first time home buyer’s tax credit

There is a new tax credit this year, aimed at first time home buyers.  If you bought your first home last year, you can claim a special $7500 tax credit on this year’s tax return.  If you are already getting a refund, even without this credit, the credit just adds to your refund.  If you owe money to the IRS, this credit will be reduced by what you owe.

The credit is available to anyone who purchased their first home between April 9, 2008 and July 1, 2009.  If you bought your first home between April 9 and the end of 2008, you can claim the credit on your 2008 tax return.  If you buy your first home between the first of 2009 and July 1, you can claim the credit on your 2009 return.  Which means there is still time.  If you’d like to buy a home, but are not sure if you can afford it, this credit might be just enough to put you over the line if you can do it in the first half of this year.  Of course, be sensible – don’t jump in over your head just to claim the credit.

What is a first time home buyer?

For purposes of this tax credit, “first time home buyer” means you can’t have owned your own home at any time during the past three years.  Which means if you owned your home in the past, had a three-year string of incredibly bad luck, during which time you rented, but now you are in position to buy again, you too can claim this credit.

Credit or loan?

Although this credit is called a “credit,” it is actually an interest free loan from the government.  You’ll get the $7500 now, but you’ll have to start paying it back in two years.  You’ll pay it back at a rate of $500 a year for 15 years.  This payback will either reduce your refund or increase the amount you owe on future tax returns.

One very sweet way to take advantage of the credit, and remove some of the sting of the loan, is to go ahead and claim the credit on your return, but then just sit on the money.  Park the $7500 in a bank or invest in a well-structured CD ladder.  The interest you earn is yours to keep.  It’s not much, but it’s more than you would have had without the credit.  You just have to make sure you have $500 available each year to pay back the government.

As narrowly defined as this credit is, I don’t imagine many people will be able to benefit from it.  If you were able to claim the credit, what did you think?  Was it worth it?  Let me know what you think.

This article originally appeared in the February 4, 2009, edition of the Greenhorn Valley View.

mysteries of the 1040 revealed

When you report your taxes to the government, the form you use is called “1040″.  This is true whether you do your own taxes, buy a software program, or hire a professional to do them for you.  The 1040 is a surprisingly simple, two-sided form, that lists all your income, the deductions and credits to which you are entitled, and the refund you are owed, or the payment you owe.  Even if you get a software program or a professional to fill it out for you, you still need to understand the basics of the 1040, so you can be sure it’s right.  Fortunately, it’s not difficult to understand.

The front side of the form is all about your income.  In the first section, lines 7-21, you list all your income.  This could include income reported on a W2 or 1099, and from a variety of sources, e.g., employment, contract work, interest, dividends, rents, alimony, social security payments, and unemployment compensation, to name a few.  When you add all these up, your total income is shown on line 22.  Don’t panic, the tax you pay isn’t based on this number.

Now you get to adjust your income.  As much as this sounds like a maneuver your shady accountant would recommend, adjusting your income is perfectly legit.  On lines 23-35, you can subtract from your total income things like moving expenses, contributions to health savings accounts and IRAs, student loan interest paid, and alimony paid.  The government wants to encourage you to do these things, so they allow you to reduce your income accordingly.  When you add up all your adjustments, and subtract it from your total income, the result is your adjusted gross income, on line 37.

The back side of the form is where we get down to the nitty gritty – how much tax you actually owe.  But before you do, you get another chance to reduce your income.  The government allows a “deduction” to your income.  The standard deduction is $5,450 for an individual, or $10,900 if you are married and filing a joint return.  Or, if you think you have more deductions available to you than the standard deduction, you can itemize your deductions.  Things you can itemize include mortgage interest paid, and gifts to charities.  Again, the government wants to encourage you to do these things, so it lets you lower your tax bill if you do.  If your total itemized deductions are greater than your standard deduction, then it makes sense to itemize.  You enter your deduction on line 40, your exemptions on line 42, subtract both of those from your adjusted gross income, and the result is your taxable income, shown on line 43.

The amount of tax you owe is a percentage of your taxable income, but must be calculated from one of the tables or forms specified on the 1040.  Once you know the number, it goes on line 44.

