My Multiple Streams

That Time of the Year Again

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Have no worriesYep it’s that time again that can test our strength if not prepared. Time for the triple whammy of taxes! As I am writing this  the deadline for filing taxes is fast approaching (tomorrow actually).  Thanks to a slow down in the studio business, if one can be thankful for that,  my income tax bill was not that bad this year and the money was set aside. Still painful to write the check (or press the send button) I think everyone needs to pay this way then maybe we would actually have lower taxes.

Here April is also the time for the second installment for property taxes. Luckily even through the slow down we were having money automatically  set aside each month so had that covered as well.

To complete the trifecta of taxes are the state sales tax. Being self-employed and selling physical products I of course need to collect and then forward on to the state sales tax each quarter. This is a little harder as I have not been doing to well setting it aside but getting better at it.

Oh wait this year there is a bonus. I received a warm letter saying last year’s return has been re-evaluated and we owe additional taxes.

Well one thing I have been learning through my recent journey is patience. Patience and putting aside worries of the future and dealing with one thing at a time. This is defiantly one of those times and I must say I’m dealing with it a lot better this time than I would have a year ago.

So what tests to your patience have you had lately?

My Tax Plan or Why I’d Never be President

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tax and spendI get tired of hearing how unfair it is that the wealthy do not pay higher taxes. Especially when most of the people whining are amongst the 50% of americans that pay nothing in income tax (I underline because I am not say that 50% pay no taxes). Yes 49.5% of americans pay no income taxes, now how is that fair??

The Fair Solution

I heard this today on the radio (was an unable to find out who it was from sorry) of a 5 step way to make the taxes fair.

  1. Abolish the current code altogether. Thats right, burn it, flush it, just get rid of it. All 72, 536 pages of it! Interesting to note that it started out at only 400 pages in 1913.
  2. Determine a flat rate for all individuals and businesses. No deductions for this or credits for that, just plain and simple you pay a percentage of what you made. Government does not need to try and control what the people think and do buy creating loopholes if you do something they want. Thats all it is in the end, they want you to behave a certain way so they entice you with tax breaks.
  3. Same thing for corporations, a flat rate that they pay on their profits. Maybe then GE would actually pay an income tax?
  4. File your taxes on a postcard!
  5. Enjoy your new found time and money on your own pursuit of happiness.
Seems pretty simple to me and quite fair. Say everyone pays 5%… as you get rich you will pay more money. No need for one person to pay 30% just because they worked hard for their money and in managing it. And I’m sorry its only fair even if you are making min wage that you contribute a bit to your state and country.

What the Government does with the money

The other side of the equation is what the government does with the tax dollars. I think we can all agree that there is so much waste and programs that are not needed. Well Im sure we will argue over whats needed.

We need to get the government back to doing only what it is supposed to be doing. In my opinion it should only being doing things that benefit the nation as a whole. Military for one is one of the top priorities of a national government, the protection of its citizens. Locally that would of course mean police and fire as well. Infrastructure and roads such as the interstates and bridges. Honestly I cant think of much else 🙂 The national department of education I think is a waste and should be handled on the local level. I think that our education systems were doing much better before that  bureaucracy was put in place. I mean if we went through everything that our money is spent on and started trashing programs that dont benefit everyone Im sure we could right the budget quickly.

Lets just start off with redundant and over lapping programs. The GAO was tasked in 2010, unanimously I might add, to find such programs. They came back with reports in 2011 and 2012 with multiple duplicative programs and tax expenditures, and with reforms where to cut and combine that would save over 300 billion. So when it came time to vote and move forward you think we would get the same unanimous enthusiasm to save OUR tax dollars. Of course not, a dozen changed their minds and we are still wasting the money.

Its Your Money

Like I said before, if more americans actually cut a check for their taxes then maybe they would care a bit more on what it is spent on. Or even if more americans actually paid income taxes…

The spending is out of control folks and the only answer we hear is lets tax someone else. If the tax code was simpler we would save so much money in just the preparation and collection of taxes. Its the spending that really needs to be overhauled. We continue to spend on programs the government has no business being in and continues to add more. Currently the nation is borrowing approximately $0.42 out of every dollar we spend and are $15 trillion in debt and rising. This can not continue forever.

We are not allowed to run our budgets this way and those of us that have tried find out the trouble we run into eventually. Everyone in the personal finance world preaches budgeting and sticking with it (well most of us) I just ask that we  hold our government to the same standards.

