Money Blue Book

The first month of the new year was a good month for me financially. Now you must be wondering to yourself – how can that possibly be – especially considering that my calculated net worth dropped in excess of $15,000 for the month of January. Well, because I only show a singular snapshot of my financial picture in each of my monthly net worth updates – they generally don’t reveal sufficient cash flow numbers to offer one a complete picture of my true financial health from all appropriate angles. Thus, the balance sheet numbers reflected on these reports can at times be somewhat misleading, as in this particular case. At first blush, my January numbers would seem to suggest that this particular month was a disappointing one. But truth be told, in terms of earnings stability and projected future income potential, January 2010 was yet another reliably steady month for me.

For January 2010, the combined income accumulated from this personal finance blog, the revenue generated by my other online affiliate ventures, and the part time income I earned from my small legal practice as an attorney – all saw slight increases. However, much of the income stats were gobbled up by the hefty estimated tax payments I had to make to the federal and state government during the month. Because I operate my small business and solo legal practice using a cash basis form of accounting, I don’t spread the estimated quarterly tax payments evenly throughout the year, but rather record them on my personal financial balance statements only when they are actually paid out – resulting in these precipitous drops in total net asset value that occur four times a year.

There was one major financial hit however which came from a furious stock market correction that reared its ugly head at the latter half of the month, which pretty much wiped out the hefty gains I would have been on track to record. But as far as the worth of my stock investments go, I don’t generally pay substantial attention to them – as I see them as long term investments that will ultimately pay off years down the road. Month to month dips in stock portfolio value don’t generally rattle me in any significant way (so long as there aren’t serious financial Armageddon type issues lingering in the market). On the whole, so long as I can continue to pull in a steady income with my online website businesses and small legal practice, I am generally content to stay the course. No one ever said becoming a millionaire would be easy, as there are bound to be unexpected bumps on the road. But so long as the rules haven’t changed to any major degree, the economic and financial landscape will inevitably improve in the long run, and such long term investments will ultimately enjoy much success.

My Current Net Worth and Financial Status Update Compared To Last Month

Paying My Quarterly Estimated Taxes As A Self Employed Taxpayer

For those not familiar with what quarterly estimated taxes are in general, or not sure as to why they took such a big bite out of my networth this month, here’s a quick explanation. Estimated taxes are basically the  income taxes that self employed individuals like myself  pay on income that is not subjected to withholding. This income includes everything  from self employment income, interest, stock dividends, rental income, and gains from the sale of assets, etc. It’s important to pay attention to this obligation, because failure to timely pay the quarterly assessed estimated taxes on time does result in a hefty penalty and associated interest charges, even in those cases where you are ultimately due a refund when you file the tax return.

Most people never have to deal with paying estimated taxes because their employers usually already withhold their federal, state, and social security taxes on their paychecks. But for self employed small business owners like myself, because we don’t have someone else to withhold these types of taxes for us, the Internal Revenue Service (IRS) has mandated that we do so ourselves – requiring us to make four projected pre-payments throughout the year at set intervals on April 15, June 15, September 15, and January 15 of the following year. One of these hefty tax payment dates occurred in January, which is why the vast bulk of the income I generated during the month was siphoned off to pay the Man. But next month, my networth will likely return back to its regularly anticipated upward growth trajectory.

Buy Low, Sell High – And Continue Investing In A Down Stock Market

Some are saying that we are up for another routine market correction after a somewhat furious run up from spring 2009, while others are running around in circles predicting another major collapse again. But once you cut past the rhetoric and emotional hyperboles, you realize that it’s really just business as usual. The economy naturally ebbs and flows and there is always bound to be good stock market days and bad ones as well. But if you are generally optimistic about the distant future as I am and are willing to make your long term investment bets today, I am confident that years from now, your investments will pay off quite handsomely.

While I keep a rather sizable amount stored away in my safe and secure FDIC insured high interest bank accounts for emergency fund purposes, the vast bulk of my savings reside in discount broker accounts – invested into a variety of long range investments. I intend to stay invested for quite a few years – at least 3-5 years before I plan to engage in any significant portfolio reshuffling. I think the market is currently at its low and that all indicators strongly suggest that there is only tremendous upside from hereon. It is certainly possibly for the market to continue getting spooked and experience a pullback, but I don’t think we are in for another financial Armageddon scenario or are on the verge of a serious economic depression – the likes of which were talked about during the early part of last year. We are definitely on the road to economic recovery – however, admittedly, the road is long, and heavily paved with pot holes and obstacles.

