5 THINGS TO DO WITH YOUR TAX REFUND/TAX REBATE

With the average individual tax refund over $2200 and most individuals getting an additional $600 tax rebate this year, you may find yourself awash in excess cash this time of year. While hardly a troublesome situation, it does pose the question of “What am I to do with all my extra money?” Before you run out to buy the latest I-Phone or Gucci bag, let me play the role of the little angel-shaped financial guru on your shoulder and offer these suggestions for what to do with your money:

1. PAY OFF DEBT - especially credit cards. How sweet would it be if your credit card company called and offered to cancel $3000 of your balance? You should feel the same satisfaction here; after all, you weren’t “planning” on this extra money, right? HINT: Even if you’re paying on a student loan or mortgage, you’ll save tens of thousands in interest over the life of the loan if you pay off more now.

2. FUND A ROTH IRA – our generation has problems saving money for next month, let alone for retirement, but think of it this way: all the interest earned over the life of a ROTH IRA is tax free! A couple grand a year should mean big bucks by the time you’re 50 or 60. HINT: Find a “no-fee” IRA, which will save you money.

3. BUY A HOUSE – I know what you’re thinking: “I thought Real Estate was in the crapper right now.” Well, that’s only partially true. In some markets that had high run-ups over the last ten years, prices are dropping dramatically. However, in markets that are growing or stable, real estate continues to be a solid purchase, especially when used over the long-term to build wealth. HINT: Rental property can also be a good investment for the right type of investor.

4. SAVE IT! Most financial planners agree to have at least six months of your income saved up for emergencies or large purchases. Need motivation? Just think about the look on the car salesman’s face when you say that you’re paying in cash the next time you buy a car. HINT: Open an online savings account (like E*Trade or ING) to earn better rates.

5. IMPROVE YOURSELF – invest in your career by taking continuing education classes, getting that MBA, or attending a seminar. Studies show that individuals with a master’s degree will earn around $400,000 more over the course of a lifetime than individuals with a bachelor’s degree. HINT: Can’t find the time to attend class? Many schools offer online education options.

Financially literate?

This article caught my eye today --> http://biz.yahoo.com/cnnm/080226/022608_financial_illiteracy.html?.v=6&.pf=banking-budgeting

It's only one of many that state the same things:

1. Americans don't really understand basic financial concepts - even college grads.
2. Even if they "understand" them, our lifestyles usually do not coincide - most people live beyond their means on credit.
3. It's a growing problem.
4. Most people are not saving money.

I'm interested in some opinions here:

Do you claim to understand financial concepts like debt, compounding interest, and NPV?
Why is it so hard to live within our means in today's society?
What are the negatives of this lifestyle? Since we all die anyway, why not spend all our money?

Christmas in June!?

It's always nice to get tax rebates...what are some thoughts on the upcoming economic stimulus?

By ANDREW TAYLOR, Associated Press Writer

Congressional leaders announced a deal with the White House Thursday on an economic stimulus package that would give most tax filers refunds of $600 to $1,200, and more if they have children.

House Speaker Nancy Pelosi said Congress would act on the agreement — hammered out in a week of intense negotiations with Republican Leader John A. Boehner and Treasury Secretary Henry Paulson — "at the earliest date, so that those rebate checks will be in the mail."

President Bush praised the agreement in a statement he delivered to reporters at the White House. "This package has the right set of policies and is the right size," he said.

The rebates, which would go to about 116 million families, had appeal for both Democrats and Republicans. Pelosi's staff noted that they would include $28 billion in checks to 35 million working families who wouldn't have been helped by Bush's original proposal. Republicans, for their part, were pleased that the bulk of the rebates — more than 70 percent, according to an analysis by Congress' Joint Tax Committee — would go to individuals who pay taxes.

Individuals who pay income taxes would get up to $600, working couples $1,200 and those with children an additional $300 per child under the agreement. Workers who make at least $3,000 but don't pay taxes would get $300 rebates.

The rebates, expected to go out in June, would cost about $100 billion, aides said. The package also includes close to $50 billion in business tax cuts.

The package would allow businesses to immediately write off 50 percent of purchases of plants and other capital equipment and permit small businesses to write off additional purchases of equipment. A Republican-written provision to allow businesses suffering losses now to reclaim taxes previously paid was dropped.

