A Quick Guide for Last Minute Tax Strategies

Act now before it’s too late! A recent H&R Block press release details how we’re running out of time to reduce our taxes for 2006. This quick guide summarizes each strategy, its potential savings, and important things to consider. Read them through, if any apply to you, get on the ball!

1) Retirement Contributions
If you haven’t contributed the maximum for your 401k or IRA for 2006, increase contributions in November and December.

Contributions to your regular IRA and 401k will reduce your Adjusted Gross Income (AGI), lowering your overall tax bill. Read more about your AGI in this article by Five Cent Nickel.

Things to Consider
Unlike a regular IRA, contributions to your Roth IRA will not reduce your adjusted gross income but will still pay off big time in the long run! The 2006 contribution deadline for both the Regular and Roth IRA is April 16 2007.

2) Charitable Giving
The rules around tax deductions for charitable giving have become more stringent and require additional documentation in 2006. Make sure you are familiar with these rules.

Various. The key point here is to deduct and document the donations appropriately. Things to Consider The press release notifies us of the following:

  • “After Aug. 17, 2006, donations of clothing or household items that aren’t in ‘good used condition’ or better won’t be tax-deductible”
  • “An additional form must be filled out to claim a deduction for non-cash contributions that total more than $500. The IRS also may disallow deductions for items that have little or no monetary value.”
  • “For cash donations of $250 or more made during 2006, deductions are granted only with written acknowledgment from the qualified organization. For 2007, all cash contributions must be documented with a bank record, such as a cancelled check, or a written acknowledgment from the qualified organization.”

3) Energy Efficient Home Purchases
Lower your energy bill with qualifying energy-efficient home improvements and also earn a tax credit.

This strategy offers a $500 maximum one-time credit for 2006.

Things to Consider
The press release reminds us that this credit “applies to qualifying energy-efficient home improvements” and that we should “look for certification that the item is eligible for the credit”. Purchases must be made by the end of 2006.

4) Education Expenses
Pay any spring 2007 semester college tuition bills in 2006.

Someone with modified AGI under $45K ($90K for married taxpayers filing jointly), may qualify for the Hope or Lifetime Learning credit. Learn more about the Hope at H&R Block or the Lifetime Learning credit at Free Money Finance.

Things to Consider The credit is not available for people with modified AGI of $55K or more ($110K for married taxpayers filing jointly) and begins phasing out at modified AGI of $45K ($90K for married taxpayers filing jointly).

5) Hybrid Vehicle Purchase
If you’re planning on buying a hybrid vehicle, do it before the end of 2006.

The press release says the purchase “could qualify taxpayers for tax credits ranging from $250 to $2,600, depending on the make and model of the vehicle and when the purchase is made.”

Things to Consider
The tax credit varies widely between make and model so research this before buying.

Are Americans Obsessed with Money?

What is the one thing most Americans have in common? Amanda Congdon, former host of the popular videoblog Rocketboom, has been traveling across America and from her journey she concludes that many of us “seemed to have money on the brain”.

When asked by Guy Kawasaki what she’d learned from her trip across the country Amanda answered:

“Americans are obsessed with money. I know it’s common sense, but driving across the country and actually, literally – seeing all these different Americans living such radically different lives – it was fascinating that they all seemed to be concerned about the same things: where their money was going, how it was being spent, how much they were saving, and on and on. It was quite eye opening. Whether they were rich or poor – or somewhere in between – everyone seemed to have money on the brain.”

A Means To An End
Do you obsess about money? It’s easy to do; money affects every part of our life in one way or another. Money should be a tool, something we use to live our lives; but unfortunately, many of us end up living our lives around money instead.

Money Smart Life
The battle between quality of life and an emphasis on money is a constant struggle. Sometimes we become so focused on the money portion of it that we lose sight of the most important part, living. I think there is a healthy balance that can be found between living the life we desire and finding the money to reach these goals. How do you balance living your life with managing your money? How do you live a money smart life?

Halloween Profits – A Magic Moment

Seth Godin points out in That magic moment, “In the right moment, something goes from ordinary to precious. From everyday to essential.”

The key to his insight is timing. Anticipating an opportunity before it arises (Halloween Profits) allows you to prepare and strike while the opportunity is fresh. When you read about the opportunity after it hits the news, often times you’ve missed that early mover advantage.

If only all opportunities were as easy to predict as buying at a 75% discount the few days after Halloween. Have a potential opportunity you’re willing to share? Let me know!

