Archives for 2010

What Happens If The Bush Tax Cuts Expire On January 1st 2011?

I‘ve written about the Bush tax cuts several times on this site, mainly wondering if they'll be renewed, and how if they're not renewed the tax rates will go up for everyone who pays taxes (not just the wealthy).

Today I thought I'd take a look at what exactly will happen on January 1st if they're not renewed.

Immediate Impact Of Tax Cuts Expiring

If the Bush tax cuts aren't renewed for everyone, there will be several immediate impacts.

Tax Rates Go Up

the tax rates will go up for everyone who pays taxes. According to CNNMoney.com, you could see less in your paycheck as early as your first paycheck of the year!

If the tax cuts do expire and tax rates go up, you may notice the difference in your wallet as early as January, when your employer starts to withhold more taxes from your paycheck. The Tax Policy Center estimates that a married couple with two kids under 13 and a household income of roughly $75,000 could end up paying about $2,600 more in federal income taxes next year than they would if the tax cuts were extended.

While both parties have stated that they want to renew at least some of the tax cuts, nobody has made it happen yet. The parties disagree as to which of the cuts to extend, and even within the parties themselves there is disagreement.

So what will the tax rates look like under different scenarios – with all of the tax cuts expiring, or with only some expiring? Here are what the marginal tax rates will look like if the Bush tax cuts are allowed to expire either for everyone, or just for some.

If No Tax Cuts Are Renewed
2011 Tax Bracket	Single	Married Filing Jointly
15% Bracket	$0 - $8,500	$0 - $17,000
15% Bracket	$8,500 - $34,550	$17,000 - $57,700
28% Bracket	$34,550- $83,700	$57,700 - $139,500
31% Bracket	$83,700 - $174,650	$139,500 - $212,600
36% Bracket	$174,650 - $379,650	$212,600 - $379,650
39.6% Bracket	$379,650+	$379,650+
If Tax Cuts Are Renewed For Some (Obama's Plan)
2011 Tax Brackets	Single	Married Filing Jointly
10% Bracket	$0 - $8,425	$0 - $16,850
15% Bracket	$8,426 - $34,200	$16,851 - $68,400
25% Bracket	$34,201 - $82,850	$68,401 - $138,050
28% Bracket	$82,851 - $192,000	$138,051 - $232,950
36% Bracket	$192,001 - $375,700	$232,951 - $375,700
39.6% Bracket	$375,700+	$375,700+
Current 2010 Tax Rates
2010 Tax Bracket	Single	Married Filing Jointly
10% Bracket	$0 - $8,375	$0 - $16,750
15% Bracket	$8,375 - $34,000	$16,750 - $68,000
25% Bracket	$34,000 - $82,400	$68,000 - $137,300
28% Bracket	$82,400 - $171,850	$137,300 - $209,250
33% Bracket	$171,850 - $373,650	$209,250 - $373,650
35% Bracket	$373,650+	$373,650+

Child Tax Credit

Another provision of the Bush tax cuts that will expire is that child tax credit. It will drop from $1,000 to $500 per child if it isn't renewed. There will also be tougher eligibility standards in order to claim this credit.

Capital Gains/Qualified Dividends

With the tax cuts expiring, the long term capital gains and qualitified dividend tax rates would increase from a maximum of 15%. Capital gains would then be taxed at a maximum of 20%, and qualified dividends would be taxed at the regular rate of the tax filer, which could be as high as 39.6%.

Marriage Penalty

The provision that gave a married couple filing joint a standard deduction that was twice that of a single person would expire if not renewed.

Return of Phase-Out Rule for Itemized Deductions

The Bush tax cuts put in place a rule that allowed higher income individuals to itemize deductions. If the cuts expire, the phase-out rule could eliminate up to 80% of a higher-income individual's itemized deductions for mortgage interest, state and local taxes, and charitable donations. If you itemize and have adjusted gross income above about $170,000 ($85,000 if you use married filing separate status), this phase-out rule will once again take effect.

