What Is a Good Mortgage Rate Today?

Finance Gourmet on March 2, 2015

When shopping for a home loan, it can be tough to tell if a certain mortgage rate is good these days. The trick is that all matter of gobbledygook can complicate what you are looking at when shopping for a good mortgage rate. In fact, the mortgage companies and mortgage brokers have made it pretty hard to know exactly what is the best mortgage rate today, or any day.

Lookup Good Mortgage Rates

First, stop worrying about what the “best” mortgage rate is. Chances are that the best interest rate for your mortgage is different from someone else. This is due to differences in credit scores (check your credit scores for free with Credit Karma, or Credit Sesame), differences in home price, and differences in areas. Then, don’t forget that like anything else, the advertised price for a mortgage is only for a specific mortgage in specific circumstances.

One of the few good things to come out of the Great Recession and the near-collapse of the banking system is the Consumer Financial Protection Bureau, or CFPB (who for inexplicably uses lowercase latter for their logo). The CFPB has been building out not only an enforcement division to help protect consumers, but a variety of educational resources as well, so consumers can protect themselves instead.

cfpb-logo

One such tool is a government check interest rate tool. The benefit of this tool is that it isn’t run by a mortgage company trying to direct your business, or take a commission, or collect your information for some mailing list. While the information is general, this is a perfect place to start to get an idea of what things should look like once you get serious about mortgage shopping online or over the phone.

Is it any good? Well, mortgage companies and banks hate it, so you do the math.

It’s fairly easy to use. Down the right hand side you input your information such as your credit score, your state (where you will be buying the house, not where you are now), how much the house is, and how much down payment you want to make. Then, you can pick term, fixed or adjustable rate, and so on. What you see, is a graph showing you what various lenders are offering for rates based upon the data you enter. Then, as you scroll down you can see what your interest costs will add up to.

cfpb mortgage interest rates website from government

Armed with this information you can see if that mortgage rate being offered is a good interest rate on a mortgage today, or if it is a bad mortgage interest rate. Remember, these are averages and estimates and they depend greatly on what information you enter into the tool. If you enter a 720 credit score, but have a 690 credit score, expect very different results when you go to actually get a mortgage.

Once you know what the going rate is for mortgages, you can shop around. Don’t just take a verbal quote, or a website quote. Ask for a Good Faith Estimate from each lender you are considering. This document has legal requirements and formatting which ensures that you are comparing apples to apples while shopping for your mortgage.

The CFPB mortgage tool is available at consumerfinance.gov.  Make sure you type .gov and not .com which is something else.

Tags: , , ,

Finance Gourmet on February 24, 2015

Somehow I missed this until today. The Supreme Court is hearing arguments regarding a new(ish) law about 401k plans. Under something called the Employee Retirement Income Security Act (one of the few legislative acts of recent years that doesn’t have a snappy acronym), a company that has a 401k plan has a fiduciary responsibility to employees in the plan. This means that the company must act in the best interest of the employees. As you can imagine, in U.S. courts this gets pretty nebulous, but it does set a standard.

Supreme Court 401k Case

In this particular case, the company, Edison International, has a 401k plan with six mutual funds that charge higher fees than identical options. In other words, the plan administrator, through incompetence, or for other reasons chose the more expensive options for the plan.

supreme court 401k caseUnfortunately, this is very common. Usually, this isn’t the company, or the HR person, deliberately trying to screw over the employees. Instead, what happens is a 401k company comes in and offers up some proposals. It will say something like, you can have a plan with these investments and it will cost this much, or you can have these other mutual fund investments and it will cost this much. The investment options chosen determine the profit of the provider. Only the biggest and most sophisticated employers ever get to setup a plan from scratch and choose fund by fund. In fact, in anything but big employers, the person running the 401k has another “real” job and the 401k is usually something they do on the side. It’s no wonder that many plans have high fees and expenses.

Ironically, the issue the Supreme Court is hearing has nothing to do with the actual investments. Instead, the law has a statue of limitations of six years. The company argues that since these funds have been in the plan longer than six years that they can’t sue over them. The other side argues that since the funds are still in the plan, they don’t count as six years old. So, the Justices will actually be deciding a technicality.

Lower 401k Fees Help Employees

The good news is that no matter what gets decided, lawsuits like this are already moving the bar. Companies will soon demand that the plan providers either certify that they are offering the lowest costs, or even that they indemnify the company if these pre-packaged plans end up being challenged. That means, that 401k providers will just flat out have to offer better plans with better fees.

All of this is good news for 401k plan participants because the expenses in these plans can be absurdly high, especially for smaller employers who can’t get as good of deal on a plan as larger employers can. Reviewing these expenses is a key factor in deciding whether or not you should roll over your 401k plan to a rollover IRA or leave it with your old employer.

