IRS Tax Support

The Federal Reserve is taking steps to crack down on “unfair and deceptive” credit card industry practices that have added to the financial woes of millions of people trying to cope with the economic downturn.

The Fed on Friday gave approval to proposed rules that would target credit card companies that arbitrarily raise interest rates or don’t give borrowers adequate time to pay their bills.

Consumers and lawmakers praise the proposals as needed and long-overdue. The banking industry opposes them, saying they would limit consumer choice.

AP

It’s hard to beat the thrill of a windfall. So far this year, more than 50 million of us have felt the rush, courtesy of the IRS. As of late March, Uncle Sam had mailed nearly $128 billion to taxpayers, which amounts to an average refund of $2,548 (not including rebate checks, which won’t begin to be mailed until early May).Not that I don’t enjoy getting money in the mail, but I do take a dim view of this annual financial rite of passage.

The Worst Investment You’ll Ever Make

You already know this, but I think it bears repeating: Your tax refund is tantamount to an interest-free loan to Uncle Sam. In other words, if you’re getting the average refund, that means $212.33 of your money is pulled out of your paycheck each month, plunked into an account where it earns squat (a.k.a. “zero” or “zippo”) in interest, and then mailed back to you like some prize for spending hours toiling over a blizzard of tax forms.

What you might not have considered is what it cost you over the course of time to let your money languish interest-free in the government’s coffers.

If the IRS were paying out measly checking account rates (0.5%), you’d at least earn enough to buy a few espressos — so long as the bill was less than $6. If your money earned the same rate of interest as a decent money market account (say, 4%), you’d be up to about $50 extra over the course of one year.

Nonplussed? I hear ya. It hardly seems worth the trouble to adjust your withholding to earn just a few extra bucks. But what if we were talking about more substantial coin?

What Uncle Sam Really Owes You

Let’s say you invest each monthly $212.33 overpayment in an index mutual fund that simply tracks the overall stock market’s performance. Over the course of 12 months, your $2,548 “refund” would have grown to $2,631 (based on the stock market’s 7% annualized rate of return over the long term). OK, that $83 profit is better than parking it in a plain old bank account, but just barely.

Keep it up, though — adjust your withholding so you zero out with Uncle Sam every year and invest what you were previously overpaying — and over the course of five years, using the same scenario above, we’re talking about a tidy profit of $2,439. And after one decade, if stocks continue to do what they do (go up, go down, but smooth out and gradually gain value over the long haul), we’re talking a whopping $11,215 — quadruple the amount of this year’s average tax refund.

That’s the kind of money that makes the government’s rebate check start to look like chump change.

Get Your Tax Refund Right Now

At The Motley Fool, we’re committed to turning non-investors into shareholders, and we think results like these are convincing enough to make us ask HR for a fresh W-4.

Grab your most recent pay stub and last year’s income tax return and use (shortcut alert!) the calculator at paycheckcity.com, (mind-numbing alert!) the actual IRS Form W-4, or (compromise alert!) the IRS’s withholding calculator to guide your adjustments.

To avoid underpayment penalties, shoot for the number of allowances that satisfies 100% to 110% of the prior year’s tax payment (not counting your refund). Don’t worry about nailing your withholding perfectly. Put a reminder to revisit your income status in your datebook for June, when you’ll have a better handle on how your annual wages and withholdings will shake out.

A lot of taxpayers would rather over-withhold from their paychecks than owe the IRS come April. But now you know better. Tell Uncle Sam you no longer need his banking services. 

Motley Fool

The government began depositing tax rebate checks in thousands of bank accounts on Monday as the stimulus program aimed at giving the ailing economy a jump-start got under way early.

The Internal Revenue Service started making the direct deposits on Monday with the goal of completing 800,000 payments each day over the first three days of this week. No deposits will be made Thursday while the IRS prepares a big batch of 5 million direct deposits scheduled on Friday.

The IRS had expected to begin the program in May but was able to start a few days earlier by utilizing a computer system that can process payments on a daily basis. The government’s paper checks will start going out on May 9, a week earlier than previously announced.

The rebates, which are expected to reach 130 million households, range up to $600 for an individual and $1,200 for married couples plus $300 for eligible children younger than 17.

The rebates were the centerpiece of the government’s $168 billion economic stimulus package enacted in February and are designed to bolster consumer spending and lift the economy out of the doldrums.

The first wave of payments are going to people who opted for direct deposit on their 2007 income tax returns.

Both the direct deposit payments and the paper checks are being processed by the last two digits of a taxpayers’ Social Security number.

