By Tom Tennant

You’ve got bills to pay and a creditor or two reminding you that you’re a couple weeks behind on your payment. Maybe your car is in desperate need of repair. Or, heck, could be that vacation is around the corner and you’d like some extra “walkin’ around” money.

No matter the reason, the promise of quick cash by way of an “instant tax refund” is pretty darn alluring. The problem is, that fast federal tax refund isn’t a refund at all. It’s a loan – and an ultra-expensive one at that.

We’re talking tax preparation fees, interest rates that could soar into the triple digits, and the possibility that your refund will be less than your loan amount.

Which begs the question, if you can file your taxes electronically, possibly for free and with help from local non-profit groups and the IRS, and then have Uncle Sam direct deposit your refund straight into your checking account in under two weeks, why give so much of that refund away to get cash in your pocket the same day?

It just doesn’t make sense.

Government intervention in Refund Anticipation Loans

Consider, too, that the government is so down on these types of loans it won’t even allow businesses to call the loans “instant tax refunds” anymore. Which is good, since they’re not refunds at all. They’re now called Refund Anticipation Loans, or RALs. And in 17 states RALs are highly regulated to protect consumers.

Starting this year, the IRS won’t tell tax preparers and financial institutions whether a person’s refund could be garnished for unpaid taxes or child support. This makes underwriting the loan risky for lenders, because they’re taking a chance that refund will come through and the borrower will pay back the loan.

Lenders responded by lowering the amount you can borrow to about $1,500 and jacking up the interest rate on the loan to anywhere from 50 percent to – get this – 500 percent. Yes, you read that right: 500 percent. This, according to the Center for Responsible Lending.

To get an RAL, you often visit a tax preparer who charges you $50 or so to prepare your taxes and then works with a bank to lend you the refund. Pay the tax preparer’s fees with your refund, and that’ll cost you a little extra, too.

Then there’s the off chance that your refund amount will be less than the amount your tax preparer “anticipated.” Or that a snafu holds up your refund for a short period of time. Or the IRS denies your refund altogether.

No matter the reason, you’re still responsible for paying the loan in full. And if you can’t … ouch. That’s going to cost you.

The more you know, the less you spend

But if, after all that, you still want to pursue an RAL, the City of Chicago suggests you ask for this info in writing from your tax preparer:

• Fees that the preparer charges for tax preparation
• Fees that the prepares charges for facilitating the RAL
• The RAL’s Annual Percentage Rate (APR)
• The RAL’s total cost
• The estimated date the consumer can obtain their RAL money

If the tax preparer balks, go elsewhere. No matter how good the deal sounds. They could be up to no good.

Remember, if you are pursuing an RAL just to pay down some bills, you could be making things worse. Before you take out another high interest loan, talk to your creditors to see if they’ll give you an extension. Most creditors will work with you, if you’re not too far behind. Wait for your full refund and pay down even more.

And look into free tax prep help by visiting www.irs.gov or calling (312)-566-4912.

Source URL: Can’t wait for a refund? Refund Anticipation Loans will cost you

Copyright Protected © 2011 Money Blue Book: Personal Finance Blog. All Rights Reserved.

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By Tom Tenant

You’ve got bills to pay and a creditor or two reminding you that you’re a couple weeks behind on your payment. Maybe your car is in desperate need of repair. Or, heck, could be that vacation is around the corner and you’d like some extra “walkin’ around” money.

No matter the reason, the promise of quick cash by way of an “instant tax refund” is pretty darn alluring. The problem is, that fast federal tax refund isn’t a refund at all. It’s a loan – and an ultra-expensive one at that.

We’re talking tax preparation fees, interest rates that could soar into the triple digits, and the possibility that your refund will be less than your loan amount.

Which begs the question, if you can file your taxes electronically, possibly for free and with help from local non-profit groups and the IRS, and then have Uncle Sam direct deposit your refund straight into your checking account in under two weeks, why give so much of that refund away to get cash in your pocket the same day?

It just doesn’t make sense.

Government intervention in Refund Anticipation Loans

Consider, too, that the government is so down on these types of loans it won’t even allow businesses to call the loans “instant tax refunds” anymore. Which is good, since they’re not refunds at all. They’re now called Refund Anticipation Loans, or RALs. And in 17 states RALs are highly regulated to protect consumers.

Starting this year, the IRS won’t tell tax preparers and financial institutions whether a person’s refund could be garnished for unpaid taxes or child support. This makes underwriting the loan risky for lenders, because they’re taking a chance that refund will come through and the borrower will pay back the loan.

Lenders responded by lowering the amount you can borrow to about $1,500 and jacking up the interest rate on the loan to anywhere from 50 percent to – get this – 500 percent. Yes, you read that right: 500 percent. This, according to the Center for Responsible Lending.

To get an RAL, you often visit a tax preparer who charges you $50 or so to prepare your taxes and then works with a bank to lend you the refund. Pay the tax preparer’s fees with your refund, and that’ll cost you a little extra, too.

Then there’s the off chance that your refund amount will be less than the amount your tax preparer “anticipated.” Or that a snafu holds up your refund for a short period of time. Or the IRS denies your refund altogether.

