Tax Minimization Strategies

Disclaimer:  I am not an accountant or a tax professional and any advice here should be verified with a professional before acting upon it.

I’m doing my taxes this week.  It’s going to be painful and I’m not going to like the answers it gives me, but I might as well bite the bullet.  If you’re in the same boat you may be looking for strategies to help you minimize your taxes this year.  There are several categories of expenses that we should consider as possible sources of tax deductions:

Business Expenses

Most of the minimization strategies you will see are for people with small businesses.  You open up a world of deductions by starting a business, however this who area of deductions doesn’t apply to most of us.  Consider starting a business if you have one in mind, but we’ll cover individual deductions instead since they are of the broadest interest.

Tax-Deferred Accounts

Make sure you put any money into your IRA, 401(k), HAS or any other tax advantaged accounts you have.  Not having to pay taxes can be a huge savings by itself.  When you throw in the capacity of some of the accounts to grow tax-free, this is a no brainer.

Unemployment

This is very relevant to all of us in this economic climate.  If you lost your job, many of the expenses that you incur in your job search are tax deductable.  Phone calls, agency fees, travel to potential employers as well as costs for printing resumes may all be deductible.  Be sure to take advantage of any opportunities to lessen your tax burden in this climate.
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Do Economics Matter?

I write generally about three topics on this site:

• Personal Finance
• Investing
• Economics

I list them in that order based on what I perceive as the general public’s interest level.  Most people are concerned with getting out of debt and maintaining a budget – Personal finance issues.  Those who have succeeded at those tasks become more interested in how to put their savings to work for them and become interested in investing.  Very few people proceed to an interest in policy and economics, and perhaps rightly so.  It’s certainly not immediately clear that an understanding of economics is beneficial to your personal wealth.

The Case for Economics

There are obvious reasons to believe that an understanding of economics should be a great asset in your financial life.  Inflation is one of the examples.  If I judge accurately what future inflation will look like, this can greatly improve my ability to choose good investments.  If I can look at upcoming legislation and see what its effects will be, I should be able to capitalize on that.  It seems like a slam dunk that an economic view should be a great boon to my financial freedom.

However…

Sadly, economists have a habit of being spectacularly wrong.  Even when they aren’t completely wrong, it’s very difficult to profit off of their decisions.  For example, right now treasuries are already priced very low because of a perception that inflation in the future will be high.  So even if that perception is correct, the expected price change is already “baked into the cake;” and if they’re wrong, there’s a chance for spectacular loss.

So Why Bother?

Despite all this I have a nasty habit of continuing to write about the big picture, particularly policy.  One reason I do this is because I believe that a basic understanding of economics can help you make wise decisions in your day to day life, not just in your investing life.  The law of supply and demand may not be useful in deciding whether to buy Microsoft, but it can be useful in starting a business or in deciding what political policies to pursue.  While the value of economic understanding may be questionable for investing purposes, its value in life is much less questionable.

The More Things Change

Many sage investing professionals have a saying:  The most dangerous words in the English language are this time it’s different. Each time that politicians proudly proclaim that we’ve defeated the boom and bust cycle for example, we know how the story always ends.  The more things change, the more things stay the same.
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Is Debt consolidation the right solution for you?

Today’s post is a guest post by David Brown,  a financial writer with Oak view law group

Have you been hit by the money bug? Are you suffocating under the burden of multiple debts? Well, debt consolidation can be one of your options. However, you need to know certain things before you decide to consolidate your debt. Read on to know more:

How can debt consolidation help me?

• If you have a poor monthly income right now then debt consolidation provides you the option of making lower installments over a longer period of time. It might certainly suit your current financial condition

• If you have several loans right now then you might be facing a tough time calculating interest rates. With debt consolidation you take a single loan to pay off all your debts. So you can manage your finances in a more organized manner.

• You need not handle calls from the collection agency. The debt consolidation company does that for you.

What are the shortcomings of debt consolidation?

• In most cases debt consolidation loans are secured loans. This means that you have to pledge some asset (your car or your home) as collateral for the loan. So you risk losing your assets in case you fail to pay back the loan. You should be confident about health, job and other unpredictable issues which can cause financial trouble. To be eligible for unsecured consolidation loans you must have a pretty good credit rating. Even if you manage to get a unsecured consolidation loan with a poor rating, it will probably not be big enough to pay all your debts.

• Many people wrongly assume that all consolidation loans have low interest rates. However it’s a different story altogether. In most cases the payment is lower because of the extended term and not the interest rate. Secured consolidation loans sometimes have a low interest. But it can still cost you if you are taking a long term loan, say for 30 years. In such cases you have to pay interest for a long period of time and over the years the interest might grow even bigger than the original debt amount. Depending on your present debt, the interest rates for these consolidation loans can be more than those on the pre-existing debt. That is what makes debt consolidation a profitable business for your lenders.

