Personal Finance Resources

Whenever you get a new job, or if you are in a job and always end up with a large tax refund check, you may want to consider re calculating withholding allowances for your w-9 again. But Jeffry, why would I want to lower my tax refund check? I like getting that big check back in April. My question to you is, do you like giving the government an interest free loan? Because that is exactly what you are doing by not increasing your allowances during the year to compensate for your overpayment to the government in income taxes. I understand that you don’t want to end up owing the government anything at the end of the year, and on that point, I agree with you. So what I wanted to do today was give you a quick formula to even out those withholding payments to the government, thereby increasing your take home pay and minimizing your tax refund check. Don’t worry, it isn’t going to be complicated, these are just some brush strokes.

Gross pay - charitable deductions - exemptions - mortgage interest expense = taxable income (for our purposes)

There are many more deductions out there, but I wanted to take the basics here just so you can quickly make a better decision when setting your number of allowances. Before I run an example, you need to know a basic calculation for each part of the above equation.

Charitable Deductions

Donations to your Church or other charitable organization is currently 100% tax deductible. So whatever you anticipate giving to these organizations this year, just fill that into the blank.

Exemptions

On a family tax return for 2008, you can take $3,500 per exemption, so a husband, wife, and 3 children could take 5 exemptions, or $17,500.

Mortgage Interest Expense

Although this will vary from year to year, just simply use your last statement of interest expense as a quick number to use for the purposes of calculating withholding allowances.

A Quick Withholding Allowance Example

Ok, now that we know the parts of the equation, let’s run a quick example. Let’s say that you are married and have 3 kids, like above, you make $50,000 per year, you gave 10% of your income to your Church, and paid $2000 in interest to your mortgage company last year. So then the quick equation is:

$50,000 - $5,000 (charity) - $17,500 (exemptions) - $2,000 (mortgage interest)  =  $25,500

Ok, so now that you have a yearly approximation, then divide that by 12 (for monthly payments), or 26 for biweekly payments, then look at this tax table (for 2008) to figure out about how much you owe in taxes on every paycheck. In our example, we would be liable for $980.77 every biweek, which means our equivalent tax would be $76.10 per paycheck. Now that you have that, just check with your payroll department to see how many allowances would be about right for $76.10 tax liability per paycheck. Also, just check with them to make sure you are about right in your calculations, just to be sure you don’t undershoot or overshoot too much, then have them make the change.

Internal Tags: Tax Planning

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by guest author Nicholas

This is the beginning of a multi-part series because options are generally thought of as complex transactions. Do you think options are risky? Options were originally created to reduce risk. I preface the next few days postings by saying, do not rush out to invest in options until you understand the risks involved.

What is an Option?
An option is a contract to buy or sell a specific financial product officially known as the option’s underlying instrument. The underlying instrument that I will focus on is a stock. The contract itself is very precise. It establishes a specific price, called the strike price, at which the contract may be exercised. It has an expiration date. Upon expiration, it no longer has value and no longer exists.

What does an Option Consist of?
An option is either a call or a put.
A call gives the owner the right to buy the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.
A put gives the owner the right to sell the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock if the option is assigned.

What does that Mean?
I will start today by only discussing call options from the buyers point of view. Let’s take an example. Say I want to purchase 1000 shares of XYZ stock. XYZ closed today at $26.95. I could purchase those 1000 shares, and I would pay $26,950.
Question: Why does anyone buy a stock?
Answer: Because they think it will move up.
With options, the question that I have to ask myself is when will it move?
I personally believe that XYZ stock will go up to $31.00 by the middle of December. So instead of risking my $26,950, I could buy 10 call contracts (one contract equals 100 shares of the underlying instrument) of the $30 December strike price. Each December call is currently valued at $0.65 per share. These expire on the 21st of December. So if each call is $0.65 and I want 10 contracts of 100 shares each, I will pay $0.65 x 1000 for a total of $650. So I now control, that is not to say own, 1000 shares of XYZ until the 21st of December.
Looking to the future if:
XYZ goes down to $22.00: my 10 calls will expire worthless, and I lose my $650 had I bought the options.
Had I bought the stock, it would be worth $22,000, and I would have lost $4,950.

XYZ goes up to $34.00: my 10 calls give me the right to buy those 1000 shares at $30, and I could sell them on the open market for $34. The calls are then worth at least $4 per share. So I sell them for $4 a share x 1000 shares for a total of $4,000. I subtract my $650 for a gain of $3,350 or a 515% return on my money.
Had I bought the stock, the 1000 shares would be worth $34,000 minus my initial $26,950 for a gain of $7,050 or a 26% return on my money.

XYZ stays at $26.95: my 10 calls expire worthless, and I lose my $650 had I bought the options.
Had I bought the stock, the 1000 shares would be worth $26,950, and I lose nothing other than the time value of money.

