November 2008 Archives

Could you use an extra $45 a week? Did you know you could get this for just about 30 minutes of your time? Sounds too good to be true... a scam? Well the IRS just released statistics about the 2007 federal income tax filings and noted the AVERAGE refund Americans received was a whopping $2,371 or a little over $45 a week. While many people grouse about paying taxes, in this situation, they are voluntarily overpaying in order to receive a refund.

Common practice for some workers to get the really big refund is by using 0 allowances on their W-4 form. Young people entering the workforce and unfamiliar with how to complete the form receive this sage advice from co-workers and family members, not fully understanding the implications. They perpetuate this practice by advising others when asked how to file the form. At first blush, a check of several thousand dollars seems like a windfall, but is it?

 I've spoken with many people who say this is the only way they can "save" money. Effectively, they are using the IRS as a bank. But the IRS is unlike a bank in two ways. First, they take the money you send them based on your W-4 and don't pay interest on excess received over your actual tax obligation. Additionally, unlike a bank where you can access your money when you need it for situations like new tires, a layoff or a job loss, you must wait to receive YOUR money until you file your annual income tax return.

Here's where 30 minutes of your time can earn you $45 a week. Take some time now to review your income and tax situation. If your household and income will remain relatively unchanged next year, consider filing a new W-4 form with your employer to reduce the amount of taxes you have withheld which will increase your net pay. Log onto www.irs.gov and search for 2009 W-4 form, print both pages, read, complete and file with your employer. Generally on line 4 where you indicate the number of allowances you are claiming use the number of individuals who live in your household.

Now that you've increased your net pay, consider depositing the increase into a real bank or credit union savings account. You were living on less before you made the change, so continue to do so and allow your account balance to grow over time. Using direct deposit puts your savings on autopilot and reduces the temptation to spend it immediately. You now benefit by having money in an interest bearing account and accessibility to YOUR money when you need it, not when the IRS sends it to you.

This pay-yourself-first strategy will help you develop a robust emergency fund that ideally will grow to a balance equal to three to six months of your living expenses. Potentially you are now EARNING interest on your funds rather than PAYING interest on credit purchases you made in the past because you didn't have enough cash.

 

 

While it may have escaped your attention, brick and mortar payday lenders have closed up shop in our area. In fact legislative pressure caused them to leave the state of Pennsylvania. That doesn't mean that vulnerable individuals with lower credit scores can't get short-time low-value loans. Their choices are to seek services of online predatory lenders whose short term "fees" translate into high interest short-term loans often exceeding 200% APR OR they can visit their local credit union and apply for a Better Choice Loan. These products are short-term installment loans of up to $500 for a maximum term of 90 days. Credit Unions can charge up to 18% annual percentage rate interest and a $25 application fee may be charged. In addition to being a short-term loan, it also establishes and funds a savings account in the borrower's name. Upon loan satisfaction, the interest paid on the loan is rebated to the savings account as an incentive for the borrower to now become a saver, reducing their need for future short-term loans.

 

Unlike a traditional lender, Credit Unions offering Better Choice loans do not check the applicant's credit history or credit scores and this product is designed as a break-even for the lender. Some credit unions even offer financial education workshop to Better Choice loan applicants. If you do not currently belong to a credit union or would like to learn more check www.pacreditunions.com.

 

To reduce the possibility of your needing a short-term loan, establish a pay-yourself-first habit. Get in the habit of putting $5 or $10 each week into a savings account. If you find you could increase the amount, get in the savings habit where you are earning interest rather than paying it!

Many people pride themselves in being a do-it-yourselfer, even when it comes to preparing their annual income tax returns. While most DIY'ers  have switched from paper, pencil and calculator to using computer software, these programs will only calculate the taxes that you owe based on your annual income. Likewise, a paid income tax preparer can only tell you how much you owe or your refund amount and will be based on information you provide regarding your past year's financial transactions. In other words, they can't advise you of strategies to reduce or avoid taxes for the past year. Informing you of current tax laws, how those laws apply to your unique situation and strategies you can employ to reduce the tax bite on your natural gas income falls within the expertise of financial professionals such as Certified Public Accountants (CPA's) and Certified Financial Planners (CFP's).  Regardless of whether you are a tax DIYer or use a paid preparer, consulting a financial professional about the potential tax implications and following up on their recommendations can save you hundreds and even thousands of dollars.

 

There is no one-size-fits-all answer to the question of how to reduce the tax bite due to the incredibly complex tax code and how it applies to your individual situation. Because of five and six-digit natural gas payments some families are receiving, they may find themselves in the 25% tax bracket this year when they were in the 10% bracket just last year!

 

December 31, 2008 and April 15, 2009 are two key deadline dates you should plan to meet. Missing one or both of the deadlines can result in your paying unnecessary federal, state and local taxes on your natural gas income. Scheduling an appointment with a financial professional in the next six weeks or so will give you time to consider their suggestions and develop and implement a plan to minimize the tax bite and maximize the amount of money you have available to meet your financial goals.

 

If you started to receive natural gas bonus payments, lease payments or royalty payments in 2008, this year's tax return will be significantly different from you 2007 return. In order to prepare to meet with your financial professional to start year-end tax planning, your 2007 tax returns will be useful. In addition, here are some other factors that shape your 2008 income tax liability:

·         How much in natural gas bonus payments, lease payments and or royalty payments do you expect to receive by December 31, 2008?

·         Did you and/or your spouse contribute to and employer sponsored retirement plan in 2008? If so, how much did you or are you planning to contribute?

·         Did you and/or your spouse contribute to a traditional or Roth IRA for 2008? If so, how much did you or are you planning to contribute?

·         Did you and/or your spouse turn 65 in the 2008 tax year?

·         Did you and/or your spouse become disabled in the 2008 tax year?

·         Are you and/or your spouse considered legally blind?

·         Did your household gain or lose a member in 2008?

·         How much in federal and state payroll income taxes did you have withheld and how much in quarterly estimated payments did you make?

 

Signing bonuses and lease payments receive different tax treatment from the royalty payments which are subject to expense deductions such as depletion. Once you choose how your depletion is calculated, either percentage or cost, that decision is irrevocable. This is another area where a financial professional can assist you.

 

In addition to helping you reduce your current income tax bite, your chosen financial professional can also help you understand your options on the best way to use your natural gas income to meet other current and future financial goals such as debt reduction, financing college, or funding a comfortable retirement.

 

While there is nothing wrong with being a do-it yourselfer, seeking and following the advice of a financial professional can not only save you time and money, but also assure that your natural gas income will meet your family's needs for years to come.

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