maximum was increased by $300 per child. Certain low-wage workers and those on Social Security also qualified for only a $300 payment ($600 if married). However, you needed to file a tax return to get the economic stimulus payment. If you didn’t file a return last year and qualify this year, you can still get the payment if you file this year. (That’s your daughter’s situation, Lisa.)

Read the original recovery rebate credit post for more details and extensive comments about other facts that may have changed your possible eligibility in leading to a possible credit coming your way. For example, if you had another child in 2008 (as I did), you’ll get the credit for that alone. If you’re income went down or up significantly, it’s also possible that you will be eligible for the credit.

Either way, make sure you’re getting your taxes prepared the right way!

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Financial literacy, recovery rebate credits, and living in balance

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at February 2, 2009 in Balance, Carnivals, Media and Tax. 3 Comments

I had a great trip to Chicago last Friday and Saturday, keynoting a financial literacy event to a large group of students ranging in age from 16 to over 50. The best part: a most enthusiastic crowd, many of which had traveled two hours of more for the education. Talk about self-selection for success!

I’m not sure financial literacy has ever been more important than today. More people get it everyday (”It” being the importance more so than the education, unfortunately, but I am working to change that.)

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Not surprisingly given what’s going on in the world, my post from several weeks ago, Economic Stimulus Payments are now Recovery Rebate Credits - will you get yours? continues to get a ton of traffic and frequent comments/questions. If you didn’t receive the maximum economic stimulus payment last year (that special check often for $600 or $1,200), find out if you’ll get it this year. You might be surprised at the answer.

# # #

I just finished reading through this week’s Carnival of Personal Finance, hosted by Funny About Money and featuring my article Roth IRA Contribution Limits: Your Earnings, Income, and Marital Status Matter - a good primer as we enter the time of year when most people make their IRA contributions.

The best “other” article of the carnival this week is by Kate at The Paycheck Chronicles, titled 5 Reasons That Not Saving Money is Saving Me Money. It’s a great reminder of the importance of not sweating all the small stuff, and, more importantly, of living in balance, a key component of living Beyond Paycheck to Paycheck.

Enjoy and have a great week!