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Who Should Do Your Taxes?

Written by Ted Hunter on February 9, 2012 — Leave a Comment

Taxes. They’re one of those unavoidable facts of life. When it comes to preparing your taxes I believe the key is striking a balance between keeping it simple—not spending more time or money than necessary—and being smart about getting all the deductions and savings you are entitled to. So, how do you get the job done right and walk that line? It depends on your particular situation.

Do It Yourself

If, like the majority of people, your tax return is pretty simple—you don’t itemize tax deductions, don’t own a business, earn less than $1,500 a year in interest income, and your taxable income is less than $100,000—you can quickly and easily do your own taxes. Go online to www.irs.gov and fill in and file form 1040EZ or 1040A, and then file a simple version of your state return. Better yet, if your income is less than $57,000 you may be eligible to file your federal taxes online for free using either the forms or software programs available from the Free File Service at www.irs.gov.

Use Tax Preparation Software

If you are not in the above group, but still have a fairly straightforward financial picture, you definitely still have the option of doing your tax return yourself. If you do, I’d suggest using one of the major tax return systems such as TurboTax or TaxACT that includes both federal and state forms. I would, however, have a tax professional check your return the first time you do this and also once every three to four years. The likelihood is that they will catch some things that will more than pay for what they charge you.

As I see it, here are the pros and cons involved in choosing to use one of the major do-it-yourself tax return systems:

Pros:

  • They do a good job of explaining your options and guiding you though the process.
  • Your return preparation cost is likely to be lower than hiring a professional.
  • You are likely to develop a better understanding of how to minimize your tax bill going forward.
  • Such systems automatically save all previous years’ data. This makes doing the next year’s returns a lot easier and it also helps remind you of every deduction you took last time, so nothing much slips through the cracks.
  • If you try to go this route and it’s not working for you, you always have the option to turn to a professional. You can also start by trying a do-it-yourself option for free online with a service like Turbo Tax or Tax ACT.  If you like how it's going you can then pay for the service and file your return.

Cons:

  • It won’t work well if you are someone who has trouble following detailed instructions and explanations or feel you have weak analytical skills.
  • It may take more of your time than using a preparer and you will, at times, have to do a little homework on your own. This isn’t that big a factor, however, as the overwhelming majority of the work involved is in the gathering and maintaining of the information and records needed, regardless of whether you do your return yourself or not.

Hire a Tax Professional

If you have a somewhat complicated financial picture, I believe you are best off hiring a professional to prepare your taxes. Your choices are a national tax return franchise (like H & R Block), an online service, or an individual local tax professional such as a CPA or an Enrolled Agent (tested and background checked by the IRS). My advice is to go with an individual local tax professional.

Here’s why:

  • The difference in fees between them and a large company is likely to be fairly small.
  • The return preparers provided by large companies are usually part-timers and likely not as well trained and knowledgeable as the average CPA or Enrolled Agent.
  • Franchise and online preparers are less likely to be available for any questions that might arise during the year.
  • The turnover of franchise and online preparers is quite high, thereby reducing the chances you will have someone familiar with your tax situation on an ongoing basis.

Should you choose to go the route of using a local individual tax professional here are a few additional suggestions to make the most of the situation.

Despite the similarity of fees you will encounter, it will still pay to negotiate for the best price. Also, once you have someone you use regularly, here’s a good tip for after your taxes are done. Tell the preparer you need to know the price for the next year. You’ll often get a committed price and at the same amount you just paid. If you don’t do this, there is a 50/50 chance that you’ll find the price bumped a little come next year. A good approach is to acknowledge that the first year you use someone it’s more work than it will be in future years. Use that situation to try to negotiate a lower price for the next year by saying something like, “I can appreciate that it’s more work the first time you do someone’s return, but then somewhat less time consuming after that. What will it cost me next year?”

Seriously consider using tax preparation software first by yourself before you turn over your information to your tax preparer. Many find this to be a very valuable extra step as now there are two sets of eyes looking at the data from every angle to maximize deductions and minimize the hit. Also, you’ll end up with a better understanding of how to minimize your tax bill going forward.

Even if you don’t also use software, do take the time to understand your return as no one but you could possibly know the complete ins and outs of your financial situation. Start with last year’s return. Look at the different sections (income, deductions, itemized deductions and exemptions, credits, and tax payments) and understand how they work. Unless your financial situation is a very complicated one, you'll usually be surprised to learn that the whole thing isn't as difficult as it looks.