Either way, more scrutiny on 401k plan fees, mutual fund fees, and investing fees in general is a good thing for investors all around.

 

Tags: , , , ,

Finance Gourmet on February 21, 2015

Most professional financial advisors, and most non-professional know-it-alls as well, say that you should keep three to six months worth of expenses in an emergency fund for, well… emergencies.

They aren’t wrong. You never know when life will throw you a curve ball, and when it does, you don’t want a few months of problems to turn into a crushing blow to years of hard financial work and smart decisions. However, the reality is that an emergency fund will never stand up to the worst financial calamities (long-term medical problems). Another reality that causes a lot of people stress is that your emergency fund is designed to be used. Over the course of your life, you fund will likely get drawn down, and then get refilled by more saving.

Emergency Fund versus Reserve Fund

When I was a professional financial advisor in Denver, I stopped calling it an emergency fund when people would find themselves torn about using it when they needed the money for something worthwhile. For example, imagine your son or daughter spent the last several years in the band. During that time, there have been numerous practices, and your child has built up a real love for playing the instrument. Then that day comes where the marching band has a chance to play in Ireland, on St. Patrick’s Day. It’s a dream opportunity.

There will be fundraising, of course, but you still need to come up with $500 for your child’s part of the trip. It isn’t unreasonable to want to be there for what will likely be a huge event in your child’s life. You and your spouse would be looking at a few thousand dollars, plus a little extra because Ireland gets pricier around St. Patrick’s Day. All in, with expenses for the travel, getting your child ready, and having a nice trip, maybe this is a $10,000 expense.

It helps to consider your emergency fund as something more. Calling it a reserve fund, or a cash reserve, is a more accurate way of explaining how and when those funds should be used when the time comes.

For most people, just dropping $10K out of cash flow is difficult. The purpose of your reserve fund, unlike an emergency fund, is for you to take advantage of both OPPORTUNITIES and handle emergencies. This is an important distinction. While a reserve fund isn’t for every night on the town, or every suit or handbag that goes on sale, a unique, expensive opportunity is exactly what such a fund is for.

Never forget that the purpose of all your hard work, and the money earned thereby, is not to check off various financial to-do list items, and it sure as heck isn’t to make a proper net worth spreadsheet. The point of money and work is to live lift. Being responsible is not the same as being stingy or fearful of spending money. When life gives you an opportunity to really live, take it. Enjoy the many wonderful things that friends, family, and places have to offer.

Then, when you get back home, work that budget to get that reserve fund re-built quickly. Then, hope that the next change to tap it is not an emergency, but rather another of life’s many opportunities.

Tags: , , , ,

Finance Gourmet on February 14, 2015

No sooner than had I finished my Digit review, than I saw an ad for another automated savings app on Facebook that takes a different tack for building up your savings automatically with the help of an app and online financial service.

acorns appThis one is called Acorns. Whereas Digit monitors your bank balance and transfers off money its algorithm determines is “extra” into a savings account for you, acorns rounds up the change on every purchase you make and automatically saves that money for you. Another difference is where Digit sends your money off to a savings account somewhere, Acorn, invests your money in a “personalized investment portfolio.”

Is Acorns Legit and Safe?

First up, we’ll want to make sure that Acorns is not a scam. Again, the company is backed by some big name investors, so if it is a scam, some other people got scammed for a lot more money than you ever will.

According to the website, your money is transferred to an SIPC insured account. (SIPC is the investing world’s equivalent of FDIC insured.)

How Acorns Works

Acorns doesn’t work exactly the way you might think it does based upon the headlines and bold print. It’s not that Acorns is a scam, it’s that the actual mechanism it uses to operate doesn’t match up with the concept that is boldly advertised by the company.

This online money service actually has no way to “round up” your purchases. That kind of transaction adjustment can really only be done by the merchant (like when Safeway asks if you want to round up for cancer research), or by the payment processor themselves. Instead, the actual mechanism of Acorns is that you link whatever accounts you want to use for your rounding up and investing, and then the Acorns software keeps track of what you would have rounded up. Then, by linking your checking account, Acorns then makes a transfer of that amount at a later time, once all of your round ups totals at least $5.00.

So Acorns really works like this:

  1. You link your Capital One Rewards credit card to Acorns
  2. You buy lunch for $6.37
  3. Acorns calculates the round up as $0.63
  4. You keep buying stuff, and Acorns keeps adding the amounts up
  5. When you have at least $5.00 of round up, THEN, Acorns transfers $5 from your checking account, no matter where you made the charges originally.

So, if you expect to see each one of your purchases rounded up to the nearest dollar, that won’t happen.