Conclusion

In the end, if the tax cuts and side provisions aren't renewed and extended, we'll all be seeing an increase in our taxes next year. If only some of them are renewed, some of us will. Here's to hoping that congress and the administration can put aside their differences and get something done.

What are your thoughts on the Bush tax cuts, and whether they should expire? Would you be willing to pay more if they don't get something done? Do you think they will? Tell us your thoughts in the comments.

What Separates Millionaires From The Average Joe? Discipline, Frugality and Moderation.

By Mr. Money 4 Comments

When looking at what makes people successful, people often attribute wealth and success to things that really aren't the cause. For example, people often assume that the wealthy only got to where they are because they inherited their wealth, and because they did unethical things to cheat people out of their money. The reality is that most millionaires are first generation wealthy, and that they got to where they are because they place a premium on ethics and are extremely fair in how they treat other people.

So today, I want to do a quickie post talking about another misconception, and talk about a few attributes that set the wealthy apart from those who aren't.

Discipline, Frugality And Moderation Lead To Success

We're often told that the wealthy are prone to great excesses, and that they love to spend lavishly on things they don't necessarily need. In some respects people believe that the wealthy lack a sense of moderation, and that they love to spend. Quite the opposite is true.

One thing that often leads to success for the wealthy is the fact that they are disciplined in the things that they do, whether it be in researching and planning their financial lives, or if it comes to being disciplined in their eating and exercise habits. They learn their outlook on life via their parents who taught them the value of discipline, frugality and moderation from an early age.

Author Thomas J. Stanley discusses this point in a recent post where he talks about calls for government restrictions to fast food consumption.

Just like hypereating is a danger to one's physical well being, hyperconsuming is a danger to one's financial well being. So what does this all have to do with millionaires? Most millionaires eat and spend in moderation. They are well disciplined. In fact, it is rare to find any of the millionaires whom I have interviewed one on one or in focus groups to be overweight. I have found that the typical millionaire, a male, is 5'10” tall and weighs 184 pounds. Decamillionaires are about an inch taller and 3 pounds heavier. After reviewing this data, I was prompted by the numbers to review my latest copy of the Forbes 400 issue. Looking at the pictures of the wealthiest 400 people is telling. Bill Gates is hardly overweight nor is Steven Jobs or Larry Ellison. One must be well disciplined to achieve the status of a Forbes 400 designation. This discipline extends to the consumption of food.

The problem often isn't necessarily that someone doesn't have the opportunity to succeed due to their situation, it's the fact that they haven't been given the tools to succeed by their parents. They haven't been taught the value of hard work, discipline, frugality and moderation. They see the excesses that society says is ok and laudable, and they shoot for those goals, when in fact discipline, moderation and frugality are the actual keys to success.

The habit of eating in moderation among the wealthy in America was not developed via government mandates and laws. Most economically successful people tell me that their disciplined lifestyle including consumption habits originated from their upbringing. In other words, the parents mold the child. They are the ones who dictate how much the child eats and where he eats.

Today a good number of millionaires patronize fast food restaurants. In fact 47% of those in the $1M-$5M net worth category reported eating at least one meal inside a McDonald's within the last 30 days before being interviewed. Forty percent of those with a net worth of over $5M did the same. If anything these numbers understate their patronage since my question did not ask about drive-in or take-out orders.

What can I say about children who are taught the benefits of discipline, frugality and moderation? They are much more likely to become economically successful and satisfied adults than those who were raised in an atmosphere void of these characteristics.

So having discipline, frugality and moderation are key ingredients to becoming successful in life, no matter what your starting point. If you have those things, you'll be much more likely to be economically successful – and satisfied adults.

What are your thoughts on this. Do we understate the importance of these things – discipline, frugality and moderation? Tell me your thoughts in the comments.

