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I started investing in my 20′s when I came into a small inheritance from a great aunt. My fear of the stock market and recollection of stories of the great stock market crash of 1929 led me to consider investing in bonds as a safer way to grow my money. Flash forward several decades, as I prepare the lectures for my university Investments class, I am struck by how easy it is to decide whether to invest in taxable or tax free (tax-exempt) bonds. Learn this quick and easy formula and you will never wonder again whether it is better to snatch up those state or city municipal bonds that are offered by your locale or stick with corporate bonds paying a higher yield.

What is a Bond?

First, a quick tutorial for those just getting started. A bond is a loan to a company, city, state, or federal government. In exchange for the loan, the borrower pays the lender a coupon or interest payment. When you purchase a corporate bond, you loan money to a company and pay tax on the interest income received. Corporate bond  taxable.

What are Tax Free Bonds?

A bond in which the income produced is free from federal, state and local taxes. Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. Investopedia

Purchase a bond issued by your state to improve the roads and the interest you receive is exempt from federal and state taxes. Sounds like a great deal doesn’t it? Since the bonds are tax- exempt, they usually sport lower coupon (interest) payments.

So how do you determine whether you are better off buying a 5 year municipal bond issued by your state and paying 2.5% or buying a 5 year corporate bond paying 3.5%?

Tax-free or Taxable Bonds?

There is an easy way to determine which bond offers a higher after tax return. Calculate the Tax Equivalent Yield of the tax exempt bond and compare it with the yield of the taxable bond. Then choose the one that offers the greatest after tax return.

Try it out

Let’s assume that your state and federal combined tax rate = 30%

You can purchase a 5 year taxable corporate bond with a yield = 3.5%

Or, you can purchase a 5 year tax-exempt municipal bond from your own state with a yield of 2.5%

Which is the better deal?

This simple formula will tell you in under a minute.

Tax Equivalent Yield

Compare which is higher:  municipal bond return/(1-combined tax bracket) = taxable return (or tax equivalent yield) 

Taxable return = 2.5%/(1-30%)=tax equivalent yield of 3.57%

A taxable bond must pay at least 3.57% in order to beat the 2.5% tax exempt return on the municipal bond.

Since the best return on a comparable taxable bond is 3.5%, the investor in the 30% tax bracket is better off purchasing a tax free bond paying 2.5% interest, as this yield is equivalent to a taxable yield of 3.57%.

With the Bush tax cuts expiring at the end of this year, it may be time to check out investing in tax free bonds.

Can’t Get Enough Tax Free Bond Info?

What are Muni Bonds and Should I Own Any? @ Oblivious Investor

7 Pillars of Investing in Tax-Free Bonds @ Kiplingers

Put on for my City; Tax-Free Bonds @ Young Adult Finances

Investing in Municipal Bonds @ About.com

Bond Investing-What are Tax Free Bonds? @YouTube-eHow Finance

Have you considered investing in tax free bonds? 

image credit; google images_scminvestment

“I am proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money.” — Arthur Godfrey, entertainer courtesy of IRS.gov

There are two reasons why I usually do my own tax preparation.

Reason 1

Many years ago Money Magazine had a feature where they gave several tax preparers the same data and asked them to complete a tax return. Every prepared return yielded a different amount of tax due. How is that possible? Because the tax code is so confusing that there are a variety of interpretations concerning how to input the tax data.

Reason 2

When I used a tax professional, each year I found mistakes in the return. I would pick up the return, review it, and then have to return it to the preparer for corrections. How is does that happen? I’m not an accountant, yet, I found errors in my professionally prepared return every year. I understand that everyone makes mistakes, but every year?

I figured if the Money Magazine accountants couldn’t agree on how to prepare a tax return, and my tax preparers couldn’t complete one without errors, how much worse a job would I do? (Unfortunately, in 2010, I did have a small tax problem.) But, 2010 aside, paying a few bucks for Turbo Tax, saved me hundreds on accounting fees. Doing my own taxes didn’t even take much more time than putting all the records together for the tax preparer.

This Year I’m Using an Accountant

Although I usually do my own taxes, this year is different. Since we moved across country and bought and sold a house in two different states, I decided to use my corporate accountant for our personal taxes. But, I’m interested in saving money, so I decided to complete the return on Turbo Tax first and just let the accountant do the heavy lifting. The accountant will complete the forms associated with our home sale and the two different state returns. Since I decided in advance to file a tax extension, all I’ve done so far is sort the receipts and bought the Turbo Tax Program.

