Credit Crisis - Visualized

I just received an awesome link to videos that do a great job of explaining the credit crisis that is currently being experienced.  

Special thanks for my friend linking me to MNPublius.

Stay Disciplined!

Understanding the Psyche Behind Debt Elimination

What is debt?

According to Investopedia, debt is the following:

An amount of money borrowed by one party from another. Many corporations/individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest. Definition of Debt

Maybe it is a new TV?  Maybe it is a new car?  Basically debt takes on many forms depending on the person who makes the purchases.  At any rate, debt is a bad thing...or is it?  Sometimes debt is necessary to make progress in life.  Sometimes it is needed in the form of a mortgage.  Sometimes it may be needed in order to pay for medical bills and save a life.  At any rate, for most Americans, debt is a way of life.  Although many of the popular TV analyst swear up and down that debt caused the economy to be in the state that it is today, I disagree.

I believe that one of the causes of this particular situation is due to the fact that Americans have lost control of their debt.  It seems like we stopped using debt as a means to secure a home or buy a reasonable car and instead purchase clothes, tvs and other luxuries that almost immediately lose value.  Contrary to the way most people use credit, it seems like as far as I could remember, my parents never had that problem.

It seems like my parents never really had a problem with credit.  They never bought lavish luxuries such as TVs or furniture.  They simply got their mortgage, got their car and followed the rules to pay their minimum payment on time.  However, using this method, it just seemed like my parents were always sending out checks to creditors to make a payment.  Throughout my whole life, I could not remember a point at which my parents never had to send out a check to pay for some kind of debt.  

Although my parents never really complained about debt or money, I am sure they wished that they were not in it as long as they were so they could have done more.  It seems like today, our mindset has changed to eradicate debt and become debt-free as soon as possible.  In an attempt to find out what is different between when they used credit and what we do today, I had a conversation with my friend who is currently working on becoming debt free.

During the conversation with my friend about her progress on eliminating her debt, she explained to me that it is important for her to get rid of her debt.  She explained to me the following points she has understood to help herself to become debt free:

1. It is hard to start paying when the debt seems to be so much
• Debt is so easy to obtain that before you know it, you are over your head in no time.
• Over time, anything can be accomplished, but you have to chip away at it.
2. A budget is necessary in order to make progress.
   
• The first step to controlling spending is identifying where the money is going.
• A budget allows for the pre-allocation of funds.
3. Paying the minimum is just not enough.
   
• Just as compound interest works in your favor when you are lending your money, it works against you when you are borrowing.
• Paying more than the minimum specified amount reduces the amount you will be paying on the loan as well as the time that you spend paying the loan back.
4. Seeing progress helps with following through on the plan.
   
• Achieving small goals allow for a sense of accomplishment.
• Setting a goal and achieving it propels you forward to continue with the plan.
5. The potential from the freed income is limitless.
   
• The new income allows for money to be allocated for investing or other projects.

From discussing these points, I understand that situations and mindsets are different.  Although my parents did not mind having debt, they did not use it as a tool to buy furniture, TVs or other "luxuries".  However, my friend used her credit to make purchases for her home comforts.  The difference between the two is that in this day and time, it is a general consensus that debt is necessary but needs to be eliminated as soon as possible.  What do you think?

Stay Disciplined!

Track the Stimulus Spending

It seems that President Obama read my previous post about the stimulus package (if only I were that lucky).  I just learned through a colleague that the government has created a website that explains where each tax dollar is going to with the stimulus package.  It went live as soon as the President signed it into existence.

Here is part of the FAQ from the website:

Q: What is Recovery.gov
A: Recovery.gov is a website that lets you, the taxpayer, figure out where the money from the American Recovery and Reinvestment Act is going. There are going to be a few different ways to search for information. Within days after the signing of the legislation, Federal agencies will start distributing funds, and you will be able to see which states, Congressional districts, and even Federal contractors are receiving them. As soon as we are able to, we'll display that information visually, through maps, charts, and graphics.

To view this site, click on the link below:

Recovery.gov

From time to time, I plan on checking this site to see how our money is being spent.  Stay Disciplined!

The New Stimulus and How It Affects Me Directly.

"In human affairs, the best stimulus for running ahead is to have something we must run from”  -Eric Hoffer

President Obama is expected to sign the new stimulus package to help in the economic recovery of the United States of America.  While waiting in anticipation of him signing this new plan, I have been trying to research as to how this package will effect me.  I feel that I am a good representation of the "Middle Class" that Obama has referred to so I was very hopeful that the Stimulus package would be very beneficial to me.

