Tax Tantrum Tuesdays: Stay Out of Trouble

Another finance guru I absolutely love, Mellody Hobson, President of Ariel Investments in Chicago, talks about personal finances on Good Morning America from time to time. Specifically, I was reading an article discussing the IRS's increase in tax audits. Every person I know, including myself, should be very, very afraid of the IRS. Not afraid to the point that you are scared to try to do your own taxes, but afraid to the point that you don't ever want to purposefully lie to them. Ever.

When I hear of people lying to the IRS about small, insignificant things like filing single when you're actually married, claiming kids who aren't yours, claiming your kids when you know your 'baby momma' already claimed them, I send up a quick prayer...because if the IRS finds out, they're cleaning you OUT. Believe me, you don't want it. Most of the time, actually, ALL of the time, it's just not worth it.

With that being said, there are some obvious red flags that the IRS looks for when they're determining who to audit. Statistically, only about 1% of Americans with annual incomes under $100k get audited. The more money you make, the higher the probability that they will want to audit your return. Additionally, your return is more likely to get audited if you have big changes from one year to the next. It sends up a red flag. So if you start making a ton more money, claiming three children as dependents when last year you only claimed one, or claiming a large deduction/credit that you don't normally claim, BE SURE to keep those records.

Other more specific red flags for the IRS are:

• High expenses. A lot of expenses are deductible as itemized deductions. If any of these are abnormally high, like $60,000 in medical expenses, or $10,000 in work related expenses, you should make sure you have some great documentation to prove you're not lying.
• High charitable deductions. People use charitable deductions ALL the time to beef up their itemized deductions. Be careful. Make sure you have check stubs, receipts, letters from non-profits detailing how much money you gave them. Mellody says that the average charitable donation is around 2% of one's income...so if you're donating around 10%, that may be cause for concern.
• Errors. This is easily avoidable because of all of ability to e-file. But if you're still using a paper return, make sure to double check your math, make everything nice and neat as to not arouse any questions from the IRS.

In general, just be honest. It's much better for you in the long run. If you made an extra $10,000 cash doing some kind of side hustle, don't hide it. The amount of tax you'd pay on that would be far less than the penalties and fees the IRS will hit you with if they ever find out.

Debit Diet: "Where da, where da cash at?"

I'm in complete reform mode. Last night I did my federal tax return, started on my FIVE state returns (traveling all of the time has it's cons), and put together my debt snowball budget! I'm happy to say that my snowball has me paying off all of my debt (with the inclusion of my private school loans and the exclusion of my federal school loans) by the time I'm 30. I will see my first major payoff (credit cards) by May 2011 and I will have paid off a small school loan by the beginning of 2012. My car loan and larger school loans take a little longer but either way it goes...I'm stoked!

In addition to implementing the snowball, I came across another one of Dave Ramsey's amazing ideas that I am very excited to share! Dave Ramsey's....

Cash Envelope System

The way it works:

1. Label envelopes with different budget categories such as, food, miscellaneous, entertainment, gas, etc. Dave says you can do this for all of your budget categories but for me, I'd probably only want to do it for the ones I actually spend money on throughout the month. I have no need for a bills envelope because I pay all of my bills via automatic debit, which many of you may do as well.

2. Once you get your paycheck, you cash the amount of money you are to spend on these categories, and put each respective amount in its envelope.

3. As the month goes on, whenever you make a purchase, you take the money for that purchase out of its rightful envelope and you record the purchase on the envelope. Once all of the money in an envelope is gone, you can no longer spend money from that category.

For those of us who don't want to carry a lot of cash on us, or fumble around with 5 or 6 cash filled envelopes, we can do the same thing with our debit card. Instead of putting cash in the envelopes, we can make a debit card purchase, then record the purchase on the respective envelope and insert the purchase receipt in the envelope. Once we've reached our monthly max in any category, we can't use our debit card for those purchases anymore until the next month.

I'd like to add a component to this that I don't think Dave came up with. Once putting this into practice for maybe three months or so, I'd like to challenge us to deposit any excess money unused at the end of the month into our savings account. Of course that money could rollover to the next month but in order to help with discipline I think it would be more beneficial to get used to being limited to a specified amount of money each month. If you don't use it, you save it. Just a nice way to beef up the savings over time as well.

I'm going to implement this spending system in March. I shall let you all know how it goes! And  for those who would like to take the journey with me, let me know!

P.S. I wanted to name this post...Don't be surprised when she ask...."Where da cash at?"...and I would've, but it was too long.

Ta ta!

Tax Tantrum Tuesday: You Can Do It!

