Today I’ve got a rant on something I had heard rumor of before, but still can’t quite believe how messed up our system is.
As it happens, an exception to the luxury car rules allows you to use expensing if your new business vehicle is heavier than six thousand pounds. For a car, that means six thousand pounds empty, which disqualifies almost all cars right off the bat.
But, for a sports utility vehicle, it is six thousand pounds including the maximum for passengers and cargo, so many SUVs can qualify.
My side comment to this, not The Tax Lady’s, is how on earth can our government create a tax system that gives benefits for purchasing SUVs rather than disincentives. It just really doesn’t make sense.
At least if they left things alone and didn’t subsidize SUVs or gas people could make choices based on the real cost of driving a car.
Readers: Please leave us a comment for our giveaway, and I’d love your thoughts on this reg.
Cheers,
Miel
P.S. There was an article today on the New York Times today called “G.M. to Close Hummer After Sales Collapse” So perhaps there is justice in the world, or at least reduced demand for gas guzzling behemoths driving on freeways in America, despite the tax system!
PLEASE LEAVE US A COMMENT FOR THIS WEEK’S BOOK GIVEAWAY!!!
In keeping with our tax week with the book giveaway from The Tax Lady, Roni Deutch, here are the her top ten tax-record keeping tips for small business owners:
Keep business and personal tax records separate.
Open a separate checking account for your business and keep your records accordingly.
Keep all records and receipts to support income and expenses claimed.
Use a separate credit card for your business.
Keep a business use mileage log for your service vehicle.
Avoid cash purchases that do not produce a valid receipt.
Reconcile your bank and credit car statements each month.
Highlight all long distance business calls on your personal (home) telephone bill.
Get a receipt for everything. If the expense was incurred for business purposes or in the course of producing business income, it is likely to be tax deductible.
Keep all records and receipts in a safe, dry location.
One of the things that Roni hits on throughout her book is the importance of staying organized, as this will pay off in spades.
A favorite example of this from the small business perspective is the real cost of missing business expenses. Say you forget a $20 receipt that you should have claimed, once you add in the overstating of your taxes as well as the tax increase, this comes out to cost you $8.06 additional in taxes. She goes into all of the detail on how this is calculated, and it makes you really realize the power of missed expenses.
Please leave us a comment and we will be giving away a copy of the Tax Lady’s book on Friday!
As finance bloggers, we’ve received our fair share of finance books, many of which frankly aren’t ones I’d pay for myself. I’d have to say that with our latest book give away I couldn’t be more excited to share it with our readers.
We’ll be doing posts all week sharing tips from the Tax Lady and then we will select two winners on Friday. Just leave us a comment with your tax questions or comments and we’ll draw winners from the comments.
2009 was one of the biggest years for tax law change in history. Filing this year will be more confusing and could cause many to pay money to the government that is rightfully theirs. Here are the 5 essential changes in tax law you need to know:
Newly Expanded Home Buyer Credit If you were thinking about buying a home, get a move on! Congress approved the newly expanded homebuyer credit which counts for all homes with closing dates before April 30, 2010. First time homebuyers are eligible for up to $8,000 in refundable credit for new home purchases!
Increased Contribution Limit for 401(k) Plans Invest in your retirement! The maximum employee contribution rises to $16,500 from $15,500 in 2009 for these and similar workplace retirement plans including 403(b)s and the federal Thrift Savings Plan.
Tax Credit for College Tuition For 2009 and 2010, the new American Opportunity credit provides up to $2,500 per student a year for four years of college, not just the first two years. It now also covers the cost of books!
Higher Annual Gift Tax Exemption For 2009, you can give up any individual up to $13,000 without owing any gift tax, a $1,000 increase over 2008.
Partial Exclusion for Unemployment Benefits While your unemployment checks are usually considered taxable income, in 2009, the first $2,400 you received will not be taxed. Simply subtract that amount from the total benefits your received (which should be reported to you on form 1099-G).
Drop us a comment and we wish you luck in winning! Please keep in that anonymous comments are fine, but if you’d like to win, please leave a name of some kind so we can announce winners and get information to send out the books.
