2009 Year End Tax Moves

by Patrick on November 2, 2009

The calendar just flipped to November, which means the holidays are fast approaching. I don’t know about you, but for me it seems like the year is practically over once Thanksgiving hits. My holiday season will be full with travel and a newborn at home, so I thought now would be a good idea to look at some end of year tax planning.

End of year tax planning

There are several new ways to save on taxes this year due to the personal tax breaks in the economic stimulus packages passed by Congress earlier this year. Some of these include exemption from the first $2,400 of federal unemployment compensation benefits, extended COBRA benefits, AMT relief, and more.

Retirement contributions.

You can make tax deductible retirement contributions that will lower your taxable income.

  • Maximize 401k contributions. Calculate how much you have left under your 2009 401k contribution limits and determine if you can increase your contribution through work. This scan be a great move if you can work it into your budget.
  • Traditional IRA contributions. You can deduct up to $5000 if you qualify. Here is more information about 2009 IRA contribution limits.
  • Self employed retirement plan contributions. Several self-employed retirement plans are tax deductible, including SEP IRA, Solo 401k, SIMPLE Plan, and Keogh Plan.

Of these plans, you can contribute to the Traditional IRA, SEP IRA, SIMPLE Plan or Solo 401k after January 1st. So you should focus your contributions toward maxing out your retirement plans that must be funded by the end of the year, such as your 401k, 403b, Thrift Savings Plan (TSP), or similar retirement plans. Then focus your retirement contributions on any retirement plans that allow you to max out your retirement contributions in the following calendar year. Here are more year end retirement plan tips.

First Time Home Buyer Credit.

Earlier this year Congress passed a credit for first time home buyers good for up to $8,000. To be eligible for the credit in 2009 you must not have purchased a home within the previous three years and you must meet income requirements (the credit phases out for some high income earners). The credit does not have to be paid back, but the home must be your principal residence and you must close on the purchase before December 1, 2009. There have been talks in Congress regarding extending the first time home buyer credit, but nothing is official at the time of this publication.

New-car sales tax deduction.

New car buyers may be eligible to write off state and local sales tax from a new car purchased in 2009. Single tax filers who earn less than $125,000 and joint filers who earn less than $250,000 are eligible. This is an above the line tax deduction which means you don’t even need to itemize your taxes to take advantage of this tax deduction. Eligible vehicles include new cars, motorcycles, light vehicles, and RV’s.

Buy an energy star appliance.

This year there are special rebates for Energy Star rated appliances. These programs are federally funded, but the money and rebates are being handled by the states, so the details may vary. Eligible appliances include heat pumps, furnaces, central and window air conditioners, refrigerators, freezers, dishwashers, washing Machines, and water heaters. The amount of the rebates varies between $50 – $200 per item and you do not have to turn in an old appliance like one had to turn in an old car with the Cash for Clunkers program.

Business deductions

If you own a business, you may be able to deduct eligible expenses.  If you haven’t been categorizing your expenses, now is a good time to go through your receipts and categorize them based on type of expenditure. You can also look at your expense forecast to see if there are any purchases you can make before the year end to  increase the amount of deductions you can take. You should also look at depreciation schedules, some of which have changed for this tax year. This is an area where hiring an accountant can really pay off.

Other year end tax deductions and tips

  • Harvest tax losses. You can write off investment losses
  • Donations. You can make tax deductible donations to eligible charities and non-profit organizations. Be sure to avoid charity scams and determine which charities are legitimate before giving your hard earned money.
  • Avoid capital gains taxes. Wait until after the New Year to sell investments for gains – postponing your taxes for a full calendar year.

Every tax situation is unique

The focus of this article is to share a few ways you can prepare for your taxes before December 31st rolls around. This article isn’t designed to be a full blueprint for tax planning as it only covers a small percentage of the available tax deductions. Most tax software programs, such as TurboTax and TaxCut should include these deductions when you file next year, but it also doesn’t hurt to start now. You may also consider meeting with a tax professional for more advanced tax planning.

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Free Stock Trades, Bonus Money, and Discounts

by Patrick on November 1, 2009

There are a lot of great deals going on in the financial world right now, so if you are looking for some free stock trades at one of the leading online brokerage firms, discounts on financial management software, or a $50 sign up bonus for TradeKing or the Chase Freedom credit card, then you are in luck.