Simple Strategies for Donating As You Shop

Do you ever feel guilty spending tons of cash on Christmas presents, knowing there are many people in the world that could use that money to improve their situation in life? I know I do.

With the upcoming holiday shopping season, Smart Money magazine reviewed several ways we can donate to a good cause while gift buying. Compared to the annual charitable donations we make, these methods are pocket change but the more people that participate, the bigger the result. The article lists 4 different approaches we can use:

1) Affinity Cards
How It Works
Banks partner with a charity and send a small percentage of each purchase made with the branded card to the charity.

Sierra Club and the National Breast Cancer Organization both have affinity cards.

Things to Consider
If you carry a balance, interest rates on these cards tend to be high.

2) Credit-Card Rewards
How It Works
Any cash back, rewards points, or airline miles you earn on your credit card can be donated to charity.

Any cash back card will work here. Once you have the money, you can donate it to the charity of your choice. For rewards points, American Express and Citibank will send a check to your charity based on the amount of rewards points you’ve earned. United Airlines and Northwest Airlines partner with charities and allow members to donate miles to the approved nonprofits.

Things to Consider
Rewards points may get you a bigger bang for your buck than cash back. For example, American Express will give you $50 cash back if you accumulate 10,000 points but if you have them make the donation directly, they’ll contribute $80.

3) Purchases for a Cause
How It Works
Known as “cause marketing”, a small percentage of the purchase price goes to benefit a charity.

When you purchase a red 4GB iPod Nano, $10 of the purchase price goes to the Global Fund to Fight AIDS, Tuberculosis and Malaria.

Things to Consider
Don’t use the excuse that you’re giving back to rationalize buying something you’re craving. If you’re really buying it to give back, the charity would be better off getting a check for the full amount of the purchase rather than a small percentage.

4) Charity Shopping Portals
How It Works
An online portal links to different retailers’ websites. If you make a purchase the retailer sends a commission to the portal, who then donates it to your charity.

Both GreaterGood.com and iGive.com donate money to your charity if you purchase an item through their website.

Things to Consider
Different retailers offer different commission rates to the portal. If you can buy the same thing different places, check out each company’s rates and buy at the one with the highest.

10 Money Smart Ways To Get Re-Elected

What office are you running for? Did you know your seat as treasurer of your personal finances is always up for grabs? Sadly, thousands of people a year don’t realize this. They blindly hand financial control of their life off to credit card or debt consolidation companies.

Will your financial constituents re-elect you this year? Follow these ten tips and getting re-elected will be as certain as money in the bank.

1) Know your Constituents Needs
Who are your constituents? Your family and friends; maybe your community. What do they need? The only way to find out is to ask. Sit down and find out their dreams and goals. If you prioritize the list and focus on meeting their most important needs, you will have a satisfied base of support!

2) Have a Good Record
The election debate always turns to a person’s track record. Your list of goals and dreams becomes your election platform. They should guide you in the financial decisions you make in the year to come. As an elected official you have the responsibility of answering to your constituents for the choices you make. Popular or unpopular, if at the end of the year your decisions stayed true to the goals and dreams list, re-election is just around the corner.

3) Keep your Constituents Safe
Will your supporters feel safe voting for you again next year? Do you have an emergency fund built up for a rainy day? What about the appropriate insurance to cover against the unforeseen? Have you put the appropriate security measures in place to protect their personal information?

4) Cut Spending
Have you cut pork barrel spending on special interest projects such as a Prada purse for her or a 60 inch big screen for him? Have you reduced the nickel and dime expenses that add up over a year?

5) Reduce the Deficit
Do you have a plan to pay off the debt? Do you have a plan to keep the debt away? Did you use credit for big purchases or did you save up and buy with cash? Have you kept a clean credit history so if you need to borrow in the future you can do so at low rates?

6) Reduce Taxes
Have you reduced the tax burden on your constituent’s wallets? Have you done tax planning to increase the amount of money they keep from their paycheck?

7) Build Wealth
Are you building the treasury through an automatic investment plan? Are you keeping good counsel for growing and protecting the assets of the community? Have you diversified the economy so that you’re not dependent solely on one income source?

8) Give Back
Are you giving time and money back to the community? Are you working to build lasting relationships and helping those that need it the most?

9) Add Revenue Streams
Creative officials find ways to use the strengths of their community to bring in extra money. What untapped talent do you have that could earn extra cash for you and your family?

10) Be Efficient with their Money
Have you made the treasury more efficient with direct deposit, online bill pay, and electronic accounting systems? Nothing upsets voters more than wasting their time and hard earned money.

