Ah, November, when the American mind turns toward Thanksgiving, Christmas shopping, and strategies to avoid paying too much taxes for 2009. Yes, you should be doing tax planning year round to achieve the maximum savings on taxes, but reality isn’t always so kind. Still, there are some end of year tax moves that are smart and some that just aren’t worthwhile tax strategies when you add up your tax savings. Figuring out which is which is a critical part of personal finance.
To avoid making tax moves that aren’t worth the trouble, there is a simple strategy.
Always calculate the real dollar amount of any tax strategy prior to implementation.
Tax Savings Strategy Example #1:
The Top 10 End of Year Tax Strategy Tips lists always include the barely usable advice to pay your January mortgage early. By paying your January mortgage bill in December, you get to deduct the interest from your payment in 2009.
There is a big, fat catch, however. Although you do get to deduct 13 months worth of mortgage interest in 2009, you will only get to deduct 11 months worth of interest in 2010 unless you make sure to make that January payment in December again next year. This will be true until you finally bite the bullet and take just 11 months worth of deductions, or you pay off your mortgage. Is it worth it? Maybe.
Calculate the real dollar amount of tax savings from paying your Jan. 2010 mortgage in December, 2009.
Grab a mortgage statement and find out how much of your monthly mortgage payment goes to interest. What you find might surprise you. If you pay your homeowners insurance and property taxes through your mortgage company (a common practice) a substantial chunk of your monthly payment goes toward those, and you do not get to deduct those items by paying them early. Likewise, if you have had the same mortgage for many years, or you have a 15-year mortgage, a big hunk of that monthly bill might actually be going toward principal. (The horror! 
A $2,000 monthly mortgage payment might breakdown as $500 per month into escrow (for the taxes and insurance) and $500 per month going toward principal, leaving just $1,000 per month paying interest.
For a taxpayer in the 25% tax bracket, paying that extra mortgage payment a year earlier will result in a tax savings of $250 in real dollar numbers. Conversely, that will be the approximate cost of forgetting to do the same thing next year. Even worse, is if the taxpayer forgets to do the same thing next year, AND forgets to properly account for the fact on their 2010 taxes.
Tax Savings Blunder Example:
Assume our taxpayer pays 13 mortgage payments in 2009 thanks to the advice in a year-end tax savings tips article. He saves $250 on his 2009 taxes.
Let’s that come 2010, our taxpayer is very busy at year end racking up sales and commissions to increase his income. He doesn’t have time to read any of those tax advice year-end articles and isn’t really thinking about Federal income taxes as he flies around the country trying to make sales.
Come April 13th, he fires up TurboTax or some other tax preparation software and types in all the numbers. In the tax deductions section he inputs his mortgage information. If he used TurboTax to file taxes in 2009 or imported his 2009 tax returns, he might get a flag about entering his mortgage info, and maybe not. Even if he does, there is no guarantee that he will pay any attention to it as he rushes to complete his taxes. After all, entering in the mortgage information from the 1099-DIV the mortgage company sends is a no brainer, right?
Unfortunately, he includes all 12 months worth of interest on his 2010 income taxes. Since he did not pay the January 2011 mortgage payment in December 2010, he actually can only deduct the remaining 11 interest payments in 2010.
In 2011 or 2012, or taxpaying hero gets a phone call from the IRS. It’s informational audit time and the IRS would like to see additional documentation regarding his 2009, and 2010, mortgage deductions. The taxpayer does the smart thing and runs to a tax attorney, accountant, or enrolled agent, and finds out to his dismay that he owes back taxes and a penalty. Chances are, he’ll get out of any fraud trouble, but it still won’t be cheap to pay up, especially if it takes two or three years to get around to the audit and that interest payment has added up.
Tax Advice Worth It?
Is it worth a $250 savings to follow this tax advice? You bet it is! Why pay extra when you don’t have to. But, if the above example sounds a lot like you, you might want to think twice, or make a really big note in your 2010 Taxes file.