But don’t panic yet.  You can subtract from your tax certain credits for child care, elderly care, and education.  Read about these credits carefully.  Since credits directly offset your tax, dollar for dollar, you don’t want to miss any credits you are entitled to.  After subtracting credits, and adding self-employment tax, your total tax is shown on line 61.  But it’s still not time to panic.

In lines 62-70, you add up the amount you have already paid to the government.  The largest part of this is usually the withholding shown on your W2, or your quarterly payments, if you are self-employed.  The government requires your employer to send in a portion of your paycheck every they pay you.  This insures the government that they will get your money.  Your total payments is listed on line 71, and hopefully, this amount is greater than your total tax.  If so, you get a refund.  If not, you may now panic – you have to pay more to the government.  The government would rather owe you a refund than wait around with bated breath hoping you send in the extra you owe, so there will be an additional penalty if you didn’t have enough withheld.

So there it is, the 1040 in a nutshell.  As always, I suppose I should tell you that I am not a professional, and this is not legal advice.  But I think if you spend a few minutes looking at the 1040 and what each line means, you’ll learn a lot about yourself and your government.

Also, it turns out, accountants don’t like the term “shady”.

This article originally appeared in the January 28, 2009, edition of the Greenhorn Valley View.

tax forms

Among the potentially confusing, but important, tax documents that have probably already begun arriving in your mailbox, and will continue arriving for the rest of this month, are the familiar sounding W-2, 1099, and 1098. These are the most common documents, and of course, there are other forms and documents that you may receive, but I want to focus on these three for a minute.

W-2
If you are a salaried employee of a company, you will receive a W-2. “W-2″ is the arbitrary number assigned to the form by the IRS. You will get a W-2 from each company that you worked for in 2008. The W-2 shows the total amount that the company paid you throughout the whole year. It also shows how much of your income was withheld to pay your income tax bill. The income shown on your W-2 (or all of them together, if you get more than one) must be reported on your tax return. It is this income that will be used as a starting point for figuring out how much tax you owe.

1099
A 1099 is similar to the W-2. It shows income you earned, but not from a company you were employed by. A person hired to do a single, temporary job typically has their income from that job reported on a 1099. Interest and dividends you earned from bank accounts or investments is also reported on a 1099. Just like the W-2, you’ll have to add up the income shown on all your 1099s and report it on your tax return.

1098
A 1098 shows tax-deductible interest you paid during 2008. The most common 1098 is from the bank that holds your mortgage. The form will show all the mortgage interest you paid. You’ll want to be very careful not to miss any 1098s. All the interest you paid, shown on all the 1098s you receive, is tax-deductible, which means you can subtract every dollar in interest from your taxable income. And lower income means lower taxes.

One final word about these tax forms – the IRS gets duplicate copies of them. They will compare the numbers on the forms they receive with the numbers you report on your tax returns. If you’re thinking about not reporting some income shown on one of your forms, you can count on the IRS noticing and following up with you.

This article originally appeared in the January 21, 2009, edition of the Greenhorn Valley View.

refund anticipation loans

It’s almost tax time again.  Before the end of the month, you’ll receive W2s, 1099s, and other complex sounding forms from your employers, contract employers, banks, brokerage firms, and a lot of other companies you didn’t know you had relationships with.  Then you’ll have to wade through a 1040, Schedule A, Schedule C, countless other forms and worksheets, and software that may or may not be getting it right (how would you know?).

If you’re the kind of person who throws all this stuff in a file folder and takes it to a tax preparation agency, good for you.  The service will cost you a little bit, but what price is the peace of mind you’ll be buying.

There is one thing to be aware of though.  If you use a commercial tax preparation agency this year, and you discover you get a refund, you’ll almost certainly be offered a refund anticipation loan, or RAL.  An RAL sounds very attractive.  The tax preparation agency, for a small fee, gives you the amount of your refund – on the spot, in some cases.  No waiting!  Then when your refund arrives, the agency keeps it to pay back the loan.