Tax Season is in full swing. And as of Monday, all of you itemizers can file. I'm a huge advocate for doing your own taxes, especially if you don't itemize. Paying any type of service or person to do them is a complete and total waste of money. In fact, a lot of my friends/family in the past have asked me to do their taxes...and while I've done some, I always tell them I'd much prefer to teach them how to complete their taxes themselves, instead of just doing it for them.

One of my friends actually took me up on that offer last year. I went up to her house after work and we sat down for an hour or so. I explained everything she needed to know about personal income taxes. She was a very excited learner which made me a super excited teacher :-)

I got a wonderful instant message today from her letting me know that I would be so proud of her because she completed her own 2010 tax return today in 30 minutes! I am in fact proud and it goes to show that you should not be afraid to touch your tax return. If you're nervous about getting it right on the first try, have a friend or tax professional look them over before you submit. As long as you complete everything in good faith, the IRS will not truck you off to jail. You'd be amazed at how much mone you can save...

...doing it yourself!

Happy Filing!

Trick AND Treat

Yeah, yeah, I know it's Valentine's Day and not Halloween but the title just fit better. Additionally, while I don't consider myself to be a bitter single woman, I don't think of Valentine's Day as some super fantastic addition to my world....mostly because I believe we should be spreading love every single day...not just once a year. But I guess that goes for most holidays...

I digress. Recently, as you all may know, I've been really focused on managing my money correctly since becoming a full time working woman. Since July 2010, I've reduced a lot of my monthly costs in order to allow me to save more money and reduce debt. However, most recently, as in the past few weeks...I've been on this spending frenzy. Well...I'm not sure that's what you'd call it but whatever it is, it ain't good. It hasn't really hurt anything too badly, it has just forced me to slow down on my massive savings revolution...which makes me sad.

I think I'm starting to realize that I have these financial roller coaster rides....where for a few months I'll be doing spectacular (and sometimes I'm not even sure what I'm doing to make the money flow like it does) and then for another few months, I will need to watch what I'm spending like a hawk, as to not overextend myself because I'm thisssss close. I hate those months. They make me nervous. Does anyone else have this problem?

My financial personality, as I'd like to call it, makes me the type of person who always thinks the worst is going to happen..I think they call this pessimistIC. So if I feel like my emergency cushion isn't all there, I'm freaking out when I don't have a really big threshhold for error, which is usually the case in the down months. Sometimes...I just need to check myself.

So while I stumbled upon this video on CNN Money, I was excited to share with you all. Some guy (he didn't say anything about himself) was advising ways to "Trick Yourself Into Saving More." I thought maybe we could all try to implement these and see how it helps or hinders our progress:

1) Put Savings on Autopilot - this includes automatic deposits into your 401k, IRAs and your savings account. I definitely do this now...I cannot count on myself to manually transfer money every month from one account to another. Automatic transfers have become my best friend.

2) Dangle a Carrot - now this was interesting to me because I kind of do this...but I think I need to do it a lot better. hahaha. Dangling a carrot involves setting a savings (or debt payment) plan with a reward once you've achieved the goal. For instance:

Goal: if I can increase my savings by $5,000 by June,
Reward: I'm allowed to purchase a new really expensive bag I've been eying.

I think usually I start here...but at some point, when I'm on my way to the reward, I convince myself I've done well enough to get the reward now...lol. Not to mention, if I want something now (say a new bag, shoes, etc), why would I still want the same thing in June...there will be something new for me to want and it could be completely out of season. So maybe I should try smaller rewards along the way that lead up to a large one? It's like eating 6 small meals a day to effectively diet instead of starving yourself all day and then binging on one huge meal. *just had an a-ha moment*

3) Use a Stick - so this is the opposite of dangling a carrot and I'm not sure would ever work for me but maybe some of you respond better to punishment rather than reward. The idea behind this is to make yourself a commitment contract. If you don't hold up to your end of the bargain, you have to pay a fine (I guess to your savings???) or punish yourself in some sort of way. Yeah...punishment de-motivates me so I'm going to stick with the carrot.

4) Focus on the Big Stuff - in general, when looking for ways to cut costs and save money focus on the big stuff...get a smaller apartment instead of the larger one, buy a used car instead of a new one, etc etc.

I have definitely done this in the past year. I yearn so badly for my own one bedroom in Chicago...but I'm sticking with a roommate for the time being because my costs are greatly reduced and it allows me to save more and pay down more debt. Not to mention that most of the time I absolutely love my roommate. Even still, frequently I scour Craigslist and rental agencies looking at apartments. In the end I'm always forced to remember that I can have that, AFTER I reach my savings goals. I guess this encompasses a little carrot dangling too.

On the car aspect of this...I completely failed.

Next...