Pelosi, D-Calif., agreed to drop increases in food stamp and unemployment benefits during a Wednesday meeting in exchange for gaining the rebates of at least $300 for almost everyone earning a paycheck, including those who make too little to pay income taxes.

"I can't say that I'm totally pleased with the package, but I do know that it will help stimulate the economy. But if it does not, then there will be more to come," Pelosi said.

Boehner said the agreement "was not easy for the two of us and our respective caucuses."

"You know, many Americans believe that Washington is broken," Boehner said. "But I think this agreement and I hope that this agreement will show the American people that we can fix it and will serve to move along other bipartisan agreements that we can have in the future."

Paulson said he would work with the House and Senate to enact the package as soon as possible, because "speed is of the essence."

The Treasury Department has already been talking to the IRS about getting the checks out "as quickly as possible, recognizing that the tax filing season is ongoing," said Treasury spokesman Andrew DeSouza.

The rebates would phase out gradually for individuals whose income exceeds $75,000 and couples with incomes above $150,000, aides said. Individuals with incomes up to $87,000 and couples up to $174,000 would get partial rebates. The caps are higher for those with children.

The agreement left some lawmakers in both parties with a bitter taste, complaining that their leaders had sacrificed too much in the interest of striking a deal. Many senior Democrats were particularly upset that the package omitted the unemployment extension.

"I do not understand, and cannot accept, the resistance of President Bush and Republican leaders to including an extension of unemployment benefits for those who are without work through no fault of their own," Rep. Charles B. Rangel, D-N.Y., the Ways and Means Committee chairman, said in a statement.

Sen. Max Baucus, D-Mont., the Finance Committee Chairman, said leaving out the unemployment extension was "a mistake," as he announced plans to craft a separate stimulus package in the Senate starting next week.

Majority Leader Harry Reid said the goal is to send the package to the White House by Feb. 15 for President Bush's signature. Reid said senators would want to look at add-ons including the unemployment extension and possibly money for highway projects.

Bush has supported larger rebates of $800-$1,600, but his plan would have left out 30 million working households who earn paychecks but don't make enough to pay income tax, according to calculations by the Urban Institute-Brookings Institution Tax Policy Center. An additional 19 million households would receive only partial rebates under Bush's initial proposal.

To address the mortgage crisis, the package also raises the limits on Federal Housing Administration loans and home mortgages that Fannie Mae and Freddie Mac can purchase to as high as $725,000 in high-cost areas. Those are considerable boosts over the current FHA limit of $362,000 and the $417,000 cap for Fannie Mae and Freddie Mac's loan purchases.

After a key Wednesday night meeting in which the parameters of an agreement were reached, Pelosi and Boehner spoke again Thursday to cement the accord.

In the talks, Pelosi pressed to make sure tax relief would find its way into the hands of lower-income earners while Boehner pushed to include upper middle-class couples, according to congressional aides.

The package was drawing fire from liberal activists and labor unions upset that proposals to extend unemployment insurance and boost food stamps had been dropped. Many Democratic lawmakers had assumed those proposals would make it into the package, and critics of the deal said those ideas could pump money into the economy more quickly than tax rebate checks that won't be delivered until June.

Democrats wanted to extend unemployment benefits for people whose 26 weeks of benefits have run out, but Republicans resisted.

Conservative Republicans, meanwhile, were likely to be restless over tax rebates going to those without income tax liability.

Democratic aides said greater GOP flexibility over giving relief to poor families with children — who would not have been eligible under Bush's original tax rebate proposal — was the catalyst that moved the talks forward.

Health Savings Accounts

The topic of Health Savings accounts was raised recently, so I thought it would make an interesting discussion. I myself have only had experience with FSAs (Flexible Spending Accounts) that you have to "use or lose" the money each year. HSAs roll over each year and can be very effective when paired with a High-Deductible insurance plan.

Here is information taken directly from the IRS. Please post comments especially if you have experience with HSAs:



What are the benefits of an HSA? You may enjoy several benefits from having an HSA.

• You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040.
  
• Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
  
• The contributions remain in your account from year to year until you use them.
  
• The interest or other earnings on the assets in the account are tax free.
  