The Cheap Solution for Using a Tax Professional

My confession of employing a professional this year is tempered with the reality, that I’m still doing most of the work. By just using the accountant for the difficult forms, I’m making a trade off. I spend a bit more time, but I save a lot of money. Our tax records and returns are so extensive, that completing the usual schedule C’s, E’s, A, B, and D is just as easy as compiling the information. Hiring the accountant for the more confusing state returns and forms associated with the house sale and purchase is a great compromise. I’ve had so many challenges surrounding the “tax return issue” that I hope it works out okay.

I’ll let you know how it turns out!

Can’t Get Enough Tax Information? Check Out These Related Articles;

MSN Money asks, Should You do Your Own Taxes?

PT Money writes about the Tax Deadlines

Broke Professionals write about Eliminating Your Tax Refund

Smart Money instructs How to do Your Own Taxes

Financial Samurai ponders whether to Do Your Own Taxes or Hire an Accountant

Check out my submission to the Yakezie Carnival at Watson, Inc. this week.

Chime in, do you prepare your own taxes or outsource?

image credit; google images-llctaxes dot com

“A tax extension is an extension of time to file your tax return. However, it is not an extension of time to pay your entire tax bill.” efile.com

Why I’m Filing an Extension for Last Year’s Tax Returns

I decided to file extensions for our family’s tax returns as well as my corporate tax return. Here are the reasons:

1. We moved across the country last August. In tax speak, that means we need to file 2 state tax returns as well as a local return from our old town, on top of the federal return.
2. In addition to my corporate day job, I’m teaching a university class on Investments, continuing to write for this website, doing some freelance writing (at The Digerati Life, Benzinga, and FindtheBest), and putting the finishing touches on my personal finance book for Gen Yers.
3. We are refinancing our condo with a 15 year mortgage. (Just finished the refi, still have to or

I’ve filed extensions before, but this is the first time I decided in advance (not at the last minute) to postpone completing our returns. The first time we filed an extension was when our moron of a tax accountant didn’t return our phone calls and delayed getting our documents in on time. That was a totally different situation than this one. Needless to say, that accountant is history.

This year, I deliberately decided to space out my personal and professional demands. I’m the opposite of a procrastinator, which means in reality I can be working 24/7. Trust me, working all the time is not a healthy approach to life! This type of excess also cuts back on one’s personal productivity.  To be proactive, I decided in advance that I was not going to approach the tax returns until late Spring. I made certain to pay up by April 15th to avoid any late fees. Although the extension allows an additional six months to file the paperwork, I expect to have it all done by June.

Should You File a Tax Extension?

The time is coming up really soon to get that tax return in. Here are some questions to ponder when deciding whether to file a tax extension.

• Are you at your wits end right now?
• Do you have a tax preparer?
• Do you plan on filing your own taxes but haven’t completed them yet?
• Have you bought the tax preparation software yet?
• Are other pressures in your life overwhelming you?
• Will you have more time in the summer to handle tax related matters?

If you answered “yes” to any of these questions (or “no” to the one about the tax preparer or tax prep software), maybe it is time to file a tax extension.

Remember that a tax extension allows you extra time to file your tax return, not extra time to pay what you owe!

How to File a Tax Extension?

According to the IRS, there are three ways request an automatic extension of time to file a U.S. individual income tax return:

1. You can electronically file Form 4868 (PDF), Application For Automatic Extension of Time To File U.S. Individual Tax Return

2. You can file a paper Form 4868, by mail.

3. You can pay all or part of your estimate of income tax due using a credit or debit card (EFYPS) and obtain an extension during the process. This approach may involve an extra fee.

If now is especially busy and you expect more free time for tax preparation in the upcoming months, consider filing an extension of time. Just remember, those six months can pass by really quickly, so don’t put off your filing until August!

Read What Others are Saying About Tax Extensions

Efile talks about an IRS Tax Extension

KNS Financial instructs How to File for an Extension on Your Tax Return

Saving to Invest asks, Should You File a Tax Return or File a Tax Extension?

 Have you ever filed a tax extension? Did it cause you to procrastinate even more?

image credit; google images-blogcritics.org

Barb Recommends Reading List

As April 15th approaches, those in the USA are swamped with the arduous task of completing the dreaded tax return. I took the easy way out this year and decided to take an extension. That’s another word for putting the unpleasant task off. A tax extension doesn’t mean you don’t have to pay what you owe, but only that you can delay sending in the return for an extra 6 months.

