Archives for 2011

How To Avoid The Capital Gains Tax

Investments are difficult enough without losing huge portions of your investments to taxes, and capital gains are no exception to taxes. Capital gains are the profits that come from investing in capital assets, such as stocks, bonds, or real estate. If the profit exceeds the purchase price, which is what we all hope for, then the difference between the higher selling price and the lower purchase price is considered a financial gain for the investor, which is subsequently taxed. However, there are a few ways to get around paying large amounts of your investments. These are all legal, commonly used, and designed for investors to maximize their investment gain, without losing hard-earned funds to taxation.

“The government always wants its portion, but donating is one of the ways around tax requirements,” said Charles Bulger from RetirementCalculator.com. If you bought stocks in the past for 2,000 and the stock is now worth 10,000, you can donate the shares to charity for a tax deduction of 10,000 without having to declare the 8,000 profit as a taxable gain in capital. This is a common device used by investors called a charitable gift trust, which is offered by brokerage firms. You are allowed to donate a block of appreciated stock over a period of years, and the stock is sold by the trust, not the investor. No capital gains tax is applied.

If you’ve made some gains in your stock and you’re in a higher tax bracket, the appreciated stock is going to get hit with some hefty taxes at a higher rate. To bypass this tax, you can transfer the stock to a family member who ranks in a lower tax bracket. The gain would be placed on their tax return and, if the tax rate is low enough, they could end up having to pay much less than you would have. There are some drawbacks to this type of gift. Over 13,000 will eat into your lifetime gift and estate exclusion. Talk with your broker about this option, and see if it would work to your benefit.

This option is for those who are not relying on investment for financial support. If you want to bypass paying any gain taxes, consider your stocks, bonds, and other investments as one portion of your will. Death is one extenuating circumstance around taxation. It sounds morbid, but it’s one way of keeping the government out of your investments. Your heirs never have to pay income tax on the appreciated value between the time of purchase and your death, which your investments in their entirety to the next generation.

These are just a few of the many ways you can get around paying huge sums to the government. Forbes also has an article that goes into other ways that consumers can get around this form of taxation. As always, you should consult your broker and discuss in greater detail the usefulness of these types of actions. Looking into some of these options can save you a lot of money, and can help keep government hands out of your hard earned cash.

President Obama Signs Repeal Of 1099 Tax Reporting Provision Of Health Care Plan

By Mr. Money 5 Comments

A while back when President Obama and congress passed the health care reform law, there was widespread criticism from some small business groups and lobbies because of some stringent new 1099 tax reporting requirements that was a part of the law. Basically that portion of the new law aimed to increase government revenue by having small business and freelancers (like myself) report more transactions to the government via 1099 reporting.

In the past small businesses and freelancers would have to report to the government any time they purchased $600 worth of services from an outside vendor. The new requirement, that was to go into effect in 2012, would also make it a requirement that small businesses and freelancers file a 1099 for every company that they purchase $600 worth of goods from as well. While that may not sound like a huge deal, many recognized that the costs to comply with this order for many small businesses would be a job killer, and in some cases, a business killer. At the very least it would mean a lot of time and money wasted by businesses reporting on what could potentially be hundreds of transactions that could possibly put any vendor over the $600 threshold.

Because it was agreed that this part of the new law wasn't a good thing, Congress and the President worked to come up with a repeal of the 1099 reporting requirement.

1099 Reporting Requirement Repealed

Before the election last fall the talk of how to repeal the 1099 reporting requirement of the health care law started. While it didn't get passed last year before the election, this month the Senate and House were able to come to a solution. They passed a measure that would repeal the 1099 reporting requirement, and relieve small business from at least one more pressure they don't need in this tough environment.

President Barack Obama signed a bill repealing a tax-compliance mandate in last year’s health- care law, giving a victory to business groups that led a campaign against the requirement.

The repealed provision, under which companies would have had to report more transactions to the Internal Revenue Service, was included in the law as a revenue-raising measure. It was to have taken effect in 2012.

“Small business owners are the engine of our economy and because Democrats and Republicans worked together, we can ensure they spend their time and resources creating jobs and growing their business, not filling out more paperwork,” Obama said today in a statement released by the White House.

To cover the cost of the forgone revenue from the repeal, the legislation Obama signed today includes provisions that will curtail health-insurance tax credits in the health-care law.

How Will They Pay For The Decrease In Revenue?