On the contrary, according to the information I have read, it seems like there will not be much included in this stimulus package that will be directly applicable to me.  From what I saw, below are a few highlights as to some of the applicable points of the stimulus:

New tax credit

•About $115 billion for $400 per-worker, $800 per-couple tax credits in 2009 and 2010. Credit phases out for individuals with adjusted gross incomes of $75,000 to $90,000 and couples with AGI of $150,000 to $190,000. 

From my understanding, this change goes into effect starting in June. We are due to start seeing $13/week extra in our paychecks which will reduce the overall money taken out of our checks due to federal payroll taxes. I am not sure how much this will allow me to help stimulate the economy, but at least I can have enough money to buy a lunch or dinner each week (which could help).

Auto sales

•$2.5 billion to make sales tax paid on new car purchases tax deductible.

If I decide to purchase a car this year (which I highly doubt because the Civic is running like a champ), I would be able to deduct the sales tax for the vehicle. This is not a credit, but rather a deduction, and the information I have read so far does not clarify whether you will be able to take this deduction if you take the standard deduction in 2009.

Outside of the these two provisions, I do not really know what else is going to be applicable to me to help stimulate the economy.  However, I do trust the vision of the leadership and hope that they understand how this will bring the economy around.  I am very hopeful that the other provisions will indirectly affect me and allow us to turn our economic situation around.

Below is the source of the information provided in this log.

http://www.usatoday.com/money/economy/2009-02-12-stimulus-plan-breakdown_N.htm?loc=interstitialskip

Please let me know your thoughts on the economic stimulus package below.  Stay Disciplined!

How To Be A Cheap Date

I thoroughly enojoyed reading Jonathan's recommendations for saving money on Valentine's Day. My wife and I have had a lot of fun "going cheap" in the Atlanta area ever since we started dating, so I thought I'd pass along some of the activities we've tried:

• Stargazing at the Fernbank Planetarium - The Fernbank Planetarium hosts stargazing sessions every Thursday and Friday (weather permitting) from 8:00 PM until 10:30 PM on their 36 inch Cassegrain. There is no charge to attend, and this sets you up to tell your date, "Instead of coming all the way down here, I could have just spent all evening staring at the stars in your eyes." You can grab dinner beforehand at one of the cheap spots on Ponce De Leon - Eats, The Old Spaghetti Factory, etc.


• Ice Skating - Even though the Centennial Olympic Park Ice Skating Rink won't reopen until November 14, 2009, you can still go skating at the Ice Forum in Duluth or Kennesaw.


• Banana Split at Brusters - Brusters sells banana splits for 50% off on Thursdays if you bring your own Banana. Stop by the grocery store before picking up your date, then surprise her by bringing the bananas out when you get to the ice cream shop.


• Bike Ride on the Silver Comet Trail - The Silver Comet Trail is a great low-key bike ride - the trail is paved, and extremely flat. Bring a picnic lunch and a bottle of Sparkling Lingonberry Juice (alcohol is apparently forbidden on the trail).


• Go to the High Museum for free - If you're a Fulton county resident, you can visit the High Museum of Art for free on the first Saturday of every month. Even if you have to buy a ticket for your out-of-county date, you're still getting a good deal!


• Go to a Swing Dance at Georgia Tech - During the Spring and Fall semesters, dances feature a live singer and big band. Admission is $10 each, and include a one hour lesson.


• A day at Stone Mountain - You can grill burgers, hot dogs, or steak for lunch, and finish off the evening by watching the Laser Show.


• Hit up a dollar movie - I like to go out for cheap movies over at the "Picture Show at Merchant's Exchange". Evening movies are only $1.75, matinees are $1.25, and movies are $0.75 all day Tuesday. At that price, you can justify spending more on dinner or even buying a container of popcorn.

Most importantly, any of these things can be done solo as well, in case you're celebrating "It's okay to be single" day.

Love Don't Cost A Thing

"Money can’t buy me love." -The Beatles

Well, with Valentine's Day around the corner, if you are anything like me, you are struggling to figure out what you are going to do for your special someone.  There are tons of gifts that one could buy.  There's flowers, stuffed animals, jewelry, chocolates, etc, but I have one thing that is working against me, I'm CHEAP (or just really frugal).  I am convinced that Valentine's Day does not require the $25 bouquet of roses or the $60 dinner to be successful.  

