Taxes — Beating Broke

Parents Tax Bill Rising?

October 12, 2012 By Shane Ede 3 Comments

Tax season is right around the corner. Before you know it, we’ll all be holed away in some corner of our house punching numbers into our computers as we try to squeeze a few more of our dollars back from the IRS. That’s a task that might get a bit harder for some parents this year.

According to this CNN Money report, on January 1, 2013, several tax credits are set to expire. And, unless Congress manages to pull it’s collective head out of a dark place and extend those credits, many of our tax returns will be quite a bit heavier come April. For parents, specifically, this could cause quite the burden.

Specifically, the Child Tax Credit, Earned Income Tax Credit, Child/Dependent Care Credit, and the American Opportunity Credit will expire.

The Child Tax Credit would be reduced to $500 per child, instead of the $1000 it’s currently at, and would no longer mean a refund of any excess credit above and beyond tax liability. It’s debatable whether it should be giving that excess credit as a refund, but I’d certainly like to see them keep the credit at the $1000 number. This is one that we use on our taxes every year, and I know it’s been quite beneficial.
The Earned Income Tax Credit will have several of it’s key income thresholds reduced back to previous thresholds. The maximum credit will also be reduced by 5%. I believe we exceed the threshold for this one, but reducing the thresholds will eliminate it for quite a few families.
The Child/Dependent Care Credit, like the EIC, would see several of the maximum credit and reportable expense reduced. This is one that I know we’ve used every year, since we’ve always had some sort of child care expenses. Could mean a significant loss of credit on our tax return.
The American Opportunity Credit is a credit that replaced what was called the Hope credit. It allowed for a higher amount of credit and for some of the credit to be refundable to the tax filer. If it expires on January 1, it will revert back to the hope credit which means the credit will be reduced by $700, and also reduced to something that can be claimed 4 years to something that can be claimed only 2 years. The Hope Credit is also a non-refundable credit, so if you have no tax bill, it doesn’t mean a larger refund like the American Opportunity Credit would. Again, I don’t necessarily agree with the refundability of credits, but this could mean a huge difference for some families still paying for college expenses. I’ve never been able to use it since I was well out of college when it was put into place.

That’s just four of the parts of the tax code that are set to expire on January 1 if Congress doesn’t act on it. In a Presidential election year, you can bet they won’t make any moves on it until after election day, so they’ll have a very short window in order to get something done. I truly doubt that they’d let them all expire, but depending on the outcome of the election, it could be a pretty dirty fight.

How many of you have used these credits? Would their loss on January 1, 2013 change your tax bill considerably?

Debt Ceiling Crisis?

July 25, 2011 By Shane Ede 13 Comments

If you’re even slightly interested in the US economy, and, let’s face it, most of the world is, then you’ve likely been at least marginally following the last few weeks worth of debt ceiling news. The quick and dirty of it is that the US government has a debt ceiling that puts a cap on how much debt the US federal government can carry. If they reach that cap, they can no longer issue treasury bonds and the like to raise money to pay for things. Based on what I’ve read, everyone would like us to believe that it’s a major crisis, and the world will end if we don’t raise that debt ceiling and allow for more debt. But, is it really a crisis?

Let’s think about this just a little bit. Replace “U.S. Government” with John Doe in everything I’ve just said, and all the news you’ve read. If we were talking about an individual, we wouldn’t be talking about how the world would end if they weren’t allowed to accumulate more debt. We’d be talking about how they need to radically cut costs, increase income, pay off debt until they can get their finances in order. Would it be called a crisis? Maybe on a personal level, John Doe would believe it was a crisis. But, it certainly wouldn’t be world ending.

I’ll admit that it is a bit different when it’s a government entity that we’re talking about. If the US government goes bankrupt, there will be some pretty serious problems with the economy for a while. Which brings up another issue altogether. The US economy needs some diversification of it’s revenue streams. Way too much of the economy balances on how much money the US government sinks into it each month.

