JoeTaxpayer

I spent some time this past week cleaning up files on my computer, pieces of spreadsheets I’ve written, and articles I’ve download for future reference or food for thought for articles I’d like to write. Amidst the disarray, I discovered a 42 page eBook titled “Money Matters For All Ages“, which I am making available to my readers who haven’t seen it yet. This eBook is a series of separate articles written by 16 prolific finance bloggers.

(Link above is now fixed, please comment if you have any issue downloading the eBook)

Enjoy the weekend,

Joe

Not a major Faux Pas, but one that can cost you if you are playing the float on zero interest credit card loans.

For those of you not familiar with this, let me start with a description of what I am discussing. Despite the state of the economy and credit crunch we are in, a number of credit card issuers are still offering zero interest cash withdrawals for as long as 12 months, and some with no transfer fees. The no-fee deals make it tempting to borrow the money, put it in a CD, and just pay it back when the zero rate comes to an end. Of course, this is not for everyone. You set yourself up for the risk of a missed payment, (in my case I set up monthly automatic payments on line), or the temptation to spend that money instead of putting it into a CD. For others, the credit line offered isn’t high enough to justify the effort.

Now, to my recent mistake. When you have an outstanding zero interest loan, any new charges are typically incurring the standard interest rate. So, with an outstanding zero interest loan, I forgot that I had this same card set up to charge my eBay account seller fees. I recently had a sale that had a fee of $2.47. So this amount will accrue interest until I pay this card off in January. Now, interest on this tiny charge would normally be about three cents per month, but BOA credit cards have a minimum $1.50 per month finance charge. So the account will be subject to $7.50 in finance charges over these five months or about 1450% when annualized. Not enough to cancel out the interest I earned on this deal, but enough to offer this as a warning. If it’s early in the free year, and you accidentally pull out the wrong card to make a large purchase, you may find you’ve just negated the saving for the whole year’s deal.

(To be clear, I have no issue with BOA, their rules are clear, the $1.50 min finance charge is stated on their agreement as well as on the checks I used to draw the loan. This is just one of the ‘got ya’s to watch out for.)

Joe

I must admit, this only recently came to my attention. The fair tax (not to be confused with the “flat tax”) is a system that does away with income taxes completely, instead it taxes consumption at a 30% rate. Lower income households are “pre-bated” their projected sales taxes, so in effect, they would pay no tax at all.

Many questions occur to me as I ponder such a system. I’ve saved mostly in a pre-tax 401(k). Seems this system with let me access that money at retirement with no further taxes due until it’s spent, same as others would pay with money they’ve already paid taxes on. And therein lies the rub. How are these two sources of funds (one’s savings already taxed vs money in pretax accounts) differentiated? I feel sorry for the retiree who spent the last few years converting all his retirement money from a pre-tax IRA to a Roth IRA, now to only find a 30% sales tax waiting at the other end.

On the other hand, there’s a certain appeal to knowing that those in the underground economy, who are paying no taxes at all, will be drawn in to the system if only when they go to their local grocery store. I’m not sold either way, a lot more discussion is needed on this topic.

Joe

Some time ago, in an article titled Social Insecurity, I wrote about what I call Phantom Tax Rates. To understand this, one first must understand what one’s Marginal Tax Rate is. A single person, after taking his exemption, and deductions, will pay 10% of the amount up to $16,050, then 15% from $16,050 to $65,100, then 25% from $65,100 up to $131,450. Let’s stop there. The Phantom Tax Rate comes into play when there is either a phase out of deductions or phase in of other income. In the case of Social Security, when half of your Social Security benefits plus other income exceed $25,000 ($32,000 if married filing joint) your benefits start to become taxable, until 85% of your benefits are fully taxed. This create a graph that looks as follows;

While we would expect a 15% rate from $16,050 right to $65,100, instead we find that for each $1000 of income (or IRA withdrawals for the person for whom this chart applied) that the incremental tax is as high as $462.50.

In another situation, the adoption credit is phased out for AGIs between $174,730 and $214,730, and in the case I’ve been alerted to, the taxpayer loses $11,600 on the next $40,000 of income due to this phaseout. This loss, plus his marginal rate of 25% total 54.13%. My advice to him was to defer income if possible to 2009, which he will. By deferring that $40,000 worth of income he will pay $26,600 less tax this year, and just $10,000 when he receives this income in 2009.

When it comes to taxes, nothing is simple. When planning, it’s best to get a copy of TurboTax and run a few ‘what-if’ scenarios to best understand the impact of any financial changes you may incur.
Joe