The problem, of course, is the “small fee.”  The fee doesn’t seem like much, especially when it comes directly out of the loan and you don’t have to pay it out-of-pocket.  But when expressed as an annual percentage rate, the fee can be as high as 113%.  RALs are second only to payday loans in the World’s Worst Way to Borrow Money category.  Would you take out any other loan at that rate?  Probably not.  (And if you would – Hey, I have some money I’d like to lend you!)

And don’t forget, customers who e-file, which includes you if you use a tax preparation agency, can get their refunds from the IRS in as little as eleven days.  So not only are you paying a high rate to borrow money, you’re doing it just to get the money a couple weeks sooner.  So do yourself a favor and skip the refund anticipation loan this year.

This article originally appeared in the January 14, 2009, edition of the Greenhorn Valley View.

impulse spending

You know the feeling. You’re shopping and you see that one thing that you can’t live without. You’re surfing the web and there’s that one thing, and it could be yours with a click. That new iPhone app could be yours with a flick. That new book could be on your Kindle in under a minute. You know the feeling.

The problem, of course, is that all of these things cost you money. Not much money, but $0.99 here, a couple bucks there, $10 for a whole album or a new book, and it adds up quickly. Cutting out all impulse spending would solve the problem, but going cold turkey in never easy. How do you control impulse spending without cutting all the fun out of shopping and browsing?

Plan ahead
Before you hit the store, or the web site, recognize you are going to see a lot of tempting items, a lot of enticing ads. Since you know ahead of time that it’s going to happen, you can plan how you will handle them. Steel yourself now. Prepare yourself mentally to ignore anything but what you’re there to get. If you’re going to Amazon.com for a present for your folks, get the present and get out of there. Pay no attention to the “People who bought this also bought…” messages.

Make a list
Speaking of getting only what you need, make a list of items you intend to buy before you go to the store or web site. A list is a very handy tool for keeping you focused on the goal, and it can be used just like a To Do list. As you get each item you can check it off your list, and when all the items are checked, you get to come home.

10 second rule
The ten second rule is for those times when you pick up something interesting that wasn’t on your list. Spend ten seconds asking yourself questions like, “Do I really need this?” or “Could this money be better spent elsewhere?” or “What value will this add to my day?” It will be obvious, after ten seconds, what you should do with most of the things you pick up.

Sweet rewards
And, of course, don’t forget to reward yourself. Every time you successfully resist the temptation to buy something you don’t need, take the money you would have spent and apply it toward one of your debts. Or just put it in your piggy bank. I think you’ll be surprised how quickly the savings add up.

This article originally appeared in the January 7, 2009, edition of the Greenhorn Valley View.

financial resolutions

Is one of your resolutions this year to “spend less money?” I’ve made this resolution before, and I know many people have made similar resolutions. The resolution is kind of fun, for a while. You can trim every last expense and be left with some money at the end of the month. But before too long, the discipline required to make it work begins to take its toll. Your defenses are weak and you give in and spend more money than you wanted to. By the time the spring thaw arrives, your resolution is stone cold.

Here are some tips to make your resolution to “spend less money” stick. First, take baby steps. Take one small expense, and try to cut it down. Do you by a new DVD every week, buy new clothes too often, or eating out too much? Try cutting out just the DVDs. You don’t need so many anyway. With the time you save by not watching movies, take up a hobby. With the money you save by not watching movies, you can pay for that hobby, or just save it. After you’ve adjusted to life without the new DVD every week (and this might take a couple months), you can tackle one of the clothes, or the meals out. Just remember to do them one at a time.

The second tip is to use buckets to plan for your spending. If your car insurance comes due every six months, divide your total insurance bill by the number of paychecks between now and when the bill is due, and put that much money in your car insurance bucket every time you get paid. Then, when the insurance is due, just empty the bucket. If you use the bucket system with all of your major expenses, then you know you’ll be able to pay all your bills when you need to. Now you can breath a sigh of relief, because all of the money that’s not in a bucket is available to spend. Spend away! As long as you don’t spend more than you have available, you haven’t broken your resolution and you don’t need to feel guilty.

The key with resolutions is to be reasonable. Tackling your financial resolutions one small step at a time is the best way to ensure success. After a whole year of continuous small financial improvements, next year you can tackle another area of your life, like dieting. Ugh.

