Keep the “Grinch” from Stealing your Christmas!

Wow, it is November already. The stores are already filled with Christmas decorations and gifts ready to be purchased and sometimes we feel like there really is a Grinch stealing all of our joy by straining our finances. Here are some tips to avoid busting your budget during the holiday season.

• Write out a budget. List each person and how much you plan to spend on each of them.
• Include a budget for non-gift items like gift wrap, cards, pictures, postage, food, entertaining, decorations and any other seasonal purchases you might make.
• Decide how you will fund your budget. If you haven’t already put money away, you will need to determine how much to take out of each paycheck in the next two months.
• Use CASH! I can hear you groaning, but if you stop spending when your budgeted cash is gone, you will NOT go over budget!
• If you feel that you are more disciplined, I would set aside the money in your checking account and track every expense right beside your budget. I like to start with my budget, subtract each purchase and keep a running total of the money I have left to spend on each person and item. This is a good method for online shopping as well.
• Make adjustments as you go! You will always find that you spend more in some areas than you originally planned or you forgot some items entirely. I encourage you to get creative. The best gifts are those from the heart and not necessarily the most expensive.
• Include some giving in your plan. The Christmas season is a great time to help others who need it most. Add these items on your budget because it really helps keep our spending in perspective and it will give you the freedom to give when you find a worthy cause.

Whatever you plan for your spending this year, do not finance Christmas on credit cards. Each year, Americans find themselves paying for Christmas for much of the new year. Beat the real “Grinch” this year and start the new year free from holiday debt!

IRS Crackdown on Charitable Contributions

The IRS has decided to find all of those people who lie about how much they give to the Salvation Army in front of Walmart each Christmas season by requiring receipts for every donation. In the past, you were able to deduct cash contributions that were less than $250 without a receipt. However, this year you need to have a receipt, bank statement, credit card statement or canceled check for every penny you drop in the bucket if you want to deduct it on your tax return. Bank statements and credit card receipts must have the name of the charity, amount and the date posted. For contributions in excess of $250 you must have a receipt from the charity just as in prior years.

If you give by way of payroll deduction, keep your W-2 and a pledge card with the name of the charity. For payroll deductions of $250 or more, the pledge card or other document prepared by the donee organization must also include a statement that the organization does not provide goods or services in whole or partial consideration for any contributions made to the organization via payroll deduction.

In addition, they have also cracked down on the non-cash contributions of clothing and household items. As of August 17, 2006, any clothing or household items donated must be in “good or better condition”. How are we supposed to prove that our old sweaters were in “good or better condition”? One man’s junk is another man’s treasure, right? This standard allows the IRS to deny ALL clothing and household goods deductions. It has made it almost impossible for a taxpayer to sustain this deduction in an audit, even if it is legitimate. If you plan to deduct donations for these types of goods, you might want to take pictures of what you donate or get an appraisal, but who would do an appraisal on someone’s old jeans? It is quickly becoming apparent that these types of donations are just not going to be deductible. According to the IRS, American’s deducted $9 billion for these items on their 2003 tax returns. While some of that might be overstated, I assume that most of it is legitimate and much more is given that isn’t deducted. There are many people like myself who don’t even bother to keep track of these items. I would venture to say that these unreported donations would offset any fraudulent claims anyway.

I am pretty sure the deduction for contributions was put in place to encourage donations to charitable organizations. Will this new law discourage people from giving that $5 to the Salvation Army or prevent someone from giving a $10 bill to the American Red Cross? Perhaps, but I don’t think America is the most generous nation on earth because it is deductible on our tax returns. Keep giving but maybe you just need to write more checks!

UPDATE: For those who might doubt my last comment about the generosity of the American people, read this story about the donations for the people in California displaced by the wildfires… “Donations Pour in for Calif. Fire Victims”

Medicare Part B 2008 Premiums Released

The premiums for Medicare Part B have recently been released. The standard premium only went up by a few dollars from $93.40 to $96.40. However, if you are married filing jointly and made over $160,000 in 2006 you will see dramatic increases in your 2008 premiums. Be careful before you say that it is good they are taxing the rich, first you must understand how the SSA determines your “rich”.

The monthly premium charged is based on your modified adjusted gross income – the recipient’s 2006 adjusted gross income plus any tax-exempt interest. Maybe you are still saying who cares, but just realize the government is using your tax return from two years ago. If you are newly retired and have gone from a full-time job to living on a fixed retirement income you will be paying this higher premium for two years after your income has decreased. This causes the greatest problem for people, but it can be appealed. Divorce, death of a spouse or another unavoidable loss of income are also life changing events that can be appealed.

Unusual spikes in income from the sale of rental property, business or a home that exceeds the exclusion also affect your premium but cannot be appealed so just be aware!