The new 1099 reporting requirement was expected to increase revenue by 21.9 billion dollars, which would help pay for the new health care law.

So where are they going to find that money now that the 1099 reporting portion of the law has been repealed? Though President Obama says he isn't happy about it, they will be minimizing who will be eligible for certain health care tax credits under the new law. (Of course they would never consider cutting back on certain spending provisions in the law!)

The new law changes the portion of the health-care law that deals with the health insurance tax credits that low- and middle-income Americans will get.

Eligibility for the tax credits, which are paid directly to health insurers, is determined each year by examining income from a prior year. At the end of each year, there is a reconciliation through which the government can seek repayment of credits from people whose incomes rose.

The new law changes the calculation and will require more people to return overpayments. Democrats maintained that this portion of the legislation represented a tax increase for people who happened to receive a year-end bonus.

So the government has realized that certain provisions of this law might put an undue strain on small business, and have now repealed those measures. Now if only they would see just how much of a strain the rest of the law will put on our health care system in general – and repeal that as well! (</end rant>).

What do you think of the 1099 reporting requirement repeal? Are you happy about it like I am? Do you think that they should have left it in place? Give us your thoughts in the comments!

30 Tax Organization Tips For Faster Filing

By Contributor 3 Comments

You’re scrambling around your home office, looking for the paperwork you so desperately need to file your taxes. W-2s, 1099s, expense reports – it’s all blurring together and you’re asking yourself, “Where is that last piece of paper I need?”

Getting organized for tax time shouldn’t be something you cram into the evenings leading up to April 15. Instead, it should be a yearlong process. Tax time can be overwhelming enough without having to dig through piles of paperwork and the mess on your desk to find just what you’re looking for.

That’s why we’ve put together a list of things to get you ready. You’ll find essential steps for getting organized, tips to help you get ready for next year, and more.

Read on, my friends…

6 Reasons Being Organized For Tax Season Can Eliminate Stress

Come January, your mailbox becomes filled with all the documents you’ll need for filing your taxes – not to mention all the piles of receipts you have filed away. Here’s why being organized sooner (rather than later) will save you time – and stress.

If you don’t have organized files, you’ll run the risk of misplacing documents and receipts that are essential for your taxes.
You won’t get stressed by running to your tax preparer or post office in the days leading up to April 15.
If you’re not organized and leave that up to your accountant, they may charge extra fees for the time it took them to get your paperwork in line.
Thinking long-term, you should keep your tax records for four to seven years. Having these well organized throughout the year will help if an audit ever occurs.
It’s also recommended you keep your W-2 forms until retirement. Having these filed nicely will also help down the road.
It will make next year’s return easier. Having your old returns on hand will give you a great starting point when considering your credits, deductions, etc.

16 Essential Steps for Getting Organized

By early February, you should’ve gotten all of the paperwork you’ll need to file your taxes. Now, it’s time to get organized:

Make a tax appointment – Call your tax preparer to schedule an appointment. Late February or early March is best, as they get busier as April 15 approaches. (too late for that this year!)
Purchase an expandable file folder or box to keep your paperwork – Ideally, a device with partitions (so you can separate by category) is ideal. In the future, buy one of these at the beginning of the year. Whenever tax documents are sent to you, put them in the folder right away so they’ll all be in one place.
Categorize – Categorize your folder into sections like: W2’s and pay stubs, 1099s, medical expenses, mortgage interest statements, real estate taxes paid, tax-deductible contributions, and business expenses.
Eliminate clutter – The first step to finding the documents you need is to eliminate what you don’t need. Go through your files and get rid of expired warranties, year-old bank statements, and anything else that’s no longer needed.
Gather all tax-related documents – This includes things like:
- W2’s
- 1099’s
- Checking and savings account interest statements
- Real estate tax statements
- Mortgage interest statements
- Investment statements
- Receipts for charitable donations
- Pay stubs
- Retirement plan statements
- Record of any tips (this is most common for bar and wait staff)
Gather all expenses – Hopefully, you’ve kept good track of these throughout the year. Gather all receipts that are considered business expenses, including:
- Advertising and promotion
- Professional dues and subscriptions
- Licenses and permits
- Utility, Internet, and cable bills
- Meals and entertainment
- Professional fees (tax preparation, business coaching, etc.)
- Interest statements
- Auto-related expenses
- Computer equipment
- Business-related books and magazine subscriptions
- Travel expenses