This column originally appeared in the December 31, 2008, edition of the Greenhorn Valley View.

emergency travel

I’m writing to you this week from lovely Ohio.  OK, not too lovely.  The temperature has been below freezing, and frequently in the teens, most of the time we’ve been here.  Thick curtain-like clouds obscure the sun.  The wind blows strong, chilling to the bone.  And all this without any snow to make it pretty.

Why would someone give up the grandeur of Colorado for the grayness of Ohio?  If you’re going to spend a mid-winter week away from home, why not make it Florida or the Yucatan?

We have family in Ohio, and we were called here by a family emergency.  Because of the nature of this trip, I’ve noticed several things about traveling that I haven’t noticed before.

Out of town guests are a strain on the host family, especially if that host family has other duties due to the emergency.  While we are always welcome at our hosts’ home, our hosts’ lives must continue in spite of us.  They have jobs, and a house to keep, and a sick family member in the hospital, and all of this is only complicated by having house guests.  We have attempted to make ourselves as useful as possible, but our efforts can only go so far.  Our future emergency plans will probably include a hotel stay, for everyone’s sanity.

Pet care is more difficult.  There are basically three options for pet care when leaving town.  You can take the pet with you, you can board the pet in a kennel, or you can find a friend to take care of it.  Taking the pet with you costs you travel time, as you still have to feed it and take it to the bathroom.  Boarding the pet costs you money, plus you leave the pet with a potentially impartial care-giver.  And asking a friend to care for the pet is difficult, because, let’s face it, nobody likes your pet but you.  In our case, we brought the dog with us, and we left the cat at our house and asked a friend to come by to check on it now and then.  When we get home, we’re going to spend some time making emergency pet care plans so we’re not left scrambling in the future.

An emergency fund is absolutely essential.  No matter how you handle the details, taking a last minute trip out of town is expensive.  If you do not have an emergency fund you will sink further into debt, turning a medical emergency into a financial emergency.  This is the first time we had to use our emergency fund since we started building it.  The difference between this trip and our past trips is like night and day.  If you have any desire at all to change your financial picture, you simply must have an emergency fund.  There is no substitute.

In short, while I wouldn’t wish an emergency on anybody, they are bound to happen.  At some point you will have an emergency.  How are you preparing to handle it?

This column originally appeared in the December 24, 2008, edition of the Greenhorn Valley View.

tax reduction strategies

The end of the year is coming.  The cold winter months of January and February will bring dreariness, depression, and tax forms!  Although the year is almost up, there are still some things you can do to lighten your tax burden or increase your refund for 2008.

Contribute to a retirement plan
Any money you contribute to a qualified retirement plan, such as an IRA, 401(k), 403(b), or any of the similar plans, can be deducted dollar for dollar from your taxable income.  And less taxable income means less taxes.  If you’re investing through your employer’s plan, you still have time to bump up your contribution amount for the remainder of the year.  Even though you probably have only one or two paychecks left in 2008, increasing your retirement contributions could earn you a couple hundred bucks back from Uncle Sam and his Cousin Oliver.  You don’t even need to itemize your deductions to take advantage of this.  It just comes right off your income.  Not to mention, now is a great time to be buying stocks.

Give to charity
Charities are always ready to accept your donations, but there’s no better time than Christmas to clean out your closets and open your checkbook.  Like retirement contributions, charitable donations are subtracted from your income, but you’ll need to itemize your deductions to take advantage of this one.  Add up all your deductions, and if they’re greater than the standard deduction, you’re making money!  Charities always need help, and you can benefit yourself and the charity by giving at this time of year.

Use all the money in your flexible spending account
If your employer offers flexible spending accounts for medical or child care expenses, don’t forget to check your balance.  All the money you’ve put into your account is tax-free, and can be used for qualifying expenses.  But if you don’t incur the qualifying expense before the end of the year, you’ll lose the remaining balance.  Check your balance right now, then plan how you’ll spend that money.  (some ideas: get your eyes checked, get your teeth checked, get an end-of-year physical, stock up on over-the-counter medicines.)

