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What’s Your Effective Tax Rate?

Posted on April 24, 2012 by Khooppres Leave a comment

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:

wealth

Avoid Tax Refund Anticipation Loans

Posted on January 11, 2012 by Khooppres One comment

The holidays are over, but for many that may have overspent during Christmas shopping; the anticipation of receiving your 2011 W-2 forms may be mounting. The people that I’m referring to are prime candidates for Refund Anticipation Loans.

According to the Consumer Federation of America (CFA), a RAL is a costly bank loan that is secured by a taxpayer’s expected refund, and carries an effective annual interest rate (APR) of approximately 149%. This is almost five times worse than the default rate on most credit cards. Believe me, I understand the desire to get your refund quickly, but you should never take out a loan to obtain money that’s owed to you. Additionally, you should know that if the IRS reduces your refund for any reason, the entire amount of the RAL must be paid in full – hence, you will have to pay back the money out of pocket.

So, who are RALs targeted to? According to the CFA, RALs are particularly targeted to low-income working families that claim the Earned Income Tax Credit (EITC). In fact, over half of all RAL borrowers are EITC recipients – individuals that cannot afford to pay exorbitant fees to obtain their money. Additionally, during a national survey commissioned by the CFA, it was concluded that RAL users are more likely to rent instead of own their homes; utilize high cost financial services, such as rent-to-own, payday loans and pawnshop loans; and a significant number of them are African American females.

Given the information above, I urge you to consider doing something different this year. There are services available to help you get your money quickly, and without the excessive fees that are associated with RALs. Included below are quick, cost-effective methods for obtaining your tax refund:

In 2011, the U.S. Department of Treasury launched a pilot project offering low cost pre-paid debit cards to low-income families that are unbanked. If you are reading this post and do not have a savings account, go open one! You can’t be serious about taking control of your financial future if you don’t have this basic service. Although there are low cost debit cards available, there are still fees associated with this service. Take the first step toward making wiser financial decisions by opening a savings account. Even if you’ve had trouble with banks in the past (i.e., overdrawn checking accounts) there are still many banks and credit unions that will offer certain services to you
Visit the I-CAN! E-File site (www.icanefile.org) or the IRS site (www.irs.gov), and file your taxes for FREE on your own
Visit a Volunteer Income Tax Assistance (VITA) or AARP Tax-Aide site. They will e-File your taxes for you. Tax-Aide sites save taxpayers money by eliminating the cost of RALs and tax preparation fees. To find a location near you, call (1-800-906-9887) or visit www.irs.gov

Now that you know better, you should choose to make better choices. After all, why pay for something you can get for free? As you prepare to file your taxes, commit to the following:

Stay away from RALs and consider utilizing one of the tax preparation services noted above
Open a savings account if you don’t have one. According to a study conducted by Insight Center for Community Economic Development, people of color are almost five times less likely than Whites to have a bank account
Deposit the fees that you would have paid on a RAL into your savings account to begin your nest egg. According to CFA, the average fees for an RAL (including tax preparation fees) are approximately $300

Remember, small steps can lead to significant change!

Taxes
wealth

Seven Things to Do Before Year End

Posted on December 22, 2011 by Khooppres 3 comments

It is hard to believe that we will be ‘ringing’ in the new year in less than two weeks. If you’re like me, you’re probably wondering what happened to 2011. Over the course of the next week, many of us will spend time with family, give and receive holiday gifts, and take a break from our normal work schedule. During this time, each one of us has an opportunity to perform those administrative tasks that we often put off by saying, “I’ll get to it later.”

As we prepare to say goodbye to 2011, performing the following seven tasks will help you transition to 2012 with ease:

1. Purge Old Mail – This is definitely on my to-do list. I have a difficult time ‘releasing’ mail. I often keep it with the intent of reviewing it or filing it. Because this is a task that I dread, I have procrastinated to the point that I now have a significant amount of mail to shred! If this is your fate too, set aside a day during the holiday and just do it. I will be joining you on this journey. I am looking forward to the sense of accomplishment that I’m sure I’ll have once my kitchen counter is cleared of its current clutter.

2. Review Your Flex Spending Accounts (FSAs) And Use Remaining Balances – This is something that you should do right away. If you have elected to participate in the FSAs offered by your employer, you’re more than likely aware of the spend it or lose it policy. Make it a point to review any remaining balances, and if needed, schedule your final dental or doctor’s appointment for the year. Additionally, review the list of eligible expenses and take advantage of those as well. For those of you that haven’t taken advantage or are not familiar with this type of account, an FSA allows you to set aside a portion of your pre-tax earnings to pay for qualified expenses. FSAs are most commonly used for dependent care or medical expenses.

3. Prepay Your Mortgage – I’m sure that most of us are familiar with the term mortgage interest. If your payment is due January 1, why not pay it before the end of December to ensure that your mortgage interest is captured on your year-end statement for tax purposes?

4. Clean Out Closets And Make Final Donations – Similar to the purging mail concept, get rid of those items that you no longer wear or need. I know that we’ve all heard the phrase, “One person’s trash is another person’s treasure.” During this time of year, it’s important to consider those that are less fortunate; it’s the right thing to do, and it’s also a tax deduction. Don’t forget to request a gift receipt for your records!

5. Make a Contribution to Your Retirement Account – If you have an IRA, you have until April to contribute for tax purposes, but if you are contributing to your employer administered 401k, the deadline is year end. There may still be time to contact your benefits department to increase or make a final contribution for the year. The IRS communicated that the annual maximum contribution for 401ks is $16,500 for those under 50 and $22,000 if you’re older. If you’re contributing to an IRA, the IRS reported that the maximum contribution is $5,000 for those under 50, and $6,000 if you’re older.

6. Review Your Beneficiaries – While you’re making your final contributions for the year, take a moment to ensure that you have beneficiaries listed on all of your investment accounts. This is extremely important. If your company has an open enrollment period and you’ve added or confirmed the beneficiaries on your life insurance, you may have assumed that it also covers your retirement accounts; it doesn’t. Check each investment vehicle separately and verify that you have at least one beneficiary listed.

7. Write down Your Achievements for the Year – No matter what’s happened to you this year, you’re still here, which means you still have opportunity. Life is a journey that is filled with ups and downs. Before you celebrate a new year, take an opportunity to reflect on those things that went well for you in 2011. Perhaps you didn’t achieve every goal, don’t waste time thinking about what you didn’t do; take a moment to ‘pat yourself on the back’ and say, “job well done.” Make a commitment to become your own cheerleader. You are worth it!

I hope that this blog post has given you some ‘food for thought.’ This is indeed the most wonderful time of the year. As you enjoy your time with family and friends, make a commitment to complete some of the administrative tasks that we often put off. While it is important to ‘handle our business,’ I ask that you make a commitment to be ‘present.’ As I close, I’ll leave you with the following quote, “Yesterday is history. Tomorrow is a mystery. Today is a gift. That’s why it’s called the present.” ~ Unknown

From my heart to yours, Merry Christmas!

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