Cashing In and Taking Advantage Of Credit Card Rewards and Bonuses

This month I also happened to redeem a rather large chunk of the credit card rewards I’ve accumulated over the last many months – converting my various credit card reward points into usable currency – namely, gift cards. Overwhelmingly, the more lucrative card reward program I use at the present time is the Citi Thank You network, with the American Express Blue Cash program being a close second. Because I used reward credit cards to pay for pretty much everything I purchase, I tend to rack up a substantial amount of reward points in a very short period of time.

The amount of credit card reward points I had accrued after only a year of routine credit card spending was rather enormous (in my opinion) – an amount that exceeded a value of $1,500. Ultimately, I decided to convert the majority of them into gift cards to places like Marshall’s and Macy’s. I don’t go shopping for clothing very often, but I’ll probably go on a small shopping spree in the near future with my new found loot. I had the option to convert my accrued credit card reward points into a cash lump sum, but for those who are familiar with credit card rebates and rewards, the point to cash conversion rate is frequently pretty low – and you tend to lose a big chunk of your points during the conversion process. While pure cash back credit card rewards are more versatile and bypass the hassle of having to manually convert accrued points into usable gifts or rewards, I’ve found that point based reward programs tend to offer a higher purchase rebate percentage. If you don’t mind a little work or putting in a little effort towards micro-managing your points, you’re better off going with a point based reward program.

I know credit cards tend to get a very bad rap with many out there believing them to be the source of all evil as evidenced by the government’s recent crusade to regulate every aspect of how credit card issuers run their businesses. However, I personally feel credit card programs are what you make of them. If you spend responsibly and pay off your balances in full every month, the credit card usage incentives they provide can be extremely lucrative. Even those who persistently carry monthly balances are not without options – there are a variety of 0% balance credit cards and low interest credit card deals out there for the qualified applicants to take advantage of. Keep those FICO credit scores high and monitor them regularly with programs like MyFICO Score Watch like I do, and you’ll ensure that you’ll always have access to the best credit card offers according to your personalized needs.

If you’re a new home buyer, or an existing homeowner who has been contemplating about selling your house or condominium apartment – you might want to start taking decisive action fast. There is free government money in the way of tax credits to be had for both prospective new home buyers and current homeowners – to the tune of either $8,000 or $6,500, depending on your qualifications.

To keep this stagnating economic train running, President Barack Obama has recently signed a new bill – extending the duration and expanding the coverage of the federal housing tax credit. Previously, the economic stimulus package only provided free tax credit assistance to first time home buyers and was slated to expire in late 2009. But with economists and pundits still doubting the ability of the economy to recover without additional stimulus intervention, the federal government has now officially extended the deadline of the federal homebuyer tax credit program until April 30, 2010 for new home contracts, or until June 30, 2010 for the final closing. The home’s closing can occur by June 30, 2010 and still qualify for the free tax credit, but the contract  to buy the home must be completed by April 30, 2010 at the latest. Those looking for a further extension after early 2010 might be disappointed as current indications suggest that this extension may be the final one.

To incentivize and encourage continued homebuying activity (as much of our economy is intertwined with the housing industry – example: banks, construction related services, home equity based spending), the new federal legislation will not only extend the current program’s eligibility deadline for new home buyers, but it will also add additional tax credit incentives for qualifying existing home buyers who choose to move out of their present homes and trade up for new homes. While the whole motivation behind the federal government’s approach towards providing housing tax credit assistance is to jump start and spur on sluggish housing sales, it really remains to be seen whether this will ultimately have a sustainable long term impact on the economy. Hopefully, the government’s well meaning emergency actions today won’t drive us into irreparably dire deficits and higher tax brackets down the line. After all, it’s been said that the road to hell is often paved with good intentions.

