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March, 2009:

A Small Step (and it’s free!)

Mar 13th, 2009
by jblankenship.
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Quick – can you tell me your net worth?

How about the balance on your credit card (okay, cards)?  Your savings account balance?

by dbking For many folks (okay, face it, most of us) the answer to those questions is only available after a multi-hour session digging through recent statements, online accounts, possibly tax returns, and the like.  But it doesn’t have to be that way: and getting a handle on questions like this doesn’t have to cost a lot of money, either.

One of the first tenets of sound financial planning involves an understanding of where we are now.  What is our current financial picture?  What assets do we have?  What liabilities do we owe?  What is coming due soon?  What income can we expect?  Without an understanding of where we are, it’s hard to figure just how we’ll move toward our goal, be it financial independence, comfortable retirement, or a new home.

I have written in other posts about the various ways you can use the internet to help you with your financial records, and so in a way this is just an update.  The difference is that we’re focused primarily on “organizing” our information here.

Two very good *free* options that I have had experience with are Yodlee (www.yodlee.com) and Mint (www.mint.com).  These sites are commonly referred to as “account aggregators”, meaning you will have all of your account information in one place once you’ve set things up.

Each of these sites provides you with the ability to link all of your accounts – checking, savings, retirement, IRA, credit card, etc. – in one place.  This takes a little while to set up the first time, because you have to go through all of your accounts and set up your aggregation site with the passwords, account numbers, and such. Once you’ve gone through this process, you’ve got all of that information available at your fingertips, and this is where the real power of the sites comes in…

Now, you can see at a glance what all of your balances are, up-to-date as of the moment you clicked on “update”.  I’ve tested this out, and, while your mileage may vary, these aggregators have been current on activity that has happened within an hour or two.  I went to the ATM and withdrew some cash, and within an hour or so I went to Mint and updated, and voila!, the account was already current.

In addition to the ability to see your balances, each of these sites will notify you when a bill is coming due (such as for a credit card), as well as to project your income and bills for the coming month or two.  There are built-in tools that alert the user when spending in a particular category is above the norm.

Granted, these two tools are not the only ones out there, and they may not be the *only* tools you will use to organize your finances.  You could also use the likes of MS-Money or Quicken, which both include online account aggregation tools as well – but each of these products comes with a price tag, albeit pretty low cost in the scheme of things.

With free tools like these available, there is little reason to *not* get your information organized these days.  And for many folks, just getting things organized is the small step that becomes a giant leap for your personal financial situation.  So get going – Aggregate!

Many Happy Returns*

Mar 11th, 2009
by jblankenship.
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Al Capone Arrest Record

I was recently talking with an acquaintance who told me about a friend of his that had not filed a tax return for several years… Now, we all know that burying our head in the sand is no way to deal with *any* problem – but especially this one.

Right off the top of your head, I’m sure you can name a few folks who have been “taken down” by the IRS for tax evasion.  Let’s see… for starters, Wesley Snipes, Sophia Loren, Richard Hatch, Leona Helmsley, Richard Pryor, Pavaratti, Martha Stewart, Elton John, Nicholas Cage, Heidi Fleiss… the list goes on.

And then there is probably the most powerful, certainly the most influential, of all of these:  Al Capone.  The granddaddy of ‘em all. Legend has it that the notorious gangster once remarked that tax laws were a joke because “the government can’t collect legal taxes on illegal money.”  The IRS charged the infamous Chicago mob boss with failure to pay four years’ worth of taxes. Capone was sentenced to 11 years in jail and an $80,000 fine in 1931.

My point in listing all these names is to show just how pervasive and powerful the IRS can be.  Even the likes of Al Capone (as well as, believe it or not, former Vice President Spiro Agnew, and even a former IRS commissioner, Joseph Nunan) couldn’t escape the long arm of the Treasury Department. 

Now, if you happen to be in a position where you have not filed tax returns for some time, or if you are simply having difficulty paying the taxes that you owe, Uncle Sam has many options to help you work things out.  In this article you’ll find some advice on how to work out a plan with the Treasury Department in order to get you back on track. 

And if you need help in working with the IRS for any reason, don’t hesitate to contact me.

* My original tax preparation service was named MHR Income Tax Service - MHR stood for “Many Happy Returns”

The Equity-Indexed Annuity

Mar 9th, 2009
by jblankenship.
2 comments

If you’re anywhere near retirement age, or if you’re in retirement, chances are that barely a week goes by without having an Equity-Indexed Annuity (EIA) pitched to you these days…

Now, if for some reason you’ve missed out on these pitches (Maybe you’ve been out the country? Don’t have a phone? Don’t read your mail?) here’s the gist:  Insurance salesman tells you about this wonderful product that allows you to participate in the stock market’s upside, while not experiencing *any* of the market downside.  In today’s stock market climate, sounds pretty good, huh?

