July was a month of peace and it was wonderful. No roof to replace, plants are flourishing, and life was nice and relaxing. Net worth increased 7.7% this month despite retirement accounts falling 1.93% this last month (yesterday’s nearly 3% increase in the DJIA will help correct that), mostly because we didn’t have any major expenses to record for the first time in what feels like a long time.

The only significant expense of the month was a wonderful wedding up by the Finger Lakes region of New York where we had a wonderful time. It was a Friday wedding so we drove up early to stay with a college friend. Her family has a cabin on Lake Canandaigua and she graciously let us stay there the night before. We’ve been up there before for holidays and it’s absolutely beautiful. The weather was wonderful, the water looked refreshing, and we were so glad to be able to have a nights sleep after a six hour drive. The wedding the next day was on Lake Seneca and the weather cooperated wonderfully. Afterwards, we stopped by Cornell as one of our friends showed us around his old stomping ground.

All in all, it was a great little weekend mini-vacation.

Irregular Income

As a full time blogger, I pay taxes on a quarterly basis. This means that my income will seem abnormally large for a few months, then drop down significantly for a month, then seem abnormally large for a few months… you get the picture. This is the case for all independent contractors, which is technically my employment status, and I don’t see a need to adjust earnings to account for this. To smooth things out I could adjust my earnings by a suitable withholding amount, say 25%, to make the number seem smoother but that seems like a lot more work than its worth. At the end of the day, the actual number doesn’t matter as much as the meaning behind it and I’ll know the meaning.

If you have irregular income and track your net worth, how do you manage it for your planning purposes? At the moment my income, while irregular, is still pretty stable within reasonable single digit variances. I think of seasonal contractors or teachers as the ones who face this most often when there is a lull in work, how do you, or if you even do, factor this into your net worth tracking?

Laughable Rollover Story

I’ve rolled over my 401(k)s from my two previous employers into Vanguard Rollover IRAs. With the first employer, I wrote about how you should liquidate your funds and then rollover, because otherwise you might find yourself with some dividends left over. Well, I cashed out the dollar or two in the 401(k) and took the 10 cent hit. Three days ago I received another letter, notifying me that my account still had forty cents in it. Unbelievable.

That, and the 401(k) at my last employer had a dollar or two left in them. Argh.

Oh, and the taxes you pay on the withdrawal isn’t even recordable on your return because it’s less than a dollar (and gets truncated).

The Future

Last month we talked about some super-long-term items and then some not so long term, one of them being a pet. That’s still on hold (along with the tankless water heater!) as we’re going to try enjoying life with what we have now rather than adding to it, but they’re still ideas floating around in our mind. Our dishwasher stopped draining so that’s the current minor headache (don’t know if it’s the solenoid, though we don’t hear the thud, or the actual drain pump failing) on the brain right now.

Update: I ordered the pump assembly from AppliancePartPros.com (I chose economy delivery, 4-7 days but it arrived the next day because their distributor is located in Williamsport, PA) and discovered a piece of plastic stuck in the old pump assembly when I removed it. We are lucky the motor didn’t burn out. I put back the original, turned on the dishwasher, and it drains perfectly! I’m going to keep the part around for a few days (thirty day return policy) just in case but it sounds like this mini-disaster was averted.

Until next month!

(Photo: twcollins)

Student loans have been on my mind ever since I read about the latest legislation dropping Stafford rates earlier this month.

Here’s a brief recap of where my student loans are now. I consolidated my Stafford loans years ago, locking in a very comfortable rate of 3.25%, and the balance currently stands at a little over $22,000. The loan had been in deferment as I completed my MBA at Johns Hopkins, which has stopped the clock the last few years, but with my graduation the interest has started to accrue again. We earn too much to be eligible for the student loan interest tax deduction (certainly not a bad thing) and thus bear the full brunt of the 3.25% rate. Once again, I’m revisiting my student loan dilemma.

$22,000 in student loans at an effective tax rate of 3.25%. We also have a mortgage of around $220k at an effective tax rate of 4.3125% (the rate is 5.75% but it’s tax deductible, in the 25% tax bracket the effective rate is 4.3125%; we could consider only the deduction above the standard deduction for couples $10,900 but that begins to get overly complicated). Math says that if we were to pay down a debt, it would be my mortgage first because it’s at the higher tax rate. So I should never make more than the minimum payment on my student loan unless we have paid off the mortgage (which I envision is something that won’t happen for quite some time).