I was really busy this winter and decided in advance I didn’t want any extra stress. It’s lucky I filed the extension as last week an audit notice from the IRS appeared in the mail box. I just spent a good part of 4 days pulling together all the requested documents. The 11 page packet went out yesterday and a huge weight was lifted!

For a break from all your required work, why not check out a compilation of some thought provoking articles from across the web.

Two Months of Entrepreneurship; The Good, the Bad, the Ugly at Invest it Wisely. My blogging colleague Kevin took the entrpreneurship plunge. Read about his volatile premier two months. I’m certain he’s destined for success!

Best Cash Back Credit Cards at Free Money Finance-He shows you the ins and outs of how to make a few hundred extra bucks per year. If you pay off your cards in full each month, this might be a strategy worth looking into.

40+ Passive & Extra Income Ideas to Help You Earn More at Moolanomy. I love ideas to boost your earnings. This article highlights some unique strategies for boosting your cash flow.

Our Experiences Staying at a Vacation Rental Instead of a Hotel by Mom’s Plans. Read this article if you’ve ever considered forgoing a hotel for an alternate accommodation when travelling.

Making Money Ain’t Glamorous at Afford Anything. This article tells it like it is. Even the “coolest” jobs are filled with drudgery.

Why Posting Everyday is a Silly Strategy-This is a great article for lazy bloggers as well as those who want to grow their numbers. Does that include everyone? This is a must read.

6 Ways to Save Money on Your Next Mortgage at Canadian Finance Blog-Just swapped our 8 month old mortgage for a new 15 year one. Payments are higher bus overall we’ll save $180,000 in interest payments. Find other ways to save in this informative piece.

Save on Gas at the Expense of Our Marriage from the Millionaire Nurse Blog; Read this entertaining “he said, she said” dialogue on gas practices.

Pinterest; My Favorite Free Traffic Source in 2012 by 2 Create a Website. This is a great article to help unpack the mystery of how to best utilize Pinterest.

5 Ways to Save Money While Eating Out in honor of Financial Literacy Money at Bucksome Boomer. Who doesn’t want to save money and eat out? Check out this creative video.

Winning the Lottery and Still Accepting Taxpayers Money at Everyday Tips. What’s your take on this unethical practice?

A Few Thoughts From Aunt Doris; Do I Know You? at Len Penzo dot com. You don’t need to be over 90 to encounter this embarrassing scenario. Read this for a good laugh.

Barb Across the Blogosphere

Carnival of Personal Finance at Nerd Wallet

Carnival of Wealth at Control Your Cash

Carnival of Financial Camraderie at Step Away From the Mall

Carnival of Passive Investing at Free From Broke

Have You Filed Your Taxes Yet?

image credit; lilsuburbanhomestead dot com

The Dreaded Letter

The thick IRS letter arrived and I assumed it enclosed the tax forms I ordered. I was wrong. The letter contained a list of 5 sources of income that were not included on my 2010 tax return. Total bill due the IRS including penalties and interest, $25,000.00.

google images from octaxlawattorney

Panic set in.

Ironically, 2010 was the year I was exceptionally familiar with the tax law as I served as a VITA volunteer tax preparer for the IRS. What was going on?

I caught my breath and raced upstairs to my home office to look for the 2010 return. Fortunately, even after a cross country move, I found the file containing the returns and a back up file.

Call to the IRS

After failure to reach my accountant (I guess 9:30 PM is a bit late for an accountant to be working), I decided to call the IRS early the next morning. I was quickly transferred to someone in the audit department. This helpful and confident man walked me through every item in the letter. We discussed what information the IRS needed. He gave me details and tips to avoid problems with this audit.

“Don’t sign at section one as that admits to owing the tax!”

I am in the midst of the arduous process of going through each of the claims and providing support that shows I have complied with the law and do not owe any additional tax.

Why was I Targeted for an Audit?

The major culprits were two certificates of deposit (CD) that came due in 2010. Last time I checked, as long as I paid the tax due on the interest received on the CDs, which I did, I was in compliance with the IRS. Here’s the problem, the principal received when the CDs came due were listed on my aggregate brokerage statement. I didn’t include this repayment of principal as I didn’t think it was necessary.

Fortunately, the fix for this oversight is to prepare an amended schedule D with the cost basis and sales price listed on the CDS. Since these amounts are the same, no tax is due.