I can see why some guys like to stay single around this time of year.  Waiting until the last minute and standing in line to get picked over roses from the grocery store does not cut it for most.  There's only so many times when you can buy the above mentioned items until it because a routine and no longer "special".  Spending money in general to impress someone is quite overrated also.  This year, I am putting a new theory into practice to see if I can come up with a way to have great results for little money.

Now by no means, do I feel like I am a creative person.  After all, I am a geek at heart and accustomed to thinking inside the box.  However, I believe with enough time and a clear objective, anyone can come up with a creative way to have a successful Valentine's Day.  After all, "it's as easy as P.I.E" isn't it?

I have brainstormed and researched to come up with a list of great Valentine's Day ideas that are free or cost very little money.  

1. Write a love letter and mail it to your companion (be sure it gets there by V-Day).
2. Create handmade coupons with gifts your partner can use anytime, such as a massage, cleaning or something your mate enjoys to do.
3. Create a photo book of you and your companion.  (Snapfish.com - Great Site To Create Own Photobooks)
4. Make a mixed CD of all of your favorite loves song.  Go a step further and create a unique CD cover and make sure to include the year.  Has a great replay value for special occasions later on.
• Click to see how to create a CD Cover using MS Publisher
• Click to see how to create a CD Cover by hand
5. Create a blog for your mate and write a new note to them everyday so they can check it online and show their friends.
• Cilck here to create your own blog!
6. Turn your home into a fancy restaurant by buying a table cloth, a few candles, playing music and cooking dinner.
• Video instructions on how to cook.
• Website with quick and easy restaurants.
• Another website with Quick and Easy recipes.
7. To help create a romantic environment for your mate, if you have access to a laptop and an HDTV, you can create a Powerpoint presentation and play it on the big screen.
• Click for a Free alternative to create a slideshow if you do not have Powerpoint.
8. Create a Valentine's day box for your mate that includes a combination of the previous mentioned items.
9. Gather a group of your friends and stage a nice sit down dinner and split the costs.
10. Create a Valentine's Day card.
• Step by Step instructions to create a V-Day Card
  
• YouTube Video with Instructions to make a V-Day Card
  
• Another YouTube Video with Instructions to make a V-Day Card

There more Valentine's Day ideas that you can probably research online.  However, the point of this article is to mention that having a successful Valentine's Day does not require a lot of money, although it does require effort.

What are some of your (frugal) Valentine's Day ideas that you will be putting into action this year?  Leave them in the comments below.

Stay Disciplined!

Withholding Judgement

While at lunch with a group of coworkers recently, a colleague made a comment about how unfair it is that bonuses and overtime gets taxed at 40%. He had recently received a paycheck for $50 with $20 worth of tax taken out, and wanted to know why the government is taxing this type of income so heavily.

The answer, I was surprised to learn, is that they weren't taxing him at 40% after all. The misunderstanding arose from the governmental policy of tax withholding, a process with is sufficiently nebulous that most people have no idea how it works (or even why it occurs). This article will attempt to clarify the concept of withholding while also exploring how to insure that an appropriate amount of income is withheld.

A bit of history

First, it's important to cover some history of taxation in the United States. Taxation has been a part of American life since pre-revolutionary times, and was deemed important enough that the Congress is specifically empowered by the Constitution "to lay and collect Taxes, Duties, Imposts, and Excises...". With the development of the modern income tax during the Civil War, the government faced the dual challenges of determining how much taxable income was earned, and also insuring that owed taxes were actually paid. (For more information about the history of taxation in the United States, you might enjoy reading the Department of the Treasury's History of the U.S. Tax System.)

In modern times, this responsibility is largely delegated to the individual employer. First, employers are required to report earned income to the government and to the employee using Form W-2. Secondly, employers are required to withhold a certain amount of income from each paycheck and pay it to the government, which will then count it towards taxes owed at the end of the year. This process has greatly simplified the process of collecting taxes, but also made it more difficult for employees to realize how much tax was actually being paid on a month-by-month basis.

This difficulty is what lead to my colleague's misunderstanding. Although it appeared that his paycheck was being taxed at 40%, it was actually being withheld at 40%. What's the difference? With withholding, you can (often) get the money back.

How Withholding Works

Four things are routinely withheld from an ordinary paycheck: Social Security, Medicare, Federal Income Tax, and State Income Tax. Social Security and Medicare are withheld at 6.2% and 1.45% respectively, while the amount of Federal and State income taxes withheld will vary based on your expected filing situation and the number of allowances you take.