A couple of things come into play that the salesguy doesn’t highlight for you:

First, your “participation” in market upside is limited. Typically there is a cap on the amount of market upside that the account will pay out, and in this market climate, the upside potential is tremendous, which will primarily benefit the insurance company, not you.  In other words, given that the market has experienced a 40% plus drop, there is high potential for double-digit increases in the coming months and years.  If there is a cap on your upside “participation” of say, 8%, the rest of the account’s upswing goes to the insurance company’s bottom line.

Now, you might say – that’s a small price to pay for not having to endure a downswing in the market like we have had for the past several months.  And I would agree with you on that score, however: this is a hindsight statement, because again, the chance is quite small that the market will continue trending continually lower after its performance of late.

And so – the downside protection that you receive comes at the cost of limited upside, which would have throttled back your performance in the bull market periods, leaving you with dismal returns overall.  But that’s not the biggest issue you face with these accounts…

The second issue is the overall cost of these accounts. Annually, there is a fee charged against the value of the account of between 2% and 3%.  Doesn’t seem like much, until you think back to the caps that are placed on your account’s participation in the market.  Suddenly, that 8% cap becomes 5% when you remove the annual fees.  And what about if the market just goes sideways?  You still lose 3% to fees every year.

I just thought I’d give you a brief rundown on these accounts since they’re getting a lot of “push” these days – since the market decline has highlighted their selling points, plus there is a lot of upside potential benefit to the companies pushing them.  Now, it’s possible to set up your IRA to do something similar to the EIA – here’s an article which goes into the details if you’re interested.

Tax Credit for First-Time Homebuyers

Mar 7th, 2009
by jblankenship.
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With the passage of the American Recovery and Reinvestment Act of 2009 (ARRA 2009) comes an additional tax break for First-Time Homebuyers, in addition to the break already available in for homes purchased in 2008.

For your 2008 return (being prepared now) you have two different options available if you have purchased a home recently.  If you purchased your home in 2008, you may qualify for up to a $7,500 credit (which must be repaid over the next 15 years).  However, if you have purchased a home in 2009, you may be eligible to receive a credit on your 2008 return, up to $8,000.  And this one does not have to be repaid!

Taxpayers who qualify for the first-time homebuyer credit and purchase a home after December 31, 2008 and before December 1, 2009 may claim the tax credit either on their 2008 tax return, due April 15, or on their 2009 tax return next year.  Taxpayer’s may be eligible for up to $8,000 ($4,000 if MFS).

For more information, go to:
http://www.irs.gov/newsroom/article/0,,id=204672,00.html


Contact your tax professional if you need assistance with this item.

Auto Purchase Incentive (from ARRA 2009)

Mar 5th, 2009
by jblankenship.
2 comments

The expanded automobile sales and excise tax deductibility component of the American Recovery and Reinvestment Act of 2009 (ARRA 2009) has caused a bit of confusion.

new-car-by-brian-teutschHere’s how it works:  If you purchase a vehicle between February 17, 2009 and January 1, 2010, your state and local sales tax may be deductible on your 2009 tax return.  If you itemize your deductions on your tax return, this deduction can be taken on top of your calculated sales tax deduction (on Line 5, if your sales tax is greater than your income tax).  However, if you do not itemize your deductions, this provision in ARRA 2009 allows you to take a deduction for the sales and excise taxes from your qualified auto purchase above and beyond the standard deduction.

Specifically, a qualified motor vehicle means a passenger automobile, light truck, or motorcycle that has a gross vehicle weight rating of not more than 8,500 pounds, or a motor home, acquired on or after February 17, 2009, and before January 1, 2010, the original use of which commences with the taxpayer.

Individuals who itemize deductions will be able to deduct qualified motor vehicle taxes on their 2009 Form 1040, Schedule A. Qualifying individuals who do not itemize will be allowed to claim qualified motor vehicle taxes paid as part of the standard deduction.

This is, of course, subject to income limits ($125k for singles, $250k for joint filers, each with a phaseout up to $135k and $260k, respectively) and is also subject to a $49,500 cap on the purchase price (tax attributible to that amount or less is deductible).  The deduction is also allowed for purposes of calculating alternative minimum tax (AMT).

I hope that helps clear things up!

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