Year End Tax Planning

Hello everyone, it’s that time of year again, time to look alive.  Sorry this post is so long but its important information and the post break on this system isn't working, Google claims it's working on it.

Yes, I know you are getting ready for the holidays and that alone can be overwhelming, but I want you to remember that you have less than 30 days to make any last minute decisions to positively affect your tax liability for the 2009 tax year. Yep, you’ve got to take action by December 31st for it to matter this year.

Review the items below to see whether you can direct things in your favor financially. Talk with your tax advisor to see if any of these items have a place in your financial position.

Retirement Distribution Penalty Exceptions

       If during the tax year you took a distribution from your 401K or your IRA, and you did not have taxes withheld, you will probably owe quite a bit of taxes, as your distribution is taxed as ordinary income and, if you took the distribution before reaching age 59 ½ you will likely also owe a 10% penalty.   
       If you made a direct rollover from one brokerage house to another (which is generally the safest way to do it), or if you took possession of the funds and rolled it over yourself, neither the tax or the penalty will apply, until you actually decide to have the proceeds distrbutable to you.  
      So if you actually received a distribution before you were 59 1/2, you will still be responsible for the ordinary income taxes on the distribution, but you may reduce or eliminate the 10% penalty using one of these exceptions.

For either a 401K or IRA distribution:
a. If your medical expenses are over 7 ½ % of your adjusted gross income (you do not have to itemize to take advantage of this).
b. If you are totally and permanently disabled
c. If the IRS levied your account.
d. If  you take equal periodic payments over your life expectancy
e. If the distribution was made after the death of the account owner
f. If you are a qualified reservist serving on active duty for at least 180 days.
For IRAs only:
g. If  you used the amount to pay for higher education including room and board, for either yourself, your spouse or your dependent.
h. If you are a first time home buyer – a maximum amount of $10K applies here and is a lifetime limitation (each spouse if eligible).
i. If you paid medical insurance premiums and you were unemployed (see your tax advisor for details)
For 401K’s only:
j. If you separated from service of your company and if your were 55 or older (50 if you are a qualified public safety)

There are other less common exceptions, or see your tax advisor. 

NOTE: You may have requested the brokerage house to deduct income taxes from your proceeds, and they may have done so, however, because they are not aware of the rest of your tax life for that year, it may not be enough, particularly if you are married filing jointly (your spouses income would not have been considered).  Your tax liability is based on your total income.  So you should keep some of the funds in reserve in case you do owe Uncle Sam.


Tired Of Being Jerked Around by your Credit Card Company?

A friend called me up recently and said “OK, Ms. Personal Finance, what are these people doing? I have been paying down my credit card balance, but all the card company keeps doing is reducing my available credit.” I said, “Welcome to the new credit card world, if you can, you should try to find a new card company. Not only is the practice inconvenient, but it may even be hurting your credit score.”

The credit card companies are attempting to make as much hay as they can while the sun shines. They are scrambling to ensure they can eke out the maximum revenues possible from you, their “clients” before the new credit card reform goes into action full-force.

As I was doing some research to help my friend find a new card company, I stumbled upon Rob Lieber’s article in the New York Times “It May be Time to Find a New Credit Card” and since I agreed with him for the most part, I’ll let you read it yourself, via a link at the bottom of this article.

I do believe that this moment in our economic life, gives us the space to put better financial practices into place. One practice I would definitely suggest is reducing the grip of credit cards.

Folks who are considered “good credit card customers” by the credit card companies, are generally folks who have “bad credit card practices,” they make late payments, go over their credit limit, pay minimum balances – all the things that provide lots of revenues for the card companies. Yet, the card companies are clamping down on both good and bad customers alike. For instance, they are reducing the available credit on cards and they are closing down cards that you use infrequently. They are also hiking up your interest rates – putting into effect that “universal clause” that allows them to hike the rate on your credit card, even if you have never missed a payment on that card. The universal clause allows the card companies to raise your interest rate, if you are late on any other bill that is reported to a credit reporting agency. Sneaky, huh!

So why are the card companies clamping down on these people? Well, in a good economic climate, these folks would keep on paying their minimum payments, their late fees, their over the limit fees etc., while the credit card companies continued raking in big bucks, but in a more murky economic climate, there is a real possibility and lets say probability that many of these users may not be able to continue paying these extra charges, because with fewer dollars all around, who can keep up this practice long term. The card companies certainly do not want to be left holding the bag. Even for folks who do not abuse credit cards, by necessity, credit cards may become more of a life-line and less of a convenience, until this meager period passes on.

So lets get back to basics. Make a plan to get out of the grip of those credit cards. Pay those balances down, but also think about which card company you want to do business with. Make these changes work for you.

Ron Lieber's article: It May be Time to Find a New Credit Card.


Hurry, Last Day for DTV Converter Box Coupons

This is it. Last Day for DTV Converter Box Coupons

If you still have analog TVs in your arsenal, today is the last day that your application for a subsidized coupon will be accepted. You can apply via FAX, mail, phone or online.
Mailed applications must be postmarked by today, July 31st.

Coupons expire 90 days after they have been mailed.

