It’s not Rocket Science, yet…

Hi Everyone,

With the end of the year looming and April 15 on our brains, it may *sigh* become time to think about what we need to all assemble.  Whether we are preparing taxes ourselves, enlist the help of tax software, or have a professional complete your returns for you, there are certain forms that you cannot escape from.    Although you cannot escape from them, you can minimize the stress you put on yourself by assembling everything in a lean manner.  Create a file, or at least a pile, of items you find on this list to help you save time when handling taxes.

Think of taxes as a partnership between you and your government.  You need the government to make laws, protect you, as well as allocate appropriately whatever additional tax that is collected.  The third one seems a little grey, but with the amount of tax that is collected, I feel much better knowing that there are watch dogs to make sure the tax is being used properly! 

When thinking of this partnership, think of any financial gain, as well as loss, that you have incurred in the year.  Tax is based off of economic gain, rather than pure addition and subtraction.  If I am better off than I was before, chances are we should pay tax to the government, much like you would give some to family, friends, church or a business partner.  Bearing this in mind keep any income documents you may have from income:

1.       Income:  A W-2 form or a 1099-MISC

2.       Investment: 1099-B or 1099-D

3.       Retirement: 1099-SSA (yes, I know, the shame of taxing that!) or 1099-R

4.       Gambling: W2-G

Really to make it simpler, if you see W-2 or 1099, chances are you should file it, or at least pile it (together, with other tax documents mind you)!  As support it may be a good measure to save any bank statements, and anything from your investments.

Through this partnership with our government, there are certain things that should not be taxed.  This is either a set amount (calculated by the IRS as a ‘poverty line’ you could think of it as), which is around $5,500 per person, per year.  If you perform certain ‘socially useful activities, ’things that the government wants you to do, they will tax you less.  Certain things like go to school, buy a home, or have kids would all qualify under these socially useful activities.  They also give special exemptions to everyone, regardless of these certain “non-taxed” items.  To make sure you are taking advantage of these socially useful activities, keep record of some expenses:

1.       Property tax bill (with proof of payment)

2.       Mortgage Interest paid on a mortgage (with proof of payment, on 1098-E)

3.       Child Care (with proof of payment)

4.       Medical bills (you get the drift!)

5.       Tuition! (1098-T, received in the mail at year end)

These proof’s of payment are simply receipts in most cases.  And many of these ‘socially useful activities’ understand the benefit and mail you a year end statement.  Throw those on the pile also!

I wonder whether you see a pattern in the form numbers?  See, there is order amongst sometimes apparent chaos!   Remember, regardless of how you beat the April 15 buzzer, you will need these documents.  And let me also note; that this list (although just beautifully written in my humble opinion!) is not all encompassing, and when in doubt, throw it on the pile (or maybe a shoebox now?). 

And although the tax code is 2,139 thousand words long, remember it is tailored to the needs of over 300 million people!  I will end this one with a personal touch, for those still reading: a video that Jamie and I made to announce our wedding website!

Merry Christmas everyone!

Kevin

Interest Rates

Whether you are going to school, buying your first home, or just swiping a credit card, you may be entering an agreement to receive money now, and pay it back later.  I don’t know about you, but if someone were to ask to borrow money from me to repay at a later date, in many instances I would think “what is in it for me?”

What is in it for me?  I would have to forego using this money for myself until you paid it back in the future (assuming that you would pay it back!).  There would need to be an incentive; motivation to take this risk.  There is also the risk of inflation; the money you repay is not worth as much as the money I gave you. 

Well in just about any situation, there is incentive for this type of agreement, and that incentive is interest.  The more risk there is involved in the loan, the higher the interest rate there will need to be to compensate the lender for taking on that risk.  If you were to take a small loan to purchase a car, the interest rate may be lower, because the lender could take the car as collateral in the event of default.  My car loan was 6% interest on about a $5,000 loan.  The interest on that was about $300.  Let’s say instead of buying a car, I wanted a business loan.  Well there may not be collateral there, and the interest rate may end up being higher to compensate.  The same $5,000 borrowed at say 12% interest rate is $600.  These are estimates, depending on the payment terms the exact interest amount may vary!

This may seem like small potatoes, but when you talk about mortgages it can be quite a large difference.  $200,000 at 5% would be $10,000 in interest paid, whereas $200,000 at 7% would be $14,000 in interest paid.  Also to note: what I am calculating here is simple, one-time-charge, interest.  In reality they charge a percentage on every payment, which can make the overall interest paid quite LARGE! 

Lastly, credit cards not only charge you interest for taking on the risk of default, but also charge you for the convenience.  Some credit cards charge up to 20%+.  You would only need to rack up $1,500 in credit card debt at 20% to have to pay the same amount in interest as you would pay for the $5,000, 6% interest rate, car loan mentioned above.  Let's say you were willing to spend $1,000 in interest total.  The graph below shows how much you could get, depending on the reason for the loan!

To us, interest is the cost of obtaining the money now.  To the lender it is an investment.  Invest wisely, but also understand the terms to your borrowing.  Shopping around a little bit can save you lots of “points” on an interest rate, and lots of $$ for your wallet (or purse).

When it comes to taxes, the percentages can get even higher, but that is another topic!