But, what if the taxpayer is in the 10% tax bracket? Don’t laugh, it’s possible for high-income taxpayers to save enough money through deductions to get down to a tax bracket of 10%.
Then, the above example is worth just $100. Many other tips and advice will produce raw dollar amounts of tax savings of even less, sometimes just $10 or $20 for a complicated strategy that involves collecting a lot of receipts and getting a bunch of tax forms just right.
In the end, you are the judge of what anything is worth to you. The important thing is that you know what its real value to you is before you waste time and money on something that has limited value.
Tax Deductions Value
One final, very important thing to consider when determining the cash value of any tax savings advice is its possible impact on other tax deductions. To determine whether or not this need concern you, pay attention to any tax credits or tax deductions that are phased out or that have income limits. Depending upon the tax deduction or credit and where the tax savings created by the strategy used occur (above the line or below the line) the value of a tax-savings tip may actually be much higher than just the amount directly created by the tax avoidance strategy.
To hear many of the newspapers and other media outlets tell it, Google’s blowout third quarter is the official signal that the recession is over and that businesses are spending again, because customers are spending again, and everything is fine again.
The logic goes something like this. Google is not only the largest search engine, but it is also the largest provider of Internet advertising, particularly in America where its ad market share is something like 75% or so. Thus, Google acts as a bit of a proxy for the online advertising market in general. Online advertisers, then, spend money on online advertising only when, a) they have the money available to spend, and b) there are customers out there spending money to attract. So, theory is that since Google’s earnings came in above expectations, then that shows that advertisers are spending more money on online ads, which therefore means that more consumers are spending money online. That’s the idea, anyway.
Google Is Not The Economy
It is tempting to pronounce everything that Google does and everything that happens to Google as very important to major aspects of American life, including the overall business environment, and the U.S. economy. After all, Google is probably one of the most followed stocks in the country. Those who own shares can’t stop obsessing about them (and using them as proof that they are smart investors) and those who don’t own them can’t stop obsessing about whether or not they should cost as much as they do. Analysts trip over themselves raising their 12 month price expectations and revenue forecasts, each one dying to be the one who was "right" by calling the huge upward move in the most popular stock.
However, there is a major problem with using Google’s fortunes in this way. Regardless of whether or not Google’s stock is or is not a good investment now, the company makes a very bad barometer of the current state of business and by extension, the economy overall.
Google’s advertisers are almost exclusively smaller businesses. As such, Google’s fortunes do not connect very much with the major corporations whose fortunes move the most widely followed market barometers like the S&P500 Index, the Dow Jones Industrial Average, and even the NASDAQ 100.
While small business is a major component of the U.S. economy – some statistics suggest that small businesses are THE drive force of the American economy – there is a very big disconnect between most small businesses, and those who advertise online via Google and other ad networks. Entire segments of the small business economy have nothing to do with online advertising. Mom and Pop stores on Main Street, U.S.A. typically do not find their customers online.
In fact, the vast majority of all online ads are placed by online retailers, which is a very small subset of small businesses overall. Furthermore, increased online spending could actually be an indicator of LESS spending by U.S. consumers. After all, many people turn to online retailers hoping to find cheaper prices, different products than they would normally buy, a way to save money by not paying sales taxes, and of course, to shop around for the lowest prices without ever leaving their homes.
While many other indicators seem to be pointing toward a recovering U.S. economy, including the fact that over 70 U.S. cities are no longer statistically in a recession at all, using Google as the proverbial canary in the coal mine for the American economy, carries a very significant possibility of providing the wrong signal at the wrong time.
Virtually every one of the so-called work from home jobs is a scam. Keep in mind that while plenty of Americans work from home, they do it for their regular jobs that they already have, and they probably still have to go into the office some times. These people did not find an online ad and get a working from home job with no experience by just filling out some forms and information over the Internet.
Just think it through for one minute. Doing something like data entry from home would be a great job, especially if you could get a job like that without any experience.
That means TONS of people would want these jobs. If that is the case, then why would any business pay high wages for that, especially to someone with no experience?