End of rant…

http://blog.heritage.org/2012/02/19/chart-of-the-week-nearly-half-of-all-americans-dont-pay-income-taxes/

http://isaacbrocksociety.com/2012/02/12/what-is-the-real-size-of-the-u-s-federal-tax-code/

http://washingtonexaminer.com/opinion/editorials/2012/03/congress-truly-serious-about-eliminating-wasteful-federal-spending/393136

Image from the Sun Sentinel

Divorce, Dependents and Taxes

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Divorce, Dependents and TaxesWell the day has finally arrived, the dreaded tax deadline day. I E-filled mine last night paying $8500 in taxes but went to bed feeling good and refreshed. The I woke up to a couple emails…

State tax return, accepted! Yea! Federal tax return rejected. Oh Noes! Anxiety returns!!

Dependents and Divorce

I should have seen it coming but I thought I had headed it off. I am divorced and have a son with that marriage. He has lived with me since separation and I have claimed him as my dependent. It wasn’t always easy as she felt it was unfair that I always got to claim him and she even tried one year I think. I would send her a copy of the rules and that would be the last I heard of it. You see he lived with me and during the summer we would alternate weeks so he legally lived with me more than 50% of the year. We also had a separation agreement that was adopted in the divorce that gave me physical custody.

Along comes this year where my son finally graduates High School, a week later he decides to stay with his mom. With this it seems she couldn’t wait to jump and claim him as a dependent as she called and told me so in Jan or Feb. Tried again to explain the rules to her and I thought she saw it but guess not (or she had already filled).

He was home till late June have you so on face value it looks like he was in our home for more than 50% of the year, but there was the spring break and every other weekend thing. Also he didnt really stay with her for the rest of the year either. Thanksgiving on (I believe) he was actually up in Idaho with grandparents getting ready for Idaho State. So it would come down to counting nights in each persons home to determine who could actually claim him and it may get close.

Moving On

Today I just removed him from the tax return, kinda like the final nail that he is actually on his own. Mainly to just get it filed and done with, ends up costing an extra $500 in taxes (well a bit more as now I owe state as well). If I really feel like it I will do the math and perhaps file an amended return later. I hate doing so, again as I dont like to cause ripples and this would most likely end up in some sort of audit. Even though Im sure I would be in the right it is time to move on. My son is more than a tax right off and Im not going to get into arguments over this last claim. She did take out a loan for him to go to college this year so perhaps Ill just give her this one and try to work on my relationship with my son as a person and not a write off.

Lessons Learned

I did want to post this for a couple reasons though. For one it helps as always for me to put my thoughts out there, it calms the anxious feelings (most of the time) and helps me organize. Second for those of you out there in the same situation I hope you can learn from what has happened to me. If you get separated or divorced with kids and you are fortunate enough to have the kids stay with you there are a couple things you should do. I know it sounds cold but its for your protection.

  • Get it in writing, especially if its a separation. If you cant afford a lawyer to do so draw up an agreement between you and both of you sign it with a notary. I found a sample separation agreement online and used that. It divided up the debts and money and such but also stated the terms for the custody, visitations, and child care. If you can get it right in there who claims the children for tax purposes.
  • In case it ever comes up as a point of contention keep a log and document each and every day and night that the kids are with you. The IRS rules are pretty simple, there are 365 days in the year and if you can prove that the kids are with you 183 of those dates then the right is yours.
  • Document all money spent on the kids for support. This does not include Disneyland trips, but rather the meals, clothing, child care, and even a portion of the rent/mortgage. If it comes down to it being able to show that you provided 51% or more of the support for raising your kids you will win out as well.
I know it may seem cruel but you need to protect yourself at times. I come from the dad side of thing and history has given dads the short end of the stick in divorces so do what you can to make sure you come out ahead.

What if You Can’t Pay your taxes?

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taxes breaking the bankFirst I would like to point out to Andrea that I ended the title with a Question Mark.

Next it is tax time again as my recent posts have mentioned and this year was a bit of a shock to us as we owe quite a bit more than expected. First my wife was on unemployment during last summer (teacher, need I say more?) and no withholding is performed on those checks. Second it seems to me at least that the her regular withholding by the school district is light (lesson here boys and girls is to check with your HR dept before tax time to be sure enough is being withheld if you dont want a big bill come April 15th). Lastly I actually made more money than the year before. Now I was setting aside $125 a week to an ING account for income taxes but this was based on last years and I didnt really think it all out (maybe a bit more on my thinking another time) also I only started doing this mid year. Bottom line is the set aside and what ever the wife can dig up quickly is no where near enough.