8 Commonly Forgotten (Yet Extremely Useful) Items

There are also several pieces of documentation that you may not even think of, but they’ll actually be helpful when determining your deductions. Look around your home office and gather the following:

Rental property documents – Find any records that detail the purchase, improvements, or maintenance of rental property.
Insurance policies – These can help determine how much you should be reimbursed for a casualty or theft, business losses, or medical expenses.
Family records – Have records like marriage certificates and birth certificates handy in case your filing status or dependency information has changed.
Capital asset records – This includes things like jewelry, stocks, bonds, antique collections, and more.
Medical bills – This will give paper proof of any deductible medical expenses.
Energy-efficient purchases – Anything installed on your property that is considered energy-efficient may be eligible for a credit.
Theft or loss documents – If the unfortunate event of theft or loss occurred, collect information regarding when the item was missing, your proof of ownership, and the value of the property before and after loss.
Gambling winnings – These are fully taxable, along with the market value of prizes, and should be reported using Form 1040. Be sure to include the type of gambling activity, the date, address of the establishment, and the names of anyone who was with you.

Using even a few of the above steps to get organized before filing your taxes will relieve much unneeded stress, saving you time and energy.

What tips can you give us for getting ready for filing?

Pamela King promotes tax literacy and tax payer empowerment through research and education. She preaches the “KISS-AF” gospel – Keep it Super Simple and Free. If you can use the 1040ez form and e-file then you should do it!

No Need To Rush. Get An Extension On Filing Your Taxes!

By Contributor 3 Comments

This year, millions of Americans will sweat over doing our taxes during the final week before the April 18th deadline. Trying to find all of the paperwork, digging up and organizing charitable contributions, and searching for extra deductions takes time. What many are not aware of is that there is actually no need to hurry. You can get an extension on filing your taxes simply by utilizing one of many available options. The IRS will grant a six-month filing extension (to October 17, 2011) to just about any taxpayer who requests one by April 18, 2011.

Does That Mean I Get Extra Time To Write The Check For My Tax Bill?

Unfortunately, no. Otherwise, this would surely be a more popular option. The extension is only to prolong actually filing your taxes, not to paying them later. If you owe taxes, you will need to do at least a rough estimation of how much you are going to owe and then send that in. The amount you send must be at least 90% of what your final tax bill or you may owe the failure to pay penalty, but this penalty is significantly less than the late fees for not filing. The failure to pay penalty is 0.5 percent of the unpaid money for each month that you are late paying. If you were to not pay and not file the penalty would be 5% a month (25% maximum). Filing an extension gives you extra time to file your taxes and avoid the higher penalty. Of course, if you have a refund waiting, you cannot receive that refund until you file. If you incorrectly estimate the amount that you owe and send in too much money, you will be able to get the extra back when you file.

How Do I Get An Extension?

There are two basic options for getting an extension: you can either file the request form (4868: Application for Automatic Extension of Time To File U.S. Individual Income Tax Return) electronically or by mail, or you can simply send the IRS the amount of money that you estimate to owe them (using a credit card or debit card). Form 4868 has a worksheet to figure out what you owe and provides additional information.

File Electronically

Many tax programs include this extension form, so if you have already started your taxes with a tax program, you might be able to file through that program. Or, if your income is $58,000 or less, you can use the IRS’ Free File website. The service is free and very easy to use. (How to file taxes for free)

If you do not qualify to use Free File, be sure to only use a trusted and established tax program to file your extension; while this is one of the most simple forms that the IRS provides, there are many “services” on the web that will charge you a lot of money to file it for you, and it may not even go through at all.

File By Mail

The IRS will accept printed copies of IRS form 4868 through the mail. Make sure that the form is filled out completely and accurately. This includes double checking your Social Security number (and your spouse’s, if you file as “married filing jointly”) and make sure that your name is readable if completing it by hand. You must take these precautions because if your form is rejected for any reason, however minor, you will owe significant penalties on your now-late payments. If you have any tax due, be sure to include a check, money order or printout of your receipt from paying online.

Simply Pay Your Tax Bill

Sending the IRS your tax due will automatically provide you with you a six-month extension to filing your actual tax return itself. The IRS accepts credit and debit cards (although fees from the card issuer may apply), as well as direct transfers from your bank. If you can do a quick estimate of the tax bill you will owe, and you have paid or pay at least 90% of what you owe (through estimated payments, withholdings, or whatever you include with form 4868) then you will most likely be okay. However, if you do not owe any money or you are due a refund, you need to file a tax return, especially if you made more than the standard deduction.

