Archive for the tag 'Taxes'

Ryan

Wow. Taxes Were Ugly

I finally spent some time this weekend working on taxes. The results were pretty ugly, although I will say, as I have many times, that it’s really better to owe than not.

This year I owe the feds over $1,000, and the state about $300.

That doesn’t exactly thrill me, but it’s what I’ve got.

I don’t mess up often, but there are times I do.

I take full responsibility.

I haven’t finished my taxes yet. I’ve actually barely started.

This might involve my taking a vacation day or two before the 18th.

If there’s any one thing to compare energy price increases (like the current spike in the price of oil) with, it’s a tax. We’re paying more for the same thing we got a few weeks ago, and unlike with a lot of other goods, we have to pay it, or we don’t get the energy we need.

Unless we’re willing to invest in large infrastructure changes (even on a micro level, such as installing a bunch of solar panels or going to an electric car), we’re going to end up paying more.

And, just like a tax, since we’re paying more there, we have less to spend elsewhere, in the areas that contribute to the economy, like retail goods and services.

My belief is that this is temporary, and once the unrest in other countries settles, oil prices will not only come back down, but the quality of life for the people of those countries will improve–over time.

After hitting an all time high–by far, actually–in 2009, my income in 2010 took a downturn.

Not totally unexpected.

And it wasn’t a huge one, a few thousand dollars.

My income was mostly down due to my part time job having fewer clients than usual; in all other respects my income was stable or improved over 2009.

I’m hoping that 2011 brings me back some income that disappeared in 2010. Hopefully, all of it.

It’s been open enrollment time at my place of employment for the month of October and I am surprised all the time at the selections people make in their open enrollment. Things I wouldn’t pay a dime for–accidental death and dismemberment insurance or dependent (read “child”) life insurance–are popular among my coworkers. Young, healthy, early thirties men and women are opting for the high option medical coverage even though the chance of them needing the benefits it pays for in addition to the basic coverage is very low. And folks with incomes approaching the six figure area who have known medical issues are choosing not to go with flexible spending.

My guess is it’s another time when financial education could really help.

Ryan

Flex Spending Change for 2011

October was open enrollment month at work, and one of the changes is in flexible spending, the great benefit that allows workers to put aside dollars pretax to pay for medical expenses.

In 2011, over the counter medications will not be eligible for flexible spending unless a doctor prescribes it.

This, in addition to the fact that I overestimated my medical expenses, will have me revising my 2011 contribution downwards. I’ve bought the things that will last me for awhile–mostly prescription glasses–and the rest are prescription medications, office visits, and dental expenses.

There’s enough left that instead of losing it, it’s likely I’ll get myself an expensive pair of designer sunglasses–talk about an expense that’s not like me at all.

Ryan

Tax Cuts on the Line

We all agree that taxes are not our favorite things, yet I, for one, like things like public schools, paved roads, and home trash pickup, so I’m not opposed to paying them–I just wish they would use the money efficiently.

In times when growth is almost at a standstill, taxes don’t make a lot of sense, but when there are massive deficits to make up, taxes are absolutely a necessity.

Exactly where these will all go is not clear, but things like dividend and estate taxes and the alternative minimum tax all will be looked at closely.

I will keep an eye on this; I don’t want to pay more, but I believe I will need to.

Ryan

Outmaneuvering the Tax Man

While I realize the government is running such a deficit that it needs as many of my tax dollars as I can give it, I don’t agree this is best for me, so a lot of my financial planning has to do with tax efficiency.

This comes down to just a few things:

1) Use all the tax advantages I can. This means 403(b)s (in my case, anyway, since I work for a non-profit), Roth IRAs (I qualify), and flexible spending accounts. If I needed it and I could I’d also use a dependent care account. Anything to reduce the tax sting, which is substantial for someone like me with a marginal tax rate of about 30%. It also means claiming mortgage interest and student loan interest if you’re in those positions.

2) Invest in a tax efficient manner. This means not only to use the 403(b)s and Roth IRAs but to invest outside those accounts in ways that make sense for taxes. Index funds (or, actually, in my case, an index fund exchange traded fund) which spin off little to nothing in capital gains helps. Right now, dividend paying stocks or funds are fine in taxable accounts since they get a preferred rate, but that could change soon. Stocks which pay no dividends are even better in taxable accounts. And hold onto your stocks long enough to avoid short term capital gains.

3) Don’t overpay! Despite all the many, many friends of mine who brag about their tax returns, I don’t believe for a second getting a return is financially wise. In the exchange between yourself and the government regarding your income, someone owes someone, and I’d rather I owe them at the end of the year rather than they owe me. Why? Because someone’s giving the other an interest free loan, and I’d rather get the interest free loan and pay it back in the end than give the interest free loan and get the money back later–sometimes much later. This is why I was kicking myself so much over getting a refund recently because I overpaid on April 15.

These three things are the core of my tax strategy. Do you have any other ideas?

Ryan

Rethinking Dividends

Yes, I have historically loved dividends, and in fact, it’s always been a consideration when evaluating a potential stock buy. One of the great things about dividends recently has been the preferred tax treatment that the federal government has given what it considers “qualified ordinary dividends”: a maximum federal tax rate of 15%.

In 2011, unless legislation changes things, that’s all over.

Starting then, qualified ordinary dividends will be taxed as ordinary income.

This doesn’t mean I’m going to stop loving dividends, but I’ll want to buy those dividend paying stocks in sheltered accounts, rather than ordinary brokerage accounts, for some time to come.

Ryan

(Almost) Repaid

A few months back I borrowed money from myself to pay my tax bill for 2009. I did this by reducing (not eliminating!) my 403(b) contributions, increasing my tax withholding, and taking money out of a savings account I try to not touch.

A couple of months later, I’ve almost repaid the whole amount.

In celebration, I just increased my 403(b) contribution back to the previous amount so I can make sure I still do my maximum for 2010. In a week or so I’ll get my tax withholdings back down.

It feels nice to have repaid that to myself.

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