There were three more items on the audit. Two of them dealt with education credits. The IRS wanted to make sure we incurred the tuition costs for which we were claiming a credit. Another quick search revealed I had no idea where my receipts were for the tuition we paid on behalf of Jr. Carino for her college expenses in 2010. No problem. After a quick call to the University, the assistant controller emailed me a receipt of tuition payments.

The final two issues regarded an IRA rollover. I’ve been combing IRS documents for two days. Have you ever tried to make sense of these booklets? I don’t know who they are written for, but it is not the general public.

As far as I can tell, without revealing too many details, there is no tax due on those rollovers either.

According to my calculations, we don’t owe anything and we have back up and documentation for all the contested items.

Tips for Handling a Tax Audit

Audits sometimes happen. Usually they begin with a letter in the mail. In fact, I’ve been through this before and am confident that our issues will be resolved after a lot of research, documentation, and letter writing. These tips will serve you well in handling your records and preparing you for the dreaded “audit letter”.

1. Keep copies of prior year tax returns.
2. Keep copies of all documentation to back up the returns.
3. Know where your copies are.
4. If you have an accountant prepare your taxes, understand the documents yourself as well.
5. Call the IRS for clarification. This lets the IRS know you are responsible and gives you additional information and clarification.
6. Make notes on the IRS conversation.
7. After completing the amended documents required, write a detailed letter outlining your case. Leave nothing out.
8. Keep copies of everything.
9. Send the information back to the IRS in a certified, return receipt packet. That way you have a record of the date mailed.
10. Follow up with a call to the IRS in a month to check on the progress of the audit.
11. Consider using a program like Turbo Tax 2012 to make your records easy to access in the future.

Life throws you curve balls when you least expect them. Be resilient and tackle the issues head on. You will get through the tax audit. Accept that it will take time, organization, and follow through.

Can’t Get Enough Tax Audit Information?

10 Most Im portant Things to Know About a Tax Audit; IRS Tax Attorney

How to Handle a Tax Audit; Smart Money

How to Handle a Tax Audit; Financial Highway

How to Handle a Tax Audit; Bloomburg  Businessweek

Have you ever gone through a tax audit? How did it work out?

& Barb Recommends Links

Sign up on right to get free WEALTH TIP’s Newsletter, and FREE bonus eBook; 20 Minute Guide to Investing! If you like what you’re reading here, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.

“Our current economic crisis calls for bold action to truly stimulate the economy and Renew America back to its greatness.” Herman Cain

9% Business Flat Tax

9% Individual Flat Tax

9% National Sales Tax

Aside from the fact that there is no way this proposal will be passed, a national sales tax is regressive.

A regressive tax disproportionately hurts the poor!

That’s right. The poor are hurt most by this system!

Consider FAMILY #1 with 3 kids and $30,000.00 per year annual income, a trip to the mall for back to school clothes and supplies costs at least $250.00. Tack on 9% sales tax or $22.50. For the FAMILY #2 making $75,000.00 that same trip also pays $22.50 in tax payments. But here’s where the lower income family gets screwed.

FAMILY #1: $22.50 is taxed .075% of their $30,000.00 annual income

FAMILY #2: $22.50 is taxed .030% of their $75,000.00 annual income.

The tax impact on the poorer family is more than double that of the wealthier family. That is not fair.

Then consider the additional impact of state taxes on top of that, and the poor family is totally penalized!

The Takeaway

A flat sales tax disproportionately hurts the poor. It is a bad idea. A flat income tax has some merits as long as those at the lower income levels are exempted, but the idea will never catch on! There are too many individuals supported by our existing tax system.

So, Herman Cain, although charismatic and innovative is going down a no win path.

BARB RECOMMENDS

Please enjoy these superior articles from top personal finance bloggers.

Causes of Stress; Rating the Most Stressful Financial Events at The Digerati Life. After spending the entire summer in transit, waiting for our short sale home, halfway across the country, to come through, I know firsthand about financial stress!

Laura Adams from Smart Moves to Grow Rich writes about 7 Tips to Choose the Right Life Insurance. You can read or listen to it!! But, don’t avoid, it’s important.

Online Income Report-September at Tight Fisted Miser-Who doesn’t like money? See how Andy does it!

My Current Financial Problem; Too Much Extra Cash at Buy Like Buffett. This is how hard work pays out. Mark Riddix is a great model.

