So did ya get a big tax refund?  Yeah?  Wooohooo!

No, wait.  Hmmmm… Maybe not so good.  Wait a minute, do you mean that I let Uncle Sam have all that money all year?  When it could have been (at least) slumming in my savings account?   Hey, maybe I should fix that.

If you had a large tax refund, then your employer is likely over-withholding from your paycheck.  Your employer’s calculation assumes that you’ll use the standard deduction, so if you itemize, you’ll probably want to reduce your withholding.  The larger your itemized deductions (as a percentage of your income), the less you’ll want withheld.

Now I agree with Nina, over at Queercents, that it is nice to get a refund at tax time — much better than having to write Uncle a check — but you don’t need to drive your refund to zero, just bring it down a notch or two.  It’ll help your cash flow throughout the year.  Bonus points will be awarded if you set up an automatic investing plan to invest the tax savings every paycheck to take advantage of dollar-cost-averaging. Continue Reading »

My article on Why don’t more 401(k) plans include index funds? was published today in the Carnival of Personal Finance hosted this week at FIRE Finance.

I’ve submitted ETF’s vs. Index funds: The good, the bad, and the ugly to the Money Hack Carnival being hosted this week at Financial Highway.

If you pay estimated taxes, remember that the 1Q 2009 bill was due 15 April 2009. With everyone focusing on finishing 2008 taxes, it’s easy to overlook this deadline for the current year’s obligations.

If your primary income is from an employer that withholds sufficient tax, so that when you file your income tax you either get a small refund or a small bill — generally less than $1,000 — then you don’t need to file estimated taxes.

If you have significant other income, for example, from investments, then you need to calculate the additional tax you will owe, and send it in.

If you own or participate in a small business, then you need to calculate the business’ quarterly profit. The profit is distributed to you (if you are the sole proprietor), or to the partners (if it is a partnership). You must pay self-employment tax of 15.3% plus income tax on your income from the business.  If your business is a corporation, then consult the relevant regulations.

If you are self-employed as an independent contractor, you might not think about income tax until you start receiving 1099-misc’s at the beginning of each year.  Turns out that you really do have a small business — the business of you — whether you think about it that way or not.  And, yes, you should pay estimated taxes, including the self-employment tax.

“Taxes are the price we pay for a civilized society“  Oliver Wendell Holmes, Jr.

1040-ES:  Estimated Tax for Individuals

Photo credit: stock.xchng

Dana and I enjoy playing board games such as Carcassonne, Catan, and our latest addiction, Dominion.  I find it useful to establish a strategy early on and stick with it — whether it’s focusing on gathering wheat or maximizing the land grab, having a plan and carrying through seems to win more consistently than switching tracks halfway through.  That doesn’t mean that there hasn’t been the atypical game, when it started off looking like wheat was the way to go, but suddenly the dice rolls were continuously directing you to buy steel.  You gotta learn when to go with the flow, too and not be too rigid.

I’m not surprised that consistency is also advantageous in investing, as reported in a recent paper from the Finance Department at University of Texas, Austin.  I only have access to the abstract, so I haven’t read the entire paper, but the authors found a direct correlation between a fund manager’s consistency and the fund’s performance.  In their lingo, they say that they “demonstrate that, on average, more style-consistent funds significantly outperform less style-consistent funds on a risk-adjusted basis.”

Tip ‘o the green shade to Abnormal Returns for the original link.

I’m always interested in what we can learn from other cultures.

I really don’t know much about feng shui, but I remember that when Dana and I were trying to sell our home in New Jersey, we had several propsective buyers who liked the home except that the main staircase was straight and was aligned with the front door, making the house unacceptable. I do think there should be an addition to the MLS to indicate whether a property was designed with feng shui principles in mind; it must be difficult to house hunt if this is an important issue for the buyer.

I was in San Francisco last week at a convention at the Moscone Center.  I frequently took lunch by visiting the Whole Foods on 4th St., near Harrison.  It has the best salad bar I’ve ever seen.  Highly recommended, should you happen to be in the area.  You can take lunch to go and walk over to the Yurba Buena Gardens.  On a sunny day (and San Francisco does have several such days each year) it’s a great way to lunch and frugal, too.