No matter the reason, you’re still responsible for paying the loan in full. And if you can’t … ouch. That’s going to cost you.

The more you know, the less you spend

But if, after all that, you still want to pursue an RAL, the City of Chicago suggests you ask for this info in writing from your tax preparer:

• Fees that the preparer charges for tax preparation
• Fees that the prepares charges for facilitating the RAL
• The RAL’s Annual Percentage Rate (APR)
• The RAL’s total cost
• The estimated date the consumer can obtain their RAL money

If the tax preparer balks, go elsewhere. No matter how good the deal sounds. They could be up to no good.

Remember, if you are pursuing an RAL just to pay down some bills, you could be making things worse. Before you take out another high interest loan, talk to your creditors to see if they’ll give you an extension. Most creditors will work with you, if you’re not too far behind. Wait for your full refund and pay down even more.

And look into free tax prep help by visiting www.irs.gov or calling (312)-566-4912.

Source URL: Can’t wait for a refund? Refund Anticipation Loans will cost you

Copyright Protected © 2011 Money Blue Book: Personal Finance Blog. All Rights Reserved.

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I drove by one of those sign wavers dressed up as the Statue of Liberty this morning. Maybe you’ve seen one or two of them in your town. They wear green costumes and direct people to the offices of their employer, Liberty Tax Service, which prepares tax returns for people.

Weird thing was this particular sign waver had a beard. The Statue of Liberty endures some pretty harsh conditions there in New York Harbor, but last time I checked things weren’t so bad that the towering lady had grown a beard.

Other changes expected in your federal income tax return

There are some other things about this federal income tax season that are off kilter, as well. For one thing, outfits like Liberty Tax Service and other businesses that figure out your tax deductions for you are not likely to be making as many refund anticipation loans as they used to.

Those loans are attractive to many people who can’t afford to pay to have someone prepare their return. With a refund anticipation loan (RAL), though, they can have their return completed and e-filed and the company will give them a check right away–minus the “processing fee” and the tax preparation fee.

The tax preparation companies’ RAL business has been handicapped this year by the IRS’s decision to stop providing tax preparers with “debt indicators,” which let the companies know when their client’s refund might be withheld for outstanding debts. The IRS said that with electronic filing and direct-deposit refunds, the debt indicators are no longer necessary.

Many nonprofit groups are also trying to derail the RAL business by offering lower-income taxpayers free tax preparation when they have their refunds directly deposited into cooperating credit unions, who charge a far smaller processing fee. The goal of the program, such as the Earn It! Keep It! Save It! Program in the San Francisco Bay Area, is to help people get bank accounts and to start saving money.

As a result of these changes, H&R Block Inc., which made nearly $150 million on those loans last year, has decided not to offer them in 2011. According to the Winston-Salem Journal newspaper, the loans reached a peak in 2002 when 13 million were made, but analysts expect only 2 million this year.

The push for e-filing and direct deposit

The IRS is really encouraging people to file electronically and take advantage of the direct deposit offer. It gets people their tax refund in 10 to 14 days instead of the three to four weeks required for a paper check, and the process saves the federal government a lot of money.

The tax season–at least for those who itemize their deductions–was delayed somewhat by the last-minute tax bill passed by Congress in December 2010. This required the IRS retool its computers and delay processing the more complicated returns till mid-February.

But if recent trends hold steady, most people will e-file and get their refunds in a timely fashion. Last year, out of 142 million tax returns filed, 98.7 million were e-filed, and about two-thirds of those e-filed returns were prepared by professional preparers.

E-filers–and refunds for them–on the rise

Still, the number of people e-filing on their own was up 8 percent to 35 million people, and not surprisingly the number of visitors to the IRS website was up, despite the availability of turbo tax or some of the best online tax software available.

The average refund last year was a cup of coffee over $3,000, up 5 percent from the previous year, according to one of the myriad spreadsheets you can examine on the IRS website. The average federal income tax refund for those using direct deposit was nearly $3,200, a nearly 6 percent increase over the previous year.

Nearly half a million people from various federal tax brackets took advantage of the first-time homebuyers’ credit, earning $3.5 billion in total tax credits. The greatest number of first-time buyers was in California, where 58,179 people got $442 million in tax credits, and Florida and Texas were close behind with 46,000 and 42,000 people respectively.

Understanding that e-filing and direct deposits leave a lot of uncertainty (Did they actually get my return? When is that refund going to show up?), the IRS is providing an online tool, “Where’s My Refund,” that lets people track the progress of their money. All you need is your Social Security number, your filing status and the exact whole-dollar amount of your refund. Information about your refund will be available 72 hours after the IRS has acknowledged the receipt of your e-filed return.

Jim Sloan is a freelance writer in Reno, Nev.

Source URL: Learn how to get your federal income tax refund fast

Copyright Protected © 2011 Money Blue Book: Personal Finance Blog. All Rights Reserved.

