Owing the Government less money by maximizing deductions! (Part 1)

Tax Season...

To some, it's the most dreaded time of the year, to others, it is a wonderful time.  It all depends on which side of the line you are on.  The side of where you owe the government money, or the side of where the government owes you money.  Typically, the government gets its cut up front, hence this is why you see things like "Fed Inc Tax" on your paycheck with a big "-" sign beside it.  

Now many wonder why they still owe the government money even after paying so much in taxes all year.  Well, let me give you a rough example of how to calculate taxes:

*DISCLAIMER:  I AM IN NO WAY AN OFFICIAL TAX ACCOUNTANT NOR OFFICIAL, THIS EXAMPLE IS BASED ON MY UNDERSTANDING AND I DO NOT CERTIFY IT FOR CALCULATING TAXES.  PLEASE USE FOR GUIDANCE AT YOUR OWN RISK*

First, let's calculate your taxes using the document from the following link:

http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

2008 Tax Rate Schedules

Filing status of Single

Taxable Income Over:	But Under	The tax is:	of the amount over
0$	$8,025	10%	$0
$8,025	$32,550	$802.50 + 15%	$8,025
$32,550	$78,850	$4,481.25 + 25%	$32,550
$78,850	$164,550	$16,056 + 28%	$78,850
$164,550	$357,700	$40,052.25 + 33%	$164,550
$357,700	....	103,791.75 + 35%	$357,700

Let's take a person who makes roughly $50,000/year of taxable income.  The total amount of taxes they would pay is calculated by the following formula:

4481.25 + (.25 * (50000 - 32550)) = 8843.75

This is very close to the estimated tax of the document, which is 8850.

Now this calculated amount is strictly without any deductions or exemptions.  As you can see, you owe the government over $8000 in taxes!  If you do not take out enough money, you will be required by the government to pay at the end of the year (by April 15).  However, let's see the difference a few deductions can make.

Let's take the same person who roughly makes $50,000/year of taxable income.  The total amount of taxes they would pay (after taking a standard deduction and one exemption [claiming as sole dependent]) is calculated by using the following formula:

4481.25 + (.25 * ((50000 - (5450 + 3500)) - 32550)) = 6606.25

$5450 deduction is the standard deduction for a single employee

$3500 is the deduction for claiming a dependent.  You claim yourself as a dependent (if no one else can claim you).

As you can see, with standard deductions, you can save approximately $2000 on the amount of taxes owed to the government.  

Website used to calculate the taxes.

This is just the first half of calculating your taxes.  The next article will feature some common deductions and tips on maximizing your deductions to reduce the total amount owed to the government so that you can pay the least amount or even get a refund back.

Stay Disciplined!

By all means, please leave comments if there are any corrections you would like to make or have any information about deductions.

Take control of your finances by creating a budget

It's clearly a budget. It's got a lot of numbers in it.  ~George W. Bush

I know you have to be thinking that I am kind of crazy posting the quote that I did.  However, in 2008, it seems like the Government took this type of approach when handling the finances of the country.  Not only are we currently in a recession, but the current steps taken to get us out of this predicament is highly flawed.  I mean after all, we have given over 300 Billion dollars to companies and have no idea about what they are doing with the money.

As much as we would like to blame the government for all of our problems, that would be ignorant to do so.  I mean in retrospect, 2008 was a year that most Americans paid for previously bad decisions.  Whether it was being caught in the "oil" rush, buying the biggest SUV possible, taking out an ARM loan to re-finance the house or even buying the big screen TV on credit, Americans have learned this year really how vulnerable our economy and personal finances are.  The Jones's are no longer the family to be and keeping up with them is for the birds.

We are far from the times of good job security as many people on Good Morning America reported that they feel like they were "disposable" once they were laid off by their job.  However, there is a silver lining, going through these times helps us to reconsider how we evaluate ourselves.  We learn new and improved ways to define ourselves and not tie ourselves down to nothing more than a specific job.  

2009 is a new year and the mood of America, based off the latest choices we have made as a country, demonstrates that it is time for a change.  We are moving from a consumerist nation to a nation who is re-taking control of our personal finances.  It is time to get back to making the choices that secure our financial future rather than impede it.  It is time to do what Americans do best: become innovative, make the best of what we have and change for the better.  