To get your money’s worth, give everything to your tax preparer in early February, as soon as you’ve received all the necessary documents. Any later and you enter a period of greater stress and a higher probability for both error and lost opportunity. Don’t risk filing late. If you do, you’re almost certain to pay more taxes due to rushing errors and not having the time to get supporting documentation—and that’s before adding in the late filing penalties involved of about 4.5% per month.

Finally, it’s possible that you might run into someone who sets their fee as a percentage of the amount of your refund, who claims the ability to obtain larger refunds than other preparers, or who asks you to sign blank forms to be filled in later. All three of these things are red flags warning you to never to use that person. Remember that regardless of who prepares your return, you are the one responsible for paying the taxes actually owed. If someone improperly does a lowball return, you will not only end up having to pay the correct taxes, you’ll also end up paying a penalty.

Regardless of how you decide to prepare your taxes, be thorough and keep an eye to streamlining the process for the next year. It’s a great time to set up some simple systems to use throughout the year to help you track the information you will need at the end of the year.

Nobody really likes preparing (or paying) taxes, but as with the rest of your finances, it’s important to give it the attention it deserves because the payoff can be high.

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Estate Planning Demystified—It’s Not Just for the Rich

Written by Ted Hunter on February 2, 2012 — Leave a Comment

Estate Planning. Just the mention of the subject is enough to turn off the brain. Well stick with me for a minute, because we all need it and also because I believe I can quickly show you how over 85% of adults can do a really good job of estate planning in just a couple of hours. And the best part? It's free!

In my opinion, all most people need to do are these 5 things.

Have a will. Almost half of all adults do not have a will. No way do you want to be in that camp, some court deciding whatever they wish regarding the disposition of your assets and even the guardianship of your children. Creating a will is quite simple these days. The forms are available on-line and are inexpensive or even free. If you want help filling it out there are on-line services that will walk you through it for a small additional fee.

The purpose of a will is to cover children, personal possessions and such but should not cover the disposition of your assets if you can avoid it. I say this because assets covered in a will are subject to probate which can tie up assets for a long time, even a year or more, and in most states it will also consume a bunch of your money in fees. So how do you handle your assets while avoiding delays and fees? That's what the next two steps are all about.

Own assets jointly, where appropriate. Property held in joint ownership, such as your home (if you’re married) and joint bank or brokerage accounts are essentially immediately available to the surviving party at no cost whatsoever.

Identify a beneficiary on all asset accounts. If it's a joint account, you're done. If not, just list a beneficiary. If anything happens, the assets are available immediately on a joint account and in a few days on the rest. If you're unsure of how to do this, just call the company holding the account and they should be able to quickly walk you through it. You should also know that, as a general matter, the ownership of any and all tax-free/tax-deferred accounts automatically goes to the surviving spouse unless you designate otherwise, and without any taxes having to be paid at that time.

In the case of minor children, the wills of both parents should specify who will be the guardian and who will be responsible for managing any and all assets left to them on their behalf if both parents die.  Also, there may be instances where you cannot find a good way to cover your wishes by naming beneficiaries, such as in the case of multiple adult children. In those instances you may have no choice but to include the assets in question in your will and have them subject to the probate process.

Have a living will and healthcare power of attorney. These are just some straightforward forms you need to fill in to insure that your wishes are carried out regarding medical treatment, should you be unable to speak for yourself. In some states both forms are even combined into one. Your healthcare provider should have these forms and can usually help you fill them in.

Organize your documents. Put all of your financial and legal documents in one place and keep them up-to-date. At the end of this blog is a complete list of what to include.

If you have millions in assets, own a business, or have otherwise non-standard assets, then you're likely not to be in the 85% who don’t need help setting up their estate plan. In that case you need to look into the possibility of setting up one or more trusts and getting legal help to set things up correctly.

Here is a list of the documents you need to gather together and maintain. Be sure that the executor named in your will knows where the documents are being kept.

  • Asset accounts- The most recent copies of all bank, brokerage, and retirement account statements. If they are paperless, print out and file copies of your account statements semi-annually and identify where the latest statements can be found online.
  • Debts- Copies of any mortgages, notes, credit cards, or other agreements and obligations and the current balances due on all outstanding debts and loans; also include the payoff documentation on all closed loans. If they are paperless, print out and file copies of your account statements semi-annually and identify where the latest statements can be found online.
  • Family legal documents- The originals or copies of all other family legal documents, for example, birth and death certificates, marriage certificates, divorce settlements, passports, etc.
  • Estate Planning- Copies of all wills, trusts, living wills, health care powers of attorney, and general powers of attorney.
  • Insurance- Copies of all insurance policies.
  • Taxes- Copies of tax returns for at least the last five years, statements, receipts for deductions, proof of payments, etc.
  • Titled Property- Originals or copies of all deeds to homes or other real property, titles to motor vehicles, and any ownership documents to other assets with titles.
  • Social Security and Medicare/Medicaid- Cards, benefit printouts, etc.
  • Business legal records- The books and minutes for any corporations, LLCs, or partnerships.
  • Other- All documentation regarding any other assets or liabilities, location of and access to lockboxes or storage units, lists of people to be notified, and anything not covered above, which you feel is important and which would be necessary for your executor and/or heirs to review and use when you pass away.