Again, please remember that an extension on filing your taxes is not the same as an extension on paying your taxes. If you genuinely do not have the money, filing an extension will not allow you more time to pay, and you will still rack up penalties if you do not make a payment. If you cannot pay your tax bill, contact the IRS and ask for assistance and in most situations they will be happy to set up a monthly payment plan or some other type of payment arrangement. The IRS would rather work with you and get something set up now than wait for years while your penalties pile up.

So even if you are out of stamps, you are not out of time! File an extension and gain a little breathing room. At the very least, your accountant will thank you.

This guest post was provided by TaxDebtHelp.com, a site that provides news, tax tips and IRS debt help.

“Working” Retirement: Make Money Doing What You Love

By Miranda Marquit 15 Comments

One of the things about retirement that has always somewhat bothered me is the idea of doing nothing. To me, the idea of sitting around without working doesn't hold any sort of appeal. Which is why I plan a sort of “working” retirement. I plan to continue writing, even when I am retired. Retirement doesn't have to mean sitting on your front porch, waiting for the grandkids to show up (unless you want to mean that, of course). You can still do something you love — and possibly make money at it.

Why Income Is A Good Idea In Retirement

Planning some sort of income for retirement is a good idea for just about anyone. While you can withdraw money from a nest egg and count that as income, it isn't always best to rely on your retirement account — as many found out in late 2008 and early 2009. A market crash can take its toll on your nest egg, and you don't actually know what will happen with Social Security in the future. This means that it can be a good idea to find other sources of income that can help you in retirement.

If you have another source of income, you won't need to take the same distributions from your retirement account, and that will ultimately help it last longer. Plan a “working” retirement, and you will be more firmly in control of your financial destiny, rather than being at the mercy of the market, or a collapsing Social Security system.

What You Can Do To Enjoy A Working Retirement

As I mentioned already, I plan to continue writing, even in “retirement.” I probably won't write as much. Or I will write from some fabulous and exotic locale, enjoying myself when I'm not writing. There are other jobs conducive to a semi-retirement lifestyle. Some of these include:

Consulting
Marketing and public relations (including social media marketing)
Other freelance options, such as graphic design, programming, and editing
Teaching (especially adjunct teaching at a local college)
Investing (building up an income portfolio)
Monetizing a web empire

Not only can these options provide you with a steady stream of income, but they can also ensure that you have something engaging to do. You will keep yourself busy and engaged, and probably enjoy your time more. Semi-retirement is all about doing something you enjoy, while still earning a little bit of money. This creates a situation that allows you to be more financially secure during retirement, while at the same time remaining active.

Helping Others During Retirement

Of course, it is still possible to be busy during semi-retirement and not do something that brings in money. Many people choose to devote their retirement years to service. There are a number of volunteer opportunities in your community and around the world. If you have some sort of expertise, you can use it help others, giving of your time and talents to make the world a better place. This can be a great way to use your retirement funds to enjoy this part of your life — while making a real difference. What your retirement looks like should largely depend on your financial priorities.

What do you want to do during retirement?

Can Identifying With Your Future Self Get You To Save More For Retirement?

By Mr. Money 9 Comments

Our country is currently going through some hard economic times, with record numbers of people being unemployed, or out of the work force. So when folks finally get back into the workforce, it can be tough to even begin thinking about setting up a retirement plan and saving for retirement. The problem is, time waits for no man (or woman). People are in danger of having to drastically reduce their lifestyles in retirement out of necessity. In fact the Center for Retirement Research at Boston College found that 51% of American households are at risk of being unable to maintain their standard of living in retirement, up from 43% in 2004.

While we continue getting older, unless we're regularly saving for our retirement, our retirement is becoming less and less sure. So what is it that people need to get over that hump and be convinced that they need to be saving and investing for retirement? What are some things that can help make them more likely to save?

Visualizing Your Future Self

One thing that researchers have found is that people have a hard time thinking about the future because it seems so distant, because they don't know how to think about what their wants and needs will be in the future and because they can't really identify with where they'll be 20-30+ years in the future. In other words, they can't identify with their future selves. Excerpts from the WSJ:

Staring into a mirror today and seeing yourself as you will look in the year 2057 is unnerving. But that may be just what it takes to shock Americans into saving more. At Stanford and other universities, computer scientists, economists, neuroscientists and psychologists are teaming up to find innovative ways of turning impulsive spenders into patient savers…

Behavioral science offers at least a partial answer: To make long-term financial goals more achievable, you must make yourself feel as if the future is now.