OccupayLA by Wealthinformatics-Great reporting on the inside scoop from a real person. Get the scoop about the movement by someone on the street, for real.

OccupyPortland at Retire by Forty-He actually went down to query the protesters in person. Read about it firsthand, it’s fascinating.

8 Ways to Waste your Cash Back at Money Smart Life-Cash back credit cards are great, but…… beware of wasting the rewards through bad behavior.

11 Steps to Financial Freedom; Step 5, Set Your Top Three Goals at Boomer and Echo- I am a huge fan of goal setting. It is the key to success! (Of course you have to act on the goals too )

Best Investment Advice, Avoid the Next Fad at 20s Finance-Jump on the fad investing bandwagon and watch your wealth decrease.

Barbara Friedberg Personal Finance Across the Blogosphere

Guest article:

How a Vacation Can Teach You About Financial Markets at Dividend Ninja

Mentions and Carnivals:

Carnival of Personal Finance at Squirrelers posted What should I invest in?

TotallyMoney Blog Carnival at BankNerd.ca posted How to Get Rid of Debt; Start Here

Carnival of Wealth at Control Your Cash posted Money Tips

Young Adult Finances mentioned her Forex Guest post at my site.

20s Finance included Get Rid of Debt in his week-end round up.

MoneyGreenLife included What Should I Invest In in his Friday iphone Roundup.

101 Centavos included GO BEYOND KEEPING UP WITH THE JONES in his round up.

So what do you think of the Republican Presidential Candidates? Anyone you agree with?

image credit; subxinu

UPDATE; Over the next month my family is moving across the country to a new home. Please enjoy a variety of guest articles from top notch bloggers and sponsors. Also, catch up with earlier favorites from Barbara Friedberg Personal Finance.  

For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.

Below is a guest post from Super Frugalette. She blogs about being elegant in a fiscally contentious way. She shares with us that the IRS caught a faux pas on her tax return. It netted her $800 but wounded her pride.

In the past my last job, before I accepted the position of full time family COO (otherwise known as a stay at home mom), I worked as an accountant. I have done countless 1040s…I have done my own taxes for years. Many of the years had more complicated returns with Schedule E  (rental real estate) and one year painstakingly tracking $22K worth of medical expenses for Schedule A.

Thus you can understand how horrified and humbled I was when I received a letter from the IRS stating that I had made an error. The letter told me that I did not include Schedule M and that I would be receiving $800. Schedule M is the “Making Work Pay Credit”. It is refundable tax credit. Most workers have received the benefit of this credit in their paychecks. Thus, their paychecks were larger.

How could I forget Schedule M?

Everyone gets M!

(Well not everyone, but if you make less than $95,000 as a single person or $190,000 as a married couple and you have income, you qualify for the making work pay credit…I am starting to get way too excited about talking about taxes so I will stop…)

I knew everyone got M in 2009. I had forgotten that it continued into 2010 as well.

If I had paid for tax software, Schedule M would have been listed as a form for me to fill out…but no, I *do* taxes…I know it is snobby but it feels so beneath me to pay for tax software and I am a huge fan of freefillableforms. I mean it is FREE. What is better than FREE.?

$800 is better than free.

I wish I could say that I “learned my lesson” and that I will not use freefillableforms again. I will. However, I have new faith in the IRS. They are not just interested in auditing your return but ensuring that you receive your credits too.

So, the lesson learned from this story is do not be afraid to use free tax software. I still got my $800.

FYI – One month after I submitted my return, I received the letter that I had failed to file Schedule M. The IRS said it may take weeks for me to receive a check. The check was next piece of mail that I opened that day. It was right behind the IRS letter in the mailbox. I am thrilled I got a tax refund!

What are some of your oops financial moments? Ever had your money pride wounded?

“I save money when I’m working so I never have to take a role just for the money.” Gary Sinese 

I like hearing movie and television actors espouse smart money habits. It hammers in the importance of saving, regardless of 

Main Topic; Tax Time Has an Added Benefit 

I’m finally getting around to organizing our family records so I can complete our tax returns. In addition to W-2′s we have royalty income from published books, income from consulting, and dividends, interest, and capital gains. Before you turn away in disgust, let me say El Carino and I have been working many many many years in order to build up these revenue streams. We have devoted lots of time and money to education….. and many hours to work outside of the typical 9 to 5 gig. 

I was somewhat surprised when I complied all of the 1099′s and various tax forms. I certainly don’t feel like we are swimming in cash. Of course with a daughter in college, the money goes out rather quickly. 