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Posted in Estate Planning, financial plan, Manage Your Money | Tagged ,

Free Identity Theft Protection May Be All You Need

Written by Ted Hunter on January 27, 2012 — 1 Comment

There are so many advertisements out there for identity theft protection. They’d have you believe that that tens of millions of people have been the victims of identity theft and that the problem is growing by leaps and bounds. The commercials are emphatic that you just "can't afford" to be without protection. And over 50 million American's have bought into this idea, subscribing to one or more theft protection services at a cost $100-200 a year or more.

So is it really the dire problem it’s made out to be and what should you do to protect yourself?

On the one hand, there is no question that the problem shouldn't be ignored. On the other hand, a lot of these services are somewhere from questionable to flat out worthless.

Here's the long and the short of the identity theft situation:

The size of the problem is overstated. Thanks to improved security systems and increased awareness by consumers on both a business and personal level, the number of claims is shrinking. Further, in most cases the theft victim is not liable. According to Consumer Reports:

"The latest available data show that in 2010 identity fraud fell 27 percent, to 8.1 million victims. (“More than 80 percent of what’s been called identity theft involves fraudulent charges on existing accounts, according to the U.S. Department of Justice, but in most cases a cardholder’s liability is limited to $50 for a lost or stolen credit card. For debit cards, liability for an unauthorized transaction is limited to $50 if it’s reported within two business days of the date a cardholder learns of it. After two days, liability can climb to $500 or more, but many banks provide additional voluntary protections.")

Paid identity theft protection is often far too limited. Many if not most of the commonly advertised protection services don’t provide any better protection than what you can do on your own for free. It's common for many of these services to have gaps, loopholes, and payments that you’ll never benefit from because they only come after free bank protection fails, which is not what happens in most cases. It’s also common that they don't actually cover that much, just things like clerical costs, re-application fees and such. You really need to read the fine print very carefully. What you'll usually find is that the actions you can take for free can provide just as effective protection, and often better.

There's a lot you can do for free:

  • Sign up for online access to your bank and credit accounts and monitor them frequently to stay on top of both errors and fraud.

  • Sign up for free alerts from your credit-card issuer and bank that will notify you if a charge of more than say $100 is made to your credit card or if your checking balance falls below a certain amount.
  • Obtain a free credit report from each of the big three credit bureaus through AnnualCreditReport.com and check them regularly for suspicious activity. You're allowed one a year from each service, so request and review one of them every four months for maximum protection.

  • If you wish to go a step further, two identity theft services, AllClearID.com and IDSafe now offer their basic service for free. Each offers a somewhat different approach and requires a different set of private information so be sure to look at both of them. Their goal, of course, is to get you to upgrade to their paid version, but the free version may well be all you'll ever need.

Both of these free versions scan the internet for possible trouble and will email you if they find something. They also include some free support to help you in repairing your identity should problems occur, something very handy to have if trouble occurs. If you choose one of these free services, you still need to do other steps above as none of this is foolproof.

  • If you have a particular reason to be worried that something has or could happen, a powerful step is to put a freeze on your credit reports. This will essentially prevent anyone—including you—from opening a new account in your name. A credit freeze is also a very good option for the elderly or for anyone that has reached a point in life where they have no intention of opening up new sources of credit. For more on this subject here’s a good article that will fill you in on the pros and cons and how to go about it: http://www.nytimes.com/2011/05/07/your-money/identity-theft/07money.html?_r=3&scp=1&sq=ron.

In summary, be smart about protecting your identity from theft. Always do your research before purchasing any identity theft protection and don't forget to take the free protective steps that could end up saving you money and hassle in the end. They may well turn out to be all you’ll ever need.

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5 Strategies to Save 15%-20% of Your Money

Written by Ted Hunter on January 18, 2012 — Leave a Comment

It’s never too late to establish some good financial habits and secure your finances. The single smartest financial habit to adopt is to save 15% to 20% of your income each month. This is the number that will ensure you are never caught unprepared and are building  a strong financial future.