Proponents of Dave Ramsey’s Debt Snowball approach would say that you should pay off the student loan first because it’s the smaller amount (ahh, psychology). I personally don’t subscribe to that idea, I go by the Blueprint for Financial Prosperity Common Sense Payment Strategy (okay I just made that up, it’s how most people who understand interest rates and math would pay down their debt, I just added some color). While I anticipated this result, it’s always good to revisit things as situations change.

So, the student loan is here to stay for the foreseeable future.

Update: Here’s the latest on the second stimulus package.

When Democratic Presidential hopeful Barack Obama mentioned a second stimulus check in a speech in early June, I didn’t think that it would actually happen. Presidential nominees do a lot of talking in the months leading up to November and I chalked the idea of another stimulus check as a short term as just that - talk.

Well, turns out that the Democrats, led by House Speaker Nancy Pelosi, want another stimulus check. As expected, the Republicans are firing back, President Bush is asking that we “wait for the stimulus package to fully kick in,” and it’s simply business as usual in Washington.

I have mixed feelings about yet another stimulus check. On one hand, I understand that there are many families on the boundaries getting squeezed by soaring fuel and food prices. On the other, I don’t think the “stimulus package” is really stimulus at all and I don’t really think a stimulus package is the solution to our economic woes. Overall, I think it’s just political maneuvering and time that would be better spent on more important issues like education, medicare care, or climate change.

At this point, it’s merely political fodder and we shouldn’t expect another stimulus check, just that there have been discussions of one. As anyone who has watched Congress work can attest to, there are plenty of discussions in Washington that lead nowhere.

Democrats plan second economic stimulus bill [Associated Press]

(Photo: daquellamanera)

If you ever need a copy of old 1040 tax forms, there are a few options for you to pursue.

Transcript or Full Return?

Depending on what you need the return for, you can sometimes get away with providing only a transcript. A transcript is just a listing of all the line items from your tax return and won’t include copies of your W-2, 1099s, or other documents filed. These usually satisfy the needs of most requests, such as a bank, and are provided free of charge from the IRS via Form 4506-T: Request for Transcript of Tax Return or by calling 1-800-829-1040 to place your order.

If you need the whole thing, there are two options.

Tax Preparer

If you used a tax preparer, such as H&R Block, you should call them first. They usually will keep copies of your tax returns on record for a few years and can provide a copy for you. They may or may not charge a fee but it’s often the quickest way you get a copy of your return.

IRS

If the preparer doesn’t have a copy or you didn’t use one, you can submit a request directly to the IRS on Form 4506: Request for Copy of Tax Return for $39 a piece, paid with the form, and up to 60 days.

A tax credit is not the same as a tax deduction.

Tax Deduction

A tax deduction, such as contributions to a Traditional IRA or 401(k), reduces your adjusted gross income. How much that deduction is worth to you depends on your marginal income tax rate (2008 Federal Tax Brackets).

If you are in the 25% tax bracket, a $1000 tax deduction means you will pay $250 less tax that year. If you are in the 10% bracket, a $1000 tax deduction means you’ll pay $100 less tax that year. If you have a simple tax situation, with little income outside of your regular job, this translates to a larger tax refund.

Common tax deductions are the two mentioned before, Traditional IRA and 401(k) contributions, as well as mortgage loan interest, student loan interest, and charitable donations.

Tax Credits

A tax credit is a dollar for dollar reduction in your income taxes. If you have a $1000 tax credit, you will pay $1000 less tax that year regardless of your tax bracket. A good example is the $1000 child tax credit. If your child applies and you don’t exceed the income limits, you get $1000 for each dependent child you claim on your tax return.

Common tax credits are the child tax credit, Hope Scholarship and Lifetime Learning Credits (education related), retirement savings credit, and the adoption tax credit.

Wow, June was a little rough. Net worth fell approximately 5.0% on account of two major reasons: quarterly estimated tax payments and retirement accounts. Outside of those two, which really consists of not much else, everything is progressing as expected. Neither income nor expenses, outside of the roof, had drastically changed. We don’t track our expenses as closely as we probably should but we have, at least qualitatively, gone out to eat less.