The most important thing to remember about allowances is that they are not the same as deductions. Deductions are used to reduce the amount of tax you have to pay at the end of the year. Allowances simply control how much tax is withheld from your paycheck in advance.

By default, tax is withheld from your paycheck at a certain fixed rate based on your projected annual income level. (Jonathan previously discussed these rates in his post, Owing the Government less money by maximizing deductions! (Part 1)). However, since nearly everyone gets some type of deduction or income adjustment, this would result in everyone having too much income withheld. To compensate for this, you can use your previous tax return to predict how much tax you will owe in the following year. You can then take a certain number of allowances to reduce the amount of money which is withheld from your paycheck. This will reduce the size of your end-of-year refund, but will increase the amount of money you see in your paycheck every month.

So how do you calculate how many allowances to take? The easiest way is to use the IRS Withholding Calculator. Once you've completed this, you can file an amended Form W-4 with your employer as described in IRS Publication 919. To see how a change in allowances will affect your take home pay, refer to IRS Publication 15, section 16. It's also worth noting that according to IRS Topic 753, you may be subject to a $500 fine if you submit (without reasonable basis) a W-4 which results in less tax being withheld than is required.

Supplimental Wages

You may be asking yourself, "Okay, I understand that your friend wasn't getting taxed at 40%...but why was he getting withheld at 40% if he had already reported correct allowances on his W-4?"

According to IRS publication 15, section 7, overtime and bonuses can be handled one of several ways:

1. The employer can pay supplimental wages on the same paycheck as normal wages, and withhold at the the standard rate.


2. The employer can pay supplimental wages on a separate paycheck, but calculate the withholding as though the wages were paid in one lump sum.


3. The employer can withhold at a flat rate of 25%.

For convenience, many employers will simply go with the third option. The result of this is that more tax is withheld from each check than is actually necessary. When combined with Social Security (6.2%), Medicare (1.45%), and state withholding (6% for Georgia), this adds up to nearly 40% of your income being withheld. If you work a lot of overtime or typically receive a large bonus during the year, it may be worth using the IRS Withholding Calculator to adjust your allowances on ordinary income to compensate for this, so that you don't have to wait up to 15 months to get a refund on that additional withheld income.

State Taxes

State income taxes are also typically withheld from your paycheck alongside Federal Taxes, but (with the exception of a handful of states), the withholding calculations are completely different. For taxes collected in Georgia during 2008, allowances are calculated by taking the deductions listed on Georgia Form 500 and amortizing them over the number of paychecks which will be issued during the year.

Summary

Withholding is an important component of the modern tax system to be aware of. Even if you are able to take a tremendous number of deductions on your annual tax return, you'll still only see this money once per year (in the form of your tax refund) unless your withholding allowances are set correctly. Correct withholding also makes it easier to avoid making a large unexpected tax payment every April. Finally, it keeps you more aware of what is actually going on with your earnings, and makes it possible to more accurately budget and plan for upcoming expenses.

If anyone has questions about anything discussed here, please let me know, and I will discuss them in a followup article.

Owing the Government less money by maximizing deductions! (Part 2)

Owing the Government less money by maximizing deductions! (Part 2)

I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money. ~Arthur Godfrey

Well, if you read the previous post, you may have a better understanding about how taxes are calculated by your total income that you have received over the year.  Whether that be from a employer, rental income or even self-employment, you have to pay taxes on money that you receive while in the United States.  However, there is a silver lining to this cloud.

The government is not some heartless entity that ignores the fact that life happens.  Sometimes there are things in life that reduce our ability to pay taxes and the government takes account for that in the form of deductions, adjustments and credits.

Deduction:  An amount that may be subtracted from income that is otherwise taxable.

Adjustment to Income:  An expense that may be deducted even if the taxpayer does not itemize deductions. Adjustments to income are subtracted from gross income to arrive at adjusted gross income.