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Long before he became a cop, Kevin was my best friend. So when he joined the police, it seemed natural that I’d often join him and his colleagues for an after-work drink. They were a great bunch, and I really enjoyed the time I spent with them. But as they told their job-related stories, I’d frequently think to myself how much I enjoyed being their friend, and how little I’d like to meet them professionally.

I don’t know any IRS agents, but I suspect that the same would apply. They’re probably charming people socially, but you really, really don’t want to spend time with them when they’re working.

Luckily, there are simple things you can do when filing your federal income tax return that can help you avoid finding out whether I’m right.

Beware of these 5 common mistakes to avoid Tax Trouble

Here are five common mistakes routinely made on taxes, and how they can be avoided:

1. You didn’t double check
   

   Among the most common federal income tax filing mistakes are some that are so embarrassingly elementary that you wouldn’t want to admit to them outside a confessional. So, before mailing your return, ask yourself these three questions:

   • Have I signed and dated the form?
   • Have I entered and triple-checked my social security number?
   • Have I attached Copy B of the W-2 form(s) my employer(s) sent me?
2. You got the math wrong
   

   According to the IRS, the most common mistake of all is people making basic errors in their arithmetic. You can minimize the chances of this happening by finding the best tax preparation software (or the best online tax software) for your needs, and using that. And, of course, you can file online now. If none of those appeal, why not create a spreadsheet that will do the math automatically, and then transcribe the figures?

   If you are a complete technophobe, you should use a calculator (oh, come on–you can manage that), triple-check your sums, and preferably have someone else check for errors.

3. You failed to report all of your income

   Whenever you ask yourself whether you need to declare a particular sort of income, your default answer should be “Yes.” It’s true that in limited cases it can be “No,” but don’t make assumptions. Instead, consult the IRS 2010 Publication 525–Taxable and NonTaxable Income.

   Be sure not to forget unearned income. Your bank and other financial services suppliers should have informed the IRS of how much you’ve received, so you can expect consequences if you don’t report this.

4. You were over or under with your tax deductions
   

   As Gerald Barzan observed:”Taxation with representation ain’t so hot either.” And the last thing you want to do is pay more than your due. But, if you deduct items that you shouldn’t, you risk a big financial penalty or even jail.

   If your financial affairs are sufficiently complicated that there’s a chance you’re getting your tax deductions seriously wrong, you should probably consider paying a professional both to advise you, and to take over the donkey work. Depending on your circumstances, a good one may well save you way more than his or her fee.

5. You Forgot to file on time

   If you’re late filing, you’ll automatically be charged penalties, unless you can show good cause for your failure. For example, if you’re 60 days late, you’ll have to pay at least $100, and possibly much more.

   However, if you need more time to file and don’t want to pay a penalty, you can apply for an extension in advance by completing and returning Form 4868 – Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Federal income tax errors can be costly

Making innocent mistakes with your federal income tax return can be expensive. You could be stung $50 just for putting in the wrong social security number. If you file a “frivolous” return (one that clearly lacks the information to make a proper assessment), you could face a $500 penalty.

But that’s just the beginning. In addition, you could be liable to pay 0.5 percent a month for each month or part thereof when you have tax liabilities that are overdue as a result of incorrectly filing. And there’s a further–potentially even stiffer–penalty for filing late.

Of course, those penalties are for innocent mistakes. Try to defraud the IRS, and you could have limitless opportunities to test my theory about how charming its agents are during audits.

And you’re unlikely to be invited out for drinks–even after you get out of the penitentiary.

Peter Andrew has been writing about–and for–business for more than two decades. For the last few years, he has found himself increasingly specializing in the U.S. financial sector.

Image: Arvind Balaraman / FreeDigitalPhotos.net

Source URL: Federal income tax filing: 5 common mistakes — and what they can cost you

Copyright Protected © 2011 Money Blue Book: Personal Finance Blog. All Rights Reserved.

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I recently bought a laptop over the Internet. Shopping online, I found a great price and I didn’t have to drive around to different stores to compare products and features. But is it fair that I didn’t have to pay any sales tax because I bought the laptop online?

Retailers say the playing field should be leveled out with an Internet sales tax that would be collected at the point of purchase. Now I am not fan of paying more taxes, but the thought of helping put a local company out of business because I like to shop in my pajamas doesn’t sit well with me either.

Taxing e-commerce

During President’s Clinton administration, the Internet Tax Freedom Act was signed into law to protect commercial aspects of the Internet. The law prohibits federal, state and local governments from taxing access to the Internet or adding taxes that would limit Internet usage. The Internet Tax Freedom Act (ITFA) has now been renewed through Nov. 1, 2014, but the law does not address the collection of sales tax. So a few states have made it mandatory for online retailers to charge a sales tax, while a few others left the burden on the consumer to self-report their sales tax.

The latest twist is that some states have now decided that large retailers like Amazon or Overstock should be forced to collect sales tax even if the sale is run through an affiliate or if the retailer is merely deemed to have a competitive presence in the state. This goes against the spirit of Supreme Court rulings that say only an entity with a physical presence in a state should be forced to collect sales tax. Several lawsuits are now challenging the constitutionality of how the Internet tax is being applied, but for now these laws are on the books.