Buy A New Home Not For The Tax Credit, But Because It’s A Good Investment

As a new first time homebuyer myself, I recently purchased a new construction home in August 2009. Despite the fact my high income precludes me from qualifying for the housing tax credit, even if I qualified for it, it’s unlikely the tax credit alone would have been the primary impetus for my home purchasing decisions. In almost all of the reputable surveys I’ve seen on the subject, including ones conducted by the National Association of Realtors (NAR), only a tiny portion of first time home buyers cited the tax credit as the primary reason behind their recent decisions to purchase a new home. I think the strongest encouragement to buy a home now comes not from the federal government’s tax credit incentive, but rather from the innately driven love of the American people to own their own homes, and the current prevalence of favorable market conditions in the way of super low mortgage rates and depressed home prices that have plummeted 25-30% from their previous year 2005/2006 highs. I know the primary reason I decided to pull the trigger now and purchase a home for the very first time was not because I wanted to take advantage of any federal housing tax credit, but due to the fact that home prices in my target neighborhood have dropped into incredible lows and now sit at once-in-a-lifetime levels of affordability. For those of you who have been contemplating the prospect of buying a new home for the very first time or even for those of you who are long time homeowners pondering the idea of swapping up for a new and improved home – now may be the time to do it. The free housing tax credit carrot that the federal government is now dangling as an incentive for qualifying individuals might be just what you needed to push you over the decisional edge.

For both the $8,000 tax credit for first time home buyers and the newly expanded $6,500 tax credit for existing homeowners looking to buy a new home, there are a few restrictions in the way of income limits and what type of home may qualify. Buyers claiming the tax credit must be at least 18 years or older, and no individual or couple may receive the credit if he or she may be claimed as a dependent on someone else’s tax return. For both housing tax credits, the credit gradually phases out for individual single filers with $125,000 and $145,000 of modified adjusted gross income (MAGI). For married couples, the income range phaseout is between $225,000 and $245,000. Beyond $145,000 for single filers and $245,000 for married filing jointly couples – the tax credit is completely phased out.

How To Qualify For the $8,000 First Time Home Buyer Tax Credit

To be considered eligible, you must first and foremost be a first time home buyer – defined as an individual who has not owned a principal residence home in the past 3 years prior to the present purchase. This definition of “first time home buyer” also includes both partners of a married pair. There is some flexibility as to which tax return year the tax credit must be claimed. Under the new law as was the case under the old, a first time homebuyer who purchases a home in year 2009 may opt to claim the federal tax credit on either their 2008 or 2009 tax returns. Similarly, one who purchases a new home in year 2010 may opt to claim the tax credit on either their 2009 tax returns or on their 2010 tax returns.

In terms of how much money you are permitted to get back on your tax return in the way of tax credits, first time home buyers are permitted to claim up to 10% of the home’s final purchase price, up to a maximum tax credit limit of $8,000. One great feature of the first time homebuyer tax credit is that it’s a dollar for dollar reduction of tax liability and is completely refundable. What this means is that even if you don’t owe the Internal Revenue Service (IRS) sufficient taxes to completely offset the housing tax credit, you can still qualify for a free tax refund check of the difference. Thus if you qualify for the full $8,000 housing tax credit and ultimately only owe the IRS $6,000 in taxes – you can still qualify for a $2,000 tax refund check.

Additionally, there are a few other limitations on who may qualify for the tax credit. The first time homebuyer may not purchase the home from a descendant such as one’s children or grandchildren, and the home may not be purchased from a lineal ancestor, such as a parent. The same restriction also applies to purchasing from one’s spousal ancestors and descendants as well. Furthermore, for home purchases made after November 6, 2009, the price of the purchased home may not exceed $800,000. Homes priced in excess of that amount are not eligible for the tax credit. Basically, the government doesn’t want rich folks to profit from this middle class based credit.

How To Qualify For The $6,500 Repeat Homebuyer Tax Credit

This is an exciting new addition to the federal homebuyer tax credit program. To be considered eligible for the $6,500 existing homeowner’s tax credit, the homeowner applicant must have owned his or her current home for at least 5 consecutive years out of the past 8 years, and must purchase a new home by April 30, 2010. The purchase of the new home can include a new construction home, but the purchasing contract must be signed by April 30, 2010, and the final closing date must be on or by June 30, 2010. The income qualification restrictions are the same as that of the first time homebuyer’s credit – for single filers, the tax credit phases out between $125,000 and $145,000 of modified adjusted gross income, and for married filing jointly couples, the income range phases out between $225,000 and $245,000.