Tax Credit:  A recognition of partial payment already made towards taxes due.  (Similar to a credit to your account with a bill)

Common Deductions

1. Mortgage Interest
• If you have a mortgage for your primary residence, you are able to deduct the interest paid on that mortgage for the year 2008 on your taxes.
• http://www.irs.gov/taxtopics/tc505.html
  
2. Charitable Contributions
• If you pay tithes or donate money to a church, those contributions are deemed to be charitable and be deducted from your taxes.
• If you contribute clothes to a Goodwill or Salvation army and received a receipt, you can claim the worth of your donated items up to $500 without an appraisal.
• http://www.irs.gov/taxtopics/tc506.html
  
3. Medical Expenses (greater than 7.5% of your adjusted gross income)
• There is a large list of medical expenses that are tax deductible.  Some common ones that may not be known are bandages, blood pressure machines, nursing services, etc.
• Please review the deductible medical expenses link for more information about deductible expenses.
• http://www.irs.gov/taxtopics/tc502.html
  
4. Student Loan Interest
• The interest from student loans is usually qualified as a tax deduction.
• http://www.irs.gov/taxtopics/tc456.html
  
5. Tuition
• If no one else claims you as a dependent, you can claim your tuition fees and education related expenses as a deduction on your taxes.
• http://www.irs.gov/taxtopics/tc457.html
  
6. Stock Losses
• You can either use your stock losses to offset your gains dollar for dollar or you can deduct up to $3000 of stock losses for the year.  If you have more than $3000 in stock losses in a single year, you can carry over your excess (up to $3000) to the next year and so on.
• http://www.irs.gov/publications/p550/index.html
  
7. Business Expenses
• Your home, travel and car can be written off when used for your business.  In addition to that, most business related expenses can be deducted from your taxes also.
• http://www.irs.gov/taxtopics/tc509.html
  
• http://www.irs.gov/taxtopics/tc510.html
  
• http://www.irs.gov/taxtopics/tc511.html
  
8. State Taxes
• Four types of deductible taxes
  
• State, local and foreign income taxes;
• Real estate taxes;
• Personal property taxes; and
• State and local sales taxes.
• http://www.irs.gov/taxtopics/tc503.html
  
9. Educational Expenses (work related)
• If you received a new certification to help improve your current job, that is a tax write-off!  See quote below:
• "To be deductible, your expenses must be for (1) education that maintains or improves your job performance or (2) serves the purpose of your employer and is required by the employer or by law to keep your salary, status or job, and (3) the education is not part of a program that will qualify you for a new trade or business."
  
• http://www.irs.gov/taxtopics/tc513.html
  
10. Work Related Expenses
• Did you buy some snacks for a work event and was unreimbursed?  Maybe you had to buy some equipment to help with your job but never received any money from your employer.  That's tax deductible!
• http://www.irs.gov/taxtopics/tc514.html
  
11. Casualty
• If you go through the unfortunately situation of having your property destroyed or stolen, you can write off any part that it costs to replace it (that's not covered by insurance).
• http://www.irs.gov/taxtopics/tc507.html
  
12. Theft Losses
• If you go through the unfortunately situation of having your property destroyed or stolen, you can write off any part that it costs to replace it (that's not covered by insurance).
  
• http://www.irs.gov/taxtopics/tc507.html
  
13. Moving Expenses
• As long as you meet a few criteria, you can deduct your moving expenses from your taxes.
• http://www.irs.gov/pub/irs-pdf/p521.pdf
  

Common Adjustments

1. 401(k) or IRA Contributions
• If you received a W-2 from your employer, you may have noticed that there is a difference between the income that you received from your employer and the income that is taxable by the government.
• You can deduct up to 15,500 of your 401(k) contribution for the 2008 year or you can deduct up to 5,000 of your IRA (Individual Retirement Account) contribution for the 2008.
2. Health Savings Account
• For more information, read the following Government Publication 969.

Common Tax Credits:

1. First Time Homebuyer Credit
• The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009.
  
• For more information, go to the First Time Home Buyer Website.
2. Child Tax Credit
• With the Child Tax Credit, you may be able to reduce the federal income tax you owe by up to $1,000 for each qualifying child under the age of 17.
  
• For more information, go to the Claiming the Child Tax Credit Website.

It is easy to see why tax preparers make so much money when preparing taxes, but even if you do not do your own taxes, you should at least read the information listed above.  It is good to understand what exactly is going on as well as making sure that you receive every deduction that you are entitled to for your taxes.  

In total there are over 350 deductions that you can deduct from your taxes if you quality.  If you would like to review the source of all this information, please click on the following link below:

http://www.irs.gov/taxtopics/tc500.html

I hope this information leaves you feeling a little bit better prepared for this year in taxes.  In addition to that, I hope it empowers you to receive a tax return for some of the money that you have contributed to the government.  If you have any questions or comments, please leave them below.  Stay Disciplined!