Personal Finance Blog


Let’s Talk Taxes & Withholding

So, the magical tax day is approaching.  You’ve spent hours collecting paperwork, receipts, contracts and tax forms to calculate your tax burden.  The truth is likely out — do you owe money to the IRS, or do they owe you?   As a result of careful planning (let’s hope), and a little luck, they owe you.  Either way, tax time is a perfect time of year to review or calculate federal withholding.

It’s exciting stuff I know (are you getting the sarcasm here?), but think of it as just another chore to work through before the year gets too far along.  If you owe taxes on the other hand, you’re probably chomping at the bit to get to some withholding tables.  Before we get to the actual withholding calculator, let’s look at what’s new for taxes in 2010, straight from the horse’s mouth (found at http://www.irs.gov/pub/irs-pdf/p919.pdf):

  • Limit on deductible farming losses.
  • Roth IRAs.
  • IRA deduction expanded.
  • Domestic production activities income deduction.
  • Personal casualty and theft loss limit reduced.
  • Standard mileage rates. (Mostly reduced, so watch out!)
  • Personal exemption and itemized deduction phaseouts.
  • Alternative minimum tax (AMT) exemption amount decreased.
  • Certain credits not allowed against the AMT.
  • Qualified fuel cell motor vehicle credit reduced.
  • Earned income credit (EIC).
  • First-time homebuyer credit.

Each of these has been expanded or contracted in some way.  If you believe that they may be applicable to you, download the publication here.  Note as well, that many tax benefits not mentioned here are set to expire, so a review of those would definitely be in order.

Some last items to consider are lifestyle or financial changes that have, or will occur in 2010.  What kind of changes, you ask?  Well, if you get married or divorced, start or stop a job, file for bankruptcy or give considerably to charity, you’ll want to keep your claimed withholding in mind.

There are at least two ways to get tax withholding answers.  The first is the manual, paper and pencil way in Publication 919, How Do I Adjust My Tax Withholding?, as linked above.  You can  work through the instructions and fill out the accompanying worksheets to arrive at the final answer.  The more favored way, in my opinion, is the IRS withholding calculator located here.  This calculator is easier for a number of reasons, not the least of which is that the calculator asks you to answer questions.  The publication gets you to figure out the answers.  Another reason this tax withholding calculator is superior is that you can change your answers and investigate the “what-if” scenarios life tends to bring us.  Go to the calculator and play with it a while.  You’ll find you’ll bring your tax responsibility into focus and learn how to pay just the right amount for 2010.

(A disclaimer I shouldn’t have to print, but will anyway:  This blog represents my personal views, and should in no way be construed as tax advice.  Seek out your professional tax advisor should you require advice, or feel uncomfortable making decisions that could lead to tax consequences without the guidance of a tax professional.)

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Expense Categories

Posted in Budgeting by fsaffiliates on March 25, 2010
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To build any type of budget: business, project or personal, you must understand expenses.  We’re going to focus on the personal or family budget and for some, the identification and collection of expenses is very straight forward.  For others, collecting this information may present greater challenges.  If I’ve just described you, then this post is for you.

One way to look at your expenditures is to break them down into expense categories.  There are as many ways to categorize your expenses as there are shades gray — you could note them by day of the month, by type of expense or by the dollar amount spent.  Each of these methods is valid as long as you have a thorough understanding of how your system works.  This is not to say that each system is created equal, however.  Some of these break downs would be too time consuming to manage, and worst of all, they may not make intuitive sense to you.