The project underway at Stanford seeks to close this gap between the present self and the future self, without turning young people into misers. By enabling the young to see themselves as they will be when they are old, virtual-reality technology can transform their urge to spend for today into a willingness to save for tomorrow.

William Sharpe, the Nobel Prize-winning economist who co-founded Financial Engines Inc., a firm that provides investment advice to retirement savers, says, “The idea of getting people to feel sorry that ‘Poor old me, at age 70, is going to need help if I don't save more now'—I regard this not as persuasion, but as additional information.” After he heard about the technique, Prof. Sharpe asked to monitor the research and became a co-author of a forthcoming study on its effectiveness. “It's very promising work,” he says.

What they found was that when people were put in a situation where they had to identity with how they would look and act in the future, they were more likely to be open to investing for the future. Why? Because of what they call the “Proteus Effect”

The Proteus Effect

So what is the Proteus Effect? In it's simplest terms, it's behavioral alteration in the real world triggered by changes in how our bodies appear to us in a virtual world. In other words, things that happen virtually have a very real effect on us.

Experiments have shown that if you are sent into a virtual-reality environment with a particularly good-looking “avatar,” or digital self-image, you are likely to become more sociable. Seeing your avatar exercising in a virtual world can spur you to add an hour a day to your exercise routine in the real world; people whose avatars do the dirty work of sawing down a virtual tree use less real paper later in the day. Given a taller avatar, you will act more confident and negotiate more selfishly.

What researchers also found was that when young people were shown future versions of themselves, they were much more likely to want to save for retirement, probably because they were more able to relate to their future selves, and realize they would have a need for money in the future.

“People who see their future selves end up being more patient,” says Hal Ersner-Hershfield, a psychologist at the Kellogg School of Management at Northwestern University, who led the project.

In one experiment, young people who saw their elderly avatars reported they would save twice as much as those who didn't. In another, students averaging 21 years of age viewed avatars of themselves that smiled when they saved more and frowned when they saved less. Those whose avatars were morphed to retirement age said they would save 30% more than those whose avatars weren't aged.

Real World Applications

So how can we take the knowledge that feeling more in tune with your future self can help you to save, and use it to our advantage? For starters, why not create your own age morphed photo?

Create an aged picture of yourself to put on the refrigerator or on your computer – and use it to remind you of your need to save. One great site to do that at is In20Years.com. You just upload a photo of yourself and it will instantly age you by 20 or 30 years. It's quite eye opening to get an imagined version of yourself – that far in the future. Here are a couple of examples done using that site, with the originals in the lower right corner:

I know when I did it for myself, it certainly made me feel a bit more of a sense of urgency to save.

What are some other possible real world applications of age morphed photos? The article suggests some:

Placing age morphed photos on a company's benefits site: Encourage employees to save for retirement by placing an age morphed photo of them on the company's benefits page, with their approval of course. It might be a good way to encourage savings.
Tool for financial advisors: Financial advisors could use age progressed photos as a part of their practice to help encourage people to think about the future.
Brokerages and mutual fund company sales tool: Companies could of course use technology like this as a sales tool – which isn't necessarily all bad if it gets people to save.

Other Ways To Encourage Saving For Your Future Self

There are of course other things that you can do to feel more in tune with your “future self”, to encourage your savings.

Set an actual retirement date: Studies have found that people are more willing to put off the benefit of future realized savings, if they can imagine an exact date that they will retire. So set an actual date that you would like to retire, and even name your accounts by that date! For example, The “May 8th 2041 Fund”.
Monitor your progress regularly: Set goals to save towards, and monitor your progress regularly. Even consider setting up prompts in Google Calendar or other software to remind you to go and update your progress on a regular basis.
Imagine how you would feel in a comfortable and worry-free retirement: Studies have shown that just taking 3-5 minutes to visualize a trouble free and relaxing retirement every once in a while and using that as a prompt to save works quite well. People were found to be 25 percentage points more likely to increase their savings on the spot when engaging in such behavior.

What other ways can you think of that can help you to visualize your retirement, and encourage you to save today? What tips and tricks do you use? What do you think of the age morphed photos? Tell us in the comments!

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