January tune-up: Your taxes

returnThe IRS started accepting tax returns today. Perhaps some of you already knew that, and were poised with your finger over the “submit” button on your already-completed return when the IRS opened its gate. For the rest of us, though, this is a timely reminder that “Oh, yeah, I’ve gotta get that done”–preferably well before April 15. (If you need motivation, read about how important it is to file early in my Bankrate column, “What you can do now to protect your tax return.”)

Here are a few ways to make tax time less painful now and next year:

Start a file. List your employer(s), your mortgage lender(s), your financial institutions and anyone else likely to send you a tax document this year. Check off the appropriate issuer when the document arrives and keep it in this file. Note: some issuers have moved to an all-electronic system, so you’ll need to log in to your account to download the W-2, 1098, 1099 or whatever. If you have a tax preparer who sends you an annual organizer, fill that out and keep it with your documents in this file.

Eat the frog. Is there one tax-related chore that always seems to take a long time, causing you to put off filing your return every year? Make this the year you tackle it early. We donate a lot of stuff to Goodwill every year, and every year I swear I’m going to assign values to the donations as I go…and every year I don’t, meaning I have to do it all at once. At least this year, I’m knocking it off the to-do list early. (Salvation Army’s donation value guide is pretty helpful.)

Make the appointment. If you use a tax preparer, call now to make your appointment. There’s nothing like a deadline for encouraging you to get your, er, tax stuff together. If you DIY, set a date with yourself on the calendar. Don’t expect to get much help from the IRS this year–the Taxpayer Advocate Service is predicting half of callers won’t be able to connect and average wait times will stretch past 30 minutes. If money is tight, avail yourself of one of the free help services.

Digitize it. I’m hoping you already understand the importance of filing electronically–it’s safer and a faster way to get your refund than using the U.S. mail. You’d also be smart to make scans of your completed tax return and supporting documentation. Knowing you have this electronic backup can help make it easier for you to let go of the paper copies. Once your tax return is done for this year, you can purge your files appropriately.

While cars no longer require traditional tune-ups, your finances still do. This month I’ll be reviewing some areas of your money that deserve some extra scrutiny and offering suggestions for the best moves now. Stay tuned for more posts–and to make sure you don’t miss any, you can sign up for my newsletter using the link on my home page.

Tuesday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Why you should pay your credit card bill before it’s due. Also in the news: How to break a bad money habit, what the IRS is doing to prevent identity theft, and how one late mortgage payment can wreak havoc with your credit score.

4 Reasons to Pay Your Credit Card Bill Before It’s Due
Improving your credit score is one of them.

How to Change a Bad Money Habit
Reward yourself for better behavior.

IRS Aims Harder to Protect You Against Identity Theft
New steps to protect tax payers.

Will Obamacare Ruin Your Tax Refund?
Probably not.

How Much a Late Mortgage Payment Can Damage Your Credit Score
A single late payment could pack a wallop.

Monday’s need-to-know money news

Divorce-Money_43Today’s top story: What you need to know about taxes if you’re getting divorced. Also in the news: Honest mistakes that could ruin your credit, what you’ll be paying more for in 2015, and why you might need more care insurance.

Getting Divorced? 8 Things You Must Know about Taxes
Changes during a difficult time.

5 Honest Mistakes That Can Wreck Your Credit
When little mistakes become big ones.

15 things that will cost more in 2015
Prepare to pay more.

Why You Might Need More Car Insurance Than You Have
A little fender tap could end up costing you big bucks.

5 Smart Ways to Use Your Bonus
Instead of piddling it away.

Q&A: When is the right time to buy?

Dear Liz: My wife and I are young (25 and 22). We owe no one money and have built up an emergency fund with six months of expenses. We both contribute enough to our 401(k)s to get the maximum match, and I contribute the maximum to my company’s stock purchase plan. Currently we are saving $2,500 to $3,000 a month for a future home purchase. My question is will we be able to buy a decent house without getting a mortgage in three to four years at this rate? Is this something we should do? Or should we have a large down payment and pay the mortgage off quickly? We both have below average credit and mostly use cash for everything.