Here's a Way To Get That New Car

Cash for Clunkers!!!

Update on 8/5/09: The House and Senate have passed a bill to increase the "Cash for Clunkers" program by $2 billion. Its now available for the President to sign. So you have a FEW weeks to cash in on this program. Remember, if you can privately get more than $4500 for your trade, you may be better off, selling your car outside of this program.

Update on 7/31/09: Oops... I was mistaken, it was $250m left, not used after just one week of the CARS program. The program will be extended by another billion dollars or so, but the restrictions may get tightened, so hurry in...
Woohoo!!! Here's a great opportunity to trade in that low gas mileage auto that you have had for years. The government program will give you a voucher for $3500 to $4500 if your old car or truck has a combined mileage of 18mpg or less.


Tax Planning - First $2,400 of Unemployment Benefits Tax Free for 2009

If you receive unemployment benefits this tax year (2009) all or part of it may be tax-free.
The American Recovery and Reinvestment Act, makes the first $2,400 of unemployment insurance exempt from tax. So you can exclude the first $2400 of these benefits when you file your tax return next year. If you are married, the exclusion applies to each spouse separately.


Tax Planning for 2009 Tip 422

New Car on the Brain?

If you purchased a new vehicle* after Feb 16th of this year, 2009 -- or if you plan to purchase one before January 1st, 2010 - you may qualify for a deduction of the state and local sales taxes paid on the vehicle, with a purchase price of up to $49,500.

You qualify for the deduction even if you do not itemize.

The deduction is phased out between $125,000 and $135,000** if you are an individual, and between $250,000 and $260,000** if you are filing a joint return.

You'll claim the deduction on your 2009 return.

This may be as good a time as any to satisfy your desire and help the economy out at the same time. Can you say win-win?

* car, light truck, motor-home, motor-cycle.

** your modified adjusted gross income (MAGI).


Left Money on the Table?

Love to find some hidden money?
If you think you may have overpaid the IRS over the last couple of years, you may be right.
Take a look at your tax returns for the last two years, 2006 and 2007, and you may even go as far back as 2005, if you filed an extension for that year. There may be money hiding there. Can you think of a better time to go get it?
Think back.
Did you take all of your deductions?


Who's First on Your Payroll?

Some think of it as a platitude, I think it is a major financial tenet - what am I talking about? Pay yourself first. Your ability to build wealth should not be placed on the back burner, it should not be an afterthought, it should not be somethng you get around to after Peter, Paul and Mary have been paid, it should be your first priority.

An easy and painless way to do this is to have your payroll department deposit a fixed amount or percentage into a specific savings account. You can also request that a portion of your tax refund be placed into that account [the IRS will direct deposit your refund in up to 3 accounts - use Form 8888]. From this holding fund you can make your investment decisions at intervals that are appropriate for your financial goals.


Charity Begins at Home.

Deducting Charitable Contributions at Tax Time.

Many of us do good during the year, making both cash and non-cash contributions to charitable organizations. We often forget however, that we are able to take a tax deduction for those items we donated come tax time. To do this, a little housekeeping is necessary.

  • First off, to take the deduction, you must itemize your deduction on Schedule A. Your itemized deductions must exceed your standard deduction in order for it to be of greater benefit to you, than your standard deduction.
  • The contribution must be made to a qualified organization, not to an individual, political organization or political candidate.
  • The cost of games of chance, raffles or bingo cannot be deducted, and if you get merchandise or admission to an event in exchange for your donation you will need to deduct the fair market value of the merchandise or ticket price you received from the donation amount, to determine the dollar amount that can be used as a deduction.
  • If you donate stock, it is generally valued at the fair market value.
  • The old stuff from your kitchen or your linen closet that you wouldn't give to another family member does not qualify for a deduction. Donated household items and clothing must be in good condition to qualify.
  • Written bank records or records from the receiving organization are required and should be retained. It should indicate what the donation was, the date it was made and the dollar amount of the donation. If your donation exceeds $250, the organization needs to indicate whether you received benefits in exchange for your contribution.
  • If your total contributed property is greater than $500, IRS form 8283 will be required.
  • If the value of your total contributed property is greater than $5000 IRS form 8283 will also be needed and items must be appraised by a qualified appraiser.
  • You cannot deduct the time or value of your sevices, however you can deduct the items used while carrying out the charitable service.
  • You can also deduct the miles driven to provide charitable deeds or donate products. In 2009, the rate is 14 cents per mile.

So keep doing good, keep good records and watch as your tax liability is whittled away.


Are You Up to Date on Your Tax Returns?

Are all your tax records in order? Have you filed all your returns? If you have not, what's preventing you from completing this task? Not filing your return when you are required to can get pretty expensive as penalties and interest start accruing on the due date of the return. If you do not file timely, you could also forfeit a refund that was due to you. You generally have 3 years from the original due date of the return to make a request for a refund, so lets not leave money on the table. If the return you have not filed is not the current year return, make sure that you use the correct forms for that year.
"No matter who you are, making informed decisions about what you do with your money, will help build a more stable financial future for you and your family." Alan Greenspan