It’s time we start asking the same questions of the US government that we would be asking of John Doe. Do you really need that expenditure? That service? All three cars? The McMansion? Unfortunately, those that are in charge in Washington are playing political ball instead of really trying to solve the problem. They think way to hard about what programs they can cut that won’t lose them votes in the next cycle, or how much they can raise taxes without losing votes, when, instead, they should be looking to make the US government financially solvent and stabilizing it’s fiscal situation. You or I would start with a balanced budget, I don’t see any reason why the government shouldn’t do the same.

What do you think? I don’t think I’m being to idealistic in asking that they carry a balanced budget each year. Or that they cut costs until they can do that. Yes, they’ll likely have to raise taxes some to pay off what they’ve got for debt, but if it doesn’t come with some pretty significant cost cutting, they’ll all be looking for new jobs in 2012 anyways.

photo credit: Public Notice Media

Catching Up On Your Year End Financial Planning

December 20, 2010 By Aloysa 10 Comments

The 2010 year end is almost here, and hopefully most of us are looking at our finances and asking ourselves a question: “Are we ready for 2011? Is there something we need to do before 2010 ends?”

Most of us probably have already done everything from buying Christmas gifts and donating to charities to scheduling annual doctors visits to make sure our flexible spending accounts

are zeroed out. But for those people who (like me) are too busy with work and blogging, and too tired from Holiday parties or just too relaxed on their couches with a book in hand or a favorite movie on TV, I came up with the “Year End To Do List.”

During the Holidays, financial planning is obviously not a high priority on our holiday agenda. But if we do some planning right now, it might save us some money in the future. I am sure you already know all of the stuff I summarized in my list. But I think a refresher course might not hurt, and a summary below might be useful to consider.

Disclaimer: Aloysa is not your personal financial adviser. Please take this fact into consideration if you decide to follow the list below.

Year End To Do List:

1. Evaluate your portfolio. Do you have some deadbeat stock that you don’t want? Why hang on to it in anticipation of better times? Consider getting rid off them now. Why? Because you can use losses to offset gains (if you have any) to minimize your tax liability. You can use up to $3,000 in capital losses to offset your gains. Do you have any leftover? You can carry it over to the next year. Just make sure that you do not sell your deadbeat stock and buy the same or similar stock within 30 days in order to take advantage of the losses.

2. Don’t forget to max out your IRA contribution to the full IRA contribution limits (if you can). You can contribute up to $5,000 this year. Don’t forget your 401K too!

3. Some of us have traditional IRA accounts. I will not go into explanations of what it is because I assume that if you have it, you know what I am talking about. If you are clueless, skip this and move on to # 4. One of my friends is considering converting her traditional IRA accounts to a Roth. She anticipates that her income tax rate will increase significantly in 2011. I think everyone is given an opportunity to convert their traditional IRA to Roth in 2010. If you do the conversion in 2010, you will be able to delay paying taxes until 2011 or 2012. If later you are not sure anymore and think that the conversion was not a right move, you have until October 15 of the year following the year of conversion to change your mind.

4. I believe that one of the proposed changes by the deficit commission was to reduce the tax benefits of charitable donations. If this proposal becomes law, our charitable contributions might be limited to whatever rate will be determined. If you are in higher tax bracket (Check your 2011 tax brackets) you might not get a full tax deduction on your charitable contribution. But this year you still may be able to take advantage of charitable contributions (subject to certain limitations). In the end, you will feel good too because you supported your favorite charity and a great cause.

5. You are finally totaling your receipts and looking at your flexible spending account balance. What do you see? There is some balance left! You decide to do an annual exam with your physician. Wait a second, don’t rush to see your favorite doctor. I’d recommend you consider putting your annual check up off because under health care reform, most employer insurance plans must offer free preventive care, starting in 2011. You might be better off making some flexible spending account changes and spending your flexible spending account balance on a new pair of glasses, contact lenses, or getting flu shots if you didn’t get them yet.

photo credit: bterrycompton