States making a money grab

For over 10 years the argument for an Internet tax has been advocated back and forth. States argue that they need the extra money to pay for the basic services that we all use. The anti-tax movement has pushed back and tried to keep the Internet free from taxes. What has evolved from this is a hodgepodge system of Internet taxes in a few states, with consumers never really knowing until their e-commerce checkout if they will be charged a sales tax.

Now the Internet tax issue is hitting the headlines and political discussion again. The reason is pretty simple: State governments are broke. Record budget deficits have pushed legislators to examine new ways or re-examine old ways to increase tax revenue. In Illinois, lawmakers recently passed Tax Bill HB 3659 that forces merchants located out of state to charge sales tax if they run an affiliate program within a state. At least four other states also have legislation pending.

What an Internet tax would mean to you

If you live in a state where an Internet sales taxes has been enacted, there are a few things to consider. Right off the bat comes the obvious fact that you may pay more for some of your online purchases. Remember that laptop I purchased online? If I bought from an online retailer or an affiliate based in Illinois, I would now have to pay an extra $75 in sales tax.

It doesn’t stop there though. The reality is that as long as some states have the tax and other states don’t, online retailers will play a game of hide-the-tax and some consumers may still avoid paying the tax. Amazon has already ended affiliate relationships in several Internet tax states. Other companies are considering moving their operations across a state line to avoid collecting the tax. Reports say that FatWallet, an online business based in Illinois, will move their operations out of Illinois to survive the Internet sales tax.

If your state adopts an Internet tax, it could threaten local jobs. At the very least, it punishes local companies that compete online. Politicians like to project how much extra income the Internet tax might generate. Yet when the tax has been enacted, so far the extra revenue has fallen short of projections.

One thing is clear: Once you are hooked on the convenience and lowers costs of shopping online, it is doubtful you will want to go back to pounding the pavement for deals. You also won’t be crazy about paying sales tax on an item, when others do not. Hopefully the politicians get it right and fix the Internet sales tax mess they are creating.

Image: Pixomar / FreeDigitalPhotos.net

Source URL: What an Internet Tax means to you

Copyright Protected © 2011 Money Blue Book: Personal Finance Blog. All Rights Reserved.

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The media made it sound like the tax relief law passed late last year was designed to make a lot of older, rich taxpayers happy with new tax deductions and more favorable federal tax brackets.

But in reality, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 contained a lot of new and extended tax deductions and benefits for those of us just starting out with our careers and businesses.

For starters, the new law included a payroll tax cut on our federal income tax that will put about $112 billion back into the paychecks of some 155 million workers. Any employee who pays into Social Security will see their portion of FICA federal income tax drop from 6.2 percent to 4.2 percent.

For the average worker, that translates into a monthly pay increase of about $83 a month. If you have been receiving the Making Work Pay tax credit, which expired at the end of 2010, your raise will be more along the lines of $50 a month. If you earn more than $95,000 a year and weren’t eligible for the Making Work Pay credit, you’ll get the full 2 percentage point cut from your federal income tax, or nearly $2,000 over the course of the year.

Helping parents, college students

Another important portion of the law was the extension of emergency unemployment benefits for another 13 months. That alone gives an estimated 7 million workers a little breathing room. These are folks who are struggling to find jobs and were about to lose their benefits altogether.

For those with children, the new law also includes a tax cut for an estimated 10.5 million lower-income families. According to the Internal Revenue Service, the law also extends an earned income tax credit worth, on average, $600 for families with three or more children. It also reduces the so-called “marriage penalty” for working married couples.

The new law also extends for two years the $1,000 child tax credit on your federal income tax.

The bill also extends the American Opportunity Tax Credit, which is a $2,500 per-student, per-year tax deduction that’s been helping many students and their families afford college.

Advantages for small business owners

In addition to the payroll tax cut, the new law keeps federal tax brackets from climbing. The current federal tax brackets range 10 to 35 percent, and were scheduled to jump to 15 to 39.6 percent. But the new law keeps those federal tax brackets at the lower level.

The sprawling tax bill included a variety of changes and tax deductions that could help anyone who is starting a new business. Here are some examples:

• Business can temporarily expense 100 percent of certain investments in 2011, which the government hopes will spur $50 billion in new investments this year and convince companies to hire more people.
• Self-employed workers can deduct health insurance premiums from their net earnings and reduce their self-employment tax, potentially saving up to 15.3 percent on the cost of health insurance.
• The owners of small businesses can deduct up to $500,000, up from $250,000, under Code Section 179. This should be an incentive for many businesses to invest in new equipment. Business owners can also deduct 51 cents per mile in 2011 — up from 50 cents in 2010 — when using their vehicle for company business.
• While workers’ Social Security tax dropped to 4.2 percent from 6.2 percent, the small business owner’s tax decreased from 12.4 percent to 10.4 percent.

Relief from estate taxes

If your parents were fretting about the return of estate taxes — also known as the ‘death tax’ — they can breathe a sigh of relief.