Practical Application; Out of Sight Out of Mind

The reason these tax forms caught me off guard is this; almost every bit of our additional income goes immediately into savings. And a  big chunk of our regular salaries goes into retirement funds. So the actual money we have in our checking account, which we use for our living expenses is rather modest. We live a life free of excess and filled with lots of low cost fun.

I realized something that the famous financial writer, Jane Bryant Quinn stated in one of her many books; If you don’t see money in your account, YOU WILL NOT SPEND IT.

Her budgeting advice was brilliant, transfer a set amount from your paycheck into savings, and spend the rest. You’ll build up savings and you will learn to make do with what you have, not the other way around.

Instead of saving what you have left at the end of the month, which won’t be much, save at the beginning, and spend what’s left. Trick yourself into thinking that you have access to less cash and I promise, you won’t miss it.

 Say no to a couple of extravagances during the month, and over time, your net worth will grow.

ACTION STEP:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.  

Even if you already have money transferred from your paycheck into a retirement account, have a bit more transferred into a savings or brokerage account. Write in a let me know if you miss it! 

And if you don’t have any automatic savings, get started NOW, having money from you paycheck transferred into a retirement and savings account. 

What are your tricks for keeping cash from flying through your fingers? 

Stop by Everyday Tips and Thoughts today to read my featured article entitled, “Why I Don’t Want a Smart Phone.”

For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed and follow me on twitter so you get the word immediately.  

image credit; John-Morgan

A version of this post was originally published on March 15, 2010

“I am favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.”
Milton Friedman

All I can say about this quote is “ME TOO.” Yet I also really like some of the stuff taxes pay for, like roads, national parks, social security, education, etc. So I guess my recommendation on this matter would be to cut all taxes that I don’t like, and keep the ones I like!                         

Main Topic; I Prepare Many Tax Returns

I have a lot of taxes to complete; our personal family federal, state, and local, my daughter’s, and my corporation’s business tax preparation. I usually tackle this overwhelming annual project by breaking it down into bits. And I try to get the worst ones done first. So far, I’m almost done with all of them (just Jr. Carino’s and the local remain).

Additionally, (refers to 2010) I finally achieved something that I’ve wanted to do for several years. I passed the 2 qualifying exams to volunteer as a tax preparer for low income families. So, on top of all these personal tax returns I must do, I assisted others a couple of hours per week with their taxes.

 I like to give back, but I don’t want to do any volunteer work that isn’t interesting and fun for me! And that’s why I chose the tax prep.

So here’s the summation, I have a lot of tax returns to do!

I know that everyone reading this also has to do their own taxes or pay a professional to do them.

 And most of us look at this annual ritual with disdain.

Practical Application; Benefit from Action

Aside from the benefit of doing something for others, the volunteer tax prep informed me of  INCREDIBLE TAX CREDITS. Because we are paying some college tuition fees for our daughter, we got to take advantage of the American Opportunity Grant and got a very nice TAX CREDIT! We also qualified for another credit called Making Work Pay! These credits make the tax preparation a little less painful this year.

A tax credit is the equivalent of FREE MONEY!

You’ll see that you probably qualify for some really cool tax credits this year. If you make any side income, fill out a Schedule C and make sure to take all of the deductions for which you qualify! Actually, our family has some schedule C and E income. It’s well worth your time to review the related tax publications at IRS.gov to increase your knowledge of the deductions for which you are eligible. If you can itemize, you may encounter an even lower tax bill!

So, what is the personal finance task to do NOW in order to feel great?

DO YOUR TAXES NOW AND YOU WILL FEEL GREAT!

Here is why…… You will have gotten them out of the way and they won’t be hanging over your head. Thus, more time for other activities!

Action Step:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it for all of your personal finance goals, thoughts, activities, and plans.

Start your tax prep today. Just do a bit today. And then do a bit more every day until you are finished!

Write and tell me if you started your tax prep and/or finished it. DID YOU FEEL GREAT OR NOT? If you finished and didn’t feel great, feel free to blame me!  

For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed and follow me on twitter so you get the word immediately.  

image credit; lastnychero 

“In this world, nothing is certain but death and taxes.” Benjamin Franklin

The only way to avoid taxes is to be dead or not to earn any money. Which alternative would you choose? As Franklin succinctly implied, there is no positive manner to get away from the tax man!

