Tax Tip for Teachers

The 2003 Tax Act included a $250 deduction for teachers who spend their own money for classroom supplies.  Most teachers spend far more than $250, so this tax deduction was a very minor victory for teachers.

However, there is a way for teachers to get a full tax deduction for the supplies they purchase for the classroom.  IRS Code Sec. 170(c)(1) states that governmental bodies, including public schools, are considered qualified charitable organizations, which means that donations of cash or supplies to public schools are tax deductible as a charitable donation.

Therefore, teacher’s should deduct the first $250 of supplies on line 23, Educator Expenses (2005 Form 1040), and classroom supplies over the $250 Educator Expenses should be deducted as a non-cash charitable donation on Schedule A, Itemized Deductions.  You’ll need to document your purchases and get written acknowledgment from the school for supplies purchased/donated over $250, but the extra tax savings you’ll receive are worth the effort.

 

Why You Should Always Pay Yourself First

You’ve heard it over and over again: Pay yourself first.  Why is this so important?  First, it establishes good saving habits.  If you continuously pay yourself first, despite whatever is going on in your life at that time, you will be much more likely to achieve your goals.

Second, the power of compounding.  Sometimes called the 8th wonder of the world, the power of compounding is truly remarkable.  The best way to explain this concept is to show you an example:

Person 1 invests $2,000 per year beginning at age 19 and ending at age 27.  Person 2 invests $2,000 per year beginning at age 27 and continues to invest until retirement age. Assuming the same rate of return (10 percent) in each of the two examples, a person who invests early and for just eight years will have more money at 65 years old than will someone who starts late and invests for nearly 40 years.

	Example 1:		Example 2:
Age	Annual Investment	Year-End Value	Annual Investment	Year-End Value
19	$ 2,000	$2,200	$ 0	$ 0
20	$ 2,000	$4,620	$ 0	$ 0
21	$ 2,000	$7,282	$ 0	$ 0
22	$ 2,000	$10,210	$ 0	$ 0
23	$ 2,000	$13,431	$ 0	$ 0
24	$ 2,000	$ 16,974	$ 0	$ 0
25	$ 2,000	$ 20,872	$ 0	$ 0
26	$ 2,000	$ 25,159	$ 0	$ 0
27	$ 0	$ 27,675	$2,000	$2,200
28	$ 0	$ 30,442	$2,000	$4,620
29	$ 0	$33,487	$2,000	$7,282
30	$ 0	$36,835	$2,000	$10,210
31	$ 0	$40,519	$2,000	$13,431
32	$ 0	$44,571	$2,000	$16,974
33	$ 0	$49,028	$2,000	$20,872
34	$ 0	$53,931	$2,000	$25,159
35	$ 0	$59,324	$2,000	$29,875
36	$ 0	$65,256	$2,000	$35,062
37	$ 0	$71,782	$2,000	$40,769
38	$ 0	$78,960	$2,000	$47,045
39	$ 0	$86,856	$2,000	$53,950
40	$ 0	$95,541	$2,000	$61,545
41	$ 0	$105,095	$2,000	$69,899
42	$ 0	$115,605	$2,000	$79,089
43	$ 0	$127,165	$2,000	$89,198
44	$ 0	$139,882	$2,000	$100,318
45	$ 0	$153,870	$2,000	$112,550
46	$ 0	$169,257	$2,000	$126,005
47	$ 0	$186,183	$2,000	$140,805
48	$ 0	$204,801	$2,000	$157,086
49	$ 0	$225,281	$2,000	$174,995
50	$ 0	$247,809	$2,000	$194,694
51	$ 0	$272,590	$2,000	$216,364
52	$ 0	$299,849	$2,000	$240,200
53	$ 0	$329,834	$2,000	$266,420
54	$ 0	$362,818	$2,000	$295,262
55	$ 0	$399,100	$2,000	$326,988
56	$ 0	$439,010	$2,000	$361,887
57	$ 0	$482,910	$2,000	$400,276
58	$ 0	$531,202	$2,000	$442,503
59	$ 0	$584,322	$2,000	$488,953
60	$ 0	$642,754	$2,000	$540,049
61	$ 0	$707,029	$2,000	$596,254
62	$ 0	$777,732	$2,000	$658,079
63	$ 0	$855,505	$2,000	$726,087
64	$ 0	$941,056	$2,000	$800,896
65	$ 0	$1,035,161	$,2000	$883,185
Less $ invested		($16,000)		($78,000)
		$1,019,161		$805,185
Money increased		64 fold		10 fold

Need I say it again?  Pay yourself first, and start early!

New Tax Law Creates Planning Opportunities

Along with some temporary AMT relief, the tax law just passed last week extends the long-term capital gain tax rates to 2010. 

Folks in the 10 and 15% tax bracket will benefit the most (assuming those same folks have investments held outside of retirement accounts).  For 2006-2007, long term capital gain rates will stay at 5%.  In 2008, the long-term capital gain rate drops to 0% and will remain there through 2010.

Taxpayers in higher tax brackets will pay 15% on long-term capital gains from now through the end of 2010.  After 2010, the long term capital gain rates are expected to go back to the previous levels (10% and 20%).

This creates some planning opportunities for the next few years.  If you’ve been holding onto stocks that have a low cost basis, depending on which tax bracket you’re in, you’ve got several years to reduce those positions and enjoy a low tax bill in the process.