Let’s look at another way to examine expenses.  This system gets to the budgeting heart of the matter and identifies expenses by how the dollars ebb and flow.  This form is great for home expense categories, healthcare expenses, living expenses or any other type of expense that absorbs your hard-earned dollars.  There are four broad areas that we can choose from to slot our expenses:

  1. Fixed Expenses. As luck would have it, these expenses are the simplest to recognize.  These expenses are paid monthly and have the same amounts owed month after month, for the entire term of the commitment.  A great example would be ‘rent’.  Rent is paid out generally on the 1st of the month and the amounts paid monthly don’t change during the course of your lease agreement.  Likely, these are the expenses that readily come to mind when you think about how much you have to spend every month.  These are the best to manage because they rarely change.
  2. Variable Expenses. Still easy enough to recognize, but you may have to stop for a minute to recall all the items that belong in this category.  These expenses have a semi-permanent place in the hierarchy of expenses paid out monthly, and don’t really change unless you decide to change providers.  Phone bills and insurance bills are examples of these types of expenses.  These bills are okay because you know they are coming every month, but they may or may not cost you the same amounts every month.
  3. Semi-permanent Expenses. These expenses are hard to remember.  These are the types that take you off guard every time the bill for them arrives in your mailbox.  These expenses are billed quarterly, annually or even bi-annually.  An example of this type of expense may be your garbage bill (billed quarterly in my case) or annual home owners assessment.  These bills are less than okay because they commonly fall off the radar.
  4. Soft Expenses. If you don’t accurately track and predict these, you may as well call this a slush fund.  These are expenses that you know you’ll routinely have, but have an only vague idea of how much you really spend on them.  These expenses are things like daily lunch out with the office gang, a Starbucks for that afternoon pick-me-up or even weekend entertainment that goes from catching a movie to a full night out on the town.  These expenses are the very hardest to track and sometimes impossible consistently keep under control.  This area requires very special attention that we’ll pay in upcoming discussions.
  5. Emergency Expenses. These are just that, emergency expenses.  You will not know when or if they’ll surface, but they most certainly will (think death and taxes).  The car breaks, the dishwasher stops working, the roof starts leaking.  These costs will vary from just a few dollars to perhaps months of salary.  You may not be able to predict these types of expenses with any sort of accuracy, but you should be able to create a reasonable plan for getting most, if not all financially covered.

If nothing else is working for you to categorize your expenses, try this.  If you find that these definitions make sense and your expenses fall easily into the categories, you may have found a winner.  If, however, this explanation makes no sense, and you’ve given yourself some time to absorb it, it likely will not work for you.  There are many more resources available on the web that you can visit and learn from.  I’ll be sharing some very good ones in upcoming discussions and please, feel free to share your own great references.

In order for any expense system to work, it must be simple and intuitive to use.  Keep experimenting until you find a system that works for you.

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Health Care Bill and Your Budget

Posted in Budgeting,Personal Finance by fsaffiliates on March 22, 2010
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Glued to CNN along with a fair share of others I’m sure, I watched with bated breath as the House voted on the Health Care Bill. Final count, 219 to 212 in favor of passage. For nearly 100 years, the United States has tried and failed to enact this type of legislation, and we are one of last remaining holdouts to join the ranks of government sponsored health care.  All of this, you probably already know.

Whether you agree or not with the premise of the health care bill, it will have some implications on your personal finances. Outside of health care, there are a few other components to this bill that few are discussing, save Nancy Pelosi perhaps.  One is higher education.  A second are the tax ramifications should you be considered wealthy by the U.S.  Each of these items will impact the personal financial situation for the majority of us.

This is the perfect opportunity to consider (or re-consider) your health insurance coverage.  If you haven’t had health care options up until now, you’ll need to spend some time reviewing what will become available in the short, medium and long-term.  Reviewing these choices will help you develop a strategy for selecting the best course of action to keep up or improve your coverage, while hopefully reducing premiums and any out-of-pocket expenses.

If you’ve had choices, you’ll have even more very soon.  I’ll wait ’til open enrollment, you say?  Not a great idea.  This piece of legislation has many moving parts, and it may be a case of watching the train leave the station now and having little hope of catching up to it later.  The ones who have stayed abreast of the time lines for implementation and understand all the alternatives available will be the ones that realize the greatest cost savings.  If you’re self-employed, this becomes even more critical.