If you expect to see a few cents transferred out of your checking account every time you make a purchase, that won’t happen either.

Instead, depending on how often you make transactions, what you will see is the occasional transfer of $5 from your checking account, a few times every month. There is nothing wrong with this, it just isn’t exactly what you might expect to see.

Currently, Acorns only works as a smartphone app. This makes me nervous security-wise, but with services like Apple Pay, this kind of thing is clearly the future, at least until the first major rip off of people occurs and then the security gets better. However, none of this is Acorns fault. According to their website, they are working on a web app, but it isn’t ready yet.

Acorn Fees

Here is where you want to really be careful with Acorns. The company has done something really great by not having minimum account balances or minimum investments. However, investing your money isn’t free, and Acorn does charge some fees, which they are refreshingly up front about.

First, if your account balance is less than $5,000, you will pay a $1 per month fee. On the one hand, this doesn’t sound like much, but as a percentage, this is actually pretty steep, especially when you first start using the product. For example, if your round ups for the first money total $25, then a $1 fee is 4 percent. But, don’t forget that’s for one month. Annualized, that same fee is something like 48 percent. (That’s not entirely accurate, especially if your account balance is growing, but the point is the same.) Accounts with over $5,000 in them are charged a much more reasonable (actually pretty darn good) fee of 0.25% per year.

It’s too bad you can’t give Acorns $5,000 up front and get the better fee, and THEN start using the product to round up and save your money.

Where Does Acorns Put My Money?

The most interesting thing about Acorns is where it transfers your money to when it scoops out $5 at a time from your checking account.

Instead of putting your money in a savings account, Acorns invests your money in a stock-based investment portfolio. We’ll cover what Acorns investment portfolios look like in the next article, but it is important to understand what this means from a personal finance standpoint.

A service like Digit puts your money in a savings account with no fees. They also pay no interest. On small amounts that you plan to spend anytime in the next three to five years, this is much better than investing your funds in an account like Acorns does where the balance will fluctuate and you will need some time for your earnings to out pace your fees.

However, if you consider Acorns to be money you are setting aside for the long-term, like a kid’s college fund, or even for your retirement, then this is a very intriguing idea. Just don’t forget, your balance will fluctuate with the markets. The stock market is NOT where you put your short-term savings.

Tags: , , , , , , , ,

Finance Gourmet on February 9, 2015

Digit is an automated savings service. As always, my first question is Is Digit a Scam? Then, if Digit is legitimate, the question is what exactly does this online financial service do, and is Digit worth it for the average person’s personal financial situation.

Is Digit A Scam?

The burden of proof for calling something a scam differs based on what exactly it does, and what can be shown from available source. Digit is a venture capital backed internet start up, raising money from, among others, Google’s own venture capital arm. That in itself doesn’t mean it is not scam, but it does mean that it isn’t some fly-by-night hacker operation looking to steal a few credit card numbers and email addresses.

Is Digit Legitimate?

Since Digit is a legitimate business and not just a scam to steal your banking information, the question becomes whether Digit is necessary. digit automated savingsThe idea is that if you are not saving as much as you could/should/want to, then could a computer algorithm squeeze more savings out of your monthly cash flow? If so, then Digit is a legitimate service for the harried saver. If you’re already getting every penny, then you are just adding a layer for no reason. This is my review of the Digit automated savings service.

Digit Review

Digit is an automated saving service. If you are familiar with the concept behind the Nest thermometer, then you can consider Digit the Nest of saving.

There are many ways to automate your savings. One of the most popular is the concept of paying yourself first. Deductions that go straight to your 401k plan, or automatic transfers to your savings or money market account are examples of this. The trick to this concept is that you have to make some sort of educated guess, from your budget, about just how much to pay yourself before you actually experience the various life events that make up your spending for the month. If you guess wrong for that month and spend more money than expected, you’ll need to ensure that you can transfer some money back (easy from savings, not so easy from your 401k). But, what if you spend less than expected? You’ll need to notice and transfer some additional funds to savings.

As is often the case, if you already have a solid grasp on your personal finances and manage your money well, then a new service probably isn’t necessary for you. On the other hand, if you wish you could do better, and might be interested in getting some help, then Digit provides an automated way to increase your savings.

How Digit Works

Most of the press coverage of Digit is using the company supplied tag line that Digit “finds extra money” and then automatically saves it. Of course, there is no extra money that you didn’t have before, but a computer constantly looking for a dollar or two here or there may just find a few bucks more than you would while managing your finances.

To use Digit, you have to link it to your checking account. You won’t want to link it to a savings account because those accounts are typically restricted to just 6 withdrawals per month, and you don’t want Digit using them up for you.