In fact, if you think about it for just one more second, you should end up with another conclusion. A job that can be done by anyone, from anywhere, without any extensive training, or previous experience is EXACTLY the kind of job that you can outsource overseas to someone making $5 a day.
How could it possibly be that any company or business in the world would pay you "$2,500 to $10,000 a month or more"?
Don’t be naive.
Work From Home Scams
1) Get Your Cash Then Disappear – They will either require you to send in money for something that sounds legit like a background check, or for some sort of kit to get started and you will either get back nothing, or something worthless.
2) Get Your Bank Account Info – They will say that you are hired but they only pay by direct deposit, so they need your bank account information. They may even ask you to sign a form. Then, they will use that info (and your signature if you filled out a form) to rob your account.
3) Get Your SSN for Identity Theft – We have to have you fill out a form so we can withhold taxes for you. That form includes a SSN and your name and address, everything an identity thief needs.
There are jobs that allow you to work from home, but NONE of them hire people without experience for high pay without meeting them.
If you insist on trying it out anyway, protect yourself!
1) Open a new bank account with no money in it. Give them this bank account information, and only if you HAVE TO.
2) Get a Tax ID number instead of your SSN. Working from home in this manner means being an independent contractor. Get a EIN from the IRS and use it instead of your Social Security Number on any paperwork. It is free and you can get one instantly by filling out an online EIN application form. They will probably just ignore you and move on to easier fish (which is proof it was a scam). If the do bother to come back and say it has to be a SSN, then move on.
3) Some jobs do require a background check, but they do not require that you pay for it with money order, cash, or check. Buy a prepaid Visa for the minimum amount and pay with that. Do NOT use a personal credit card.
But, seriously, you will save yourself a lot of time and trouble if you just re-read this article. There are no amazing "unheard of" opportunities out there that allow you to make great income from the comfort of your own home with virtually
Identity theft can happen in a lot of different ways. Some of them are difficult to avoid, if not impossible. Others are easily preventable with a little knowledge, experience, and understanding, plus a little bit of effort. Preventing identity theft with a paper shredder to destroy junk mail and other documents is an important start.
Shred Records Files and Documents to Protect Against Identity Theft
One of the easier methods how to steal someone’s identity is to obtain documents or other papers that have personal information printed on them. Everything from old tax returns, to receipts, to old contracts, or even a utility bill can be a wealth of information for an identity thief. Easier still is to do identity theft while getting a fraudulent credit card at the same time. This is frighteningly easy thanks to banks and credit card companies sending out hundreds of thousands of credit card offers, complete with pre-filled information like your name and address.
While neither your nor the identity thief would be able to interpret it, the various letter and number combinations printed on the credit card application or special zero percent interest balance transfer offer can also direct the credit card company to approve your credit application right away. These numbers tell the bank that your name has already been approved based upon either having pulled a credit report already, or because of the list your name came from.
The credit reporting companies don’t actually make much money by charging people to look at their own credit reports, or even from the fees they charge lenders to get your credit report, although they are only too happy to collect those fees too. Instead they earn huge amounts of money by selling your information to banks and credit card companies in the form of mailing lists. These lists can be selected by the card issuer to include people living in a certain area, with a household income over a certain amount, and with a credit score over 725. If your name comes off of that mailing list, a pre-approval code is almost certainly sitting on that free cash back credit card offer you got in the mail.
Of course, the biggest gold mine for identity thieves are those "courtesy checks" that credit card companies send by the millions through the mail. Whether it is a zero percent interest balance transfer offer, or just a "friendly reminder" that you can use your cash advance credit line really easily, these checks offer a bonanza for identity theft.
Writing a nice big fraudulent check for merchandise, or even for cash is a nice bonus, but that’s not all. Your name and address are on the checks, of course, and not just any name, but your name as it appears on your credit card. Since most people use the same format (with or without middle initial, with or without full names, etc..) on multiple accounts, that info is very nice to have. But, the best part of all is that these check don’t have the security features of real bank checking account checks. And, since they come from the credit card company on paper printed on a laser printer with paper tearing perforations between each check, they are really easy to print up on a printer so that the thief can write even more bad checks courtesy of your credit card account.