While there is no explicit requirement that the homeowner must ever pay back the $8,000 or $6,500 housing tax credit to the federal government, the obligation to pay it back does arise if one claims the tax credit but then sells the house or condominium (or otherwise stops using the home as the principal residence) within 3 years (36 months) after the purchase.

Death and taxes. You can try to fight them both tooth and nail, but at the end of it all, it’s a losing proposition. Especially when it comes to taxes, the government is going to want its fair share cut of your salary and business profits one way or another, whether you like it or not. Rather than engage in tax evasion and possibly live the remaining years of your life on the run as a tax fugitive from the long arm of the Internal Revenue Service (IRS), you might as well confront the issue of taxes head on. All we can do is try our best to understand how income taxes work and take reasonable steps to minimize their effects on our financial lives as much as possible.

One of the most introductory ways to plan for the effects of income taxes is to recognize how the various marginal rates are applied to the corresponding tax brackets. Because the United States does not yet currently engage in a flat tax system, our taxable incomes are broken down into different taxation ranges with specific taxation percentages assessed depending on where they fall along the tax bracket spectrum. Although our 2010 tax returns won’t be filed until April 15, 2011, for planning purposes, it’s always good to find out the new changes to the tax code as early as possible. Let’s examine some of the upcoming tax rate changes that are being projected for 2010 and compare them to the previous year’s 2009 tax brackets.

Projections Of New IRS Tax Rates Have Historically Been Extremely Accurate

Year after year, even before the official IRS income tax brackets are released, a select number of tax experts have gotten together and crunched a determinative number of officially released statistics by governmental agencies – to project and extrapolate the upcoming year’s tax brackets. Year after year, the tax rate predictions released by these groups have yielded results in advance with near 100% accuracy. Such an income tax bracket projection ahead of time is possible because many of the major tax code numbers are pegged to officially released inflation statistics – including the standard deduction, the personal exemption, the actual income ranges of the tax brackets, and contributions limits for the investment retirement accounts (both the Traditional and Roth IRA account).

One of these tax prognosticating groups is the Tax Foundation, a Washington D.C. think tank which collects data and publishes research studies on federal and state tax policies. The other notable group operates under the auspices of the Wall Street Journal and is comprised of a merry band of private tax professionals and economists – namely William E. Massey, a senior tax analyst from the Tax and Accounting arm of Thomson Reuters; George Jones, a senior federal tax analyst from CCH; and James C. Young, an accounting professor from Northern Illinois University. For numerous years now, both the Tax Foundation and the Wall Street Journal group have consistently released to the public very accurate, albeit unofficial, early bird peaks at the following year’s projected income tax brackets based on available financial data – well in advance of the official IRS releases. If you’re eager to get a head start on tax year 2010, read on.

IRS Tax Rate Schedule Updates For Tax Year 2010

This year, citing a very sluggish economy and extraordinarily low inflation rates for 2009 to which upcoming 2010 tax rates shall be pegged to, the Tax Foundation and associated experts are predicting very little year to year change for the 2010 federal tax brackets. If there’s anything good that came out of this global economic recession that has been plaguing us for the entirety of 2009 – it’s that the combination of low gas prices, depressed consumer spending, and high jobless numbers with so many people filing for unemployment – have enabled inflation rates to stay quite low during the span of 2009 – at a mere 0.19%. Just compare that to the incredibly high inflation rate of 4.26% during the previous year of 2008 when gas prices were skyrocketing, and it’s clear the recent sudden and precipitous drop in inflation has been extremely unprecedented.

As a result of low inflation, for the most part the 2010 tax bracket ranges will likely stay relatively unchanged. As noted by the tax pundits, for the very first time since the IRS started to index the official federal income tax rates to inflation during the mid 1980’s, taxpayers will get virtually no significant benefit from inflation in 2010. As such – year 2010 tax brackets, standard deductions, personal exemptions, and even retirement account contribution limits will see very little (if any) alterations from prior year numbers.