Free stock trades, bonus money, and financial management software discounts

For more freebies and coupons, check out the Free Money page and the Money Saving Deals section of this site.

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Do You Know How Much Interest You Are Paying Each Month?

by Patrick on October 30, 2009

Are you ready to be shocked? Then gather your most recent statement for each loan you have and walk through a short exercise with me. Somewhere on the loan will be a breakdown of how much you borrowed, the amount of your monthly payment, how much of your monthly payment goes toward the principal, and how much interest you are paying on your loan. With this information in hand I want you to make a 4-column chart to record your data (you can use a spreadsheet or paper and pencil; both work great for this exercise).

How much interest are you paying?

It’s one thing to know the interest rate you are paying on your loan, but it takes on an entirely different meaning when you see how much money you are actually paying toward interest each month. In many cases, the final number is shocking! I created an example debt chart to represent loans that a young couple may face shortly after starting their life together. Details about the hypothetical loans follow the chart.

Example debt chart:

Loan Total Payment Principal Interest
Mortgage $900 $200 $700
HELOC $375 $325 $50
Student Loans $184 $166 $18
Auto Loan 1 $368 $312 $56
Auto Loan 2 $250 $215 $35
Credit Card 1 $150 $25 $125
Credit Card 2 $150 $42 $108
Total $2377 $1285 $1092

Almost HALF the loan payments are for interest!

When you look at the numbers it almost doesn’t seem real, but it is – 46% of these payments go straight to the lender in the form of interest. It is amazing to see how much interest is charged on loans, and many people don’t realize how much interest they are paying until they write it down. These numbers are even more difficult to swallow when you realize they are monthly numbers and the annual interest would run over $13,000, which is a substantial percentage of many people’s take home pay.

Of course, each situation is different. For example, the mortgage interest makes up the vast majority of the interest in this chart, but even if you remove it, you would be paying $392 interest on $1477, or roughly 27%.

Hypothetical, but realistic numbers. The loans in this example represent common loans that many young couples face shortly after graduating college, getting married, and starting a family. The numbers used in this example were arrived at by using an amortization schedule calculator for reasonable loans at various stages of repayment to simulate a real world situation.

Loans and interest rates used in this example:

  • Mortgage – 30 years, $150,000 loan @ 6.0% interest after 5 years. Mortgage payment does not include property taxes, insurance or PMI.
  • HELOC – $20,000 @ 5.0% for 5 years after 3 years.
  • Student Loans – $20,000 @ 2.0% for 10 years, after 5 years.
  • Auto Loan 1 - $20,000 @ 4.0% for 60 months; after 1 year.
  • Auto loan  2 – $15,000 loan @ 6.0% interest for 48 months; after 2 years.
  • Credit card 1 – $7,500 @ 20% interest, paying $150 each month with no new charges.
  • Credit Card 2 – $5,000 @ 10% interest, paying $150 each month with no new charges.

How long will it take to pay off your credit card? The example in this article uses a credit card with a $7,500 balance at 20% interest. If you pay $150 per month and don’t make any new charges, it will take you 108 months to pay off your card. That is 9 years! The second credit card bill will take 40 months to repay.

How to reduce the amount of interest you pay

As you can see, paying interest will get you nowhere fast. There are several ways you can reduce the amount of interest you pay each month – and you have already done the first step, which is recognizing how much you are paying. The next step is to stop adding new debt, which means no more credit cards or additional loans.

Following that, you will want to try and negotiate  lower interest rates. You may not be able to do that for fixed rate loans without refinancing the loan (which may cost money or be subjected to other conditions). But you may be able to negotiate lower interest rates on your credit cards or other non-fixed rate loans.

Other options include creating your own do it yourself debt consolidation plan, which may include using a 0% balance transfer credit card to consolidate you credit card debt at 0%, using your HELOC to consolidate your higher interest loans, or consolidating your loans through a peer to peer lending company such as Lending Club or Prosper. These loans allow borrowers to take an unsecured loan to use as they wish. In this case, consolidating debt may be a good way to pay less interest and simplify the repayment process by making fewer payments.

The importance of paying more than the minimum payment

As you can see by this example, paying the minimum on your loans means you are sending a lot of money to the lender each month instead of reducing the principal you are paying. When you make extra payments that money goes straight to the principal, which reduces the amount of money you owe, the interest you owe, and the time it will take to pay off your loan. It’s a win-win situation for you.

Read more on this topic:

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