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How to Save When You’re in Debt

This is a guest post from Fred from Credit Card Finder. Fred helps people to compare and choose the best credit card online.

If you’re in debt with credit cards, or personal loans and a mortgage you may be feeling a little nervous when you think about your lack of savings – but does it make sense to direct funds towards a savings account when the interest earned there will be overshadowed by the interest you are paying on your debt. There are ways to save when you are in debt, and there are financial products which can help specifically with this situation. So here are five years you can save, even if you have debt.

1 Consolidate credit cards to one balance transfer card

Try and avoid using equity or a line of credit on your home loan to pay off your credit card debt because you are in fact just stretching out your credit card debt for another 30 years, when you can target it now and get it out of the way for good. Instead, find a balance transfer card with a low interest rate which will allow you to transfer all of your credit cards to be charged one low rate. In this way you have your debt under control, you have a manageable monthly repayment and you have a payment plan which will help you get rid of your credit card debt.

2 In debt to 9%

Many financial planners and advisors will use the 9% rule – if you have debt which is charging you interest of more than 9%, you should direct as much of your income as you can towards paying down that debt. (more…)

Long Term Joblessness

The unemployment statistics in America are confusing.  Sometimes you will see unemployment go down without jobs being created.  How can this be?  As it turns out there are many different definitions of unemployment and the number you see is only one of them.  In fact, if you don’t have a job for a certain amount of time, you’re considered to be “out of the workforce,” and no longer counted in the common measure.  As it turns out, long-term joblessness is a danger to societies and this has implications for many of us in our personal life.

Measures of Unemployment

In understanding the impact of long term joblessness, it’s good to understand how unemployment rates are calculated.  In America there are six different unemployment numbers, U1 through U6:

• U1: Percentage of labor force unemployed 15 weeks or longer.
• U2: Percentage of labor force who lost jobs or completed temporary work.
• U3: Official unemployment rate per ILO definition.
• U4: U3 + “discouraged workers”, or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.
• U5: U4 + other “marginally attached workers”, or “loosely attached workers”, or those who “would like” and are able to work, but have not looked for work recently.
• U6: U5 + Part time workers who want to work full time, but cannot due to economic reasons.1

So as you can see, sometimes a job seeker simply “gives up.”  They’re no longer counted in unemployment statistics, but they certainly don’t have a job.  As it turns out, this is actually the worst kind of unemployment, even though we don’t see it measured very often.

Long Term Havoc

A study by the Cologne Institute for the German Economy is one of many supporting the belief that the longer a person is out of a job, the less likely they are to return to the workforce.2 Their job skills atrophy and they lose hope.  They basically get locked into a self-reinforcing cycle of poverty.  You may know someone like this, who used to be in the workforce, but now seems unable to return. (more…)

1. Wikipedia — Unemployment [↩]
2. German Think Tank Says Joblessness Behind Poverty [↩]

Web 2.0 Personal Finance

Today’s post is by Nick Barber who works for UK discounting site VoucherCodes.co.uk

Personal finance has moved on and people are now roughly separated into two groups; those that are savvy online and those that are not.  There is a myriad of tips of tricks beyond the usual blanket “buy online” advice that can slash your usual monthly spend painlessly by about 20%.  These personal finance tips however can be leveraged in the worlds of investing and of small business too so you offset the hefty start-up costs that are often incumbent on the budding entrepreneur.

Before you know where you are going to make savings however, you need to know exactly how your finances are shaping up. In recent years there has been a proliferation of online software packages that will help you keep your bookkeeping in order. Mint is a great example. Once you sign up and enter your details, it will automatically pull in your balances from different accounts, updating in real time, so you can always keep on top of how much you are laying out each month. This information can then be used in conjunction with their budgeting software and there is even functionality to check how your investments are doing.  What is more – it’s completely free!

The second tip for knowing where you stand financially is to check your credit report. Your credit report is, put simply, a record of all the debts you have taken out in the last 6 years, right down to cell phone contracts, as well as a record of how well you have managed to repay them. Experian offer a free credit report when you register with them. It is essential to check for mistakes – which happen more regularly than you think. Even the smallest error can reflect badly on you which is especially important with banks having access to your records. If it seems you have missed just a few payments, this can result in a much higher rate of interest on your mortgage and other borrowings. Correcting mistakes can result in savings of hundreds of dollars a month; as well as opening up more finance to you.

Now you know where you stand; it’s time to make savings. (more…)