Five Smart Money Tips for College Grads

Most likely your college education didn’t include financial planning, which is too bad.  Personal finance is a skill that everyone should learn BEFORE they start careers, families, etc.  Unfortunately, most of us learn these five smart money tips too late in life:

1.  When choosing between different job offers, review the benefits carefully.  Health insurance costs have increased dramatically, so a company offer that will cover health insurance may be more attractive than an offer with a higher salary but no health insurance.  Look for companies that offer 401K matching contributions, pension benefits, education assistance, etc.  A great benefit package can be worth far more than a straight salary package.

2.  Enroll in your company’s 401K as soon as your eligible!  Contribute as much as you can from day one.  The most important thing you have when you’re young is time.  Every dollar saved in your 20s, is worth far more than the same amount saved in your 40s.

3.  Create a spending plan.   Nobody likes to keep track of every penny they spend, but you should at least know where your money goes.  Keep track of your spending in a spreadsheet or software program like Quicken.  Identify priorities and spend accordingly.  If you know where your money goes each month, and you plan ahead for priority items (new house, new car), you’re much more likely to meet your goals. 

4.  Be smart about credit.  You probably received dozens of credit card offers while in college.  Pay off any credit card debt you have and avoid adding more.  Pay cash when you can, and use credit wisely when you need to.  Good credit can mean the difference between a good interest rate and a bad interest rate when you need it (like for your first home), so treat your credit well!

5.  Educate yourself!  I know you just got out of college, but the real learning is just beginning.  One of the best things you can do is to educate yourself about personal finance, including saving, managing debt, saving for retirement, investing, etc. 

Some great resources are:

About.com
Kiplinger’s Personal Finance
Morningstar
SmartMoney

Estimating College Costs

Much like saving for retirement, when you’re saving for college, you need to have a goal.  Where will your child go to college - public or private, in-state or out of state?  Wherever your scholar plans on attending, you can estimate the annual cost using this nifty calculator.

Once you’ve decided on how much you would like to contribute to Junior’s education, and how much it will cost, you need to decide the best saving vehicle to achieve your goals.  Watch future posts for a discussion on the different methods to save for college, and which type of account is right for your goals…

Financial Literacy

I found a great resource today for articles, calculators and other tools on personal finance.  The website is called 360 Degrees of Financial Literacy.

Topics include financial planning, tax planning, investment planning, business owner, estate planning and more.  This is a very comprehensive website, with easy to read articles.  I will refer back to them often in the future.  Check them out here. 

AMT Relief on the Way?

The House passed a tax bill yesterday (see article here) which will extend the reduced capital gain and dividend rates, and provide some much needed AMT relief.

If you’re not familiar with AMT, it is the Alternative Minimum Tax, created to keep higher income taxpayers from paying too little income tax.  Unfortunately, the AMT has never been adjusted, so many middle income taxpayers have fallen victim to the AMT in recent years.

The new tax bill will increase the AMT exemption for 2006 and will allow taxpayers to use nonrefundable personal credits (such as education credits and the childcare expense credit) to offset AMT liability.

Here are some good articles/websites to learn more about the AMT:

Fairmark.com - Guide to the Alternative Minimum Tax
SmartMoney - The Alternative Minimum Tax
IRS.gov - Tax Topic 2004-51

50-Year Mortgage Hits the Market

All I can say is "wow".  I never expected to see a 50-year mortgage.  See the full story from CNN Money here.

I imagine this will be a popular mortgage in California and other areas where home prices have sky-rocketed, but can you imagine paying on a house for 50 years?  And what will the interest rate be on a loan this long?  How will you build equity in your home with a 50-year loan? 

The 50-year mortgage will probably help first-time homebuyers afford their first home, especially those that live in markets where real estate has boomed, but will this be a good option?  Only time will tell…

How Much Do You Need to Retire?

How much do you need to retire?  The answer is, it depends…

How much do you wish to spend during retirement?  What will you do?  Will you travel?  Play golf every day?  Where will you live?  Florida?  Small college town?

How much you spend during retirement is probably the most important consideration when you’re determining how much you’ll need to save for retirement.

Example:  I have two clients, Client A and Client B.  Client A has saved $1,000,000 for retirement and expects to spend $75,000 per year, which includes traveling, playing golf and living in a state with a modest cost of living.

Client B has only saved $500,000 for retirement, but he lives in a small town with a low cost of living and only expects to spend $40,000 each year during retirement (no golf, little travel, but some frills, such as taking family out to eat often).  Both Client A and Client B can expect to receive the same amount of Social Security benefits.

Who do you think will fare better during retirement, Client A or Client B?  Check back soon for the answer…

Free Credit Report

I’ve had many questions lately about where you can go to get your free annual credit report. There is only one legitimate website to do this and it is www.annualcreditreport.com. Beware of ads or other websites that offer a free annual credit report. Many of these are scams or they are trying to sell you something.

At www.annualcreditreport.com, you can request a free credit report once every 12 months. This credit report does not include your credit score, but you can purchase your credit score by contacting one of the three credit reporting agencies (Equifax, Experian or TransUnion).

Another great resource for credit reports is www.myfico.com, where you can purchase your credit report from all three agencies, including your credit score. myFICO also has an education section where you can learn more about your credit reports and score.

You should check your credit report annually for errors and/or fraud.