For people receiving direct deposits, those with a Social Security number ending in 00 to 20 will have their economic stimulus payment deposited to their bank account by this Friday.

Those with Social Security numbers ending in 21 to 75 will get their direct deposits by May 9 and those with Social Security numbers ending in 76 to 99 will get their deposits by May 16.

For those receiving paper checks, the last paper checks, covering people with Social Security final digits from 88 to 99 will be in the mail by July 11 under the current schedule. The IRS estimates that about two-thirds of the payments will be paper checks and one-third will be direct deposits.

The payment schedule covers people who filed early enough to have their tax returns processed by April 15. The IRS is continuing to urge people who did not file returns because they did not owe taxes to file in order to receive an economic stimulus check.

People who do not have to file a tax return but have at least $3,000 in qualifying income may be eligible for an economic stimulus payment of $300 for an individual and $600 for a couple plus $300 per qualifying child.

“We know there are many people who are eligible for an economic stimulus payment who have not filed a tax return,” IRS Commissioner Doug Shulman said Monday. “If you think you may be eligible, even if you don’t normally file a tax return, please check it out.”

People who have not yet filed returns have until Oct. 15 of this year to do so in order to receive a stimulus payment. The simple Form 1040A along with directions on what lines must be completed for the stimulus payments can obtained by going to the agency’s official Web site, http://www.IRS.gov.

Many economists believe the country has fallen into a recession, but President Bush last week disputed that view, saying he believed it was a period of slower growth which would be helped by the stimulus checks.

Democrats, however, pointing to rising layoffs as the economy weakens, contend that more needs to be done. They are pushing for a second stimulus package that would include extending unemployment benefits for another 13 weeks, boosting food stamp benefits and adding billions of dollars for construction projects such as roads and bridges.

Presidential press secretary Dana Perino told reporters Monday that the administration was projecting that the first stimulus measure will create around 500,000 jobs this year and should be given time to work before a second package is considered.

AP

Don’t overpay taxes on income that’s protected by the U.S. tax code. Here are the major categories to watch, including five types of raises that don’t add a dime to your taxable income. 

Want to keep the tax man away from your money? It’s easier than you think. There are lots of ways to increase your wealth without having a chunk gobbled up by the IRS.

It’s not that the agency doesn’t want your money. It’s just that the tax law prohibits the IRS from touching it. And with a bit of planning, you can start to cut your current tax bill and put money in your pocket now.

Let’s look at a few examples.

Tax-free interest

Interest earned on bonds issued by a state, territory, municipality or any political subdivision is free from federal taxes. These are generically called municipal bonds, and their tax benefit increases in value as your marginal tax rate goes higher. (In other words, the bonds are worth more to you as your overall income rises.)Assume you’re in the 35% bracket, the top rate through the year 2010. A 5% tax-free rate becomes the equivalent of a taxable rate of 7.69%. In the 15% bracket, the taxable equivalent is only 5.88%. If you check out this page at investinginbonds.com, you can compare taxable and tax-free yields. Compare the after-tax rates on alternative investments of equivalent risk.

Some bonds may not only be tax-free at the federal level, they may also escape state and local taxes. If you’re in the top brackets and live in New York City, this is one investment you definitely want to consider for your portfolio.

Carpool receipts

Commuting to work? Bring a friend — and his wallet. If you form a carpool to carry passengers to and from work, any dollars received from these passengers aren’t included in your income.Commuting costs are generally not deductible. But if you establish a carpool and you’re reimbursed in amounts sufficient to cover the cost of your repairs, gas and similar items used in connection with operating your car to and from work, then you’ve converted personal nondeductible expenses into excludable income.

Assume you’re in the 25% bracket for 2007 and 2008. You have to earn $133 per month to cover a $100 monthly commuting expense. If you have a carpool arrangement with expenses being reimbursed, you’ve got no additional income. But you do have an additional $133 per month in wealth!

Sell your house

Under a tax law enacted in 1997, if your house was your principal residence for two of the last five years, you can exclude as much as $250,000 in gain ($500,000 on a joint return) when you sell it.You don’t have to reinvest the money, and you can claim the exclusion every two years. (If you’ve got $500,000 in gain every two years, I want to meet your real estate agent and go shopping!)

If you don’t meet the two-year rule, you can get a partial exclusion based on the time of use and ownership. Assume you sold after only one year and had a $50,000 profit. Your exclusion is half the $250,000, not half the $50,000 profit. In this case, you’d pay zero tax on the sale.