The federal income tax rate on an estate was scheduled to go up to 55 percent, with $1 million allowed to be passed on tax-free. But the new law allows $5 million of a person’s estate to be passed on tax-free and the remaining estate tax rate set at 35 percent. Additionally, widows and widowers can pass along $10 million tax free if their spouse dies.

The new law only extends these estate tax breaks for two year, however, and the federal laws don’t affect state estate or inheritance taxes. So if you or your parents might be affected by these taxes, it might be wise to consult an estate planner and look at bypass or family trusts as a way to avoid heavy inheritance taxes.

Jim Sloan is a free-lance business writer and a higher-education communications specialist. He has worked as a business editor and writer for various newspapers and magazines. He is the author of two books, and his stories have been selected for a number of anthologies. He has a degree in journalism and environmental science from the University of Maine.

Image: renjith krishnan / FreeDigitalPhotos.net

Source URL: Federal tax-relief bill gives many a pay raise

Copyright Protected © 2011 Money Blue Book: Personal Finance Blog. All Rights Reserved.

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Think of it as the iceberg of the tax code. And your tax return may be the next Titanic.

The alternative minimum tax (AMT) is like an iceberg because it often represents a hidden danger, and one that can have severely damaging effects. You can be sailing along, thinking you’ve conscientiously filed your tax return and paid your taxes. Then, BOOM! You get a letter from the IRS, assessing penalties because you failed to pay the alternative minimum tax. You’ve just hit the AMT iceberg.

If you want to avoid hitting the AMT iceberg, you’ll need to know a little background about the alternative minimum tax, and how to cope with it.

Defining the alternative minimum tax

Think of the alternative minimum tax as an alternative tax code, existing outside of normal federal tax brackets and rules. The AMT was created in 1969 to prevent people from claiming so many deductions that they paid little or no tax.

Basically, the AMT is a tax calculation which ignores many common tax deductions, and also ignores lower federal tax brackets for certain types of income, such as capital gains. Your taxable income is re-calculated under AMT rules, and then a standard AMT exemption is subtracted — $33,750 for single tax payers, $45,000 for married tax payers filing jointly, and $22,500 for married tax payers filing separately. An alternative minimum tax rate is then applied to the remainder — 26 percent on the first $175,000 for couples filing jointly, and 28 percent on any amount above that.

If calculating your taxes this way results in a higher liability than calculating your tax using standard federal tax brackets and deductions, then you owe the alternative minimum tax.

Coping with the alternative minimum tax

The alternative minimum tax may seem convoluted and obscure, but it is becoming a reality more and more Americans have to deal with. Because AMT exemptions have not kept pace with inflation, what was once a check on high-income tax payers has now found its way squarely into the middle class. The number of people paying the alternative minimum tax has risen from 19,000 in 1970 to the millions today.

Therefore, since you may be the next tax payer to hit the AMT iceberg, you should know some ways of coping with it:

1. Identify whether you are in an AMT high-risk group. People who are most susceptible to the AMT are those who earn more than the AMT exemption amounts listed above, and claim a large dollar amount of tax deductions and/or have a substantial portion of their income come in the form of capital gains.
2. Check the AMT assistant. If you believe that you fall into an AMT high-risk group, then a good next step is to try the AMT Assistant for Individuals, an online tool available from the Internal Revenue Service (IRS). By entering some information into the AMT Assistant, you can find out whether you are likely to be subject to the alternative minimum tax.
3. Fill out federal income tax Form 6251, if indicated. If the AMT assistant indicates that you may be subject to the AMT, then you should fill out federal income tax Form 6251 when you calculate your federal income tax return. This form will walk you through the AMT calculation, and you can then compare the result to your tax liability using conventional federal tax brackets and tax deductions.
4. Keep a copy of federal income tax Form 8801 handy for next year. If you pay the AMT one year but don’t owe the AMT the next year, you may be eligible for a special tax credit. Form 8801 will help you calculate your eligibility for this credit.

The tax code is always somewhat in flux, so check with the IRS and your tax advisor for the latest rules regarding the alternative minimum tax. The more you know, the more you’ll be able to cope with the AMT iceberg.

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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Source URL: The alternative minimum tax: Coping with the AMT iceberg

Copyright Protected © 2010 Money Blue Book: Personal Finance Blog. All Rights Reserved.

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By Richard Barrington

Have you ever run a long-distance race?

I find it useful to think of saving money like distance running. If you obsess over the total distance, then each step seems hopelessly insignificant in covering the necessary ground. If instead you just start making those steps, and concentrate on finding a comfortable and consistent pace, you’ll find that before you know it, the distance will take care of itself.

In other words, focus on the next step, because that is what you can most directly control.

In terms of saving money, a great way to make that next step is with a contribution to an IRA — either a traditional or a Roth IRA. To help you make that step, there are a few things you should know about IRAs, including important information on IRA contribution limitations for this year.

1. Traditional and Roth IRA contribution limitations

Both traditional and Roth IRAs have certain tax advantages, which will be discussed below in “Deciding on a traditional vs. a Roth IRA.” However, for anyone considering starting an IRA this year or making continued contributions into an IRA account, it’s critical to know that there are limits on how much you can contribute to IRAs each year.