Thirsty Thursdays: Zero Me Out

I received the following question from a reader:

Can you write a blog about bankruptcy one day? I'm baffled by the idea...how does someone's debt just discharged?

Well this takes me wayyyy back...to some class in undergrad where I learned the differences between all of the different types of bankruptcy. While the idea seems simple, it's not as easy to file bankruptcy and be completely dischraged of your debts as you think. Let's take a look:

There are a few chapters of bankruptcy (7, 11, 12, 13), only one chapter discharges ALL of one's debt (chapter 7). The other chapters are for debt restructuring...where you pay off as much as you can with your disposable income and your remaining debt gets restructured to make it more feasible for you to handle.

Chapter 7 bankruptcy is the most commonly filed chapter. This chapter discharges all of your debt with the exception of, taxes, penalties and fines administered by the government, alimony, child support, and student loans. Additionally, the court uses your assets to pay off as much of your debt as possible. This means, even though you lose your debt, you lose ALL of your assets too (except the exempt ones...which are few and far between). However, you can't just file Chapter 7 bankruptcy all willy nilly. You have to be able to qualify by showing that you really cannot afford to pay your debts. If a Bankruptcy Trustee reviews your financial situation and decides that you can pay some of your debt with your disposable income, they can deny your ability to file Chapter 7 and instead force you to file the second most common chapter...13.

Chapter 13 bankruptcy is a financial reorganization organized by the federal court. Basically, the bankruptcy court lays out a plan for an individual to pay off their debt. It's like going to rehab for debt. It still comes with a 10 year credit report punishment, in which you cannot obtain any new loans/financing.

Regardless of what chapter you file, filing bankruptcy is NEVER glamorous. It comes with painful years of horrible credit which could wreck more havoc on your life than you'd think.

Reader, hopefully this has helped your understanding of bankruptcy a bit better.

Tax Tantrum Tuesdays: The Tax Equation

So recently, we've been talking about a lot of different parts of the individual tax return. Below I've illustrated how all of these parts work together to complete your tax return. Honestly, understanding taxes is as simple as knowing and understanding this equation...and it is simple as pie:

Let me make sure you can read that the way I meant to write it:

It says... Income minus above the line deductions equals adjusted gross income, minus standard or itemized deduction minus exemption(s) equals taxable income, multiplied by your tax rate equals your tax liability, minus your tax credits, minus your tax payments equals the amount you are either refunded or the amount you owe.

I bet a bunch of y'all are finally happy you know what AGI is. lol

This equation helps you understand how deductions and credits work to help lower your tax liability. The goal of claiming deductions is to reduce your taxable income as much as possible. This means even if your income is $100k, you could have enough deductions to reduce the portion of that which you actually pay taxes on to about $60k. If your tax rate is 25%, wouldn't you love to only owe 25% of $60k vs 25% of 100k? Right.

Even once you get that taxable income down, tax credits are a way to reduce the amount of your actual tax. They are a dollar for dollar reduction. So if your tax liability is $10k for 2010 and you can take the $8k homeowners tax credit...now you only have a $2k tax liability. That my friends is a beautiful thing.

Payments are just your withholdings that you've been paying out of your paycheck all year. Remember the red bottoms? Say if you paid $9k during 2010 and your tax liability is $10k and you've taken the $8k credit to reduce your tax liability to $2k. That means a $7k return for you. On the other hand, if you paid in $9k during 2010, your tax liability is $10k and you have no credits. You will end up owing $1k.

Hopefully this equation shows you how all of these parts work together for (or against) your tax benefit.

Feel free to ask questions on this! I feel like it can still be a bit confusing :-)

Thanks for reading!

You all should probably get used to these monthly thank you posts where I go on and on about how much it means to me that you read my blog and reiterate how much I appreciate your support.

Here we go for this month:

Thanks so much for keeping up with my blog and encouraging others to take a gander in their free time. This blog means a lot to me and the overwhelming positive response I've received makes me happier than words can possibly express.

Please, please, please write to 25andretiring@gmail.com if there is anything you would be interested in learning more about or seeing discussed. I haven't begun Thirsty Thursdays but that's mainly because no one seems too thirsty. hahahaha.

Lastly, please make sure y'all are keeping me accountable. If you're seeing that my 9-5  9-9 is taking over my life, please yell at me. "Speedy! When is the next post coming?!" I would greatly appreciate it.

Thank you, thank you, thank you again!

Talk about MOTIVATION!

A friend of mine picked this up after the 20-something gentleman in front of her left it at the ATM he'd just gotten cash from. She twitpic'd it and it made me feel some kind of way. Even if he was born with money...that's fine...I still feel like a SLACKER.

Talk about MOTIVATION....