Answer: Since you two are so good at saving, you presumably can do the math required to determine how much you’ll have in three or four years. So what you’re asking is whether home prices will accelerate so fast in your area that what may seem like enough to buy a decent house now won’t actually buy one in the future.
The answer is: Nobody knows for sure.
The best approach is to keep your options open — and that means you’ll need to work on improving those credit scores. A year or two of using credit cards lightly but regularly, and paying off your balances in full each month, should help pull up your numbers. You could speed up the rehabilitation process by getting an installment loan such as a car loan or personal loan. Managing different types of credit responsibly is typically good for your scores.
If you wind up getting a mortgage, you may decide to pay it off quickly, or you may have better things to do with that money such as boosting your retirement accounts or saving for college educations.

Q&A: Taking a mortgage for the tax deduction

Dear Liz: My wife and I are both 66 and in good health. Currently we have about $1.2 million in IRAs. We’re receiving about $80,000 a year from a pension and $110,000 in salary. We have been aggressive about reducing any lingering debt. So we think we are in good shape for me to retire within the next year or so. If we decide to stay in our home rather than move, we will need to make some significant repairs and improvements. We were thinking of taking out a $200,000 mortgage to pay off our last remaining debt ($50,000 on a home equity line of credit) and fund the renovations. This would give us a better tax deduction and not incur the high taxes we would pay by making an IRA withdrawal. Our grown children have expressed no interest in the home after we die, so it probably would be put up for sale at that time. Does this seem like a reasonable approach if we choose to go that route? Anything we haven’t considered?

Answer: Considering the tax implications of financial moves is smart, but you shouldn’t make decisions solely on that basis. You especially shouldn’t take on mortgage debt just for the tax deduction. The tax benefit is limited to your bracket, so for every dollar in mortgage interest you pay you would get at best a federal tax benefit worth 39.6 cents. State income tax deductions might boost that amount, but you’d still be paying out more than you get back in tax benefits. You also would be locking yourself into debt payments at a time in life when most people prefer the flexibility of being debt-free.

If you’re comfortable having a mortgage in retirement, though, you might want to consider a reverse mortgage. Although once considered expensive loans of last resort for people who were running out of money in retirement, changes in the federal reverse mortgage program caused financial planners to reassess the no-payment loans as a potential wealth management tool. The idea is that homeowners could tap the reverse mortgage for funds, especially in bad markets, instead of depleting their retirement accounts.
Reverse mortgages are complex, though. The upfront and ongoing costs can be significant. Because you don’t make payments on the money you borrow, your debt grows over time and reduces the amount your heirs might get once the home is sold. You’d be smart to find a savvy, fee-only financial advisor to assess your situation and walk you through your options.

Friday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Why you should treat your savings like the government treats your taxes. Also in the news: The hidden costs of your shopping habits, a 12-month guide to staying on the right financial track, and how to optimize your student loans in the new year.

Treat Savings Like a Tax to Ensure You Do It
Government-style savings.

The Real Cost of Your Shopping Habits
“The road to bankruptcy is paved with good deals.”

Your 12-Month Guide to Staying on the Right Financial Track in 2015
Taking it month-by-month.

5 Ways to Optimize Your Student Loans in 2015
How to cut costs and pay them off sooner.

Does Everyone Need a Credit Card?
You’d be surprised.

Don’t call the IRS this tax season

Zemanta Related Posts ThumbnailNeed to call the IRS with a question? Good luck with that. The IRS ombudsman tells us about half of taxpayers who call the agency this tax season won’t get through, and the average hold times could be 30 minutes or more.

In a report to Congress, the Taxpayer Advocate Service blamed the widening gap between the IRS’ workload and its shrinking resources (read: budget cuts) for “unacceptably low levels” of customer service.

You have some free alternatives if you need help filing your returns:

In addition, TurboTax and TaxAct offer free preparation of the simplest federal returns, but you pay to file state and more complicated returns.

The software programs do a good job of guiding most people through the preparation and filing process. If your tax situation is at all complex–you own a business, are an active investor or experienced a major life change, for example–consider hiring a tax pro. Enrolled agents are a good, lower-cost choice for most people, while CPAs offer more high-end help.

Thursday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Why this year’s tax refund may take longer to arrive, if at all. Also in the news: The financial upsides to being an empty nester, the impact of the Affordable Care Act on your taxes, and tips on how to compare student loans.

Why Your Tax Refund May Be Slower (or Never Arrive) This Year
Budget cuts at the IRS could delay your refund.

The Money Bonanza For Empty Nesters
The financial upside to missing the kids.

How Will the Affordable Care Act Affect Your Taxes?
Tax credits and penalties could make things trickier.

Use These Simple Excel Formulas to Compare Student Loans
With acceptance season right around the corner, this tool can make shopping for student loans much easier.