I will update the table below to reflect the official IRS tax rates for 2010 if decidedly different numbers are ultimately released by the IRS. However, with tax bracket projections by the experts having enjoyed a near perfect accuracy rate for quite a few years now, I don’t have any reason to doubt that the displayed figures below will ultimately wind up as official.

Federal Income Tax Brackets For 2010 – Based On Taxable Income Ranges

Beyond some slight numerical shuffling of the taxable income ranges, there will not be too many significant tax changes from 2009 into 2010. Here is a breakdown of the projected changes (if any) for 2010 as they compare to the prior year:

• Personal Exemption: No change. For the very first time, the standard exemption for 2010 will not be going up and will stay unchanged at $3,650, the same as it was in 2009.
• Standard Deduction: No change, except for Head Of Household filers. The standard deduction for married couples filing jointly will remain unchanged at $11,400. For those filing as single, the standard deduction will remain at $5,700 as well. However, Head of Household filers will see a slight increase by $50 – from $8,350 (year 2009) to $8,400 (year 2010).
• Overall Tax Bracket Thresholds: Will increase across the board for all tax filing statuses, albeit at a significantly lower amount compared to past tax year increases.
• Annual Gift Tax Exclusion Amount: No change. For tax year 2010, the current gift tax exclusion limit of $13,000 will stay the same. Often overlooked by most taxpayers, the gift tax stipulates that gift givers must pay a special tax on gift amounts that exceed a certain amount per year.
• Traditional and Roth IRA Contribution Limits: No change. Despite the fact that IRA and Roth IRA contribution limits did not rise in 2009 in response to strong inflationary pressures in 2009, there will still be no corresponding change in the maximum contribution limits to individual retirement accounts for 2010. The standard IRA contribution limit for 2010 will remain unchanged at $5,000. The catch up contribution limit for those 50 or older will remain at $6,000 as well.

Update: Projected 2010 Tax Brackets Have Been Released!

The following represents the Internal Revenue Service (IRS)’s officially released 2009 federal income tax brackets. Read ‘em and weep – or perhaps rejoice, depending on where you stand on the whole federal income tax bracket sliding scale. Regardless, you’re going to be getting close and personal with the marginal rates when you file your 2009 tax return in early 2010. Let’s have a look at some of the tax changes shall we?

Official IRS Tax Rate Schedule Updates For Tax Year 2009

Via the Wall Street Journal, the following graphical table below gives you the official marginal tax brackets for married couples filing jointly as well as the marginal rates for single filers for 2009. The previous year’s numbers are also provided to give you an idea of some of the more noticeable changes since 2008. The income numbers listed in the chart below are taxable incomes, and thus they have taken into consideration all available personal exemptions as well as any of either the standard or itemized deductions, including all pre-tax above the line 401k and deductible IRA contributions.

As key portions of the marginal tax tables are pegged to inflation, quite a few numbers must be annually revised. Thus you will note that there are quite a few key changes for the 2009 tax year compared to the year prior. However, while overall tax numbers appear to have nominally increased on the whole, taking into consideration the effects of inflation, effective tax rates may actually have remained level or even dipped a bit.

Despite the text below that says “projected”, the official IRS numbers have been released and they now represent official federal income tax rate brackets, locked in for 2009.

To summarize, here is a run through of some of the more notable tax rate changes for 2009 and even a quick blurb about some of the key tax benefits that did not change based on official IRS releases thus far:

• Personal Exemption and Exemption For Dependents – Increased to $3,650 from $3,500 (up $150) from 2008, but is phased out at higher income levels.
• Standard Deduction – The great majority of American taxpayers take the standard deduction rather than itemizing deductions for expenditures such as mortgage interest, charitable contributions, and state & local taxes. The standard deduction increased to $11,400 from $10,900 (up $500) for married couples filing a joint tax return, increased to $5,700 from $5,450 (up $250) for singles and married individuals filing separately, and increased to $8,350 from $8,000 (up $350) for heads of household.
• Overall Tax Bracket Thresholds – Increased across the board for all tax filing statuses. This means that if your annual income did not increase since last year or if you did not receive an inflation based pay raise, you may likely pay a little less in taxes in 2009 than in 2008. As the IRS notes as an example on one of its press releases, in regards to a married couple filing a joint return, the taxable income threshold separating the 15 percent bracket from the 25 percent bracket is $67,900, up from $65,100 compared to tax year 2008.
• Earned Income Tax Credit – Increased to $5,028 from $4,824 (up $204) for low and moderate income workers and working families with two or more children. The income qualification limit to take the earned income tax credit (EITC) for joint return filers with two or more children also increased to $43,415 from $41,646 (up $1,769).
• Annual Gift Tax Exclusion Amount – Increased to $13,000 from $12,000 in 2008 (up $1,000). Often overlooked by people, the gift tax requires the gift giver to pay a special tax on the gift amount if it exceeds a certain amount per year. For 2009, that threshold will be bumped to $13,000.
• Social Security Contribution and Wage Benefit Base – Increased to $106,800 from $102,000 (up $4,800). This means that 2009 income sources over $106,8000 will not be subject to Social Security taxation. With the Social Security tax rate at 6.20%, this also means that the maximum a person will shoulder in Social Security taxes for 2009 is $6,622.
• Traditional and Roth IRA Contribution Limits – No change from 2008. Despite inflationary pressures that increased tax bracket rates across the boards, sadly, IRA and Roth IRA contribution limits will be staying the same – stuck at a crappy and paltry $5,000 per year for those under age 50, and $6,000 per year for those 50 or above.
• Roth IRA Contribution Limits (Income Threshold) – Increased to $166,000 from $159,000 (up $7,000) for married filing jointly couples, and increased to $105,000 from $101,000 (up $4,000) for singles and others.

Watch Out For Possible Upcoming 2010 Tax Bracket and Tax Rate Changes

While official IRS federal income tax brackets are not usually released for the following tax year until the late fall, it’s frankly never too soon to get your hands on the earliest reliable marginal tax bracket predictions. Year after year, a group of private tax experts and economists associated with the Wall Street Journal get together and crunch officially released inflationary data to provide news readers an early bird peak at the following year’s projected income tax brackets. This group, comprised of members from the Tax and Accounting arm of Thomson Reuters, tax analysts from CCH, and an accounting professor from Northern Illinois University – usually releases their annual tax bracket projections and estimations on tax deduction numbers for the following year during early fall (around September), well before the official IRS numbers are issued.

As marginal tax brackets track changes in inflation and other economic data fairly closely, the annual tax rate estimations by the Wall Street tax team members have yielded pretty reliable and on par results over the years. If you’re antsy to get a head start on tax year 2010, stayed tuned in very early Fall 2009 for the newest updates on the 2010 projected federal income tax brackets.

Because of the election of Barack Obama as the new President of the United States and the handover of the country to a new political party, there are bound to be substantial changes in the tax code and income tax rates in the coming years. Working on an economic stimulus plan and advocating aggressive social agendas, President Obama has already proposed numerous changes to the ordinary income tax rates, such as raising the top rate from 35% to 39.6% – potentially boosting the tax burdens of higher income earners to new heights. He has also suggested the need to reduce tax deductions for American households earning more than $250,000 annually, and has also made proposals to increase taxes on capital gains and stock dividends. With a political and taxation platform that is decidedly against those those in the higher upper echelons of the U.S. tax code, those who have done well for themselves over the years seemingly have a lot to fear in Mr. Obama. Personally, while I feel Obama is doing a commendable job on the social and foreign policy front, I hope he doesn’t get too carried away with his taxation ambitions. His remarks on taxes always make me nervous.

In the mean time, many of us regular taxpayers can only just ride along and hope for the best. Regardless of what Obama ultimately decides to do and no matter how federal income tax brackets eventually look like in 2010 and 2011, we should try to wisely structure our actions today to reduce our future tax burdens as much as possible, regardless of what happens. Such smart tax moves would include taking advantage of employer sponsored pre-tax perks like flexible spending accounts (FSA), and investing  in tax deferred retirement vehicles like 401(k)’s and Roth IRA accounts.