Make an extra mortgage payment
Mortgage interest is significant.  In the early years of a mortgage, most of the monthly payment is interest.  And all of that interest is deductible.  If you have a home mortgage, the interest you pay can be itemized and help get your over the standard deduction.  So if you make January’s payment a few days early, before the end of the year, you can count that interest too.  Of course, the following year you’ll only have eleven payments, unless you try the same trick next December, as well.

We have to pay taxes in this country, but we don’t have to overlook legitimate tax reduction strategies.  Make sure you finish the year out right!

This column originally appeared in the December 17, 2008, edition of the Greenhorn Valley View.

here’s a tip…

When you go to a restaurant, how much do you tip?  There is a wide spectrum of responses to that question.  Some people withhold a tip for the tiniest little inconvenience, while others tip heavily without regard to the service.  Some tip exactly 15% every time, down to the penny.  Others will tip $2 a plate, or something similar.

Servers are of one mind on the question.  Patrons do not tip enough.  Your server is typically making minimum wage, or less, and is dependent every dollar.  Meager tips can be depressing or insulting, and fat tips, while welcome, are rare.

Patrons, of course, don’t have tons of excess money either, and so tend to be stingy when paying the bill.  Any excuse to scrimp on the tip will do.  Even those who don’t scrimp can end up leaving small tips.  Consider: for $10 you can get a full breakfast of eggs, bacon, pancakes, grits, biscuits and gravy, hash browns, and coffee.  Oh man, now I’m getting hungry.  You also get visited at least three times by the server, and usually more than three.  At the end of the meal you settle up and pay the server – a buck and a half.

I heard an interesting idea recently.  I haven’t tried it yet, but I might.  On relatively cheap meals that come out to $10 a person or so, why not go wild and tip 35%, or just get crazy and tip 50%.  Is paying $15 for a ten dollar meal going to break your piggy bank.  Probably not.  But the server sees the huge tip and floats three feet off the ground the rest of the day.  Good investment?  But wait, there’s more!  Next time you go in there and see the same server, how do you think you’ll be treated?  Like royalty!

Take these two points to heart.  Never tip below 15%, regardless of service, and consider tipping extraordinarily well on the smaller meals.  And above all: lighten up!  Don’t be so miserly.  You’ll make your server’s day, and you might make your own as well.

This article originally appeared in the December 10, 2008, edition of the Greenhorn Valley View.

greed

By now you’ve probably heard about the trampling death of a Walmart worker on the day after Thanksgiving.  You may also have heard about the shooting at a Toys-R-Us, and the man who punched a woman in the nose to get the last of the TVs on sale.  It’s enough to make you want to check out.

I want to check out of the consumerist society.  I want nothing to do with a culture that says the $2 pair of pajamas is more important than the guy I’m walking over to get them.  I hate the fact that stores have to have high volumes of cash coming in so that they can have a “good” holiday season.  And we, the consumers, have to do our part.  It is our duty to spend, spend, spend to help the stores get into the “black”.  And if the stores don’t have a good holiday season, they might have to close up shop.

Don’t sit back and say, “Well, I would never act like that…”  We don’t get a pass because we live in the Greenhorn Valley, where there are no large stores.  Human nature is the same everywhere and I have no doubt that in the right time and in the right place, all of us have the potential for the same kind of behavior.  Plus, Pueblo isn’t that far away.  If we wanted to get involved in a tussle at Walmart, it wouldn’t be that hard.

So how do we tame the greed that causes all this?  I don’t know, maybe go ahead and pay the normal $4 price for the pair of pajamas.  And save up and buy the TV at a normal sale price, rather than the deep discount on the day after Thanksgiving.  You might pay a little more than you would on the day after Thanksgiving, but you still have your sanity, your soul, and you didn’t trample anybody.

Also, you might consider the opposite of greed.  You could actively look for ways to give.  You could give more than you get.  You could play Santa.  You could pay a neighbor’s utility bill.  You could throw a feast and invite the whole block.  Remind yourself that people are much more valuable than stuff.  Instead of looking for the absolute best deal on material goods, you might look for the absolute best deal on generosity.  How could you get the most bang for your buck by giving money away?  There is no run on generosity.  You won’t have to fight anybody in the giving line.

This article originally appeared in the December 3, 2008, edition of the Greenhorn Valley View.