But in addition to the salad bar, I was quite taken with the entryways at Whole Foods.  There are the usual motion-activated sliding glass doors, but these open into a small antechamber.  To continue on into the store you must go left or right around a glass wall.  Initially I thought it awkward to maneuver around it, especially at the busy lunch hour, but then I realized that it also prevented gusts of cold air from having direct flow into the store.  While San Francisco certainly isn’t the coldest city in the States, it is frequently chilly, and it can be windy.  Continue Reading »

An index fund is a mutual fund that owns all the stocks in a particular index.  The index could be the S&P 500, the NASDAQ 1000, the MSCI EAFE, or any of a hundred other indexes.  If you want your portfolio to have 80% domestic stocks and 20% international, then you could invest those proportions in two index funds.  This would instantly give you diversification across hundreds of underlying stocks.  Exchange traded funds (ETFs) are essentially the same thing, but they are considered slightly differently for tax purposes.  They are considered baskets of stocks instead of many individual stocks.  To me this is splitting hairs, but I’m sure it’s making investment companies buckets of money.  Let’s see if an ETF does us common folk any good.

Let’s compare two scenarios: investing $10,000 in an ETF vs. and index fund.

(Warning: Plot Spoiler: A good index fund is as good as an ETF; however, not all index funds are made the same.) Continue Reading »

This weekend, the Boston Globe had an article on a change made to 401(k) investment plans during the Bush administration.  The change enabled businesses to automatically enroll employees in the retirement plan — employees would have to take action to opt-out.  In addition, if the individual didn’t specify how to invest the funds, they would automatically be invested in stock-heavy funds.  The Globe article estimates that 1-2 million workers were affected by the new law, and of course with the markets in a free fall, these employees have lost much of their initial investment.

This origin of this change was the Pension Protection Act of 2006.  The Act changed many things about pensions and retirement accounts, including creating the default opt-in for 401(k)’s.  It would seem to be a good idea — to give a bit of a push to those folks who are reluctant to fund their retirement accounts, presumably out of procrastination or trepidation.  The default investment was determined by “Section 624(a) of the Pension Protection Act directed that such regulations provide guidance on the appropriateness of designating default investments that include a mix of asset classes consistent with capital preservation or long-term capital appreciation…”  In other words, the default was a conservative investment.  Fast forward to December 10, 2008 and the swift pen of the Joint Committee on Taxation, p. 12, relieved the restriction on default investments.  Hmmm… that was about 41 days before Obama took the reigns.  D’ya think maybe there was just a wee bit of lobbying going on by the investment powerhouses? Continue Reading »

April 15th is fast appoaching, and we all need to reconcile our accounts with Uncle Sam.  And Uncle doesn’t like to be kept waiting.

One strategy is to hide your stack of paper deep in your desk drawer and hope that the tax fairy will come along one night.  Surprisingly, this doesn’t work very well.

If you don’t have your return ready to file, it’s really quite easy to request a six-month extension.  Just be aware that it only allows you to file your return late — you still owe your tax on time.  If you don’t pay your tax by April 15th, you may owe penalties and interest.

You can file Form 4868:  Application for Automatic Extension of Time to File US Individual Income Tax Return.  The form is pretty straightforward — you enter your best estimates of tax owed and tax already paid.  If you think you will owe more, then send in a check or pay by credit card.

Interest and Penalties: You’ll owe interest plus a penalty on any tax not paid by April 15th.  The annual interest rate is 5%, but subject to change quarterly.  The penalty is 1/2 of 1%, up to a maximum of 25%.   If you do not file your return on time and do not file for extension, there is a minimum penalty of $135 or 100% of the unpaid tax, whichever is smaller.

One of the best tax deductions is a donation to charity.

There is a saying that heating with wood warms you twice:  once when you chop the wood, and once when you burn it.  Similarly, a donation to charity makes you feel good for supporting a worthwhile cause, and it puts a little lettuce back in your wallet.

Unfortunately, charitable donations are only deductible if you itemize.  If you don’t itemize, I’d still encourage you to contribute, because organizations need your help today more than ever.  I believe that the primary consideration in whether to spend money should be whether it makes your life more meaningful — not just what minimizes your taxes.

Nevertheless, if you can take the tax deduction, then let’s discuss how to maximize it. Continue Reading »