Tomorrow I will continue the discussion, but from the above example, one can see how an option will allow you control over a certain amount of shares of a stock for a specific time with a limited amount of money required, relative to buying the stock. The upside is that it is possible to execute many of these trades with the same amount of money required to purchase one stock. The downside is that the option is only valid for a specific amount of time.
Stay tuned for more. Feel free to ask questions, and I will answer them as best as possible.

Internal Tags: Options, Paying for College, Paying Off Debt, Student Loans Tax Planning

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I love to interact with my readers/subscribers. So don’t hesitate to send in a question and ask me to post about it. Personal Finance Resources is all about helping you with your home finance situations. In this post, we are going to address a few questions posed by one of you, on the topic of Retirement Savings vs Paying Down Your Debt. Here is the email communication:

“I happened to stumble upon your extremely valuable info while researching methods to pay off my credit cards. Don’t know if you’ll have time to answer my question, but here goes: I’m 28, have $20,000 cc debt (@ ~15%), and approx $50,000 in a Traditional IRA and Roth IRA accounts. Do I take the penalty and pay off the CC? I no longer have any need for CC now that I’m out of school, so I’m not worried about this situation reoccurring. Problem is, that compound interest down the road is just so tasty! I figure the future money to be gained is greater than the cc debt with interest, but I need to repair my 611 credit score so i can at least think about buying a house and getting a business loan within a reasonable period of time. Any suggestions?

I’ve been thinking about this one for some time now and your help is greatly appreciated. I am working and will be in the 25%, possibly 28% tax bracket, and have been paying $400 to $500 a month in credit card payments. I’m not sure what my penalties for early withdrawal would be, but if I can invest those $400/month into my accounts instead of losing it to the credit card companies, I think I will be able to compensate for the loss. As it stands now, I have not been able to, nor will be able to put any new funds towards my investments with these current credit card payments. What would be my total withdrawal (including penalties) if I were to pay off the credit cards completely, or would it be wiser to pay off 75% of the credit card debt and continue to pay smaller credit card payments while adding small amounts to my retirement funds? I figure there is a good cost/benefit ratio, but my extreme desire to purge myself of the credit card parasites has clouded my reasonable judgment. “

Possible Solution

The first, and from what I can deduce as the most important question posed here is whether or not to take a tax penalty and pay off the credit cards. If you read my post on Credit Card Secured by Roth IRA, you will notice that in addition to paying income tax on an IRA withdrawal, you will also likely be penalized with an additional 10% tax. So in this case, the total tax on a withdrawal might be as high as 38%. So, to be able to pay off the $20,000 owed to credit cards, a withdrawal of between $30,000 - $33,000 would have to be made. That would be the better part of the IRA account held.

The positive side of this equation is that the $400-500 a month spent in credit cards could be put into the retirement fund as an investment for the future. But it would take at least 4-5 years to replenish the money withdrawn from the retirement account.

The simple fact of the matter is, we need to put our money where it will earn us the most (or cost us the least). If it were not for the serious tax implication of early retirement withdrawal, it may be better to pay off the credit cards, depending on how great your return is on your investments. If it is less than the 15% being spent on credit card interest, than it would make sense.

The Personal Finance Resources Solution(s)

If possible, I would attempt to work out a secured or unsecured loan with my bank at a lower rate of interest. Try to get it down to 10% or less. If you had a house, this would be an excellent situation to use a Home Equity Line of Credit. If you are unable to obtain a consolidation loan, then use the debt stacking method to maximize your payments over the offending credit cards. Then I would stop any contributions to my retirement account, stop going out to eat, cut the cable TV off for several months, and put the maximum amount of money possible into paying off the debt.

With regard to repairing your credit score (611 should be enough to obtain an FHA loan for a house, by the way), credit card companies are mostly interested in a continuous stream of punctual payments. So paying off the cards now would help your credit score, but long term, you will build your credit better if you make some payments. I am not saying to make minimum payments, but make several months of large (as large as you can) payments to increase your credit score while getting the balance down.

I hope this solution was helpful. Consider signing up for my RSS feed so that you don’t miss out on any of the upcoming personal finance issues and solutions.

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There are quite a few adverse effects of cheap insurance. They might be a temporary debt help, but what is the use of such help that will in turn contribute to more debt piling. This consequently contributes to public debt. Turning to such resort is a common occurrence amongst people who work at home. True, that there are edges to best work at home, but ones oft left ignorant.

Internal Tags: credit cards, Paying Off Debt, Retirement Investing Tax Planning

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How many times have you completed your taxes, and then found out later that you could have gotten extra deductions if only you had  paid just a little more attention, and you missed your opportunity for more cash back? It’s aggravating, and it doesn’t have to happen to you. It is always a good idea to sit down and review the possible deductions that you can take before you do your taxes, and while there are hundreds of possible tax deductions the IRS allows, here is a list of some commonly missed tax write offs so that you can be prepared not to forget them when tax season comes around again:

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Internal Tags: personal finance, personal finance taxes, personal tax planning, Tax Planning tax write offs

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