7 Good Reasons To Budget Beyond The Bottom Line

By Mr. Money 1 Comment

As a personal finance blogger I'm a big proponent of having the family do a budget because it has the effect of helping you to better regular spending, see where the money is going, and figure out places where you can cut back. It helps you to take control of your finances.

One thing that I realized, however, was that not only does doing a budget help your finances, it has the side effect of also helping other areas of your life.

7 Reasons To Budget

Here are five quick side benefits of doing a budget for your family.

Less arguments and fights about money: Before we had a budget and cash flow plan set up at our house, we constantly argued about little things when it came to money. We just didn't feel secure, and any little thing could set us off because we felt like we were hanging on by a thread. Small expenditures by myself or my wife could set the other off because we weren't sure if we would have enough money at the end of the month. Now that we have a set budget, and specific amounts allocated to all spending categories, it takes the pressure off, and we're able to trust that we've got a plan, and we don't need to worry about what the other is spending.
We have a sense of peace: Now that we've got a plan we don't have the constant stress of worry that we won't be able to pay all our bills, or that we're falling behind in retirement savings. Now we know what our financial situation is, we're planning ahead and making sure that we're set.
No more panic when the “unexpected” happens: When unexpected expenses crop up like emergency room visits, car repair bills or the need for a new water heater, we don't have to panic and worry about where we'll get the money to pay for the problem. Instead, we've budgeted for an emergency fund, and we're ready for when the unexpected happens.
It makes the word “NO” easier to say: Before we had a budget and a plan saying no to frivolous purchases wasn't as easy because we figured we could afford something, and we'd just put it on credit in case we couldn't. Now we know what we can afford, we budget for the things we want, and we pay cash. It makes it a lot easier to say no to a purchase when it isn't budgeted for, and you don't have the cash saved up!
You have extra money to use to help others: I guess this one does actually speak to your bottom line, but to me it's priceless to be able to help others more now, because we just have more left over. Because we've budgeted, our surplus has grown, and we've been able to give more to causes we believe in, and more importantly, to our church. Without a budget, that wouldn't have been possible.
Better communication in the family: When we started budgeting at our house we had monthly family budget meetings. The result was that we were talking more about our joint finances, and we were just communicating more in general. It lead to us feeling more connected as husband and wife, and generally improved things in our house.
You feel empowered: When you have a plan, and your budget is working effectively, it gives you a sense of empowerment, as opposed to the sense of helplessness when your checking account dwindles away to nothing and you're not sure where the money is going.

Our family has been doing a budget for a while now, and it has been a huge blessing for our household. It had a lot of wonderful side effects that we didn't anticipate when we first started.

So those are my good reasons to budget, beyond just the monetary reasons. What are yours? Share with us in the comments!

Click here for a budget helper.

Personal Finance Basics: Negative Events Will Happen To You. Plan Ahead With Insurance And An Emergency Fund

By Mr. Money 3 Comments

When thinking about topics to write for my Personal Finance Basics series, one of the first ones that came to mind was the topic of planning ahead for emergencies. It's such a basic concept and one that will affect a majority of us, but unfortunately only a few of us ever plan ahead for unplanned expenses or emergencies.

Today I thought I'd take a look at planning ahead for emergencies.

Everyone Has Emergencies

Whether we like it or not, we all will face emergencies or unplanned negative events multiple times in our lives. In fact, the stats are against us:

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

Let's look at that. 78% will have a MAJOR negative event in a given 10 year period. At our house that has certainly held true – in fact we've had 3-4 major negative health events in the past 10 years. I wonder what the stats are for minor negative events – my guess is that it runs close to 100% With numbers like those it's a sure thing that you're probably going to need to have some sort of a backup plan. At our house our backup plan includes an emergency fund and plenty of insurance.