Once linked, Digit begins to monitor your checking account balance. Over time, it builds up an algorithm that determines when you spend your money, and when you get paid. The idea is that when it sees an opportunity to stash some money away, it transfers it automatically to your Digit account. The company says it checks your account “every 2 or 3 days.” The transfers are typically between $5 and $50.

Here is where it gets a little gray. The Digit website mentions FDIC insurance, but doesn’t say exactly where the money is held. It does not appear that you get any statements or interest or anything like that. This is how Digit to makes money, they are keeping the interest earned on user’s money while it is in the secret Digit savings account somewhere. When you want your money back, you send a text to Digit and then they transfer the money back into the account they took it out of in the first place.

Is Digit a Good Idea?

Whether or not Digit is worth it depends very much on how you currently handle your finances.

For example, I always recommend that people keep a little buffer in their checking account to avoid ever coming up short on an unplanned expense. Digit will eventually drain that buffer away as “extra” money that you could be saving.

For the same reason, Digit is not a good idea for people who primarily use a debit card for their purchases. Digit requires some sort of routine for the algorithm to work. If you normally spend more money in the middle of the month, for example, Digit will account for that. However, if you go out and try and spend $800 on a new bedroom set using your debit card, Digit almost certainly is not prepared for that. Big, unusual expenses are probably going to be Digit’s Achilles heel.

People who get paid monthly will probably find Digit more problematic as well. If you get paid every week, sneaking a fiver out of your checking account probably won’t be noticed because new cash flow is coming soon. But, if Digit pulls $50 out on the 11th, and you don’t get paid until the 30th, then that might be more noticeable.

The best possible people to be using Digit are those that have very set spending patterns and then use a credit card, or debit card from a different account for big purchases. That way, Digit can figure out your spending and won’t ever be blindsided by a big purchase.

In the end, Digit is probably more fun than it is necessary. The fact is, assuming you have extra money each month, the only thing that happens is that it builds up. The premise behind Digit is that unless they took the money first, you would spend it. If that isn’t you, then you can just transfer the money whenever it is convenient for you.

Digit is a very neat concept, but only a small portion of people would actually need it.

 

 

Tags: , , , ,

Finance Gourmet on February 4, 2015

Credit reports are a very important, and very frustrating part of personal finance. Nearly all financing requires a credit score, which is generated from the information in your credit report. However, you get no say in what is in your credit report. In fact, with one exception, you have to pay money if you even want to see what your own credit report says about you.

Seems unfair? Blame the millions of dollars the finance industry spends on lobbying and the politicians that care more about where their next campaign contribution comes from than about what is right for the American citizens they supposedly represent.

There are various services springing up to help fill this gap, but they all come with the potential for scams and abuse.

You can get a free credit score from Credit Karma, or Credit Sesame, and you can buy a credit score from myFICO, but none of these come with full access to all three credit reports.

Free Credit Scores Website

The one (and only) thing the government has ever required the credit bureaus to do is give each person free access to their credit report, but only once per year.

free credit report websiteTo comply the three major credit bureaus setup a website called annualcreditreport.com. Note that the website is NOT called freecreditreport.com or anything like that. Those sites are for profit organizations looking to charge you for something you should get for free, or to sign you up for a costly credit monitoring subscription. Make sure you go to the right place.

Once you get there, you click a button that says “Request your free credit reports”.

You put in your information and then you get the opportunity to view one credit report for free, or all three credit reports for free.

If you are checking your credit report for a specific purpose, such as getting ready to buy a house, there may be some value in checking all three credit reports. However, in most cases, you will actually be better served by only getting one at a time.

When To Get Your Free Credit Reports

The only way to prevent fraudulent information from being on your credit report is to find it yourself. There is no one at either the credit bureau or at your creditors checking of verifying the information being placed there. I’ve had no less than two false entries on my credit report in the past five years. One was the same name, but not the same Social Security number, and another was based on a very old address I once had, but for neither my name or number, if you can believe that.

For actual credit disputes, it can be very difficult to get your credit report repaired. The process is completely skewed away from the consumer and there is nothing you can do about it. However, in some cases, like mine above, the creditor will be willing to correct the mistake. But, first you have to find the error.

To find errors on your credit report, you have to look at it. To look at it, you have to pay. (Still not fair, is it?) The exception is the once per year free look.

Many financial institutions will report your credit information to more than one credit bureau. In fact, most major banks and lenders report your information to all three credit bureaus. So, if false credit information ends up on one credit report, it likely will end up on all your credit reports. To monitor your credit effectively, then, you should pull each report at a different time.

If you divide out the year among three credit bureaus you should pull one report every four months. That gives you the best possible free coverage for the year. Put a reminder in your calendar to check on that schedule. You don’t get any extra reports if you wait more than a year, so get one every 12 months.