To start with the simple part, the basic contribution limits for both traditional and Roth IRAs are the same, and are unchanged for 2011. The only difference is that taxpayers who are aged 50 and over are allowed to make higher, “catch-up” contributions.

IRA Contribution Limits

Note that these limits apply to total IRA contributions, so if you have multiple IRAs, including both a traditional and a Roth IRA, any amount you contribute to one reduces the amount you are able to contribute to the other.

Another limitation is that the amount you contribute to an IRA cannot exceed your taxable income for the year. That seems simple enough, but there are complications for higher earners. Depending on your tax status and income bracket, your eligibility to make IRA contributions might be reduced — or eliminated altogether.

2. Income ceilings for traditional and Roth contributions

For both traditional and Roth IRAs, there is an income level at which the amount you can contribute starts to be reduced, and a level at which it is eliminated completely. This is known as a contribution phase-out.

With traditional IRAs, this applies only if you or your spouse were covered by an employer-sponsored retirement plan during the tax year for which you are making the IRA contribution. For Roth IRAs, however, the contribution phase-outs apply to anyone who falls within the applicable income limits.

Income parameters for deduction phase-outs are described in the tables below. In each case, eligible contribution amounts start to be reduced at the lower end of the ranges given, and are eliminated altogether at the upper end of those ranges:

Traditional IRA deduction phase-outs

Roth IRA contribution phase-outs

3. Deciding on a traditional vs. a Roth IRA

So, should you be contributing to a traditional or a Roth IRA? These three key differences can help you decide:

1. Contributions to traditional IRAs are tax-deductible, but distributions from them are taxed, whereas the reverse is true for Roth IRA (as long as distribution guidelines are followed).
2. For traditional IRAs, distributions before you are aged 59 1/2 not only are taxed, but are also subject to a 10 percent penalty, whereas a Roth IRA allows for certain exceptions, such as for buying a first home or in the case of disability.
3. Traditional IRAs require you to start taking distributions after you reach age 70 1/2, whereas you are not required to take distributions from a Roth IRA at any time.

In some ways, this makes a Roth IRA ideal for younger savers who might feel they are in a lower tax bracket now than they will be in when they retire (and thus they would prefer to pay taxes now and get IRA distributions tax-free later). Also, younger savers might like the flexibility of being able to withdraw money from a Roth IRA to buy a home.

Whichever IRA you choose, the important thing is to start contributing to one this year so that you can start harnessing the power of compound interest and make your money work for you. The tax man even gives you a little leeway — IRA contributions for the 2010 tax year don’t have to be made until April 15, 2011. If retirement saving is like a long-distance race, that leeway can help you get a little bit of a head start.

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

Source URL: 2011 IRA contribution limits: 3 ways to maximize your retirement tax advantages

Copyright Protected © 2010 Money Blue Book: Personal Finance Blog. All Rights Reserved.

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For January 2010, the combined income accumulated from this personal finance blog, the revenue generated by my other online affiliate ventures, and the part time income I earned from my small legal practice as an attorney – all saw slight increases. However, much of the income stats were gobbled up by the hefty estimated tax payments I had to make to the federal and state government during the month. Because I operate my small business and solo legal practice using a cash basis form of accounting, I don’t spread the estimated quarterly tax payments evenly throughout the year, but rather record them on my personal financial balance statements only when they are actually paid out – resulting in these precipitous drops in total net asset value that occur four times a year.

There was one major financial hit however which came from a furious stock market correction that reared its ugly head at the latter half of the month, which pretty much wiped out the hefty gains I would have been on track to record. But as far as the worth of my stock investments go, I don’t generally pay substantial attention to them – as I see them as long term investments that will ultimately pay off years down the road. Month to month dips in stock portfolio value don’t generally rattle me in any significant way (so long as there aren’t serious financial Armageddon type issues lingering in the market). On the whole, so long as I can continue to pull in a steady income with my online website businesses and small legal practice, I am generally content to stay the course. No one ever said becoming a millionaire would be easy, as there are bound to be unexpected bumps on the road. But so long as the rules haven’t changed to any major degree, the economic and financial landscape will inevitably improve in the long run, and such long term investments will ultimately enjoy much success.

My Current Net Worth and Financial Status Update Compared To Last Month

Paying My Quarterly Estimated Taxes As A Self Employed Taxpayer

For those not familiar with what quarterly estimated taxes are in general, or not sure as to why they took such a big bite out of my networth this month, here’s a quick explanation. Estimated taxes are basically the  income taxes that self employed individuals like myself  pay on income that is not subjected to withholding. This income includes everything  from self employment income, interest, stock dividends, rental income, and gains from the sale of assets, etc. It’s important to pay attention to this obligation, because failure to timely pay the quarterly assessed estimated taxes on time does result in a hefty penalty and associated interest charges, even in those cases where you are ultimately due a refund when you file the tax return.