Credit Card Hangover

Alcohol + Easy Credit = Big Money
Consumer credit cards are a boon for the bar industry. This realization came to me last night at a friend’s surprise birthday party at a popular watering hole. We arrived early in the evening to gather for the surprise and people-watched as customers trickled in. The vast majority of people pulled out a Visa, American Express, or MasterCard and started a tab.

No Cash, No Pain
People are usually out to have a good time and don’t want to worry about money. Using a credit card makes this easy to do. Psychologically, it’s much less painful to order a refill or another round when a person doesn’t have to plop down the cash. Particularly so when considering that drinks at most restaurants or bars are overpriced. Keeping a tab on a credit card prevents people from realizing their favorite drink costs $6.50 a pop.

Winners and Losers
Obviously this cocktail of expensive drinks, easy credit, and impaired judgment can add up to a huge bill at the end of the night. The house definitely wins on this one. I’d be interested to see a graph that compares the average amount spent on drinks for the 10 years prior to the easy availability of consumer credit cards and the 10 years following. It’s just a guess but I’d imagine spending went up considerably.

Making Others Rich
Lets say you setup a night out with 10 of your friends and everyone spends around $50, you just made someone you don’t know $500. Why not invite your friends over to your place instead and spend $100 getting food and drinks for everyone? You just increased the net worth of your friends by $500, how’s that for an easy way to make others rich? Don’t want to spend the $100 yourself? Everyone brings their own drinks; you still saved everyone a ton of money.

Financial Checkup – Find a Mentor

Principle 4 – Find a Mentor
What do many successful people have in common? They learned their habits from someone else who was successful. The search for a mentor is basically a search for experience. You are looking for someone who has accumulated knowledge and has turned their mistakes into learning opportunities.

Who Should Be My Mentor?
For our physical health, we turn first to licensed professionals. We pay doctors, nurses, and specialists to diagnose our problems and give us healing and preventative advice. Some of us hire physical trainers or nutritional advisors and some of us just learn from a friend. They all mentor us in different ways and we have different levels of expectations for their assistance.

Financial Mentors
We can use the same combination of mentors for our financial health as well. Licensed professionals, such as certified financial planners, typically provide the most customized level of service, however, will cost you the most money.

Although it helps to have a personal relationship with someone for them to be your mentor, it is not required. You can learn from successful people through their writings in financial books, magazines, websites, or newsletters. You can attend training seminars or online courses that they offer.

Friends & Family
If you are fortunate enough to have a good relationship with someone that has done well financially, ask lots of questions and look for examples. See if they’re willing to teach you the things they know. You can also learn from people that have financial issues. Seeing what other people did that failed can be a learning experience as well, learn what not to do.

Why Over What
When learning from a mentor we may get into the bad habit of only asking them what to do, and not learning why they recommend it. Understanding the reasoning behind the recommendation does two things. It helps you learn the information, process, and habits that go into making the decision. The goal is to be able to apply the principles to pick out the best choices yourself someday.

Second, it allows you to use the common sense test. Remember, you are the one ultimately responsible for your financial decisions. Don’t follow their advice if you understand the reasons behind their suggestions and don’t agree with them. Blindly following the recommendations of a financial mentor can lead you into trouble.

Health Care Flexible Spending Accounts

How Much is Too Much?
Since taxes are our biggest expense, we’re all looking for ways to reduce them. If your employer offers a flexible spending account you can reduce your taxes by setting aside pre-tax dollars from your paycheck for health care use. The question I fight with every year during open enrollment, “How much money should I put into my flexible spending account?”

Is a Flexible Spending Account Worthwhile?
For many of us, flexible spending accounts are the only way to get a tax break for medical expenses since they are only deductible to the extent they exceed 7.5 percent of our adjusted gross income. If you contribute to a flexible spending account it will reduce your adjusted gross income in the eyes of the tax man, which lowers your federal, FICA and, frequently, state taxes.

The current annual maximum contribution allowed by the IRS is $5,000 if you are a single parent or married and filing jointly; $2,500 if you are married and filing separately. (The regulations also allow your employer to cap the maximum contribution amount below the IRS numbers). Of course, your expenses may be lower than these maximum but if you can reduce your taxable income a few thousand each year that’s more money in your pocket.

The Dilemma
Due to current IRS rules you lose any money you contribute in a plan year that is not spent for approved medical expenses by the end of the year. An article by Bankrate.com highlights this is a problem that many people face:

“Studies by benefits specialists regularly show that employees typically forfeit more than $100 each year in flexible medical accounts.”