One of the best choices you can make to take control of your financial future is creating a sound budget.  Although this sounds like a daunting task, you can accomplish this by completing five steps:

1. Track Spending
   
• The most important step to developing a budget is tracking your spending.  This will allow you to identify holes of your income and help you isolate spending problems areas in your life.
• Steps to Track Spending
1. Each time you buy something, SAVE THE RECEIPT.  Even if it is a pack of gum, a utility bill or whatever, take the receipt and file it away in an envelope, a folder or a filing cabinet.
2. At the end of a 30 day period, collect each of the receipts and figure out general categories most of the receipts can be grouped into.
• Example of categories
1. Utilities
2. Mortgage/Rent
3. Eating Out
4. Gas
5. Groceries
6. Discretion Funds
7. Savings
8. Retirement
3. Once you have developed your categories, use a spreadsheet program like Microsoft Excel or Google Spreadsheets, put the date of the receipt and the amount into each category that is most applicable to.
4. Add the totals of each category and develop your estimated monthly expenditure for each category.
2. Prioritize
• For most of us, budgeting will require us to make sacrifices in order for us to abide our plan.  Whether it is cutting back on eating out so we can save more for retirement, or wearing sweaters in the home so we can lower our gas bill to spend more money at our discretion, we have to prioritize what is important to us.
• The most helpful thing you can do to help with prioritizing is develop a goal or an end point of what you hope to accomplish.
3. Be Realistic
• Although most people have good intentions with the initial development of a budget, a lot of time people fail due to having goals and expectations that are not realistic.
• Rome was not built in a day and neither will having the "ideal" personal financial situation.
• Patience is your friend and just by following a well thought plan, you will be able to eventually reach your goals.
4. Use Automatic Accounting
• Automatic accounting automates your budgets.
• Not having to worry to about your money and actively touching it can reduce the stress in money management.
• See the following article for more information about "Automatic Accounting".
• Automatic Accounting
5. Evaluate and Re-evaluate
   
• Although you may invest a lot of time to develop your initial plan, things change.  You may get a pay increase, you may lose your job or you even may take on a new financial responsibility.  
• There has to be a re-evaluation period that takes place to look at your current plan and make changes to accommodate whatever new changes you experience in your life.

Although many corporations are really hurting right now due to this current economy, some are still staying afloat.  They accomplished this by determining a budget that was tailored to their personal situation and stuck with a sound plan that continues to work for them.  In addition to that, they took the necessary steps to adjust to the current economic situation.  Unfortunately, many companies that tailored themselves to become more like their competition and did not change from their ways have caused them to fail.

Remember, 2009 is a new year and it is time for you to take control of your situation.  It is no longer a time to make excuses or blame our current situations on someone else.  We must hold ourselves accountable for the decisions that we make.  Starting today, make a decision to change for the better.

Stay Disciplined!

Leveraging your knowledge to make extra income

Have you ever thought that you could be making better use of your free time? I mean after all, you are a pretty smart person. You have a lot of knowledge about the field that you work in and there would have to be some way that you could make money using this knowledge, right? Maybe you are a little reluctant to start your own business because of all of the overhead that is required. Or maybe you do not have the investment capital to invest in yourself. Well...all that is about to change...

In addition to my interests in personal finances, I am also a huge computer enthusiast. During my usual brainstorming process, I was trying to think of a way to leverage my current knowledge and ability to make some extra income. I did a few searches online and found that there are a lot of sites that you can do freelance work and they pay you for it! Yes, you can actually work from your computer at home and make money.

For my skeptics out there, I know this sounds too good to be true, so let me go into further detail. There are two websites that I have come across that have great opportunities for freelancing. The first is Guru which is a site dedicated to match-making between freelancers and those who want to purchase their service/product. Below is a small excerpt from the website:

Guru.com is the world's largest online marketplace for freelance talent. Through our free service, employers find top freelance and contract talent locally, nationally, or globally. Our web-based marketplace directly connects businesses with more than 100,000 active freelance profiles specializing in over 160 professional categories including web design, programming, graphic design, business consulting, and administrative support.

Although I have not personally registered for the site, it is a great concept and a great way to help supplement your current income (especially during these times). I am still deciding on whether or not I am going to sign up for this site, but it is always great to have options.