When providing financial coaching and in my money book and blog, I've gone on record that most people, barring job loss or major unexpected bills, can save 15% or more of their take-home pay. I'm often challenged on this. "That’s not possible for me", people tend to say. Then we get into their numbers and the truth emerges that saving at least 15% is actually a very do-able thing.

There many ways to reach this goal. Here are my 5 favorites, plus a rough estimate of how much I think each strategy can save someone with an annual income of around $50,000:

My 5 Favorite Strategies for Getting the Job Done

1. Always Ask for a Lower Price ($500-1,000/yr)

Always ask for a better price. Two-thirds of the time people ask for a better price they get one. 54% who ask for a lower doctor bill get one. Unfortunately, over 70% of the time consumers simply don’t ask. Everyone can negotiate a better price for cell phone plans, bank account fees, credit card interest rates, furniture, appliances, costs for hotels and airfare, and much more. It's simple. Here are my blogs that explain what to do:

What Most People Won’t Do to Save Money

Money Saving Opportunity of the Year

2. Buy Your Cars Smart ($1500-2500/yr, or more)

Most of us think we already know how to buy a car smart. Well I thought that too until I found a few years ago that I'd blown over $300,000 in my life buying my cars the wrong way! We're talking some big money here, and anyone can do it if they know what to do. Here is some information to get you started.

  • For starters, never buy your cars new. This one move alone is likely to save you thousands a year. For more on this subject here's a quick read to fill you in: More Destructive Car Buying Advice
  • Arrange your own financing and know the value of your current car before you start to shop. Never finance though the dealer because it’ll almost always cost you a lot more.
  • Don’t purchase an unnecessarily expensive car for its image.
  • Don’t buy a gas guzzler. If you already own one consider getting rid of it in favor of a reasonably fuel-efficient model.
  • If you really want to know the game you're up against and how to win it, I highly recommend buying and reading Don't Get Taken Every Time by Remar Sutton. You can get a used copy for about $5 or so and it'll be $5 well spent. By the way I don't know this guy, but I sure know what he has to offer. Quite simply, he's "Da Man" when it comes to car buying.
  • No car leasing unless what you read in Remar’s book convinces you, for sure, that you can win by doing so and are going about it the right way. For most people leasing is not a good option.
  • The Internet has greatly improved the process of buying and selling a used car, so use it to the fullest.

3. Don't Buy It if You Didn’t Plan on It ($2000+/yr)

Why do we buy what we buy?  When is the last time you picked something up you wanted to buy, stopped, and asked yourself… What is the real reason I'm buying this? Are you making that purchase based on your priorities? Or, are you being influenced by somebody else’s? Advertisers spend billions a year and are extremely good at getting consumers to spend their money where they hadn’t plan to. So how do you see to it that they don't "get" you? The answer is here:

Did I Really Want That? Why We Buy What We Don’t Need

4. Know the Annual Cost of Your Purchases ($500-1,500)

To understand the real impact of your spending choices, always look at the cost over a year, not just at the cost today. Let’s say you spend $4.50 for a fancy coffee, or $10 to eat lunch out five days a week. Those may seem like small expenses, but the annual costs are $1,125 and $2,500, respectively. That’s $1,875 and $4,165 before taxes; $142,000 and $318,000 in thirty years at a 6% investment return. This is what you are actually trading away with those small purchases. This doesn’t necessarily mean you shouldn’t spend that money. It’s your life and your choices. Just be sure you take the time to calculate the annual cost and fully understand and are okay with the true size of the trade involved in your purchase.

5. Simplify Your Life (Priceless)

If you are like most people, you probably can benefit greatly from simplifying your life. If and when you do, you will surely find that the financial rewards can amount to some pretty terrific savings over time. Even better yet will be the improvement in quality of life you’ll likely experience. Simplifying your life doesn't necessarily mean doing without, but living a less stressful, more balanced life. It means having more time for the things that really do end up making you happier and less time juggling the many costly and time consuming things that can fill your life.

For more on specific actions to take, check out this short article from Zenhabits.net by Mike Elgan, Simple Living Manifesto: 72 Ideas to Simplify Your Life. If you would like more information and ideas yet, the book Simplify Your Life by Elaine St. James does a good job of explaining the value of simplifying and provides a lot of good, practical examples of how to approach it.

If you look around at who is happy with the role that money plays in their lives and who is not you'll realize that for most people it really isn't how much they make that matters but what they do with it that counts. You'll also see, again and again, that one of the cornerstones of lasting success is to live below your means.

Saving a large portion of your income truly is a guaranteed road to financial success. Take the 5 steps listed above and begin saving least 15% of your money. Start today. What you will find is that nothing can replace the secure feeling of knowing that you are being smart about your finances and will always have the resources you need.

