Author Archives: Khooppres

What’s Your Effective Tax Rate?

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This year’s tax season is now over, but I suspect the discussion on taxable income and effective tax rates is just beginning.  With the upcoming presidential election, there’s been a lot of media attention placed on the percentage of income that each candidate pays in taxes.  While I believe each candidate’s position on the issues should be the focus of this year’s campaign season, ‘spirited’ arguments on income and taxes will likely be a hot topic.  Although we all pay taxes, unless you’re a financial professional, you may or may not know how to calculate your effective tax rate.  The purpose of this Post is to provide instructions on how to calculate it.

I know you’ve heard the news that Warren Buffet’s secretary has a higher tax rate than he does, and I’m sure you’re wondering how this is even possible.  The short answer is not all sources of income are created equally.  Most middle class Americans work in order to earn a living, but wealthy people focus on creating income without having to ‘work’ to get it.  The term used by the IRS to describe this form of income is passive.  According to  livingoffdividends.com, examples of passive income include rental properties, partnership returns, and qualified dividends.  In an ABC News Special, Warren Buffet communicated that he hardly pays any payroll taxes, but his secretary and the average working American’s primary tax is likely payroll taxes.  During the interview, Buffet disclosed that his tax rate was 17.4 while his secretary’s rate was 35.8. 

If you’d like to compare your rate to Warren Buffet’s, you can use the following formula:

Effective Tax Rate = Total Taxes (Line 61) / Total Income (Line 22)

If you filed a 1040 tax form, the diagram included below can assist you in pulling the appropriate line items for the calculation:

 

To Rent or Buy

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Homeownership has always been a key component of the American Dream, but as a result of the recession, many Americans are beginning to question if it’s worth it.  Since 2008, home values have declined at record levels.  In the African American community, home equity is one of the most significant contributors to an individual’s net worth.  Although many of us focus on what we make or our annual salary, the true measure of wealth is net worth.  Net worth is the difference in the value of your assets (what you own) and your liabilities (what you owe.)

While home values in most communities were impacted by the increase in the number of foreclosures, African American communities were affected at a greater level due to the number of sub-prime mortgages issued to African Americans.  The State of the Dream 2010:  Drained, published by United for a Fair Economy reported that over half of the mortgages issued to Blacks in recent years were sub-prime loans mostly to people who qualified for regular loans.

There are a host of calculators and charts that can be used to assess whether it’s better to rent or buy, but I believe the decision should be based on more than math.  If you are faced with making the decision to rent or buy, please consider the following:

  • Mortgage rates and home values are at historical lows.  This should not serve as a notice to buy more house than you can afford.  It simply means that individuals who couldn’t afford to purchase a home years ago may now be able to experience home ownership.  Additionally, we have to stop looking for the quick pay-off.  Many of us want equity in our homes right away, but I have a question for you – how much equity will you earn while renting?  A key takeaway from the recent housing crisis is to be weary of quick equity.  According to the Federal Reserve Bank of Cleveland, a reasonable estimate for home appreciation is approximately 2% annually.  As such, it is important to be realistic and patient
  • Credit worthiness is required for renting and buying.  If you are choosing to rent because you are afraid of being turned down by the bank when applying for a loan, you can also be turned down when applying to rent.  Another consideration is that more people are renting today, which means landlords have the ability to be selective when interviewing potential occupants for their property.  If you are concerned about your credit profile, take an opportunity to go to www.annualcreditreport.com and request your credit report from all three major credit bureaus.  You can also go to www.freecreditscore.com to receive your Experian credit score for free
  • Do your homework by researching different loan products.  You don’t have to become an expert on mortgages and the home buying process, but you should know the basics.  There are a number of credible sites that can provide a baseline of information for you.  Be realistic about what you can afford and ask questions.  Avoid creative loan products that may allow you to purchase more ‘house’ today, but can carry hidden costs or balloon payments that could very well mean trouble later

The choice to rent or buy may vary from person to person, but for the African American community, I believe the answer should be to ‘buy’.  There are a record number of foreclosures on the market right now and there are investors purchasing them for ‘pennies on the dollar.’  To achieve anything in life you have to be willing to take a risk.  The same holds true for investing.  Many of us only want to purchase something when others see the value in it, but true investors see the value before others.  This is how wealth is accumulated.  I know that renting may appear safe in today’s market, but if you want to accumulate wealth, you must take the risk and choose to buy instead.

Is Your Child College Bound?

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The end of the school year is quickly closing in on us.  While most students are preparing to relax and enjoy the summer, if you have a rising senior, the remainder of the school year and the summer break are critical times.  If and where your child will go to college is a big decision; one that requires more than one year of preparation.  Nevertheless, if you’re just getting started or perhaps you’ve been planning all along, the following steps may be helpful to you:

1.       Meet with your child’s guidance counselor to review course curriculum and ensure that your child is enrolled in college preparatory courses.  If your child’s grades are mediocre or your child has been enrolled in the vocational diploma program, you may want to consider enrolling your child in enrichment courses at the local community college

2.       Review your child’s top five college choices, assess admission requirements, and tuition costs.  Developing a matrix will ensure that you are consistent in your assessment of each school.  You should also plan a trip to tour each campus

3.       Review the results of your child’s college admissions tests (i.e., SAT, ACT, etc.) and confirm that the scores meet the minimum requirements for your child’s top five college choices.  If your child’s test scores are low, consider a SAT or ACT prep course

4.       Create a budget.  The budget should breakdown how much you plan to contribute, what portion will be covered by scholarships and other financial aid sources, and the amount your child will be responsible for paying.  I know that every parent wants to do as much as they can to help their child, but please remember that this is your child’s education.  That being said, they should have some ‘skin in the game’ too.

5.       Evaluate your child’s volunteer and extracurricular activities.  If their volunteer hours are low or non-existent, volunteering should be at the top of your child’s priority list for this summer.  Although it may not be listed as an admissions requirement, colleges may review this information when awarding scholarships and grants

6.       Review your child’s social media sites.  According to an article on offtocollege.com, a survey conducted in 2011 revealed that approximately 80% of college admission officers will check the social media profiles of potential students.  As a result, students should clean-up their profiles and photos before submitting their college applications.  The article mentions that students should leverage their social network platform to highlight volunteer activities and other key interests

College is a time of preparation and transition.  While most 18 year olds believe they no longer need their parents’ assistance in making decisions, we all know this is far from true.  The intent of this Post is to provide guidance on how to assist your child in the college selection process.  It is important that as parents, we don’t step in and take over the process.  If you have to hold your child’s hand and make all of the decisions on their behalf, you should be concerned.  In essence, your child should want their education more than you do.  Overall, this should be an exciting time for you and your family.  Your child is about to embark on a journey that will likely become one of the most memorable times in their life.  Your love and wisdom can act as a compass for them as they navigate through unchartered waters.

If you don’t have a rising senior but you would like to know how you can begin preparations for your child, please visit www.collegispossible.org.

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