Any appeals must be made within 60 days of your premium notice. This 60-day period begins when the individual receives the letter. The SSA assumes the letter is received five days after it is mailed unless the recipient can prove otherwise. The appeal form is available online at www.socialsecurity.gov/online/ssa-561.html. For more information on Medicare Part B coverage, see www.medicare.gov. You can see the full list of premiums by reviewing the US Dept Health & Human Services fact sheet.

Back to School Notes

Can you believe it is already October and the first six weeks of this school year is already finished? My oldest daughter started Kindergarten this year so I have been adjusting to the school routine for the first time in a long time!

Education can be expensive, but there are many tax savings available for parents, students and teachers. Here are a few that deserve some attention:

College Choice 529 Plans (Indiana) – Beginning in 2007, Indiana taxpayers may claim a credit of up to $1000 (20% of contributions up to $5000) on their Indiana tax return to the qualified state plans. The 529 plan is administered by JP Morgan Fund Management. You don’t get to pick the fund but all of the withdrawals are tax FREE as long as they are for qualified education expenses.

Coverdell Education Savings Accounts (ESA) – These are savings accounts that also grow tax free for higher education; however, you get to pick the fund where you invest your money. This is what we use to save for our children’s education. The easiest way is to find an investment adviser who can help you select a good mutual fund. You can set the fund up as an ESA and it works much like a Roth IRA. You make after-tax contributions but all of the withdrawals are tax FREE as long as they are for education. Private secondary education may also qualify.

Deductible Education Expenses – There are many tax deductions and/or credits available for parents or students who are currently paying for college. You can check out all of the details in the IRS Publication 970.

Teachers -save those receipts – The Educator expense deduction is available to all eligible educators whether you itemize deductions on Schedule A or not. Eligible educators include those who work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide in a public or private elementary or secondary school. This deduction is set to expire after this year, so be sure to save those receipts for books, software and supplies that you buy for use in your classroom!

On a final note, the IRS has issued some clarification on the changes to the deferred compensation rules that may affect teachers who elect to have their pay spread over 12 months rather than only being paid during the school year. The new rules do not apply to school years beginning before January 1, 2008 so your school district should have time to make the necessary changes. You can refer to the IRS guidance for more details.

The Mortgage Meltdown: How we borrowed the American dream

It’s a hot topic in the news – the “credit crunch”, “mortgage meltdown”. There are many names but really there is one problem, lenders are faced with high volumes of loan defaults and bankruptcies due to the real estate slow down and interest rate increases. Who is to blame for this mess? As with most problems, there is plenty of blame to spread around. The first target is the companies who handed out these loans to anyone with a dream and a signature. There are many reasons to blame the government, whether it is for allowing these loose lending practices to continue, the Federal Reserve Chairman encouraging people to take out higher risk adjustable rate mortgages, or do we blame the consumers for buying homes they really could not afford? Perhaps it is some of each but now where do we go from here?

How do we re-educate a generation that has grown up thinking that we “deserve” a nice car, big house, great healthcare plans? We live in a society that encourages 100% financing and calls it “American Dream” housing. I find it hard to believe that the American dream is to owe so much on your home and other debts that we can’t sleep at night worrying about the creditors calling. As I write this, know that I am not completely innocent of this mentality. I watch HGTV and find myself thinking that I need granite counter tops and life will not be the same without them. It is a struggle to find contentment in a society where we focus so much on our material possessions.

I have seen different estimates, but approximately 15% of all mortgages are adjustable rate mortgages or interest only mortgages. These have become really popular in the last several years while rates were so favorable. These loan interest rates are now adjusting and the payments are going up as well. The house won’t sell for the amount owed and many are forced into default on these risky loans leaving someone to clean up the mess.

It is obvious that the government will take action to help some of these people who are about to lose their homes. However, I do question who holds the majority of these loans. Is it really the low income families who didn’t qualify for a traditional or FHA mortgage or more likely real estate investors who were trying to “flip” houses and get rich quick? There are some proposals floating through Congress and President Bush has proposed to back some of these loans that adjust in 2008 with federally backed FHA loans. While there are some good limits in place on converting these loans to FHA loans, what happens when these borrowers decide to default because we have only temporarily fixed the problem? You and I – the American taxpayers-will be called on to bail out the borrowers and the companies who loaned them the money in the first place.

The Federal Reserve also lowered interest rates which “will hopefully make it easier for people to borrow money” according to a recent article in the Queens New York Gazette. Is that the prize we seek? Obviously borrowing more money has not worked to this point but some think that should help solve all of our problems. We tend to look at the government for the solution, but it looks like once again the government is going to put a band-aid on a generation that really just needs a good dose of common sense and self-discipline.