taxation Archives - Faithful with a Few

8 Things You Can Do With Your Tax Refund

Many people will be receiving (or have already received) a tax refund in the near future. Most people that I know plan to blow it on something that will not provide a benefit for their lives. Instead of wasting your refund and regretting your decision, try one of these 8 tips!

What To Do With Your Tax Refund

Start An Emergency Fund

Probably the most common characteristic of a financially stable household (besides the idea of living within their means) is an emergency fund. The point of this emergency fund so you can have money stashed away when something unexpected comes up.

If you are not financially prepared for emergencies, then you may be forced to rely on high-interest credit cards, or tap into your retirement savings in order to get by.

Pay Down Debt

Another great use of your tax refund is to pay off debt. This may seem like a boring option (especially when compared to how most people use their tax refund), but it will automatically earn a rate of return that is equal to the interest rate on your debt.

For instance, if you pay off a credit card that had an interest rate of 20%, then that is equivalent to earning 20% on an investment!

If you use it to pay off/down an installment loan (such as a mortgage or car loan), then you may have to specify that your extra payment should be applied to the principal.

Consider Paying Infrequent Expenses

Many times it can be difficult to remember those expenses which only come once or twice each year. Instead of being taken by surprise and sent scrambling for extra cash at the last minute, either pay or put aside money for these expenses using your tax refund.

Some of these can include your car insurance premium, a maintenance fee on a timeshare (don’t get me started on this one) or other property, roadside assistance fee, and any other types of subscriptions.

Save For Retirement

You can easily fund a retirement account, such as an IRA with your tax refund. If you have more than the current IRA contribution limits, then you can fully fund your account while taking advantage of one of these other options.

If for some reason you are not reaching the 401k contribution limits at work, you can use this extra money as a way to increase what you currently contribute. Of course, you can’t add outside money into a 401k; however, if you fall short of the contribution limit due to other expenses, you can use your tax refund to pay those other expenses and increase the amount that goes into your 401k!

Save For A Large Purchase

If you are looking to purchase a car (learn how to save money on car costs), new laptop, vacation, or any other large purchase, this may be your chance. Instead of going into debt to buy the item, you can use your tax refund.

Even if the amount of your refund isn’t enough for you to purchase the item outright, it can greatly reduce the time it will take to save up for it. You can also pad the account with bonuses, raises, and future tax refunds.

Give

Giving is a very important part of any financial plan – especially for a Christian (we are commanded to give). I know many people who have a strong desire to give, but are not able because things are too tight for them financially.

If you are in a situation like this, a large tax refund can provide you with the perfect opportunity to give. There are plenty of organizations that are looking for donations in order to fulfill their mission such as, your local church, a missionary, food banks and homeless shelters, and any other charity that is fighting for a worthy (to you) cause, and has proven to be reliable!

Start A “Blessing Fund”

One of the things that my wife and I want to do (once we are out of debt) is to establish a savings account that will only be for the purpose of providing financial blessings to others. By having a separate account for this, we never have to worry about depleting our emergency fund or any other “dedicated” savings when we come across someone in need.

If you have a desire to help people out at various times, but don’t always have the means when these times come up, use your tax refund to start a “blessing fund”.

Spend Your Tax Refund

I’ve talked before about celebrating small victories during your financial journey. Use some or all of your tax refund and do something that you have wanted to do, but couldn’t. Maybe go out to a fancy restaurant, or buy a New iPad or some clothes!

No matter what you choose to buy, use all or a part of your tax refund to treat yourself. Then take the rest and put it toward your highest financial priority. This way, you can celebrate achieving a financial milestone, without diverting funds away from your current plan.

Reader Questions

Did you receive a tax refund this year? If so, how did you spend/save it?
Do you purposely have excess taxes withheld during the year so you can have a large refund?
Do you regret how you’ve spent a previous tax refund, bonus, or other “windfall”?

5 Reasons You May Be Better Off Renting Than Owning A Home

By // by Kevin M

For many, many years the renting-vs.-owning question was a done deal when it came to housing. Everyone who could own a home did, and everyone who couldn’t aspired to do so as soon as possible. Is that still true today? Is renting a better option? And if so, what changes have caused it?

Renting Vs. Owning: 5 Reasons You May Be Better Off Renting

House Prices Aren’t Rising Any More

When house prices were rising steadily owning made far more sense than renting. You were building wealth in the form of increasing home equity while you were living in the property. But that dynamic has been missing for the past five years and even if it does return, it’s unlikely that it will be anything like the price increases we’ve seen in the past.