What can you do to stop identity theft from occurring in this manner?
The answer is to shred your mail, records, and files that have personally identifiable information. For many people, this ends up being a tedious and overly time consuming task. That means the new paper shredder they bought to stop identity theft gets used for a while, then instead, a "to be shredded" stack gets created, and finally, people have so much to shred that they don’t even bother.
To avoid shredding burnout, follow these tips for smart identity theft protection with a document shredder.
Best Tips For Shredding Papers to Stop Identity Theft
- Don’t Buy the Cheapest Paper Shredder – The cheapo shredders at most department stores and some office supply stores will only add to the shredding problem. These paper shredders overhead quickly, so you can’t shred very much at a time. Their blades and cutting mechanisms jam a lot and they get dull fast. In short, you’ll have to buy a new one very soon. It can be hard to tell which paper shredders are the junk ones. The best bet is to use the warranty information. Don’t buy any shredder that only has a one-year warranty or less. Also, make sure the warranty covers the WHOLE SHREDDER, not just part of it.
- Don’t Buy the Expensive Paper Shredder – You don’t need the top-of-the-line shredder either unless you generate a lot of documents for a business or you handle other people’s personal information. No one is going to put the effort into putting back together your shredded documents, so it doesn’t matter if your shredder does diamond cut or strip cut. Also, you don’t need one to shred CDs or credit cards. Instead, buy a good shredder that can shred more sheets at a time. Buy the shredder that can do the most pages per pass instead of one that does less pages but has extras like a credit card shredder or CD shredder. Get a shredder that can handle at least 8 pages at a time and that has both an OFF and REVERSE setting. Shredders without either are cutting corners.
- Don’t Shred Everything – There is no need to shred everything, only the papers that have your personal information on them, or are part of an application. When you get junk mail, tear it open. You don’t have to be careful, it doesn’t matter if anything rips. Just do it fast. Throw the outer envelope, the return envelope, and any generic advertising materials (usually the color glossy pages) directly in the recycle bin. Shred anything that has your name or address on it, and anything that is a check or application, as well as anything that has a spot for your signature. Watch for fine print on the back of the papers as a way of detecting things that need shredded.
If you want to have less credit card junk mail show up in the first place, have your name removed from the credit bureau mailing lists that get sold to junk mail marketers by calling 1-888-5-OPTOUT. Remember that this removes your name only for your current address. Opt out again whenever you get a new MAILING address, including a PO Box!
It will take about six-months for you to see an actual reduction in the amount of credit report related mail you get. That is because the marketing companies put together their campaigns in advance and your name will still be on the list they got three months ago that they are using to prepare a mailing for next month. So, stay vigilant with your junk mail shredding until then.
Obviously, shredding your files, mailings, and documents won’t prevent all identity theft,
but it can greatly reduce your chances of getting hit.
401(k) Plan Blackout Period
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With the meltdown of the banking industry just the latest in a long line of shenanigans that Main Street remembers happening thanks to Wall Street, it is no wonder that ordinary people are nervous about their finances. In particular, many people are worried about their 401(k) and how they will ever be able to retire if things keep happening to their hard earned savings and investments.
That is why getting an official looking letter in the mail or delivered at work informing you of your “rights” and about an upcoming blackout period can make even savvy investors nervous.
401K Changing Plan Administrators
All 401(k) plans are administered by a third-party. This arrangement protects workers retirement savings by ensuring that the company does not have any access to the money invested by workers in their defined contribution plans like a 401k plan. The third-party is a financial company such as a mutual fund company, insurance company, bank, or brokerage, that takes on the responsibility of accepting deposits, investing money into the proper funds or other investment choices, and keeping track of those investments. And, when the time comes, this third-party is also in charge of completing the withdrawals from your 401(k) and getting the monies to you in the form of a check, band deposit, transfer, or rollover.
This third party is called the plan administrator, because they are responsible for the administration of the plan. The plan administrator does not work for free. Typically, the administrator receives compensation in the form of a cash payment from the company and from each plan participant (worker who invests in the 401k) in the form of extra expenses charged on investments via a higher expense ratio.