These 10 Changes to Financial Rules Could Impact You in 2015
New year, new rules.

What you need to know about paying for college

My recent Reuters columns have focused on some of the most common issues families face in trying to pay for college, from getting the most financial aid to how to cope when you haven’t saved enough. Read on, and please share these columns with people you know who might benefit.

Increase economic mobility by busting college myths

One way to improve economic mobility in the United States may be to fix the misconceptions that high-achieving, low-income teenagers often have about college.

Avoid easy-to-make mistakes on your financial aid application

One of the worst mistakes you can make with college financial aid is simply failing to file the all-important Free Application for Federal Student Aid. But there are plenty of other ways to mess up this application.

Last-minute moves to boost financial aid

Financial aid filing season starts Jan. 1. It may be too late to rearrange your finances this year, but here are some ideas for maximizing what you can get in future years. First, though, make sure your hopes are realistic.

What to do if you have not saved enough for college

Soaring college costs and stagnant incomes mean many families will not be able to save enough to pay for a typical undergraduate education. But there are still ways to find a college degree you can afford. The good news is that most people will pay significantly less than the sticker prices.

Busting the myths of haggling for college aid

My daughter learned this little ditty in preschool: “You get what you get, and you don’t get upset.” Parents who are convinced they can haggle their way to a better financial aid package might want to learn it, too.

No need for irrational fears of student loans

The next generation of college students has heard the message loud and clear about the perils of taking on too much student loan debt – so much so that many are unwilling to go into debt at all in order to attend college. The drawback to this wariness is that most of those who do not borrow are unlikely to get four-year degrees.

January tune-up: Your credit cards

air-miles-cardCredit card rewards programs change so often that it makes sense to review your “credit portfolio” at least once a year—and now’s as good a time as any.

This post is directed at people with good credit who don’t carry balances. If that’s not you, then focus on paying off your credit card debt and store this information for future use.

If you do have good credit, you probably want to keep it that way. That means not closing or opening a bunch of accounts at once. You can, however, selectively prune your portfolio by closing an account or two and add the occasional new card without tanking your scores. Just don’t open or close accounts while you’re in the market for a major loan such as a mortgage, HELOC or auto loan.

With those caveats covered, your first task is to review the cards you have now to see if they still deserve a place in your wallet. The first to go: any card you’re not using that charges an annual fee. If the card doesn’t charge a fee but you haven’t used it in a year or more—and see no reason to do so in the future—you’ll have to weigh whether the hassle of monitoring the account outweighs the potential ding to your credit.

Because we have more than two dozen open credit accounts, many with high limits, I finally shut down a couple old Chase cards we hadn’t used in eons…with no perceptible impact on my scores. I also shut down a British Airways card that charged an annual fee because I had a better alternative—a Starwood Preferred Guest Amex card that has a great earn rate and a huge array of ways to use rewards, including a way to dump points into my British Airways frequent flier program, should I want to do so.

Next scrutinize the cards you do use. Are you able to earn rewards at a good clip and cash them in easily? You should be getting an average rewards rate of at least 1 percent and preferably closer to 2 percent of your purchases. (Some programs deliver even more.) If you’re not using your rewards, are you working toward a reasonable short-term goal? Given how fast points and miles get devalued, you don’t want to delay too long in using them. Remember the mantra: Earn ‘em and burn ‘em.

Now see if there may be better cards for your needs. Check out NerdWallet’s list of best reward cards, which is updated frequently. (Looks like you also can ask for advice and recommendations in the comments.) Another site I like to check for great travel rewards card offers is The Points Guy.

Think about how and where you use your cards and what type of rewards you’re after. Cash-back cards are typically the easiest rewards to get and redeem. Hotel cards can give you elite status with certain perks. Airline-branded cards can make sense for frequent fliers—if you check a couple of bags on a couple of flights, you’ll often offset the annual fee. More general travel cards can allow you to put miles into different plans or offset the costs of travel.

Ideally, you’ll find a card that meets your needs while offering a fat sign-up bonus. To get the bonus, you’ll have to spend a certain amount within a certain time, so make sure you can do that before you submit the application.

While cars no longer require traditional tune-ups, your finances still do. This month I’ll be reviewing some areas of your money that deserve some extra scrutiny and offering suggestions for the best moves now. Stay tuned for more posts–and to make sure you don’t miss any, you can sign up for my newsletter using the link on my home page.