• Distributions may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.
  
• An HSA is “portable” so it stays with you if you change employers or leave the work force.
  
  

Qualifying for an HSA

To be an eligible individual and qualify for an HSA, you must meet the following requirements.

• You have a high deductible health plan (HDHP), described later, on the first day of the month.
  
• You have no other health coverage except what is permitted under Other health coverage, later.
  
• You are not enrolled in Medicare.
  
• You cannot be claimed as a dependent on someone else's 2006 tax return.
  

High deductible health plan (HDHP). An HDHP has:

• A higher annual deductible than typical health plans, and
  
• A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but do not include premiums.
  

An HDHP may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible.

Distributions From an HSA

You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA.
You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 10% tax. You do not have to make distributions from your HSA each year.

Balance in an HSA

An HSA is generally exempt from tax. You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions, earlier). Earnings on amounts in an HSA are not included in your income while held in the HSA.

Death of HSA Holder

You should choose a beneficiary when you set up your HSA. What happens to that HSA when you die depends on whom you designate as the beneficiary.

Spouse is the designated beneficiary. If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse's HSA after your death.

Spouse is not the designated beneficiary. If your spouse is not the designated beneficiary of your HSA:

• The account stops being an HSA, and
  
• The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.
  

If your estate is the beneficiary, the value is included on your final income tax return.

Tax Time & Tips

Does anyone else besides me actually like tax time?

I know I run the risk of alienating like 89% of the population here, but I find tax time extremely satisfying - the closure of the last year, putting to paper how we did at managing our finances, confirming the notion that our government's tax practices have run out of control, and beginning the process to plan for the upcoming year. I love getting my year-end statements in the mail! Checking each one off my tax checklist. Reconciling my accounts. Yes, I'm a freak.

If you're having trouble relating to me right now, then never fear! This post is for you!

I want to discuss some practical tips for reducing taxes and ways to keep tax time from seeming overwhelming:

(First of all some background: I majored in accounting and worked full time in accounting/tax/financial planning for 4 years. My CPA license is currently "inactive" but I do around 15-20 returns still per year to keep up with the times with my own return being one of the most complicated that I've ever done - but that's just cause I like to have my hands in a lot of different things!)

Okay so here we go: there are 2 types of people when it comes to taxes - those who are better off doing their own taxes and those who are not. Which one are you?

Think about the following statements and if they describe you or not:

1. You hate everything to do with taxes.
2. You are not good at organization and paying attention to the details.
3. You tend to either procrastinate doing your taxes OR
4. You are too busy (with legitimate, worth-while activities) to do your own taxes.
5. You are self-employed or own a business.
6. You have many different or complicated investments.
7. You own investment real-estate.
8. You value your time more than saving a few bucks.
9. You simply would rather have the peace of mind of having someone else do your taxes.

The more of the above statements describe you, the more you should outsource your taxes (see if sounds so much more professional when you say "outsource."

Now that you know whether or not you are going to do your own taxes, I'm going to split my discussion in 2 parts; talking specifically to type.

Type 1: Outsourcing your taxes

Okay, first things first - most tax preparers command a high markup on their time and rightfully so - their knowledge and expertise should be worth it, plus they usually have to run full year operations even though the majority of their business may be done in 3 months. There are basically 3 types of preparers to consider:

1) The Chains - Whether it's HR Block, Jackson Hewitt, Liberty, or any other chain tax preparation, my personal opinion is that they are a RIP OFF. Don't get me wrong - they do good work (for the most part), but they nickel and dime you for each and every form their software spits out. Professional software automatically fills out most necessary forms after the preparer inputs a few numbers. There's still some discretion on the preparer and they need to know where to input the numbers. All I'm saying is that a "per form" charge is by and large a rip off. The chains will also try to sell you on other products like IRAs or "instant refunds." INSTANT REFUNDS ARE SOME OF THE BIGGEST RIP OFFS THAT EXIST. PERIOD. They are basically short term loans that the chains pay you up front cash in exchange for your full refund from the IRS (which only takes about 7-14 days to come in).