Insurance Helps Cover Against Major Negative Events

The first thing we've done at our house to plan ahead for major emergencies is to make sure we're covered when it comes to insurance. What types of insurance should you have? We would suggest having good coverage in the following types of insurance categories:

health insurance
life insurance
disability insurance
homeowner’s insurance
auto insurance
long term care insurance

What types of insurance you decide to buy will depend largely upon your personal financial situation, and whether you’re secure enough to self-insure. At our house we've got a ways to go so we've got everything on the list except long term care insurance, which we plan on buying after we turn 60.

While we have insurance in most of the above categories, the one that has more than paid for itself is the health insurance. A couple of years ago my wife had some major health events that meant she has spent close to a month in the hospital over the past couple of years. Our insurance has paid for almost $300,000 in medical care during that time while our out of pocket costs and premiums have been closer to $15,000. If we hadn't had insurance, we would have been in a world of trouble.

Give yourself that insurance umbrella in case the skies get cloudy and it starts to rain.

An Emergency Fund Pays For Smaller Emergencies And Negative Events

While insurance is great for transferring risk of major medical events, car accidents and disability to the insurance company, it isn't going to cover everything. There are a lot of negative events that can happen that won't be covered by insurance.

Car repairs
Emergency room visits
Unplanned hospitalizations
Unplanned travel expenses (funerals, weddings, etc)
Job loss
Water heater goes out
To pay for occasional expenses (property taxes, insurance)

To help cover the risks of negative things that can happen in life (like the things listed above), it's important to save up an emergency fund. The problem is, most Americans haven't done that.

A Gallup poll from a few years back that found only about 4 in 10 Americans say they actually have cash on hand in case of an emergency. Only 10% say they have $1,000 in cash available in case of an emergency. In fact, they found that most people say they will rely on other sources of emergency funds if it came to it including credit cards, family members or 401k loans.

In my opinion that's just bad planning – you should be saving up cash in an emergency fund.

How Much Should Be In Your Emergency Fund?

Experts vary on how much they say you should be saving in your emergency fund – and they'll give you different amounts depending on whether you're still in debt or not. If you have no other debt most will tell you that a good number to have saved is 3-6 months of expenses. In our case we're saving up almost a year of expenses to cover us in case of a job loss, major medical event or other catastrophe. We just feel safer having that much, especially with the economy being on the rocks as it is currently. It really depends on your personal level of risk you're willing to take on.

Your age, and status will also affect how much you save. If you're young and single with no major debts or obligations, you might get by with a smaller emergency fund. Have a large family and are a bit older? You might want to save up a larger emergency fund.

You will also want to take into account whether you are expecting a big event in the near future. Do you have a baby on the way, or foresee layoffs at your company? It may be time to stockpile cash.

Emergency Funds And Insurance Give Peace Of Mind

For me one of the biggest pluses of having a large emergency fund and plenty of insurance is the fact that I have peace of mind knowing that if something bad happens (and it will), we're covered for most situations. We've transferred risk from ourselves to the insurance companies for most possible major negative events, and self-insured ourselves against the smaller events. Because we've planned ahead we have less stress and we're able to focus on other important goals like boosting our income and creating wealth.

Have you protected yourself against the probable chance of life's little emergencies? Do you have insurance and emergency savings to cover you in case of a major or smaller negative event? Tell us your thoughts on planning ahead for emergencies in the comments!

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time

You May Need To Pay Estimated Taxes If You Make Side Income Blogging Or Via Other Avenues.

By Mr. Money 4 Comments

I started blogging here on this site only a few months ago, but the site is already starting to generate some income. While that's a wonderful thing, it also means that I need to start thinking about keeping track of my blog income and expenses for this site, in order to start paying taxes on the money I'm making.

If you're making enough income beyond your regular day job, you may need to start thinking about paying estimated taxes 4 times a year as well!

Today I want to look at who needs to pay estimated taxes, and how exactly it works.

Who Should Make Estimated Tax Payments?

In the U.S we have what you call a “pay as you go” type tax system – in other words you need to pay your taxes throughout the year, instead of paying one lump sum at the end of the year.