So what options are their when off the top you dont have enough to pay the IRS? Well here are some strategies I have going through my mind, of course kicking up anxiety levels as they do.

Refinance the Mortgage

This was my first option to explore. We currently have a mortgage at 6% along with a second at 4.5% So I thought if we could refinance the first to a 4.1% with my credit union which was showing 0 points and take out just enough to cover the tax liability we would be set. Taxes paid, House down to 4%, lower monthly payments and getting the insurance and property taxes back to an impound (been hell with out it). So I went ahead and started the application…

First road block, due to our wonderful credit scores (being sarcastic in case you cant tell) there would be points. This would make the loan cost us $15k to refinance. No problem I have always financed the closing costs before. Well doing that puts us outside the LTV ratio and would only get maybe $2K cash out. Not enough. Second road block, checking for the ballpark value of our home came in at $280K way below my estimate of $350k. This along with the balance on the second puts us in the category of underwater on our home I.E owing more than the house is worth. This wipes out any chance of using the home, even if I agreed to a 7/1 ARM (no closing costs and at 3%) there is no chance of getting it done.

If our home loan was held in some way by Freddie Mac/Mae then we could have been eligible fo the HARP2 program to refinance down but alas we are not.

Payment Plan With the IRS

As long as you file on time you can apply to do installment plans with the IRS. The one nice thing about this option is you tell them what you think you can afford each month. Niceties stop there. You will pay an interest rate of 6% APR on the balance as well as a monthly penalty of 1% of the balance. Oh and there is a set up fee of $43 if what you owe is less than $50,000. So in all reality I would be paying an interest rate lets just say 7% just to make it easy, which really isnt that bad. BUT in my opinion it also puts you on their radar which is not a spot any of us wants to be.

I dont have to mention how totally unfair (I really hate that word though) it is that you have to pay interest when you owe and can’t pay right away, but if they owe you of course no interest and they’ll get it to you when they can.

Credit Cards and Loans

If you read the IRS material about not being able to pay they really push you towards other financing, seems they really want all their money up front. Well with the effort I have been making towards paying off my credit cards I do have room there. Lets see I have my capital one card with $750 available (they even owe me $.68) which I could ask for an increase on, oh wait it has an interest rate of 18% (24% on cash advances). The next card I have been working on has over $4k available but does have a rate of 12.9%. Finally there is the equity line (second) with about a $1k available at that 4.5%

So their would be higher rates than going with the IRS but will be off their radar and going back to square one paying them off again.

The Ole Emergency Funds

I had been good and got my emergency fund up to $10k mark and was still adding a little bit to it each week. Along with what I had set aside it would cover the bill but would be back to the beginning here if an emergency came up. Not a prospect I really like thinking about. Speaking of cash funds I do also have a large cushion in the business account for slow months (which April is looking like). If its slow and cant pay the lease thats were it comes from. If its not there then Im out of business.

Last Resort

Im not even considering this at all but mention it because maybe somebody out there is at that point. If you have a retirement account of some sort you can withdrawal some from there, as long as you are aware of the costs. Most retirement accounts have an early withdrawal penalty and of course taxes. Since it usually goes in tax free when you take it out it is taxed as income, as well as a 10% early withdrawal penalty. Done that before and its not pretty. There are some retirement accounts where you can borrow from your funds and you make payments back to yourself, if you have one of these this might be a good alternative to credit cards.

So What do I do?

Now Im sure there may be other options out there, like borrowing from family, but its not something I’m looking at. The more I think about it I will most likely end up doing a combination of credit and emergency funds so I dont deplete either. If you read my previos post you know I also have property and sales taxes this month to contend with as well. As of right now I’m increasing the withdrawal to the ING account to $175 a week for next year and the wife is going to talk to HR about her withholding. We have other issues coming up and I think this one will be handled fine so we can move on.

How were your taxes this year? What did or would you do if you owed a large amount?

April – Tax Armageddon Month

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triple taxesI alluded last post how April is shaping up to be a not so fun month for me. It starts out that April happens to be the Triple Crown of Taxes for many people and Im one of them. Having 3 deadlines in one month on top of a slowing period of business is making this to be one of the suckiest months evar! Sometimes I would like to go back to working for the man and living in an apt…

Taxing the Land You Live On

Yes this is the month that first up is the second installment of property taxes. Property taxes are broken up to be due in December and April every year. My fist beef of course is why is this less than 6 months apart? Would make sense and be easy for people to put away money each month to pay it. I guess once you got going putting an amount aside each month it would eventually balance out, its just the principle! I should be grateful I guess that Prop 13 was passed many years ago that capped the tax amount. It is assessed when you make the purchase based on the property value, there after I believe any increases are capped so it barely rises. Where it used to be reassessed every year and with the way values were skyrocketing that would have been bad.