But this partial exclusion is only if the sale is required because of either a change in place of employment, health reasons or unforeseen circumstances. I haven’t yet seen final regulations defining “unforeseen circumstances.” My understanding is that the IRS is going to be flexible here.

Tax-free compensation

When you’re due for a raise, ask your company to get creative in your compensation. There are numerous ways to receive non-taxable compensation. Let’s look at some of the best alternatives to taxable earned income.

• Use your health coverage. Health and hospitalization insurance premiums paid by your current or former employer are tax-free — a huge benefit. Let’s say your health insurance premiums come to $280 a month or $3,360 a year (for an HMO policy for a family of four with a $1,500 deductible). If you’re in the 25% tax bracket and have to pick up the bill, the real cost to you would be $4,480. That’s $3,360 for the premiums and $1,120 for additional income taxes because you’ll be paying for the coverage in after-tax dollars. Having your company pick up the cost helps both of you. It doesn’t have to pay the salary necessary to get you even. It gets to write off the full cost of the coverage. Plus, neither of you has to pay the 7.65% payroll taxes on the premiums. And you, of course, boost your disposable income substantially.

• Cover your life. Group term life insurance coverage of $50,000 or less paid for by your company isn’t taxed to you. You pick the beneficiary; your company pays the premiums. Your company deducts the expense; you walk away with additional tax-free income.

• Send yourself to school. Get educated. The courses don’t even have to be job-related. But they can’t be for any education involving sports, games, or hobbies. Your company can pay, and deduct, as much as $5,250 per year in educational assistance paid for either undergraduate or graduate courses. Again, that assistance comes to you tax-free.

• Get you there…and parked. Your company can give you discount fare cards, passes or tokens to take public transportation to work. As long as it’s not worth more than $100 per month, your company can deduct it, but you, as an employee, receive it tax-free as a de minimus tax benefit. You’re taxed only on any excess over the $100. If you drive and have to pay for parking, your company can provide free parking, up to a maximum value of $180 per month, to you tax-free.

• Cafeteria plans. These are sometimes called Flexible Spending Accounts. Your company makes deductible contributions under a written plan, which allows you to select between taxable and non-taxable benefits. To the extent you chose non-taxable benefits, you have no additional income. Available non-taxable benefits may include group life insurance, disability benefits, dependent care and/or accident and health benefits. Your individual plan details the options. You make your choices among the items on the cafeteria menu.

You get the idea. Any time you can convert taxable income into non-taxable income, you’ve given yourself a raise. And when both you and your company save money, it’s a win-win for everybody.

Get creative…in most cases you’re paying for the items anyway, and on an after-tax basis. It’s really relatively simple.

MSN Money

The Federal Reserve announced a series of new steps Sunday to help provide relief to a spreading credit crisis that threatens to plunge the economy into recession.

The central bank approved a cut to its lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created another lending facility for big investment banks to secure short-term loans.

The steps are “designed to bolster market liquidity and promote orderly market functioning,” the Fed said in a statement. “Liquid well-functioning markets are essential for the promotion of economic growth.”

The new lending facility will be available to financial institutions on Monday.

It will be in place for at least six months and “may be extended as conditions warrant,” the Fed said. The interest rate will be 3.25 percent and a range of collateral will be accepted to back the loans.

The Fed also approved the financing arrangement announced Sunday in which JPMorgan Chase & Co. will acquire rival Bear Stearns Cos. The deal valued at $236.2 million, a stunning collapse for one of the world’s largest and most venerable investment banks. The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns‘ less liquid assets.

Treasury Secretary Henry Paulson said he was pleased by Sunday’s developments.

“Last Friday, I said that market participants are addressing challenges and I am pleased with recent developments. I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets,” he said.

The Fed’s actions are the latest in a recent string of unconventional steps to deal with a worsening credit crisis that has unhinged Wall Street. And, the action comes just two days before the central bank’s scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered.

The “discount” rate cut announced Sunday covers only short-term loans that financial institutions get directly from the Federal Reserve.

Even with the Fed’s aggressive moves, economic and financial conditions keep deteriorating.

The Fed in recent days has taken extraordinary steps to help banks and Wall Street investment firms survive the stresses of the credit crisis. Financial institutions have racked up multibillion-dollar losses when mortgage-backed investments soured with the collapse of the housing market.

The Fed this past week also said it would pour as much as $200 billion into big Wall Street banks and investment houses and allow them to put up risky home-loan packages as collateral. This maneuver was intended to bring sorely needed relief in the market for mortgage securities. The Fed also has offered as much as $200 billion in short-term loans to banks and large financial institutions.

AP