If you have a day job your taxes are already being withheld for you in the form of payroll tax withholding. If you have it setup just right, your tax liability should be covered for the year through withholdings. If you're off you could end up paying more than you owe (which is why so many people get refunds every year), or you could end up owing more at the end of the year. I usually end up at this end of the spectrum, although I'm usually pretty close to not owing or being due a refund.

When you add in side jobs (or investment income) to the equation – or if you are otherwise self employed, you're probably going to need to think about making estimated tax payments throughout the year in order to cover your tax liabilities, and avoid penalties come tax time.

So how do you make sure that you don't have to pay penalties when the year comes to an end? If you're only making a small amount of income you can meet tax requirements through increased tax withholding at your job. Otherwise, you'll probably need to make estimated tax payments – or do a combination of increased withholding and estimated tax payments. You'll want to research your own situation and figure out what's best for you.

Safe Harbor Requirements To Avoid Tax Penalties

In order to make sure you don't have to pay penalties at the end of the year, you must meet one of the safe harbor requirements at the end of the year.

Owe less than $1,000 for this year’s taxes.
Withhold 100% of last year’s tax liability.
Withhold 90% of this year’s tax liability.

To get started on the estimated tax process, just download tax form 1040-ES, and fill in the blanks to figure out approximately what your estimated tax payments should be for the coming year. If your income isn't stable (as it isn't for most bloggers), you may have to make a bit of an educated guess. But don't worry – that's why they have the safe harbor requirements, so you can avoid penalties if you’re off.

At our house we're going to withhold 100% of our last year’s tax liability to avoid any penalties. We’re also saving up a bit of extra money for any extra tax we may owe at tax time. We'll be saving it in a high yield savings account until tax time comes around.

When Are Estimated Tax Payments Due?

Estimated tax payments are due 4 times throughout the year. They are due on:

April 15
June 15
September 15 (coming soon!)
January 15

Please remember that estimated tax payments are NOT due every 3 months, but are spaced unevenly throughout the year. Because of that it can be easy to forget when they're due, and miss a payment. Set up a reminder for yourself in google calendar or other software, so that you don't forget.

Where Do I Send My Estimated Tax Payment?

You hav a couple of different options to send in and pay your estimated taxes.

Mail your payment in: You can mail your payment in. Figure out where to send your payment here.
Send your payment online: The Electronic Federal Tax Payment System allows you to send your payment in online. Keep in mind that you'll need to register in advance, and it WILL take you a while to receive your required PIN number via snail mail.

State Estimated Tax Payments Are Due As Well!

When paying estimated tax payments it can be easy to forget that they're due for both state and federal taxes – so don't forget to pay both!

Some of the things you'll be paying in estimated tax payments:

Federal estimated taxes
State estimated taxes (if your state has income tax)
Self-employment tax of 15.3% (the social security and medicare portion of your tax).

So remember, you're going to owe taxes on all that income you're earning online, and taxes take a nice big cut out of that money. Even if you meet your safe harbor requirement, it can be easy to far underestimate how much you’ll need to pay your tax bill at the end of the year.

Don't get caught flat-footed. Plan ahead and set your money aside in a high yield savings account, and have that money ready to go at the end of the year!

Do you pay estimated taxes on side income that you earn? Are you just starting to do it this year? Tell us your thoughts on making estimated tax payments, or give us your tips for remembering how to pay at the right time!

How To Save Money When Buying A Car

By Mr. Money 5 Comments

We're in the middle of a search for a bigger vehicle for our family. We recently had our first child, and my wife's little Honda just isn't cutting it anymore when it comes to carting around the baby and all his stuff. It's just getting too cramped. At this point we're looking into what type of vehicle to buy – anything from a mini-van to a smaller SUV. While we haven't settled on anything, my wife can't stand mini-vans, so we're leaning towards buying a SUV.

When buying a new car, there are a lot of things that you can do in order to save money on your purchase. Some will save you a little money – and others will save you hundreds or thousands of dollars. So let's get started!