Consider the following:

Mortgage rates are at historic lows, house prices are lower than they have been in years, and yet prices show few signs of recovery
The 76 million-strong Baby Boom generation have entered the retirement years—a typical time of trading down or selling off housing completely
Generation Y is showing nothing like the fever to own a home that previous generations did
Millions of households have been impaired by the financial meltdown, effectively removing them from the housing market for a very long time
Though employment has been improving, jobs security is conspicuously absent

It seems that the combination of these factors are putting a lid on house prices and probably will for the foreseeable future. And if prices aren’t rising, there’s no imperative to own right now. Better to rent and see how it all plays out.

Freedom To Follow The Jobs

Let’s spend a little more time on item #5 from above. When you buy a home you’re usually signing a mortgage note that will bind you to the house for something like 30 years. Can you conceive of a job that you’ll have for 30 years?

Probably not.

Jobs and even careers are becoming notoriously unstable for reasons that appear to be beyond the financial meltdown. A 30 year mortgage requires some level of income stability for the term of the loan, and that may require not just changing jobs, but also uprooting to follow them to distant places.

If you have to make a geographic move to find work in your field, owning a home will complicate matters. You’ll have to sell or rent out your home in order to make the move. And if you can’t do either, you may have to pass up the job opportunity.

When you rent, it’s far easier to pick up and follow a job.

A House Is A Capital Trap

It’s not just a mortgage you have to contend with when you buy a home; you also have a down payment tied up in it. That wasn’t much of a problem when you could easily sell a home after just a few years—for more money than what you paid for it—or borrow out the equity any time you wanted. Today, your down payment is likely to be tied up for many years.

In addition, when you own a home you have to put money into repair and maintenance, adding thousands of dollars to the money you already have tied up in the house.

At a time when so many people are dealing with job and career issues, as well as debt problems, can you afford to tie up thousands of dollars in equity in a house? When you rent, all of your money can be held in liquid accounts ready for your use.

Maximum Financial Flexibility

Here’s something we don’t like to think about too much…if you were to experience a permanent income reduction, what would you do to lower your house payment to adjust to the smaller paycheck?

If you rent, you can move to a lower priced home or apartment, or even move in with family. If you own, you first have to sell your house. In today’s market, selling a house can take months or even a year or more. Worse, if you’re in a negative equity position, you may not be able to sell at all.

Renting provides the financial flexibility that’s more consistent with today’s economic and employment circumstances. Owning, because it’s long term in nature, is rigid and locks you into a lifestyle you may not be able to sustain—or get out of.

Some people may consider such thinking to be negative; I consider it being prepared.

The Mortgage Interest Income Tax Deduction Isn’t What It Used To Be

Real estate agents often hype the mortgage interest and real estate tax deductions as a compelling reason to own a home rather than to rent. Renting, after all, offers no income tax deduction. Two factors are now weighing against that assumption though.

First, interest rates are at very low levels—a 4% interest rate on a $150,000 mortgage, will produce only a $6,000 mortgage interest deduction. Second, the standard deduction is $11,900 for a married couple filing jointly in 2012; it’s possible that even owing a house will not get you any more than $11,900 in deductions. At best, you may only get additional deductions on part of your housing costs, but nothing like the 20%, 30%, or 40% deduction agents are quick to point out.

The mortgage interest and real estate tax deductions continue to be a real factor for higher income households buying higher priced homes. But for many middle class households, and most lower income ones, the deduction will make only a minor improvement in your cash flow.
Am I saying you shouldn’t buy a house? In many cases, yes, that’s what I’m saying. It’s not as “right” as it was a few years ago, not for a lot of people. Consider the value of owning against the possibility that the home could drop in value—would you buy knowing that might happen? Do you feel your job/career is stable enough that you’ll be able to make the payments and not need to move to another city for the foreseeable future? Is your financial situation strong enough that you could weather a prolonged period of unemployment and still keep up the house payments?

These questions were always a part of the homeownership equation—they’re just more relevant now than ever.

What do you think about owning versus renting today? Do you think the pendulum has swung in favor of renting?

photo credit: FreeDigitalPhotos.net

How The IRS Wants To Help You With Your Job Hunting Expenses

By // by Khaleef Crumbley

Normally, when we talk about tax deductions, we immediately think of IRA contribution limits, the standard mileage rate, or self employment tax. However, with so many people being out of work or working part-time hours, the job market is being flooded with applicants. This is why it is important to look at the tax deductions related to job hunting expenses.

Summer used to be the season for job hunting. I received a ton of announcements and advertisements for career fairs, resume services, and headhunters during the summer. However, since the economy has tanked, I get them all year long!