Like any other vendor that provides services to the company, they can be replaced by another vendor. This can happen for lots of reasons. The most common reasons a company changes their 401(k) plan administrator are to get lower expenses (usually for both the company and the employees), to get better service, and to better investment choices.
When a 401(k) plan changes its administrator, there are several things that need to happen. Most critical to the employees contributing to the 401(k) plan is that the money currently invested with the old administrator has to be transferred to the new plan administrator. Doing this requires a blackout period.
Why A Blackout Period?
To understand the purpose of the blackout period, it is useful to think about how any financial account, such as a bank account, works.
Unless you deposit cash (actually dollar bills) into the account, the bank must “clear” the funds with wherever the money is coming from. This is just like when you write a check, the money doesn’t disappear immediately from your account, but rather, whoever you wrote the check to, presents the check to your bank for payment. Your bank verifies the check and your account balance and then transfers the money and deducts it from your account.
A similar thing happens in investing. When you sell and investment, the money doesn’t show up instantly. Instead, stock trades “settle” in 3 days. That means that if you sell 100 Shares of XYZ stock on Monday for $5,000 then your brokerage firm will transfer the 100 shares of stock three days later to whoever you sold them to and that person’s brokerage firm will transfer the $5,000 to your brokerage firm on the same day. This is known as “settling.”
However, the money appears in your account instantly and can be re-invested or withdrawn right away. This is because your brokerage firm executed the trade and therefore is certain that it will receive the money from the other firm. But, what if you transferred your account?
The new brokerage firm did not execute your trade, they won’t be the ones receiving the money. So, your account at the new firm will not show your $10,000 cash immediately. (This is typically taken care of automatically via a “residual sweep” where the new broker transfers whatever is left at the old broker a few days later.) This setup works fine on an individual basis, but you can imagine the complexity of doing the same thing for hundreds or thousands of employees.
To avoid any these issues, your 401k plan will impose a blackout period during which time you cannot make any adjustments to how your money is invested. In other words, you can’t buy or sell anything. Since no one can make any trades during this period, when the transfer occurs there won’t be any “unsettled” trades to cause issues. The transfer can happen cleanly and once all of the cash and securities have been received by the new plan administrator, the employee participants can resume buying and selling their investments in their 401(k) account.
What About Enron?
If you paid close attention to the Enron scandal and bankruptcy you may remember that one of the issues was that the Enron retirement plan was in a blackout period while the company was going under and the employees could not move their money out of Enron stock (it probably wouldn’t have helped much if they could have anyway). As a result, 401k regulations were changed to provide for a shorter blackout period. Today, a blackout period is typically only a week or two depending upon the size of the plan.
What Should I Do During Blackout Period?
Usually, you don’t have to do anything when you get a notice that your 401(k) will be in a blackout period. The exception is if you were planning to make changes to your investment allocation within your plan for some other reason. In that case, you will need to decide whether to make the changes before or after the blackout period.
The other exception is if you are retired and withdrawing money from the 401k plan, then you want to make sure that enough money is in cash during the blackout period since you will not be able to sell any existing investments or make a withdrawal. It is especially important to act if you rely on an income distribution from the plan that would normally occur during the blackout period.
For example, if you normally get $3,000 on the 20th of each month and the blackout period will be from the 15th to the 25th, you will NOT get your distribution on the 20th. Therefore, you will need to make arrangements to get your money by the 14th. However, make sure you check with your HR department to find out what will happen to “missed” automatic distributions or you might end up getting paid twice if the company executes missed withdrawals automatically after the blackout period.
If the plan is your only source of income, it makes sense to raise a little extra cash before the blackout period because you will not be able to withdraw money during the blackout period.
Just understanding what the blackout period is should be enough for most workers. If you have plans to do something with your account and the blackout will get in the way, then take action to have it done first. Otherwise, just keep contributing the maximum amount you can to your 401(k) and follow your smart, long-term, diversified investing strategy.
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