The second (and my favorite) site is JustAnswer. Below is an excerpt on how the website works:

How JustAnswer works

1. Ask a question.
Enter your question, and create a user account.
2. Name your price.
You can pay up front or wait until an Expert answers. Prepaid questions are typically answered faster.
3. An Expert answers, often within minutes, usually within a few hours.
JustAnswer will send an e-mail notifying you of any answer or request for information from an Expert.
4. Accept the answer.
If you got great service, consider adding a bonus. Your acceptance pays the Expert and tells us you’re happy.

That’s all. We guarantee your satisfaction.

So how does it all relate to you? Well, I am so glad you asked...there's more:



More Expert Information Apply now to earn money for all of your answers that are accepted! New (4 or less accepts) or below average Experts earn 25% of what a customer is offering for an answer and above average Experts earn 50%. Once you have more than $20 in your account, just request payment and we'll Pay Pal the money to you on the first business day of the month.

Now, because I have signed up for this website and actually use it, I can provide for you my experience with it. After applying to the site (as a Computer Expert), I was given a test with 10 questions. I guess I answered them correctly because they made me an expert in computers rather quickly. (I had to wait one day before I could start answering questions)

Now, whenever I have free time, I log into the website and monitor a queue that new customer's send their questions into. I find questions that I know I can answer, answer them, and get paid. It's literally that simple. So far, after 3 days of being on the site and having 7 accepted answers, I have made $40.25. Now I understand that I will not be able to go out and buy that Mercedes Benz with it, however, in my eyes, that's free money for answering questions all from the comfort of my computer.

The great thing about this site is that there are many other experts that you can apply to become. Everything from answering math questions to being a business consultant, there is an expert position that you can apply for to make some extra income. Now, "not being able to find some work" is one less excuse you can use for this new year.

Stay Disciplined!

If you have trouble registering for the JustAnswer website as an expert, send me or email or leave your email address in the comments and I will send you an invite.

Setting Resolutions...better yet, Goals for the New Year

Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success. ~Stephen A. Brennan

It is a new year and a chance to start over again. It is during this time that many people try to make "New Years Resolutions" only to realize that a month into the new year that the same old habits are still prevalent. Whether it is exercising, controlling spending or reducing debt, many of us find that we have good intentions when we start, however it is hard to stay consistent with our intentions.

At the beginning of 2008, I decided to set goals to improve my life (financially, physically and other ways). After spending about a week figuring out some of the things I wanted to accomplish, I decided to write them down. Now in retrospect, coming into this new year, I have looked at my previously written goals and feel a great sense of accomplishment due to the fact that I have completed most of the goals that I set for 2008.

During a recent conversation with my sister, I let her know of my sense of accomplishment due to the status of my goals for 2008. We discussed the idea of writing down these goals and she agreed 100% that writing down goals for the new year was the way to go. I know that sounds amazingly easy, however, there was a very meticulous procedure that was followed in order to ensure success in obtaining these goals. Below is the procedure followed:

1. Write the goals down.
• Writing down your goals helps you remember what exactly you want to accomplish.
• It allows for accountability of the goals.
  
2. Write a tangible metric to measure success on obtaining goal.
• How do you know when your goal is reached?
• Write down an expected outcome to measure the expected results once the goals has been met.
  
3. Give yourself a deadline.
• Just writing down goals without any deadline can make that goal last forever.
  
4. Write possible steps to obtain your goals.
• Jotting down some typical first steps for your goal can provide an immediate action plan to start on your goal.
  
5. Share your goals with a friend for accountability.
• Sharing your goals with a friend can help you facilitate discussions to double check that proper progress is being made on the goal.
• Your friends can offer a different perspective on obtaining your goals.
  
6. Check your goals monthly to note the type of progress being made.
• Always check your progress monthly to make sure obtaining your goal is on track to meet the deadline.
7. Remember, "It is Easy as P.I.E."
• Plan, Implement and Evaluate.

*Extra: Choose a theme for yourself that represents your ideas/goals for 2009* (My Theme: "No Excuses")

Creating goals can help you finally reach your financial situation that you have been wanting to achieve in previous years. In addition to your personal finances, settings goals can help with obtaining a more fulfilling life with accomplishing things that you set your mind to.

When discussing the previous year, a lot of my close friends looked back at 2008 and are very happy that it is over. In order to prevent experiencing the same feelings for year 2009, we have made sure to set appropriate goals, share them and go about the proper steps to accomplish them.

What are some of the recommendations that you have for setting goals? What other recommendations do you have to improve your life for 2009? Leave them in the comments below.

Stay disciplined!