The bottom line:  review your health care coverage top to bottom.  What are your premiums?  What are your out-of-pocket expenses? (If you were able to deduct these expenses from your 2009 taxes, they are likely excessive.)  What are the levels of coverage?  Are they adequate or are you under-insured?

Once you have these answers, begin comparing apples-to-apples.  Identify the coverage levels and compare premiums and out-of-pocket expenses for each of your health care alternatives.  Stay tuned to evolving parts of the health care bill, and most importantly, be agile enough to take advantage of improved coverages and cost savings where ever they may develop.

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The Dreaded Budget

My momma always told me that it doesn’t make any difference how much money you’ll earn in life, you’ll always need a budget.  Fast forward a (eh, umm)  few years, and I have to admit, that has been true for me.  I’ve had minimum wage jobs and jobs earning considerably more, and when I’ve tried to work without a budget, my finances have turned into a gigantic mess!

I’m certainly no different, better, smarter or wealthier than any of you.  I am middle everything — middle-aged, middle-income — you get the idea.  I’m not a personal finance guru, or a Ph.D. in (something or other) Finance.  I also don’t subscribe to hoity toity, over-the-top technical jargon when it comes to managing money.  What I do offer is practical, no-nonsense, (and maybe most important to you) free ways to get your financial ducks in a row.

Now, I don’t believe that ‘budget’ has to be a bad word.  Sure, it doesn’t always conjure up the most fun-filled experiences I’ve had in life, but when I’ve used a budget to meet personal financial goals, I have been terribly proud of myself for following one.  What kind of goals you ask?  Well, I’ve made room in my budget to save for new furniture and a new car.  I’ve paid off outstanding bills, and “doubled down” on others to get them under control, or pay them off.  I’ve paid off ferocious credit card bills with wicked high interest rates.  And I’ve learned how to consistently add to retirement and college funds without killing myself.

If you’d like to fulfill some of those personal financial goals yourself, the place to start is with a very simple, workable budget.  Why bother with the ‘workable’ part?  Well, sometimes managing your money is hard.  Maybe you had to take some unpaid days off this month or your refrigerator went on the fritz or you really need a weekend away from it all.  Budgets have to be flexible enough to match your lifestyle.  If the budget is too tight, you won’t follow it; if it’s too loose, you won’t reach those goals.  Think of it like an unrealistic diet — not enough food and you’ll dump it the first chance you get — but if you can eat chocolate cake sometimes, it’s more likely you’ll stick with it and actually lose weight.  Same idea.  So here goes.

The very first step in building a workable budget is to collect the basics, and I mean the very basics.  Here’s what we’ll need to get started:

  1. Your take home monthly income.  Add up everything that is paid to you on a monthly basis, whether it comes from your employer, an insurance company, the government, or a friend.  These are the actual dollars deposited into your checking account, or the amount paid on the checks written to you.  It all counts.
  2. Your actual monthly expenses.  If you’re like me, these numbers sometimes get away from me — what I remember them to be 3 or 4 years ago isn’t quite what they are today — so take a look:

If today is pay day, today is a great day to start.  Instead of putting off any bill paying, pick up those bills and record how much money is really scheduled to be paid out.  The numbers don’t lie.  Are the payouts what you thought they would be?  Or, are they way more than you thought? If they are less than what you thought they would be, you either already have a great handle on what’s going on with your money…or you are an excellent guesser!

After collecting all of this information, we’ll take a closer look at our expenses.

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Welcome!

Posted in Personal Finance by fsaffiliates on March 17, 2010
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Let’s talk about whether all of this personal finance advice floating around the internet in these turbulent times really works.  I’m not sure it all does, but some of it surely must, right?  I’ll try some of it, you try some of it and we’ll compare notes.

Like today.  Did you happen to catch this Today/MSNBC article — Rent dresses! 8 smart ways to save — http://today.msnbc.msn.com/id/35911777?  Seriously, does one really have to have a designer dress, or could the $50 to $150 rental fee plus $5 insurance be used more judiciously on something reasonably nice and available for more than a one time use?  Is this really spending money wisely?

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