So we have to weigh the cost savings against the amount we could potentially lose by over contributing. It seems to me the big question becomes, “How sick will I be next year?” A rather absurd question, isn’t it? Obviously, if we could predict the future, we would be rich beyond belief and wouldn’t need to worry about setting up a flexible spending account. Next article I’ll talk about the process I go through to come up with the “magic number” to contribute.

[tags] Taxes, Flexible Spending Account, Health Care [\tags]

Ghostly Profits, Opportunity Costs, and Inflation

Golden Ghosts
The ghosts should make me around 141% return on investment. I went against my own advice from a previous post, and made an investment in Halloween decorations. The positives and negatives I discussed still apply BUT I ran across an opportunity to buy at a 75% discount to the market price. How could I pass it up?

Halloween Profits
I spent $121.25 for decorations that normally go for $485. Based on the formula I use to price all my eBay investments, I should net around $171.41 when they are sold. Even if I was 20% high in my estimates, I’ll still net $84.99, about a 70% return on investment.

Sitting On Cash
You don’t care about how well ghosts will sell on eBay, but what you should care about is the brief thought I had while making this investment. Typically, I expect to sell my eBay investments 1 day – 3 months after buying them. Obviously the price for this investment was discounted so heavily because Halloween products are a cyclical item and I bought at the end of the cycle. (Too bad all cycles aren’t as easy to predict as “always buy on November 1st”). Which means I don’t expect these items to sell until about a year from now.

Time Value of Money
So now I have $121.25 worth of stuff sitting on a shelf for a year with inflation and opportunity costs eating away at the value of my investment. The important thought I referenced earlier is as follows. “If I’m investing this money now and won’t see any return on it for a year, would it be better invested in another way?”

The reason this is so important is that opportunity costs and inflation are so easy for us to overlook when making financial decisions. Investopedia has a good illustrative article that explains how the time value of money can affect our pocket book based on different decisions we make. The decision for me was easy, had I bought shares of stock or a mutual fund I might have expected a gain of 5 – 15% over the next 12 months. Compared with a 70 – 140% return on investment the choice was simple.

Tax Time
“But I don’t sell things on eBay or invest in stocks”, you say. It doesn’t matter; this principle still applies to you. A Kiplinger Personal Finance article tells us that “the average taxpayer is having nearly $185 too much withheld from his or her pay every month.” That comes out to $2,220 a year you don’t have working for you. While the government is holding onto your money, missed interest income and inflation are eating away at the value of the dollar you worked so hard to earn!

The Point
So what am I saying?

That you should reduce your withholding if you’re withholding too much tax?

That you should invest your money?
YES! Whether it’s selling on eBay or investing in stocks, make your money work for you.

That you should be aware of the impact that inflation and opportunity cost have on your financial decisions?

That doing these things will help you live a Money Smart Life?

Financial Procrastination

401k Overachiever
I contribute the maximum amount to my 401k each year. Earlier this year I updated my withholding percentage to 25% of each paycheck. The plan was to contribute the maximum as quickly as possible. Once I had hit the cap on annual 401k contributions, I’d use the money for other investments outside of the retirement account.

I was discussing my plan with a friend at work, who I think lives a money smart life, and he mentioned that my strategy had a flaw that would cost me hundreds of dollars. Our company matches up to 3% of each 401k contribution. If my contribution percentage was too high and I maxed out the 15,000 cap for 2006 by the fall, then I’d miss out on the 3% match for the remainder of the year’s contributions.

Procrastination Sucks!
I thanked him for his insight and put it on my list of things to do. It made sense to lower my 401k contribution percentage but I had plenty of time and would get around to it. Wouldn’t you know, time passed faster than I hoped and I’ve hit the max. I’ve missed out on the matching for the rest of 2006, money down the drain. My loss. If you take it to heart, it could be your gain.

The Cost of Procrastination
A Google search on Financial Procrastination led me to an article from the newsletter of Richmond Financial Associates that discusses the potential costs of procrastinating financially.

One of the things that rang true is that taxes, inflation, and procrastination are three main barriers to accumulating wealth. While taxes and inflation are almost a given, procrastination is of our own doing. We have enough trouble meeting our financial goals as it is why self inflict financial injury?

Procrastinate No More
Obviously financial procrastination does not lend itself to living a money smart life. I’m going to come up with a list of all the financial matters for which I’ve managed to delay action and get started on them this weekend. Has financial procrastination bitten you in the past? How do you avoid putting off your financial maintenance and decisions?

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