Uncle Sam’s Deadline

Next up of course is April 15th, the dreaded income tax filing deadline. For many like me we end up owing each year, which is better than getting a refund. I actually think that we should do away with the withholding system and that everyone has to write a check (ok these days is click a few buttons) for their taxes each year. This way I think their would be more outrage about taxes and more concern on how the governments spend YOUR money. As it is now its taken out of your pay before you even see it. Out of sight, out of mind… you dont really think about it. Im sure this was done by design.

Also everyone should be self-employed for a year or two and then they may wake up to the payroll taxes. Being self employed you still have to pay social security and medicare taxes. This is about 6.5% that is again withheld by your employer, but when you are the employer you also have to pay another 6.5%. You see your employer pays that on your behalf on top of the 6.5% that is withheld from your wages so being self employed you are paying 13% of your net income on top of your income taxes! Yea for entrepreneur incentives!

States Want Their Share as Well

Finally we have the quarterly sales tax due to the state. California is one of the fun states that businesses have to collect sales tax on the products and services we provide. As a photographer that is about everything, yes I collect taxes on the obvious prints and physical products that I sell to my clients. In California at least the service of taking the photos is also taxable so I have to charge sales tax on all my session fees. This is something a lot of my fellow photographers dont realize when they are starting out. Used to be if the end product was to be non physical, like digital files emailed to a commercial client then none of it was taxed, but if I were to hand over the files on a disc to the client then boom, sales tax on everything! I read some where that they got rid of that loop hole though.

Wake Up Call

To cap it all off I have become lazy in the past couple months. I havent stayed on top of the money shuffle, paying myself, setting aside money for property taxes and sales taxes. The only thing I was on top of was income taxes, as that was done automatically $125 to an ING account weekly.  Problem with that is that it wasnt enough. Seems I mad a bit more actual income in 2011 as opposed to 2010 which I based my numbers on. I already told you about my spending sprees in the last couple months as well.

So I need to sit down and do some more money shuffling and figure things out. Been looking at refinancing the house for a lower rate and payments, this may be the time to do it and take a little out to take care of some of the taxes as well. Also have to take another look at the budget and work harder at sticking to it, not just watching it and saying darn went red on that one again.

How about you? Do you find yourself off track often? Does it take a big wake p call like this to get you back on track?

Think Your Done With That Debt? Think Again.

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1099-C

Courtesy of the IRS

So you have or are considering one of those debt consolidation deals, or you made a deal to reduce your debt and start making a smaller payment. You are now thinking great the amount that is forgiven can now be forgotten. Well think again! As tax time approaches those forgiven debts are about to come back to haunt you. Something these guys seem to have failed to mention to you.

You see there is a provision in the tax code that considers all that debt that was ‘forgiven’ by the collectors to now be income on your part. Those collectors will be taking a tax deduction in the amount of their loss and uncle sam dosent like to be cheated out of their money so they will now come after you for some of it. You may not be paying the money back but you will be paying a little penalty on not paying it in the form of income taxes. So if you had a loan or credit card forgiven or reduced in an amount over $600 last year you should have or expect to receive a 1099-C. SURPRISE! This is now income you have to report on your taxes.

For example if you had a $8,000 credit card debt and you negotiated it down to $2,000 to be made in easy to make smaller payments over the next few years. Well you just gained $6,000 in income for that year. All taxable by uncle sam and your state agencies.

There are some exclusions that would allow you not to report this as income but as you can see it would be hard for most of us to meet one of these.

  • the debt was a nonbusiness debt and was canceled before 2007 as a result of Hurricane Katrina
  • a student loan was canceled because you worked in a profession and for an employer as promised when you took out the loan
  • the canceled debt would have been deductible if you had paid it
  • you discharge the debt in Chapter 11 bankruptcy, or
  • you were insolvent before the creditor agreed to settle or write off the debt.

What makes this especially hurtful is that it even applies to foreclosures and property repossessions. They do provide an exclusion if the money was used to purchase or improve your primary residence, but if its a second property or you took out a second to go on vacation… ouch.

Another problem is since these 1099’s are coming from credit card and loan companies you may be just throwing them out thinking its trash or harassment. Be sure you are opening these up to check! Just because you threw it out dosent make the problem go away. You are only getting part B (your copy) while the IRS is getting theirs and I bet they are not throwing theirs away.

Yes, I did get one.

you?