Things You Can Do To Save Money On Your Automobile Purchase

Saving money on your auto purchase can be done in a variety of ways – from doing your due diligence and research before you shop – all the way to figuring out what make and model to buy. Here are the tips we're using to save money on our next purchase.

Research potential cars, and how to sell your own: If you're looking for a new car, make sure that you give yourself time to look into exactly what type of car you want to buy, how much it should reasonably cost, fuel efficiency, reliability and other factors that can affect your decision. Also look into selling your current car, and figure out how much you can get for it either by selling it as a private party sale – or by trading it in. Use sites like CarSoup.com, Autotrader.com, Edmunds.com and ConsumerReports.org to give you a ballpark value of what your car is worth so that you can get top dollar for your car.
Used vehicles save you thousands: When buying a car we often dream of buying that high end luxury ride, instead of buying something that just fits our needs. We want a brand new car that still has the showroom smell. If we are honest about it, however, we can see that buying a pre-owned car, one that's 2-3 years old with low miles – will end up saving us thousands of dollars. The reason? New cars lose up to 60% of their value within the first 4 years. That's a lot of value just disappearing into the ether! Instead of buying a brand new car, do as we did with out last car. We bought a 3 year old sedan that was close to $20,000 new. By buying the same car as a used car, we got it for around $11,000, and it only had 29,000 miles on it! (plus it still felt like it was brand new anyway!)
Buy from a private owner: When you buy a car from a dealership, there is going to be markup over what you might pay to buy the car from a private party. That's why when you go to Kelly Blue Book's website, there is a price for retail and one for private party that is lower. One caveat – just make sure that you get a vehicle history report and having the car inspected by a trusted mechanic to ensure you're actually getting a good deal.
Paying cash saves interest: My wife and I have been paying ourselves a car payment for the last few years. The result is that after a couple of years you end up having a nice stash of cash to pay for your next car in cash – instead of getting a loan. While rates may be low right now, you'll still save by paying cash instead of getting a loan (of course unless you get one of those 0% financing offers – in which case you're probably not saving by getting a used car). Set up a high yield savings account, and start saving your payments!
Rental cars can save you money too: Our last two cars that we purchased were both rental cars. While you might think that buying a rental car isn't a good idea (there is a common thought that rental cars are driven harder than other cars), we've found that for our family it ended up being a great deal. The rental cars that we bought were lower in price, but were both in great shape – and had been maintained meticulously by the rental agency. My last one drove wonderfully until i got rid of it at 130,000 miles.
Extra options mean big money: If you leave off extra options like sunroof, leather and premium sound packages, a $20,000 car can quickly become a $16,500 car. Carefully consider which options you actually need.
Negotiation on price may be necessary: Sometimes whether you're comfortable with it or not, you may need to be willing to negotiate with a car dealer to get the best price. If you don't like negotiating, consider getting a family member who doesn't mind doing it – to do it for you. Make a game out of it offer to give your friend or family member a percentage of whatever they save you in negotiation.
Make sure to get an inspection and a vehicle history report: Pre-owned cars will have different histories, and you need to be careful that you don't buy one that has negative events in it's past. Get a vehicle inspection from a mechanic you trust, and also get a vehicle history report to confirm it hasn't had flood damage, accidents or other negative events. Skipping this step could cost you thousands down the road.
Don't buy an extended warranty: Extended warranties are one of the places that car dealerships make some of their biggest profits. The reason? Most people that buy them never use them. If you want to get a warranty anyway, consider buying from an outside company for less than you can get a policy at the dealership. Or even better, self insure yourself against the risk of mechanical failure by saving up a “car repair emergency fund“!

There are lots of ways that you can save when buying a car. Some of the tips will save you more than others – but really it all comes down to doing your research, preparing yourself, and going out to do battle – to save money!

Have your own tips for saving money when buying a car? Tell us your car buying strategies in the comments!

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