Most people never have to deal with paying estimated taxes because their employers usually already withhold their federal, state, and social security taxes on their paychecks. But for self employed small business owners like myself, because we don’t have someone else to withhold these types of taxes for us, the Internal Revenue Service (IRS) has mandated that we do so ourselves – requiring us to make four projected pre-payments throughout the year at set intervals on April 15, June 15, September 15, and January 15 of the following year. One of these hefty tax payment dates occurred in January, which is why the vast bulk of the income I generated during the month was siphoned off to pay the Man. But next month, my networth will likely return back to its regularly anticipated upward growth trajectory.

Buy Low, Sell High – And Continue Investing In A Down Stock Market

Some are saying that we are up for another routine market correction after a somewhat furious run up from spring 2009, while others are running around in circles predicting another major collapse again. But once you cut past the rhetoric and emotional hyperboles, you realize that it’s really just business as usual. The economy naturally ebbs and flows and there is always bound to be good stock market days and bad ones as well. But if you are generally optimistic about the distant future as I am and are willing to make your long term investment bets today, I am confident that years from now, your investments will pay off quite handsomely.

While I keep a rather sizable amount stored away in my safe and secure FDIC insured high interest bank accounts for emergency fund purposes, the vast bulk of my savings reside in discount broker accounts – invested into a variety of long range investments. I intend to stay invested for quite a few years – at least 3-5 years before I plan to engage in any significant portfolio reshuffling. I think the market is currently at its low and that all indicators strongly suggest that there is only tremendous upside from hereon. It is certainly possibly for the market to continue getting spooked and experience a pullback, but I don’t think we are in for another financial Armageddon scenario or are on the verge of a serious economic depression – the likes of which were talked about during the early part of last year. We are definitely on the road to economic recovery – however, admittedly, the road is long, and heavily paved with pot holes and obstacles.

Cashing In and Taking Advantage Of Credit Card Rewards and Bonuses

This month I also happened to redeem a rather large chunk of the credit card rewards I’ve accumulated over the last many months – converting my various credit card reward points into usable currency – namely, gift cards. Overwhelmingly, the more lucrative card reward program I use at the present time is the Citi Thank You network, with the American Express Blue Cash program being a close second. Because I used reward credit cards to pay for pretty much everything I purchase, I tend to rack up a substantial amount of reward points in a very short period of time.

The amount of credit card reward points I had accrued after only a year of routine credit card spending was rather enormous (in my opinion) – an amount that exceeded a value of $1,500. Ultimately, I decided to convert the majority of them into gift cards to places like Marshall’s and Macy’s. I don’t go shopping for clothing very often, but I’ll probably go on a small shopping spree in the near future with my new found loot. I had the option to convert my accrued credit card reward points into a cash lump sum, but for those who are familiar with credit card rebates and rewards, the point to cash conversion rate is frequently pretty low – and you tend to lose a big chunk of your points during the conversion process. While pure cash back credit card rewards are more versatile and bypass the hassle of having to manually convert accrued points into usable gifts or rewards, I’ve found that point based reward programs tend to offer a higher purchase rebate percentage. If you don’t mind a little work or putting in a little effort towards micro-managing your points, you’re better off going with a point based reward program.

I know credit cards tend to get a very bad rap with many out there believing them to be the source of all evil as evidenced by the government’s recent crusade to regulate every aspect of how credit card issuers run their businesses. However, I personally feel credit card programs are what you make of them. If you spend responsibly and pay off your balances in full every month, the credit card usage incentives they provide can be extremely lucrative. Even those who persistently carry monthly balances are not without options – there are a variety of 0% balance credit cards and low interest credit card deals out there for the qualified applicants to take advantage of. Keep those FICO credit scores high and monitor them regularly with programs like MyFICO Score Watch like I do, and you’ll ensure that you’ll always have access to the best credit card offers according to your personalized needs.

Source URL: January 2010: Net Worth Update and Paying Estimated Taxes

Copyright Protected © 2010 Money Blue Book: Personal Finance Blog. All Rights Reserved.

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To keep this stagnating economic train running, President Barack Obama has recently signed a new bill – extending the duration and expanding the coverage of the federal housing tax credit. Previously, the economic stimulus package only provided free tax credit assistance to first time home buyers and was slated to expire in late 2009. But with economists and pundits still doubting the ability of the economy to recover without additional stimulus intervention, the federal government has now officially extended the deadline of the federal homebuyer tax credit program until April 30, 2010 for new home contracts, or until June 30, 2010 for the final closing. The home’s closing can occur by June 30, 2010 and still qualify for the free tax credit, but the contract  to buy the home must be completed by April 30, 2010 at the latest. Those looking for a further extension after early 2010 might be disappointed as current indications suggest that this extension may be the final one.

To incentivize and encourage continued homebuying activity (as much of our economy is intertwined with the housing industry – example: banks, construction related services, home equity based spending), the new federal legislation will not only extend the current program’s eligibility deadline for new home buyers, but it will also add additional tax credit incentives for qualifying existing home buyers who choose to move out of their present homes and trade up for new homes. While the whole motivation behind the federal government’s approach towards providing housing tax credit assistance is to jump start and spur on sluggish housing sales, it really remains to be seen whether this will ultimately have a sustainable long term impact on the economy. Hopefully, the government’s well meaning emergency actions today won’t drive us into irreparably dire deficits and higher tax brackets down the line. After all, it’s been said that the road to hell is often paved with good intentions.