Last night I found myself in a chatroom that I frequent on occasion. I started up a conversation with a guy I’d gotten to know there. After a while I started talking money with my buddy. I was shocked when he told me about his situation. It came out that my on-line buddy was divorced, had two children, and owed over $24,000 in credit card debt. He was living with his girlfriend and her two children. After recently being laid off from a good job (he lives in the midwest), he figured that his take home was around $115 dollars a week. Yep you read that right, about $115 dollars a week.
Now, I don’t know what your personal finance situation is, but having about $115 a week take home can severely constrain anyone.
So, what can someone in my friends situation do to dig his way out of the debt?
First, get some savings. My friend has almost NO savings. One thing he’ll want to do is build up an emergency fund. If you’re in a situation where you have almost no cash – and 115 bucks a week qualifies – you’ll want an emergency fund for several reasons. First, an emergency fund will keep you from having to borrow if an unexpected expense strikes. This means you won’t have to rely on credit cards. Second, savings can help provide some psychological motivation and act as a confidence booster. My friends situation obviously makes him a bit depressed. Its important to attack your debt with confidence and money in the bank is a great confidence booster.
Second, sell some of your stuff. By this I mean that most people’s houses are full of junky things we have accumulated over our lifetimes – boxes, picture frames, books, etc, etc. All of these can be sold online or better yet at a flea market or garage sale. Usually if you get enough stuff half a days work can bring in $100 to $300 dollars. This cash will help with building up an emergency fund and will juice your later debt repayment.
Third, my friend must pay off his credit card debt. I’ve been observing the credit card industry for a while now, and last year I reached the conclusion that the industry is essentially predatory in nature. If you get involved with the card companies they will do anything legal or possibly even illegal to squeeze the maximum amount of revenue out of you. Don’t be under any illusions.Credit card companies do NOT care about you. They only want your money. If you don’t believe me, click here. Not only are card companies predatory institutions, they also charge you a lot. Sometimes effective interest rates can be up to 240% if you carry a small balance. So, my friend has got to pay off the credit card debt ASAP.
There are lots of ways to address the debt. We recommend attacking the most expensive cards first using a divide and conquer strategy. What you do is get the plastic with the highest interest rate and transfer some it onto another card. Preferably the card you transfer it onto will offer you a 6 month zero interest rate. Transfer as much as you can, then pay off the rest of the high interest rate balances. Keep doing this until everything is on a zero balances, then pay the balances off as soon as possible and close all but one of the accounts.
Fourth, get some side income. My friend spends a lot of time gaming online. Computer games are not as stigmatizing socially as they used to be, but they take a lot of time that could be going to side businesses. There are often odd job opportunities, law mowing gigs, or similar small business activities that my friend could be doing rather than playing games online. Also, he probably should consider getting some mutual funds or stocks that pay income monthly.
Just to wrap this up, despite the recession, the US is still the worlds largest economy for a reason. There is a tremendous amount of economic freedom in the States and if you are in a similar situation as my friend, I want to affirm that you can get out of debt. It can be done, but it takes work and effort.
The beginning of February is the usually the turning point for me from a mental standpoint, as far as mentally moving on from Winter into Spring. Despite the two feet of snow we saw this last weekend, I’ve found myself looking forward to the sense of renewal that the Spring brings.
And part of that sense of renewal is a refreshing of my financial situation. As we move closer to the Spring, I’ve found myself making a list of things I want to do in the coming months.
Move to completely online bill pay, as much as possible – This is a no-brainer for me. We’ll save on stamps and envelopes, obviously, but we’ll also enjoy the convenience of having our bills paid automatically. Technology should make our lives easier, and having our bank automatically issue our checks will allow us to focus our efforts on other, more important tasks.
Start automatically contributing money to an investment account – This is typically a good idea, but one I haven’t gotten on board with yet. Usually, I like the save up a sum of money, deposit it all at once and make my investment. Unfortunately, this can lead to lulls in my investing, like the one I currently find myself in. Setting this up will help me invest on a more regular basis.
Review my 401(k) holdings – I usually do this at the beginning of the year, but I let it slip this year. I simply need to make sure that my goals are aligned with my 401(k) investments
Do my taxes – I have almost all my tax information ready to go, but I haven’t found the time to do it yet. Although this is more of a “need” than a “want”, I need to get on this and take care of it as soon as possible.