Let me continue by saying, even as a personal finance writer, taxes don’t excite me. That said, there are some reasons why you need to focus on them.

MAIN TOPIC: The Benefit of Knowing About Taxes

How much time do you spend researching a new washer and dryer before you buy one? Or what about a new computer? If you’re like most people, you spend a considerable amount of time reading reviews and checking prices on line before you make a major purchase.

Now, how much time do you spend trying to understand and reduce your taxes? Probably not too much. Yet, taxes are one of the biggest expenses incurred, and you don’t just pay them once per year, but every year during most of your life. Ask yourself if it’s worth a few moments to familiarize yourself with the federal, state, and local tax codes in order to save thousands of dollars over your lifetime.

Fortunately, my parents were very savvy business people and serial entrepreneurs. I remember the times my dad would sit me down and talk to me about capital gains, business expenses, and ways to cut the tax bill. I learned so many legal ways to minimze taxes, that I’m sure our family has benefitted substantially. And, it has become a habit to think about legal ways to reduce our family tax bill.

Let me be clear, I AM NOT AN ACCOUNTANT AND ANY SUGGESTIONS IN THIS ARTICLE MIGHT NOT BE APPROPRIATE FOR YOU! That said, I’d like to share an incomplete and somewhat random list of helpful tax saving information. I invite any accountants out there to chime in with additional recommendations.

PRACTICAL APPLICATION; Pay Less Taxes by Having Less Taxable Income

The lower your TAXABLE income, the lower your taxes. None of us pay tax on every penny we earn. The key is to earn a lot, and get enough deductions and exemptions to make your tax bill smaller.

According to Jeff Schnepper of MSN Money, you get certain deductions whether you itemize your taxes or take the standard deduction. These deductions are worth examining; IRA and certain pension deductions, student loan interest, moving expenses, alimony, medical savings account deductions, self-employed health insurance premiums, and one-half self-employment taxes paid.

Contribute as much as you possibly can to an IRA and/or workplace retirement account. The dual benefit means you’ll have more money in retirement and pay less taxes.

Decide whether to itemize or take the standard deduction by calculating which approach will allow you to pay less tax. If you itemize your taxes, there are many more items which may be deducted such as mortgage interest, charitable contributions, real estate and other taxes, and business losses. If you have a small business where you make some income (like a blog), you have a wealth of expenses related to your business which may be deducted. If you qualify for itemizing, do a quick check and prepare your taxes with the standard deduction and again with itemizing to determine which method results in a lower tax bill.

Credits are the best, because a tax credit is a dollar-for-dollar decrease in your taxes. Some of you will qualify for the child tax credit or the child and dependent care credits. There are also some education credits available for the student(s) in the family.

For those parents out there, aside from the pure joy of parenthood, you get up to $3,650 deducted from your income for each qualified dependent. Don’t forget to take it!

The tax brackets change every year, and it’s really important to understand how they work as well as your marginal tax rate. You pay differing amounts of taxes as your income increases. Your marginal rate is the amount of tax you pay on the last dollar you earn. Knowing the 2011 marginal tax rates will help you to understand how much of that fat raise will go to you and how much to Uncle Sam.

HELP

• There are many free and low cost tax preparation services available. If you fall under certain guidelines, the IRS (usually through the United Way) offers free tax preparation by trained VITA volunteers. I trained and provided this service last year and helped out a lot of folks as well as learned quite a bit about the tax code! Check with your local IRS office for more information.
• AARP also offers tax prep for older citizens.
• Even the IRS and state tax offices may help with your return; but be prepared to wait.
• HR Block and the IRS dot gov web sites, have a wealth of tools to help with your tax questions.
• MSN Money has loads easy-to-read tax articles.

For your own wealth, give your taxes a little extra time and you will reap tremendous benefits. 

ACTION STEPS:

 Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

• Commit a few minutes each week to increase your tax knowledge.
• If you have a side business, keep track of your expenses and include them on your taxes.
• Give to your favorite charity and make a quick trip to Goodwill or the Salvation Army for a charitable contribution deduction before the end of the year.  
• Even if you don’t prepare your own taxes, consider using a free on-line tax preparation service or buying some tax preparation software to learn how you might lower your tax bill.
• Don’t forget to learn about special tax benefits like the 2011 energy tax credit.

 If you like what you’re reading, pick up my RSS feed and follow me on twitter so you get the word immediately. 

image credit: JD Hancock

What are your tips for LOWERING THE TAX BILL?