Due to this fact, the IRS has released a list of tax benefits for job seekers. So, while our Senators debate another payroll tax holiday, see if you qualify for any job search deductions.

A Few Guidelines Regarding Job Hunting Expenses:

You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.
You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.
If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
To qualify for a deduction, the expenses must be spent on a job search in your current occupation.

So, be sure to save all records of any of these job hunting expenses. Don’t forget things such as printing and copying your resumes, paying headhunters and agencies, and even travel costs.

Other Things To Note About Job Hunting Expenses:

You may not deduct expenses incurred while looking for a job in a new occupation.
You cannot deduct job search expenses if you are looking for a job for the first time.
You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.

So, in order to deduct job search expenses, it can’t be your first job search and it can’t be in a new field. Of course, just to complicate things, the IRS does not go on to specify what a “substantial break” actually is. However, if you decide to start your own business and become a young entrepreneur, then there is another set of tax laws that govern your situation.

To find out more about deducting job search expenses, see IRS Publication 529. If you have any questions regarding any other issues, please visit our tax help page. Also, be sure to contact us for professional tax preparation once you are ready to file.

Be sure you are aware of the tax filing delay, as well as the fact that the tax filing deadline has been extended this year. To get the most out of your financial situation in 2011, you should know the IRA Contribution Limits, 401k Contribution Limits, and the Income Tax Rates for 2011!

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Federal Income Tax Rates For 2011

By // by Khaleef Crumbley

The Income Tax Rates for 2011 haven’t changed much from 2010. This is because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law on December 17, 2010 (Click here if you would like to read the full bill). This Act included a last minute extension of the Bush-era tax cuts, which in turn confounded most projections regarding the federal tax rates for 2011.

If you recall, this is the reason for the income tax filing delay, but not the reason for the extension of the tax deadline.

First I will give you the income tax rates for 2011 in the form of a basic chart with the dollar range and the marginal tax rate. Then I will list the income tax rates using the form of the IRS rate table showing exactly how much you will pay in taxes.

Single: Income Tax Rates

Taxable Income is Taxable Income is

Over But Not Over Tax Rate

$0 $8,500 10%

$8,500 $34,500 15%

$34,500 $83,600 25%

$83,600 $174,400 28%

$174,400 $379,150 33%

$379,150 Unlimited 35%

Taxable Income is	Taxable Income is
Over	But Not Over	Tax Rate
$0	$8,500	10%
$8,500	$34,500	15%
$34,500	$83,600	25%
$83,600	$174,400	28%
$174,400	$379,150	33%
$379,150	Unlimited	35%

Below is the actual dollar amount that “single” taxpayers will owe:

If Taxable Income Is Over But Not Over The Tax Is:

$0 $8,500 10% of the taxable income

$8,500 $34,500 $850 plus 15% of the excess over $8,500

$34,500 $83,600 $4,750 plus 25% of the excess over $34,500

$83,600 $174,400 $17,025 plus 28% of the excess over $83,600

$174,400 $379,150 $42,449 plus 33% of the excess over $174,400

$379,150 Unlimited $110,016.50 plus 35% of the excess over $379,150

If Taxable Income Is Over	But Not Over	The Tax Is:
$0	$8,500	10% of the taxable income
$8,500	$34,500	$850 plus 15% of the excess over $8,500
$34,500	$83,600	$4,750 plus 25% of the excess over $34,500
$83,600	$174,400	$17,025 plus 28% of the excess over $83,600
$174,400	$379,150	$42,449 plus 33% of the excess over $174,400
$379,150	Unlimited	$110,016.50 plus 35% of the excess over $379,150

Married Filing Jointly: Income Tax Rates

Taxable Income is Taxable Income is

Over But Not Over Tax Rate

$0 $17,000 10%

$17,000 $69,000 15%

$69,000 $139,350 25%

$139,350 $212,300 28%

$212,300 $379,150 33%

$379,150 Unlimited 35%

Taxable Income is	Taxable Income is
Over	But Not Over	Tax Rate
$0	$17,000	10%
$17,000	$69,000	15%
$69,000	$139,350	25%
$139,350	$212,300	28%
$212,300	$379,150	33%
$379,150	Unlimited	35%

Below is the actual dollar amount that “married filing jointly” taxpayers will owe:

If Taxable Income Is Over But Not Over The Tax Is:

$0 $17,000 10% of the taxable income

$17,000 $69,000 $1,700 plus 15% of the excess over $17,000

$69,000 $139,350 $9,500 plus 25% of the excess over $69,000

$139,350 $212,300 $27,087.50 plus 28% of the excess over $139,350

$212,300 $379,150 $47,513.50 plus 33% of the excess over $212,300

$379,150 Unlimited $102,574 plus 35% of the excess over $379,150

If Taxable Income Is Over	But Not Over	The Tax Is:
$0	$17,000	10% of the taxable income
$17,000	$69,000	$1,700 plus 15% of the excess over $17,000
$69,000	$139,350	$9,500 plus 25% of the excess over $69,000
$139,350	$212,300	$27,087.50 plus 28% of the excess over $139,350
$212,300	$379,150	$47,513.50 plus 33% of the excess over $212,300
$379,150	Unlimited	$102,574 plus 35% of the excess over $379,150

Head of Household: Federal Tax Rates

Taxable Income is Taxable Income is

Over But Not Over Tax Rate

$0 $12,150 10%

$12,150 $46,250 15%

$46,250 $119,400 25%

$119,400 $193,350 28%

$193,350 $379,150 33%

$379,150 Unlimited 35%

Taxable Income is	Taxable Income is
Over	But Not Over	Tax Rate
$0	$12,150	10%
$12,150	$46,250	15%
$46,250	$119,400	25%
$119,400	$193,350	28%
$193,350	$379,150	33%
$379,150	Unlimited	35%

Below is the actual dollar amount that “head of household” taxpayers will owe:

If Taxable Income Is Over But Not Over The Tax Is:

$0 $17,000 10% of the taxable income

$17,000 $69,000 $1,215 plus 15% of the excess over $12,150

$69,000 $139,350 $6,330 plus 25% of the excess over $46,250

$139,350 $212,300 $24,617.50 plus 28% of the excess over $119,400

$212,300 $379,150 $45,323.50 plus 33% of the excess over $193,350

$379,150 Unlimited $106,637.50 plus 35% of the excess over $379,150

If Taxable Income Is Over	But Not Over	The Tax Is:
$0	$17,000	10% of the taxable income
$17,000	$69,000	$1,215 plus 15% of the excess over $12,150
$69,000	$139,350	$6,330 plus 25% of the excess over $46,250
$139,350	$212,300	$24,617.50 plus 28% of the excess over $119,400
$212,300	$379,150	$45,323.50 plus 33% of the excess over $193,350
$379,150	Unlimited	$106,637.50 plus 35% of the excess over $379,150

Married Filing Separately: Federal Tax Rates

Taxable Income is Taxable Income is

Over But Not Over Tax Rate

$0 $8,500 10%

$8,500 $34,500 15%

$34,500 $69,675 25%

$69,675 $106,150 28%

$106,150 $189,575 33%

$189,575 Unlimited 35%

Taxable Income is	Taxable Income is
Over	But Not Over	Tax Rate
$0	$8,500	10%
$8,500	$34,500	15%
$34,500	$69,675	25%
$69,675	$106,150	28%
$106,150	$189,575	33%
$189,575	Unlimited	35%

Below is the actual dollar amount that “married filing separately” taxpayers will owe:

If Taxable Income Is Over But Not Over The Tax Is:

$0 $8,500 10% of the taxable income

$8,500 $34,500 $850 plus 15% of the excess over $8,500

$34,500 $83,600 $4,750 plus 25% of the excess over $34,500

$83,600 $174,400 $13,543.75 plus 28% of the excess over $69,675

$174,400 $379,150 $23,756.75 plus 33% of the excess over $106,150

$379,150 Unlimited $51,287 plus 35% of the excess over $189,575

If Taxable Income Is Over	But Not Over	The Tax Is:
$0	$8,500	10% of the taxable income
$8,500	$34,500	$850 plus 15% of the excess over $8,500
$34,500	$83,600	$4,750 plus 25% of the excess over $34,500
$83,600	$174,400	$13,543.75 plus 28% of the excess over $69,675
$174,400	$379,150	$23,756.75 plus 33% of the excess over $106,150
$379,150	Unlimited	$51,287 plus 35% of the excess over $189,575

A Quick Note About Marginal Tax Rates:

As you can see from the tables above, a marginal tax system works very differently than a flat tax system. If the United States used federal tax rates based on a flat tax, then once you crossed over into a new tax bracket, all of your income would be taxed at that higher rate. For example, once a single taxpayer earned over $34,500 in taxable income, then they would pay 25% on all of their income.

However, due to our marginal tax system, this single taxpayer only has to pay 25% on taxable income over $34,500. You must keep this in mind when you evaluate whether a raise, bonus, or investment is as good or bad as it seems (especially when compared to a flat tax system).

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