 

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Posted in Financial Goals, financial plan, Manage Your Money, Simplify your life, Spending Tips | Tagged , , , ,

2011—The Year My Investment Strategy Shifted

Written by Ted Hunter on January 11, 2012 — Leave a Comment

For the past two weeks the mainstream media’s year-end spin has been, "2011 was a break-even year for investors." Break even? I don't think so. Not even close.

As we start the new year it's a good time to stop and look at the truth, and what to do about it.

When I told everyone to get out of the stock market at the end of 1999, the DOW was about 11,700, about the same as today. Inflation is up 30% since then and most investors underperform the market each year. Average mutual fund expenses are about 1.5% and about 95% of managed mutual funds fail to beat the overall market over a 10 year period.

Even if we said the average underperformance was only 2% per year, that’s another 25%+ over the last 12 years. This means that most investors lost about 6% last year and over 50% in real dollar terms over the last 12 years. Given that reality, it should come as no surprise that over 10 million baby boomers are now unable to retire.

The message I draw from both 2011 and as well as from the last 12 years is very clear. The stock market is no way the be-all and end-all it's been sold to be, and the standard advice to invest for the long run has been and continues to be nothing more than an incredibly destructive myth.

2011 was not a break-even year, but it was actually a pivotal year. I will always remember 2011 as the year that my investment strategy that has served me so well for three decades, through all the market ups and downs, was permanently adjusted to take into account a new economic reality.

So, how do you successfully plan for a secure financial future? For openers, shift to an investment strategy that works in today's world.

For decades I knew that the financial services industry's standard advice of "always invest for the long run” was a terrible idea and instead followed the logical approach of buying at fair value or below and selling when a market (stock, real estate, etc.) became noticeably overpriced. While that strategy served me beautifully for a long time, I have become convinced over the last year or so that it will no longer work.

My new strategy goes like this: Now, rather than looking for a fairly priced market, I look for the market to be greatly underpriced, then I invest moderately and stay prepared to sell when it reaches or is close to fair value (about 14 times trailing earnings). Given all of the huge unresolved problems that exist in our economy-- the Federal debt, the faltering Euro, the problems brewing in Japan and China, the weak job market, the housing market (which is NOT coming back for years, despite the desperate spin to the contrary) --I see this new strategy as the only profitable one going forward.

The other part of the strategy is that I also avoid having more than about 40% of my assets in the stock market at any given point and look to invest the rest elsewhere. Whenever we have a time, such as the one we're in now, where I can't find good alternate investments, I stay in cash and wait. When I do I lose a little money to inflation, but I've learned it's a lot better to wait when the odds for success are poor, rather than risk losing a lot.

As you wait there are a number of actions to take to fill in the gaps left by low returns on investments.

  • Eliminate all debt except a first mortgage.
  • Save 15-20% of your income. (Advice for doing this is linked from my Spend Smart and Save More page. Also next week’s blog will address it head-on.)
  • Invest in yourself; maybe start a business when the time is right (though probably not right now).
  • Look to what you do, how you spend the time of your life as what matters and what will make you happy, not what you buy or own, not that car, that house, that prestige job. Simplify your life.
  • No one, at the end of their life, ever wishes they’d made more money or owned more things. What they wish for is that they’d spent their time here better. Focus more on time well spent on the simple gratifying things that money can’t buy.

No one, at the end of their life, ever wishes they’d made more money or owned more things. What they wish for is that they’d spent their time here better.

In summary, the times have changed and to win we must also change, starting with some of the strategies and attitudes I've outlined above. When you do, I think you'll be delighted at the results that will unfold over time. What you will see is that with a little common sense and a goodly amount of discipline you can usually control both your finances and your destiny.

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Posted in Investing, Simplify your life, Stock Market | Tagged , , , , ,
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MONEY SMART BLOG   Recent articles…

Who Should Do Your Taxes?

Taxes. They’re one of those unavoidable facts of life. When it comes to preparing your taxes I believe the key is striking a balance between keeping it simple—not spending more time or money than necessary—and being smart about getting all the deductions and savings you are entitled to. So, how do you get the job done right and walk that line? It depends on your particular situation.

Estate Planning Demystified—It’s Not Just for the Rich

Estate Planning. Just the mention of the subject is enough to turn off the brain. Well stick with me for a minute, because we all need it and also because I believe I can quickly show you how over 85% of adults can do a really good job of estate planning in just a couple of hours. And the best part? It's free! In my opinion, all most people need to do are these 5 things.
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