Streamline my existence, a.k.a. sell my crap on eBay – My wife and I somehow have acquired more and more stuff. We need to do some purging. What we don’t donate we need to sell on eBay. I’m not expecting a huge financial boon from doing this, but we could end up with some pocket change.
Readers, do you have any Spring-cleaning goals as Winter starts to (hopefully) fade?
Most people are familiar with the expression “don’t throw good money after bad.” It’s a nice and tidy saying, warning the listener against perpetuating bad decisions, a very rational thought. As humans though, we often act irrationally, under the misguided notion that we are making the right decision. The concept illuminated by that saying is known as “sunk costs”. Sunk costs are transactions that have occurred in the past that are irreversible. For instance, purchasing a Big Mac from McDonalds is an irreversible financial transaction. Although I haven’t tried, I doubt they’d let you return it and get your money back, barring any sort of problem with the food of course. Therefore, any decision regarding that Big Mac occurs independent of the fact that you’ve purchased that food. You’ve already spent the money on it, you can’t get it back. It would be irrational to include the fact that you’ve already spent money on McDonalds in any future decision.
Continuing with the food example, I’m trying to get back into shape, with mixed results at best. One of the irrational decisions that I’ve known myself to make when it comes to dieting is if I eat poorly during an early meal such as breakfast or lunch, I’ll use that fact to justify eating poorly later on in the day at dinner, for example (telling myself that I’ve already screwed up for that day, and I’ll start fresh tomorrow). So, the notion of sunk costs can be used an example of using an irreversible past transaction to justify making a future decision.
The battle between rational and irrational decision making is waged in many areas of economics. One current example that has quite a controversy associated with it is the idea of strategically defaulting, championed by Professor Brent White at the University of Arizona. Many people make the decision to stay in homes that they aren’t able to afford, whereas the rational decision is often to default on their home, thus making the decision which puts them in the best position economically, long term. While that example is more complex than I how I depicted it – most similar debates are – due to the idea of a “social contract” and such, it is another example of how rationality is not always the driving force behind the decisions we make.
Going back to sunk costs, I think the clearest example of this idea can be found in politics, and specifically, the decisions that politicians make. This is tied into the idea of “loss aversion”, the preference held by individuals to minimizing losses as opposed to maximizing gains. In politics, this can be seen in any number of pet projects, advocated for and funded by state, local and federal governments. A politician might promote a program that he or she thinks is a good idea, until that program is implemented and it becomes apparent that it is perhaps inefficient and perhaps potentially incurring devastating future costs. Rather than ignoring the previous investment in that program and allocating future funds where their benefit will be maximized, the politician may attempt to save face, attempting to avoid a total loss, and will continue support a bad program, knowing that future money spent there could be used better somewhere else.
Following this theme, the health care package that is currently being debated in Congress could potentially form an example of the sunk cost fallacy. Members of Congress and their constituents are cognizant of the amount of time that has already been spent developing the comprehensive health care package. If calls to just pass a health care bill start to overwhelm desires to pass the best possible bill, members of Congress who act accordingly will be falling for the sunk cost fallacy. Although there are other issues there of course, the main one being a strong desire to get re-elected.
Irrational decisions can often mask themselves when we start talking about reaching a “point of no return”, where we feel like we’ve already invested too much to turn back. But when that happens, we’d do well to take a step back, examine the decision from a purely rational standpoint, and then make the decision that makes the most sense for us economically.
As the news dies down for Haiti, the need certainly remains. We thought you might be interested in some of the ins and outs for what you can and can’t claim on your taxes.
The US House and Senate unanimously passed a bill in January that allows taxpayers to write-off donations to Haiti earthquake relief efforts when they file their 2009 taxes this coming April. Under current law, donors would have to wait until they file their 2010 returns next year to take the deductions. The bill allows donations made by the end of February to be deducted from 2009 returns. This means you only have another couple of weeks to act, but you can always claim on your 2010 taxes.