According to the National Consumer Law Center, "the cost of borrowing against the average $1980 refund (for 10 days) equals an APR of 222.5% (including electronic filing fee). For full report go here: http://www.consumerlaw.org/initiatives/refund_anticipation/content/2003_RAL_report.pdf

BIG TIP: If you go to a chain, never get the instant refund. With E-file and Direct Deposit, you will get your FULL refund in about 7-14 days without paying the outrageous fees.

2) A CPA firm - You aren't going to save much money here versus a chain but the pricing will typically be either hourly or a standard per return (with limits) so you'll have a better chance of knowing what you'll pay ahead of time. Try asking a chain how much your return will cost ahead of time. You'll probably get an answer that resembles: "Well, each return is unique and so I can tell you how much some of the common returns cost per form, but we'll never know until you come in." With CPA firms, you'll typically just drop you stuff off (or mail/fax it in) and they'll work on it and contact you with questions or when they're done. Now many CPA firms are also in the business of making money (I know hard to believe) so they may try to sell you on other products as well. Be sure to check on some references or get a referral from someone. You can also check their license status with the state's licensing bureau. In Missouri, go here:
http://pr.mo.gov/licensee-search.asp

3) An individual tax preparer - these people are usually retired CPAs or accountants or perhaps just individuals who found their niche in tax preparation. In terms of bang for your buck, you'll probably get the best rates (along with personal service) here. However, there are also concerns: First, tax preparers do not necessarily have to be licensed in any way, just registered. Secondly, they may not have the resources that a CPA firm or chain may have. And Finally, you need to make sure that they are keeping up with the current times. I knew of one preparer who was retired IRS...he was good but he was still preparing returns by hand! In 2004! Again - check references and get a referral.

BIG TIP: If you are low income or a student, most cities or states sponsor FREE tax prep service (oftentimes organized through local schools). In Springfield, check out the VITA program at Drury: http://www.drury.edu/multinl/story.cfm?nlid=246&id=21577

Type 2: Doing it yourself

If you have a fairly simple return and if you meet certain requirements, you can qualify for FREE filing online. Check the IRS website for approved sites: http://www.irs.gov/efile/lists/0,,id=101223,00.html. Some sites file ONLY the federal return so you'll still have to file your state return separate. Make sure you find one that does both like TaxSlayer.com or TaxEngine.com.

I you don't qualify for free filing software programs like TaxCut and TurboTax make it very easy to do your own return. Just be sure that you have received all your tax statements in the mail before filing - amending a return is a pain! These programs will have checklists for you to make sure you have everything together. Be sure to save your file often and back it up to a jumpdrive or CD in case your computer crashes!

Final Tips:

Whether you do it yourself or outsource, most people who have complicated returns or own a business wait till February to try to get all receipts and tax-related materials together. If this is you, you've already blown it! You are probably paying more tax than you should!

Follow these tips:

1. Buy an accordion-style file folder at the beginning of every year and label the pockets according to your expenses: meals, auto, office supplies, insurance, interest, dues, licenses, etc. Either your accountant or your Quickbooks can give you the categories that you need.

2. Put all receipts in the appropriate file each and every day! If you forget once, you'll probably keep forgetting.

3. At the end of the year, organize and total all your receipts (This will help you immensely if you prepare your own return. If you pay an accountant, it'll save you in hourly fees).

4. Keep a mileage log for your business miles. You can either claim miles for business use of your car OR actual expenses (insurance, gas, repairs, etc) but either way you do it, YOU STILL NEED THE MILES. What I do is keep a small pocket calendar in my car and log any business miles - again don't put it off b/c you'll probably forget.

5. Re-evaluate your W4. Your W4 is what tells your HR person how much tax to withhold each pay check. If you are getting a refund of more than $1000 each year, you are paying the government to hold your money for you!!! Ask your preparer or your HR person to help. If you buy software, you can run the estimator tool or go directly to the IRS estimator: http://www.irs.gov/individuals/article/0,,id=96196,00.html

6. Plan NOW for next year! Need to increase your IRA or 401K contributions? Need to give more money to charity? What about deductible child-care or education expenses? Use the tools in the software to plan NOW for the upcoming year. If you wait, it'll be too late.

7. Research other credits and deductions available in your software or with your preparer. If you own your own business, there are a LOT of possibilities.

Please post any other specific questions or suggestions!!