If you are married, some of your credit information will be reported on both of your credit reports. This is particularly true in the case of joint accounts.

Take advantage of this by staggering getting your credit report with your spouse’s credit reports. Alternate every two months which credit report you get. This gives you the maximum possible free credit report monitoring.

For example, if you pull the husband’s credit report in January, then you would pull his second credit report in May, and his third credit report in September. The wife, would then pull her first credit report in March, her second in July, and her third in November. Remember, the exact timing is not important as much as getting a good look at your credit every few months.

There are services that provide free credit monitoring for you, but nothing is as good as getting your own look at the actual source. Don’t get all three credit reports at once. The best thing is to get your credit reports at regular intervals.

 

Tags: , , ,

Finance Gourmet on January 22, 2015

Bitcoin is a topic that pops up in the news every now and then. It’s also the kind of thing a freelance writer with ADD might get distracted by when he was supposed to be rebuilding the content on an old website. In fact, he might feel guilty for spending so much time looking into it that he would have to write several articles about Bitcoin as a way to make it seem more like work.

* Ahem. *

What Is Bitcoin?

Explaining Bitcoin is a little bit tricky. In essence, Bitcoin is a digital currency. There are no actual coins, only computer data. In many ways, this is not unlike most of the US currency, which exists electronically on bank computers and balance sheets, not in stacks of hundred dollar bills in the basement of GE headquarters.

Bitcoin has no intrinsic value. That is, that there is no organization or group that gives it a value. Instead, it is simply a means by which bitcoins are generated in a limited supply. Like anything else, supply and demand can set a price for Bitcoins in other currency, including US Dollars.

How you convert Bitcoins to Dollars is that you find someone (actually some company) willing to give you Dollars in exchange for Bitcoins. Like any currency exchange, this comes with some fees and potentially, with some spread in the transaction rates. This is no different than converting Dollars to Euros. Where you do the conversion determines exactly how many Euros you get regardless of what the current market rate is.

Is Bitcoin a Good Investment?

The history of the exchange rate, or price of Bitcoins is the perfect way to answer the question about whether or not Bitcoins are a good investment. One of the things that makes Bitcoins so interesting to a public that usually couldn’t care less about potential new currencies, is the gold rush vibe behind the whole thing. The media was full of the story of the college student who bought a handful of Bitcoins for $20 a decade ago and suddently finds out they are worth hundreds of thousands of dollars (assuming he cashed out closer to $1,000 per bitcoin).

bitcoin investing prices

As you can see, Bitcoin prices in the last few years have ranged from over $1,000 per bitcoin in late 2013 back down to the $200 per bitcoin range today. Investing in Bitcoin is a very volatile ride, and should probably be undertaken with extreme caution and a small amount of money that would not be detrimental to your finances if it was all lost.

Some people, like distracted writers, have found a way to play in the Bitcoin space without having to invest actual dollars in a crazy market. It turns out with a lot of perseverance, and some time to figure out a few computer programs, you can actually “mine” bitcoins with your computer. The odds of finding bitcoins on your own is pretty high but if you have a computer to use, and you don’t mind wasting the electricity, you can always try and get lucky. Or, you can join a mining pool, and slowly but surely acquire a few dollars at a time.

Then, if the price did shoot back up to $1,000, that little gamble, and little electricity, might just pay off.

 

Tags: ,

Finance Gourmet on January 20, 2015

Social Security is a supplemental retirement income program run by the federal government. The idea is simple. While you are working, you pay money into the Social Security system in the form of FICA tax. When you retire, you get a monthly income check from the Social Security system. Social Security is full of political controversy, and we aren’t interested in that here. This is about personal finance and your actual retirement plan, not about what should or should not be according to someone.

Social Security While Working

Once upon a time, 65 years old was the mandatory retirement age in many fields. In addition, most people didn’t live much past 65. These days, plenty of people live long past 65 years old, and plenty of people also work long past the age of 65. This introduces some new wrinkles to the Social Security program.

social security while working

First, with people living longer, Social Security was paying out more benefits than it used to. So, Congress passed a law that changes the retirement age for Social Security.

If you were born between 1943 and 1954, your full retirement age is 66 years old, not 65. You can start collecting Social Security retirement benefits as young as 62 years old, however your benefit amount will be reduced. For example, if you start collecting Social Security at age 62, you will only get 75% of the full benefit amount you would get if you waited to start collecting until age 66.

Reduced Social Security Benefit While Still Working

What if you are still working when you start collecting Social Security? If you are still employed when you start taking Social Security, your benefit payment may be reduced.