Eating Out

We’ve gone out to eat at restaurants less frequently for numerous reasons. First, gas prices have increased the cost of my wife’s commute, which is mitigated by my commute. Second, it’s far healthier to eat home on all accounts. You eat less and what you eat is healthier for you. Third, we need to learn how to cook better which only comes with practice. Eventually, whenever we have kids, eating out will no longer be an option (again, from the health and cost perspective) so it’s better to learn how to cook now than learn under the gun.

Estimated Taxes

Estimated taxes are paid quarterly, for the most part, and so the month in which those payments come due will be times when my net worth will see an “artificial” drop. Technically, that’s not accurate, it’s the other months that are artificially inflated, but you know what I mean. This is one of those cases where understanding the underlying cause explains away any concerns I might have, at least with this reason. Retirement is a totally different issue.

Retirement

Everyone knows that retirement accounts are long term. I know that when I log into my IRA’s, I can’t touch that money, unless I wish to pay a penalty, for another 40 years. However, it’s really difficult to look at the Dow drop 300+ points and not think about how one of our largest account balances is in an account pegged to that metric.

Retirement accounts took a 4.41% cut across the board, the largest single month change in my short adult life. I will do exactly nothing in response, though Todd Harrison, founder and CEO of Minyanville.com, who was a former trader at Galleon Group, Cramer Berkowitz, and Morgan Stanley, is in all cash. (there’s more to it but that’s the headline idea) A lot has happened in the last 10 years, there’s a lot more that will happen in the next 40.

The one thing I won’t be doing is adding to positions outside of the regularly scheduled retirement contributions. I think we already have enough invested in the stock market for our comfort level and unless we settle on our other long term investment goals (kids, college, home), we won’t be adding to our taxable brokerage account.

Actions from May

In May I listed three “action items,” I merely said it was looking towards the future, and I think it’s important to revisit them to see where we’re at. Think of it like my own little checklist of important things to do and where we’re at with them. I want to thank everyone who leaves comments with advice, suggestions, etc. because it definitely helps me out in many of these areas. I don’t have experience in a lot of these things and your insight, even if it’s what you did or what you’ve, is a tremendous help.

• Jewelry Insurance: A year after first discussing it and a few weeks after putting it into a monthly review, I finally got jewelry insurance for my wife’s engagement ring. If you read the article when it first was posted, I invite you to go back and read the comment Tim left as it covers many points I missed or misunderstood.
• Auto insurance: I mentioned earlier this week that being married doesn’t affect car insurance premiums and readers pointed out it was the multi-car discount, not the marriage aspect, that decreased premiums. The process will now be to get car insurance and register the car in Maryland, which includes paying the 5% tax. There may also be a penalty involved because you’re supposed to register a car within 60 days of moving to Maryland (you get a credit for taxes paid elsewhere), so we will see how that plays out.
  One interesting point, when I requested a quote, they lowered my six month premium from $282.60 to $203.30 even though it was a sample quote. This reflects something Dedicated said in a comment: “The discount comes from the wife expectance to drive a portion of the time on the mans vehicle. Thus, his rate goes down.” Cool! The addition of the new car only increased the six-month premium to $355.40. The insurance doesn’t include collision and comprehensive coverage.
• Water heater, Roof: The roof replacement is complete and the charge is sitting on our Citi CashReturns card, due next month. We opted for the 1.2% cash back over the six months 0% financing. 1.2% cashback is $53.40, 6 months 0% financing in a high yield savings account earning 3.50% is about $56 - not worth the effort. Water heater is still pending… the prospect of a tankless option is more and more attractive as energy prices increase.

Looking to the future:

• Further Consolidation: My wife and I still has some accounts floating around out there that have since outlived their usefulness. I made a big push to the last few months to consolidate as many accounts as I could, so we will have to keep plugging along. Consolidation sounds easy enough, they’re just activities that take longer than you expect.
• Getting A Pet: Every once and a while my wife and I watch my parents-in-law’s two Scotties. They’re adorable, lots of fun, and they poop everywhere (most of the time outside). My wife thinks I need more companionship during the day, the SAHMs at the gym don’t count, and so we’ve discussed getting a dog. Right now we’re leaning towards adoption from a local pound because there are so many there, it makes no sense to look elsewhere. An added benefit is that often those dogs have had their shots and are current on everything. Before pulling the trigger, we think it’s important to look at the finances just to be sure.
• Continuing Education: One of the longer term goals we have is for my wife to return to college and get her Masters or a Ph.D. Many programs offer tuition assistance or funding, but some don’t. Plan for the worst, hope for the best. This is one of those farther in the future type things, but one of the reasons why we bought those Series I bonds was because earnings are tax free when used for education. Just something to keep in the back of our minds.
• Kids: Ahhh just kidding, not yet.