Start the NEW YEAR with Savings!

Time for those New Year Resolutions! Take time to resolve to manage your personal finances better in 2008.

So I mentioned earlier that the first step for most people is to save money - most planners recommend anywhere from 2 to 6 months of your salary stashed away in a liquid savings account. This would be for emergencies (like losing a job or medical) or for your savings goals (like a new car or vacation).

Now most people don't have 6 months of salary sitting in their checking account, especially those starting off right from college so here's the easiest way to go about saving money:

Open a savings account with an online bank (I use ING Direct) with as little as $100. Online banks pay much higher rates than normal banks because of their lower overhead. This also allows you to "link" your checking account to your online savings account and establish an automatic transfer. ING lets you do any amount daily, weekly, monthly, or quarterly. You can also do 1-time transfers.

If your goal is to have 6 months of salary saved up by the end of 1 year, then set your automatic transfer to be 1/24th of your salary every month (when you get paid).

I recommend setting up the transfer on whatever day you get paid - so if you're paid weekly, you would have weekly transfers; monthly - monthly, etc. This way you're PAYING YOURSELF FIRST before you spend it!

Of course, if your budget doesn't allow this, then you should take a good look at your spending habits, your earning potential, and then transfer whatever you can with a goal to increase it. The point is to START!

Economic Outlook 2008

Nationally, interest rates were up, now down; stocks are flat, real estate values dropped on a year-over-year basis for the first time since the Great Depression! If you’re like me, your crystal ball is awfully cloudy when trying to discern the financial future right now. Let's take a look at some of the things we do know:

1. The sub-prime mortgage mess has wrecked the financial services industry, and it probably won't recover for a couple years. Bright side: increased transparency and controls going forward (at least until enough time passes that no one remembers this), and nice bargains in stocks from large, solid companies that pay dividends. I won't make any specific recommendations here, but begin your search for blue chip stocks that are paying > 4% dividends and you'll find some bargains. Also try funds or ETFs that focus on this.
2. The areas that are getting hit the worst in declining values are the same ones that had the most ridiculous run-ups over the last 2 decades (Florida, California, etc). Nationwide, there are still markets that have increasing value, even as new construction levels off. Here in Greene County, MO, average home prices continue to increase despite the high inventory. New construction has leveled off dramatically and the average day-on-market for all homes is 56 days. In the surrounding rural counties, listing times are a lot higher and it is a buyers' market. The biggest thing that sellers need to know is that buyers are having a harder time obtaining credit, therefore, your house may either need a price reduction or concession for a quick sale, otherwise it may sit a while. Thinking about "add-ons" or remodeling to increase your price? It may not be a good idea as buyers are able to afford less.
   
3. Real Estate Investing still makes sense: a recent report by the NAR shows that investors nationwide are up $54,000 over the last 5 years (taking into account the recent pull back). Only investors who bought very recent would be facing a crunch - and again it's probably more so in those markets that have felt the biggest crunch. Here in Springfield, as I suspect there are in many other places, there are major bargains to be had for the serious buy-and-hold investor. Flipping properties like on TV may net the most gains in a positive market, but it comes with the most risk. In a flat or declining market, you have a very small margin of error to make money flipping houses. Alternatively, an investor who can afford to put some money in a rental that produces nice cash flow will ride out the downturn and see a nice appreciation (to go along with his cash flow) in the future.
4. Something that really annoys me is how little the media actually understand investing - unless they're just really good at hiding it - they usually always overlook the fact that real estate investors are leveraged when they compare returns to the stock market. Remember to compare Cash-on-Cash return when investing.

OUTLOOK:

With interest rates back under control and most industries still humming along, things are actually pretty positive. Employment is good, as is job creation. The subprime mess will mean that low to average income earners will go back to FHA loans rather than the adjustable rate loans - which is a good thing. With the elevated levels of inventory, it may take a while for the market to soar again (if at all). The economy as a whole is said to be on pace for modest increases in 2008. With the election coming up, there will be a lot of jitters in the market as many wait to see who will be elected and what new policies they will bring. The NAR forecasts that the housing market overall will continue to decline between .5 and 2% per quarter until around Q2 or Q3 of 2008 at which time the trend will begin to reverse and the nation will see modest gains.