First, if you are full retirement age (age 66 if you were born between 1943 and 1955), then you get to keep your entire Social Security benefit amount even if you are still working. There is no reduction based on income for people who have already reached full retirement age, no matter how much money you make.

Now, if you are not at full retirement age, your Social Security can be reduced depending upon how old you are, and how much you make.

If you make more than $15,480, then your Social Security is reduced by $1 for every $2 you earn above $15,480. This is best understood with examples.

  • If you make less than $15,480, then your Social Security is not lowered by any amount. You get to keep the full benefit.
  • If you make more than $15,480 then you lose $1 for every $2 ABOVE $15,480.
  • So, if you make $30,000 and you qualify for a $900 per month Social Security payment ($900 * 12 = $10,800 for the year)
    • $30,000 – $15,480 = $14,520 (this is the amount you make over the threshold)
    • You lose $1 for every $2 over $15,480, or $7,260 ($14,520 / 2)
    • Your paid benefit is $10,800 – $7,260 = $3,540

The way you lose the money is odd. They don’t calculate your new amount and then change your monthly payment. Instead, they do not pay you until you have paid off your reduction.

In our example, you would normally receive $900 per month for 12 months. Instead, since your benefit is reduced, they just won’t pay you for the first eight months of the year. Then, you’ll get $800 per month for the rest of the year. If your reduction means that you would get a partial month of payment, you will NOT get paid for the partial month right away. Instead, they’ll carry forward any fraction and pay you that amount in January of the next year.

The rules are different during the year you actually reach full retirement age in which case, the reduction is $1 for every $3 you earn above $41,400 until your birthday. In other words if you turn 66 in September, your reduction would be based upon the above from January to September, then in October, you would get your full benefit. (You still get the lower benefit from starting early, but no reduction based upon income.)

As you can see, if you are still earning much of an income, it probably doesn’t make sense to start taking your Social Security early without a very good reason.

Taxes On Social Security

Paying income taxes on Social Security is different. It does not matter how old you are, or if you have reached full retirement age, if you are still working, your total income may make some or all of your benefit taxable.

If you are married filing joint and your income is lower than $32,000 then your Social Security payments are not taxable.

If you are married filing joint, and your income is between $32,000 and $44,000 then up to 50 percent of your benefits is taxable.

If you are married filing joint and your income is over $44,000 then up to 85 percent of your Social Security benefits are taxable.

Note, this is not the tax rate you way. It does not mean that you pay 50% tax (or 85% tax) on your benefits. It means that much is considered taxable at your normal income tax rate (with the additional income added.)

In other words, if your combined income is $60,000 and you get a $1,000 per month benefit, then 85 percent of $12,000, or $10,200 is taxable. You’ll pay your usual tax rate on an extra $10,200 of income.

Calculating your “combined income” to see where you fall in the above income levels includes one-half of your Social Security income.

So, if you make $28,000 per year at a job, and then you get $1,000 per month ($12,000 per year) in Social Security, then your combined income is $25,000 + $6,000 (1/2 of $12,000) = $34,000 and 50% of your benefit is taxable.

As always, a program like TurboTax or an accountant can do the actual math for you.

Information in this article is for educational and planning purposes only. It is not tax advice. Consult a tax professional for actual tax advice on your specific situation.

 

Tags: , , , ,

Finance Gourmet on January 15, 2015

Patreon is a website that allows people to contribute funds to support the work of artists and creators. Let’s start from the beginning.

Patreon is deliberately misspelled, likely because patron.com was already taken and whoever owned it wanted too much money for it. A patron, as in patron of the arts, is (or was) a person who supports artists or art causes. The most famous patrons of all time were the Medici family, who supported numerous artists, including Leonardo da Vinci. The idea behind the website is arguably similar.

taxes on patreon

The Patreon website allows people to support “creators” by pledging a certain payment per month. In exchange, the creator may (but is not obligated to) offer various “rewards” for said contributions. The question is are Patreon payments considered taxable income for income tax filing purposes.

Patreon Contributions Not Tax Deductible

Let’s start with the easier question. No matter how much you like artists, and no matter how much supporting them feels like charity, such contributions are typically not tax deductible contributions in the eyes of the IRS. IRS Publication 526 deals with charitable contributions and it specifically says,

“You cannot deduct contributions to individuals including… contributions to individuals who are needy or worthy.”

If the recipient of the contributions is established as a 501(c)(3) organization with a valid Tax ID number for that organization then contributions may be tax deductible. However, to be a fully deductible charity contribution, the person making the contribution cannot receive any benefit in exchange. Thus, even Patreon contributions made to charitable organizations may not be tax deductible if any of the rewards received by the contributor are of value. In that case, the value of any benefits received may not be deducted.