Buy A New Home Not For The Tax Credit, But Because It’s A Good Investment

As a new first time homebuyer myself, I recently purchased a new construction home in August 2009. Despite the fact my high income precludes me from qualifying for the housing tax credit, even if I qualified for it, it’s unlikely the tax credit alone would have been the primary impetus for my home purchasing decisions. In almost all of the reputable surveys I’ve seen on the subject, including ones conducted by the National Association of Realtors (NAR), only a tiny portion of first time home buyers cited the tax credit as the primary reason behind their recent decisions to purchase a new home. I think the strongest encouragement to buy a home now comes not from the federal government’s tax credit incentive, but rather from the innately driven love of the American people to own their own homes, and the current prevalence of favorable market conditions in the way of super low mortgage rates and depressed home prices that have plummeted 25-30% from their previous year 2005/2006 highs. I know the primary reason I decided to pull the trigger now and purchase a home for the very first time was not because I wanted to take advantage of any federal housing tax credit, but due to the fact that home prices in my target neighborhood have dropped into incredible lows and now sit at once-in-a-lifetime levels of affordability. For those of you who have been contemplating the prospect of buying a new home for the very first time or even for those of you who are long time homeowners pondering the idea of swapping up for a new and improved home – now may be the time to do it. The free housing tax credit carrot that the federal government is now dangling as an incentive for qualifying individuals might be just what you needed to push you over the decisional edge.

For both the $8,000 tax credit for first time home buyers and the newly expanded $6,500 tax credit for existing homeowners looking to buy a new home, there are a few restrictions in the way of income limits and what type of home may qualify. Buyers claiming the tax credit must be at least 18 years or older, and no individual or couple may receive the credit if he or she may be claimed as a dependent on someone else’s tax return. For both housing tax credits, the credit gradually phases out for individual single filers with $125,000 and $145,000 of modified adjusted gross income (MAGI). For married couples, the income range phaseout is between $225,000 and $245,000. Beyond $145,000 for single filers and $245,000 for married filing jointly couples – the tax credit is completely phased out.

How To Qualify For the $8,000 First Time Home Buyer Tax Credit

To be considered eligible, you must first and foremost be a first time home buyer – defined as an individual who has not owned a principal residence home in the past 3 years prior to the present purchase. This definition of “first time home buyer” also includes both partners of a married pair. There is some flexibility as to which tax return year the tax credit must be claimed. Under the new law as was the case under the old, a first time homebuyer who purchases a home in year 2009 may opt to claim the federal tax credit on either their 2008 or 2009 tax returns. Similarly, one who purchases a new home in year 2010 may opt to claim the tax credit on either their 2009 tax returns or on their 2010 tax returns.

In terms of how much money you are permitted to get back on your tax return in the way of tax credits, first time home buyers are permitted to claim up to 10% of the home’s final purchase price, up to a maximum tax credit limit of $8,000. One great feature of the first time homebuyer tax credit is that it’s a dollar for dollar reduction of tax liability and is completely refundable. What this means is that even if you don’t owe the Internal Revenue Service (IRS) sufficient taxes to completely offset the housing tax credit, you can still qualify for a free tax refund check of the difference. Thus if you qualify for the full $8,000 housing tax credit and ultimately only owe the IRS $6,000 in taxes – you can still qualify for a $2,000 tax refund check.

Additionally, there are a few other limitations on who may qualify for the tax credit. The first time homebuyer may not purchase the home from a descendant such as one’s children or grandchildren, and the home may not be purchased from a lineal ancestor, such as a parent. The same restriction also applies to purchasing from one’s spousal ancestors and descendants as well. Furthermore, for home purchases made after November 6, 2009, the price of the purchased home may not exceed $800,000. Homes priced in excess of that amount are not eligible for the tax credit. Basically, the government doesn’t want rich folks to profit from this middle class based credit.

How To Qualify For The $6,500 Repeat Homebuyer Tax Credit

This is an exciting new addition to the federal homebuyer tax credit program. To be considered eligible for the $6,500 existing homeowner’s tax credit, the homeowner applicant must have owned his or her current home for at least 5 consecutive years out of the past 8 years, and must purchase a new home by April 30, 2010. The purchase of the new home can include a new construction home, but the purchasing contract must be signed by April 30, 2010, and the final closing date must be on or by June 30, 2010. The income qualification restrictions are the same as that of the first time homebuyer’s credit – for single filers, the tax credit phases out between $125,000 and $145,000 of modified adjusted gross income, and for married filing jointly couples, the income range phases out between $225,000 and $245,000.

While there is no explicit requirement that the homeowner must ever pay back the $8,000 or $6,500 housing tax credit to the federal government, the obligation to pay it back does arise if one claims the tax credit but then sells the house or condominium (or otherwise stops using the home as the principal residence) within 3 years (36 months) after the purchase.

Source URL: Tax Credit For First Time Home Buyers Extension

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

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