What you CAN deduct for charitable contributions:
· Money or property you give to: Churches, synagogues, temples, mosques, and other religious organizations. · Federal, state and local governments, if your contribution is solely for public purposes (for example, a gift to reduce the public debt.) · Nonprofit schools and hospitals · Public parks and recreation facilities · Salvation Army, Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, Boys and Girls Clubs of America, etc. · War veterans’ groups · Charitable organizations listed in Publication 78, which list those that qualify · Expenses paid for a student living with you, sponsored by a qualified organization · Out-of-pocket expenses when you serve a qualified organization as a volunteer
What you CAN’T deduct for charitable contributions:
· Civic leagues, social and sports clubs, labor unions, and chambers of commerce · Foreign organizations (except certain Canadian, Israeli, and Mexican charities) · Groups that are run for personal profit · Groups whose purpose is to lobby for law changes · Homeowners’ associations · Individuals · Political groups or candidates for public office · Cost of raffle, bingo, or lottery tickets · Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups · Tuition · Value of your time or services · Value of blood given to a blood bank
For 2009 tax returns, if your adjusted gross income is more than $166,800 ($83,400 if you are married filing separately), you may have to reduce the amount of certain itemized deductions, including charitable contributions. For more information and a worksheet, see the instructions for Schedule A (Form 1040).
Being in the aid business myself, if you are looking at making a donation, I would recommend an organization that is on the ground and doing some excellent work, International Medical Corps. Keep in mind that you can also donate physical property, such as a boat, and receive the same benefits that you would when donating cash. As long as you donate your boat to a non-profit organization, you can claim the donation as a tax deduction at its full market rate. The boat is then used to fund various programs and charities around the country. The charity that you make your boat donations to will usually come to pick the boat up from your home or storage location, which gives you one less thing to worry about as you unload your vessel.
With the blizzard of 2010 behind us, or as some called it, “snowmagedon”, I pause to consider the cost of snow removal.
Here in the District of Columbia, we’ve well exhausted our 6.2 million dollar budget for snow removal. Most citizens are also pretty tired of shoveling out their places. I think if you had a shovel and went around looking for work, you’d be easily making some money.
As you can see from the snow piled up behind me, there is no shortage of snow in our neighborhood.
It made me think of my Canadian friend’s cousin, who was an entrepreneurial 14-year-old. He decided after several years of building a reputation for shoveling snow, that he would take it to the next level. He made annual snow removal contracts with his clients and agreed to shovel no matter how much, or how little, snow there was in a winter. As luck had it, the first year he did it, it didn’t snow and he didn’t have to shovel at all. He would not be so lucky this year. We have snow in 49 states at the moment!I thought I’d also throw in this picture of James in the DC winter wonderland. Like most people in DC, we are just ready for the slush to go away.
Valentine’s day is one of those mixed blessings. While it is nice to show your love, it can also get pretty expensive.
I recall our first Valentine’s together in 2004, where we went to about the fifth choice place (since reservations were all booked up) and dropped around $85 per person on Indian food. While happy to spend a nice dinner with James, I couldn’t help but thinking how many average priced dates we could have had for the equivalent.
Personally, I’d rather go out once a week for the month of February and spend the same as you would drop on the big day. Looking online, DC prices range from $50-100 for dinner, with most hovering around the middle.
While James and I toyed with the idea of going out this year, I think we’ll enjoy a nice home cooked meal and I’ll put the money towards buying him a nice suit.
We will included in the 60% of Americans that celebrate Valentine’s Day, with men spending on average $135 and women $72. Collectively that adds up to $14 billion dollars. While I will be buying my hubby a much needed suit (thus upping the average spent), I can’t help but see this as a over the top.
Another comment on Valentine’s Day is the sad situation with flowers. Time and time again, the flowers at this time of year are much more expensive and of much poorer quality. My mom got flowers last night and they were drooping this morning. I request James not buy flowers on the big day, but surprise me sometime instead.
My sister did a great post on family friendly ways to celebrate Valentine’s Day. I personally always think of my friends at this time of year, as in Finland they adopted and adapted the holiday to be called Ystävän Paivä , or Friend’s Day.
Please leave us a comment for our giveaway of book giveaway from The Tax Lady, Roni Deutch.