So, for example, if you do manage to find a qualified organization on Patreon and contribute $50 per month, but you get a t-shirt worth $10 each month, you could only deduct $40 per month as a charitable contribution.

Is Money From Patreon Taxable Income?

While the question about tax deductions is relatively simple to answer, the converse about whether or not such contributions are taxed as income is trickier to answer.

The overriding section of a tax code says,

“Except as otherwise provided… income means all income from whatever source derived.”

In other words, EVERYTHING is consider income for tax purposes unless it fits under a defined exception. Gambling winnings, drug deals, if you got money for selling your kidney, it doesn’t matter, income from pretty much any source, legal or illegal, online, offline, traditional, or new economy all counts as income.

At first blush, this makes Patreon payments taxable. It also makes Patreon’s cut, or service fee, a business expense, if you are running a small business and filing a Schedule C. The things that are exempt from being income are very limited. Almost none of them can even come close to being stretched to allow Patreon contributions to be non-taxable.

The one exception is gifts. Gifts are one of the things that is excepted from being income. So, if the contribution through Patreon is a gift, then it is not taxable. If it is ANYTHING ELSE it is taxable. (Note: there is such a thing as a gift tax. However, gift tax is paid by the person giving the gift, not the recipient, but only if it exceeds the annual gift tax limit: $14,000 for 2015.)

Here is the really important part though, GIFTS are tax-free, DONATIONS are not.

Are contributions from Patreon considered gifts?

This is the sticky part. When users of Patreon offer various benefits in exchange for contributions, it becomes easier to claim that the contributions are not gifts, rather they are payment for something. However, the value of many of those gifts is negligible and if someone wanted to argue that as such the contributions are still really just gifts, then there would mean no taxes. But, even then just the fact that the recipient does SOMETHING at all in exchange means that they are not gifts. Gifts are never”for” something. At best, you could claim that the contribution above the part of what was received is a gift.

Patreon by its very nature is about an artist or a creator DOING SOMETHING which is supported by others. That is income, even if the contributor doesn’t specifically “get” anything, the fact that you produced the podcast in exchange for those contributions means it’s taxable income, no matter how worthy or noble.

Remember, the exception for income purposes here is GIFTS not DONATIONS. You, an individual, cannot receive tax-free donations, you can only receive gifts. The distinction matters. Grandma giving you $200 because it’s your birthday is a gift (you did nothing, she expects nothing.) A $20 monthly contribution for your online comic is not a gift (you did something, contributors expect the comic will be made.)

Note: Although this is not spelled out anywhere, the IRS is more likely to believe something is a gift when it comes from someone you have an association with. One total stranger handing you money as a gift if believable, but 50 total strangers handing over cash and expecting nothing in return? That’s a tougher sell.

There are a lot of theories out there about whether or not you can count them as gits. If you are just curious, then, hypothetically, yes contributions could, possibly, maybe, be considered gifts.

However, for practical purposes, this all comes down to what gets reported to the IRS. If Patreon sends you a 1099-K or other tax reporting form for filing your taxes, that means they reported the transactions to the IRS. The IRS will assume that these payments are income, and sooner or later, the computers will flag that you are not reporting all your income. If they have the manpower, and it is deemed worth enough, you’ll get an audit letter. It is at this point that you can make your argument that it’s a gift. This is highly unlikely to sway the IRS agent in charge of your account, which means you would have to go to Tax Court and win. This isn’t a cheap proposition, which only makes it worth it if you are getting a lot of money. Ironically, if you are getting a lot of money, it makes it more likely that they’ll come asking questions, so… your call. Even worse, drawing this much attention increases the odds that you’re whole return will get a full going over, so be double sure everything else is squeaky clean if you go down this road.

Even if Patreon does NOT report your payments, they are technically still taxable, but whether anyone ever notices is a whole other question. The IRS audits a really low percentage of taxpayers, and thanks to budget cuts, it’s about to get even lower. So, in this case, if you didn’t include your Patreon contributions because you, in good faith, consider them gifts, and no one ever says otherwise, then, you are right by default, but that’s a risk (albeit a small one) you’ll have to take.

The best bet then is to keep careful track of all your expenses because you can deduct them to help with the additional taxes on your Patreon income. If you get a small amount, chances are there are enough small business expenses to wipe out most of the additional income. This is so much easier if you set up a business. I recommend an LLC for a small side project. Consult a tax professional if you want to go the C Corp or partnership route.

If your income gets reported, then you should report it too, unless you are willing to go to tax court in which case, go ahead and take one for the team. Maybe you’ll win and no one will have to report their Patreon contributions. If your Patreon contributions do not get reported (that is, you don’t get any sort of 1099 from Patreon or their assigned) then, it’s your call. I won’t sit here and tell you not to report income, but if you really believe it is not income, then you should do what you think is correct.