Marriage is a beautiful and wonderful thing. I just joined the club several months ago and it’s not too bad so far. I’m not saying that you shouldn’t fall in love and spend the rest of your life with someone, I just think that the accounting details make it a raw deal. I’ve talked about how you shouldn’t get married in the past, but if you’ve already let the cat out of the bag and paid for the license, here are some more reasons why you should considering going back to the courthouse to get your money back (it’ll be pricey but think of the ROI!).

Tax Brackets & Marriage Penalty

The marriage penalty is the cute name given to the fact that the tax brackets for married filing jointly isn’t double that of single filers. That is to say, all things being equal, you will pay more as a couple than you would if you were just dating. This is a throwback to an age where one person worked, one person didn’t. In the case of only one income, doubling the brackets gave married couples a significant advantage tax-wise. Now, with two incomes, it’s become a liability.

Your Money, Your Choice

One of the great things about being single is that you are the master of your financial domain. If you wanted to spend $200 on a new purse or a pair of Nikes, you didn’t have to answer to anyone, you didn’t have the consult with anyone, you just did it. If you’re a saver and he/she is a spender, you had conflict. If you’re a spender and he/she is a saver, you had conflict. When it’s just you, there is no conflict. No one chastises you, you don’t chastise anyone, there’s no headache in a couple of one. You are the master of your financial domain.

Alimony Is Tax Deductible!

Did you know that alimony is tax deductible? That’s right, the government loves alimony so much that they will let you deduct it as an adjustment to your income whether you itemize or claim the standard deduction. You can’t deduct donations when you claim the standard deduction, but alimony is okay! First it’s the marriage penalty, then it’s alimony being tax deductible… if this isn’t a government incentive to get divorced, I don’t know what is!

I leave you with this:
A wise man once asked, “Do you know why divorce is so expensive?”
The answer? “Because it’s worth it!”

You might not realize this but last year you probably cheated on your taxes.

Yep, even if you used TurboTax or hired an accountant, you probably cheated on your taxes and you didn’t even know it! We’re not talking about some obscure tax law that no one has ever heard of like a barrel of rum for each ship entering the Port of London, these are bona fide legitimate taxes. And you may be evading them.

Now, part of the reason why you may have cheated on your taxes and not known about it is because many of these are not enforced. Many of them are difficult if not impossible to enforce. Use taxes have been on the books for quite some time but I don’t know a single person who has paid a use tax.

So, here are the four ways you’re a tax cheat.

Use Tax

When you ordered that book off Amazon or that new Dell laptop, did you pay use tax on it? Most people don’t and that’s technically illegal. Use tax is a type of tax that is levied on products you purchase outside of the state you’re going to use them in. The tax often matches the sales tax rate of the home state, effectively giving the state the legal right to tax products you buy elsewhere. States aren’t entirely cruel though, many states have a rule that states any sales tax you pay to another state can be used as credit towards the use tax, that way you aren’t hit with a double whammy. How nice of them! (I wonder how many people pay the use tax?)

• Wikipedia on Use Tax
• Maryland Comptroller on Use Tax (you can search for “use tax [state]” to find information for your home state)

Sales Tax Evasion

An extension of the use tax example above is one in which you buy something in another state simply because the sales tax is lower there. A lot of people who live on the Maryland-Delaware or Pennsylvania-Delaware border often travel into Delaware to buy things because there is no sales tax there. Technically, that’s tax evasion.

We were tempted to buy all of the alcohol for our wedding in Delaware but scrapped the plan because the two hours drive was barely worth it and because we could return unopened bottles to our local liquor store. (we also would’ve been breaking alcohol transportation laws too)

Barter Income Tax

If you trade your services with someone else on a contract and commercial basis, you have to claim the value of services received on your 1040 Schedule C form. “A barter exchange is any person or organization with members or clients that contract with each other (or with the barter exchange) to jointly trade or barter property or services. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.”