The one thing you do NOT want to do is report it and then try and back it out with some sort of deduction or credit. That WILL NOT hold up. Either report it or don’t. Don’t try and get cute.

All information contained here is for educational purposes only. It is not advice on your specific tax situation. You are responsible for your income taxes. Consult with a tax professional for advice specific to you.

 

 

 

 

 

 

Tags: , , , , , ,

Finance Gourmet on January 13, 2015

If you are an American, chances are you have started receiving tax forms and reports from various companies. Recently, many companies, banks, brokerages, mortgage companies, and charities have started providing tax reports and forms electronically. Ironically, you may get a notice in the mail from these entities telling you that you will get your tax documents electronically.

Forms Required to File Taxes

Exactly which forms you need to file your income taxes depends upon your individual tax situation. People who own their own business have more tax forms they need. Likewise, people with more deductions, or various financial vehicles such as trusts require additional documents as well. If you have any financial accounts or situations that are not “standard” you’ll need to check with an accountant or tax professional to find out what is required for you to file you taxes.

Employed by an Employer

If you, or you and your spouse, are not self employed, then you will need a W2 Form from your employer to file your taxes. The W2 form lists several numbers including your total wages for the year, as well as various contributions to things such as 401k plans, or cafeteria accounts, or pre-tax insurance payments.

If you worked for more than one employer, you will need a W2 Form from each employer you worked for during 2014. Your employer is required to send your W2 Form to you no later than January 31st.

Self-Employed or Contractor

If you own your own business, or if you work for someone as an independent contractor, you’ll require some additional forms for your income. The most common form is a 1099-MISC Form.

form 1099-misc

If you are a contractor, you’re employer will include your taxes on line #7 Nonemployee Compensation. Then, you’ll be on the hook for self-employment taxes, but you can deduct various expenses as well.

If you a freelancer or otherwise self-employed in the business of providing services to another party, you will require a Form 1099-MISC from everyone who paid you more than $600 during 2014. Also, writers and other artists require a 1099 from everyone who paid you more than $10 in royalties (Line #2) during 2014. This kind of income will also generate self-employment taxes. Be sure to deduct any equipment or business purchases. The Section 179 deduction limits for 2014 are higher than they will be for 2015.

If you own a business as part of a partnership or as an S-Corporation, income and revenue will be reported on a Schedule K-1 form.

For taxpayers with investing income, or interest income, there are forms required for those as well. The Form 1099-DIV is used to report dividend income and interest income. Form 1099-S is usually used to report income from sales of stock.

You will also receive forms for any withdrawals from qualified retirement accounts such as an IRA, or 401k account on a Form 1099-R.

Some states issue state income tax refunds. Since you typically deduct the amount of your state income taxes on your federal income taxes, the IRS requires you to put the amount of any refund back into your income. You’ll get this tax reporting document as a Form 1099-G Government Payments. Do be sure to NOT add the state refund back into any calculation for your state income taxes. You may also get a 1099-G if you received unemployment insurance during 2014.

If you get Social Security income, you’ll need Form 1099-SSA.

Tax Deduction Forms

While many tax deductions require document such as a receipts, other, typically larger, tax deductions also require reporting from the company that handles the transactions giving you the deductions.

If you plan to deduct mortgage interest on your taxes, your mortgage company will send you a Form 1098 with the amount of interest you paid for your mortgage during 2014. This form will also list your property taxes paid for deducting, if you pay them through your mortgage company. If you have a second mortgage, you will get a different 1098 from each company.

Student loan interest will also be reported by your loan servicer. For deducing your student loan interest, you will get a 1098-E from each company that you have a loan with. Box 1 shows the amount of interest received by the lender. There is an income phase-out for this deduction, so make sure to do the calculation and plan accordingly. If you have deductible payments for current educational expenses, you will receive a Form 1098-T.

If you contribute to a Health Savings Account, you’ll get a Form 5498-SA.

Taxpayers DO receive forms reporting their IRA contributions, however, these forms are NOT always sent by the April 15 filing deadline. You can deduct your contribution anyway. When you get the Form 5498, save it with the rest of your 2014 tax documentation.

Other Tax Forms Needed to File Taxes

Of course, there are literally hundreds of other forms for various special situations. If you get income from a trust, there is a form for that. If you get income from land or mineral rights, there are forms for you as well.

Once you have the main forms listed here, you can start working on your taxes. As you go along, you may notice that you need additional forms. Don’t hesitate to contact anyone who had not sent you required forms in a timely manner. Although you do not have to submit most of these forms when you file your taxes, the numbers are cross checked by computer when you file, so you need to ensure that the information matches.

 

 

 

Tags: , , , , , , , , ,