So taking turns mowing lawns with your neighbor without claiming the “barter income” is okay, but trading website design work with a landscaping business requires claiming barter income. If you’re part of a barter exchange or network, it sounds like that’s automatic grounds for claiming it as income. I’m sure this is difficult to enforce but I doubt most people consider barter to be taxable!

• IRS.gov Topic 420 - Bartering Income

Nanny Tax

If you have any household help, be it private landscapers/lawn care or nanny/babysitter, you may have to pay what’s known as a nanny tax. The nanny tax refers to payroll taxes (such as Social Security, Medicare, etc) and you are required to pay them if you pay someone more than $1,600 in a calendar year. Whether you are subject to this tax has been debated for quite some time but the crux of the matter is whether your “nanny” is considered an employee versus an independent contractor. The best advice I have for you is to check out the two links below to get a better handle as to whether you are subject to this tax.

Your babysitter might be an employee… and you might be inadvertently failing to pay your taxes!

• Grow up and pay the ‘nanny tax’ if you owe it [MSN Money] - This article is a few years old but the concepts are right, dollar figures are stale.
• The Nanny Tax [SmartMoney] - This has a worksheet to help you do the math and is current as of January 10, 2008.

(Amazon.com box photo by markuz, Nanny picture by teddyb)

Ahhh the lovely Alternative Minimum Tax. For years the government has been putting patches on the AMT so that it ensnares fewer and fewer people, though without the corresponding adjustment in spending, and we once again dance the same dance now that we have set candidates to the two major political parties. Where do each stand on the AMT?

McCain, during the primaries, proposed doing away with the AMT altogether but recently changed his stance from repeal to phase out. Under the phase-out, more than 4 million households would continue to pay the AMT. To be honest, I doubt McCain really meant “appeal” when he was spoke about it because the thing generates so much revenue, $2 trillion over ten years. He likely meant exactly what he’s saying now, “appeal” it for the middle class but keep it for the wealthy.

I sympathize with the wealthy who feel unfairly taxed for the same services, but the money has to come from somewhere and we all have to buy the same things. While it sucks for someone to have half their next dollar taken away from the government, it hurts that person less than it does someone who has far less earning power (that doesn’t make it right, it just makes it more manageable). Plus, rich people don’t riot.

I do think that the government has to reign in its spending (I used to work in defense, I’m aware of some of its excesses) but unfortunately it’s Presidential politics season and it’s far easier to tax a smaller group than reduce benefits for a larger group.

McCain will repeal the AMT. Wait, no … [CNN Money]

Rich people, watch out.

The Tax Policy Center broke down the tax policy proposals of your options this November and if you make over $603,000 a year, watch out!

If Barack Obama wins and his plans go through as vaguely outlined, expect your tax bill to go up $115,974. If you make over $2.9M, expect to pay an extra $701,885. Now, if John McCain wins and you make more than $603,000, breathe a sign of relief because you can buy yourself a brand new 2008 Porsche Cayenne with the estimated $45,361 you’ll save. If you make more than $2.9M, buy yourself a new house somewhere with the $269,364 you’d save thanks to McCain.

Of course I jest, because rich people don’t read blogs. They get their people to read blogs and then tell them about it as they are being served tea and crumpets (mmmm crumpets). For rest of us, the 89% that benefit more from Obama’s proposal, our wallets tell us to vote for Obama because his tax policy would result in a greater benefits.

Incidentally, over the next ten years, the Tax Policy Center estimates that McCain’s proposal would increase the national debt by $4.5 trillion and and Obama’s could add as much as $3.3 trillion.

Of course, this is all in good fun, nice campaign fodder, but until things get signed then nothing is set in stone (how did Pelosi’s first 100 days go… forget the first 100 hours).

Here it is in beautiful chart form (courtesy of ChartJunk):

It does a good job of showing not only the differences in the tax rates but also the number of people affected.

What they’ll do to your tax bill [CNNMoney]
90% of Americans will pay less income tax under Obama than McCain [DailyKos]
The economy: McCain vs. Obama [CNN Money]