Debt, Credit Card & Consolidation Current News Digest

For years, I loved to get a tax refund. In fact, it seemed the only way I could save was by having extra withheld from my paycheck so that I’d get a big refund at the end of the year. Using this method, I was able to buy a new computer, a new bike, and all sorts of other toys. (But, of course, I was never smart enough to use the money to pay down debt.)

I’m older and wiser now, and I prefer not to get a tax refund. I’d rather get my money up front so I can tuck it in a high-interest savings account. This gives me an extra boost toward my goals.

But let me be clear: I certainly don’t begrudge others who do choose to get a refund. Some folks are happy to let the government use their money for a year, and others are like I used to be, using the refund as a means of forced saving. That’s fine.

If you have a refund due this year and you’re getting antsy for it, you can easily check its status with this simple web-based tool from the IRS web site. You’ll need to provide your social security number, marital status, and exact refund amount in order for your request to be processed.

If you’ve always received a refund but want to see if you now have the discipline to save on your own, consider adjusting your W-4 so that less is withheld from your paycheck. (The IRS withholding calculator can help you calculate how much you should have withheld.) This will, in essence, spread your refund out over the course of a year. If you have the discipline to use this money wisely, you’ll have use of it much earlier than if you had waited for a refund.

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Related Articles at Get Rich Slowly:

• How to Check the Status of Your Tax Refund
• Check the Status of Your Tax Refund
• Tax Refund Status
• Telephone Excise Tax Refund
• A Contrarian View: Why I Love a Huge Tax Refund

For years, I loved to get a tax refund. In fact, it seemed the only way I could save was by having extra withheld from my paycheck so that I’d get a big refund at the end of the year. Using this method, I was able to buy a new computer, a new bike, and all sorts of other toys. (But, of course, I was never smart enough to use the money to pay down debt.)

I’m older and wiser now, and I prefer not to get a tax refund. I’d rather get my money up front so I can tuck it in a high-interest savings account. This gives me an extra boost toward my goals.

But let me be clear: I certainly don’t begrudge others who do choose to get a refund. Some folks are happy to let the government use their money for a year, and others are like I used to be, using the refund as a means of forced saving. That’s fine.

If you have a refund due this year and you’re getting antsy for it, you can easily check its status with this simple web-based tool from the IRS web site. You’ll need to provide your social security number, marital status, and exact refund amount in order for your request to be processed.

If you’ve always received a refund but want to see if you now have the discipline to save on your own, consider adjusting your W-4 so that less is withheld from your paycheck. (The IRS withholding calculator can help you calculate how much you should have withheld.) This will, in essence, spread your refund out over the course of a year. If you have the discipline to use this money wisely, you’ll have use of it much earlier than if you had waited for a refund.

—
Related Articles at Get Rich Slowly:

• How to Check the Status of Your Tax Refund
• Check the Status of Your Tax Refund
• Tax Refund Status
• Telephone Excise Tax Refund
• A Contrarian View: Why I Love a Huge Tax Refund

Now that we know how the IRS picks who to audit, we need to know what we can do to prepare for it. Even if you’re sure you got your return right, that you didn’t participate in an abusive tax avoidance scheme, or can’t possible be snared by the computers, there’s still that “randomly selected” bit.

So, like zombie attacks, the key to surviving a tax audit is to be prepared.

Keep Accurate Records

When you file your return, assume that you will be audited. Keep receipts of absolutely everything and keep them with your return. If you can’t produce proof of something you claimed and you’re audited, the deduction will be disallowed and you’ll be penalized for it. While the chances of you being audited are low, you need to retrieve the receipt now while it’s still fresh in your mind. If you get audited in four years, it’ll be hard to track it down.

Read the Notice

Read the notice carefully and respond as quickly as you can, though you generally have thirty days. Being proactive and helpful can turn the auditor into your ally. The audit will tell you what items on your return are being reviewed, prepare a copy of that documentation and bring it to the meeting (don’t give them originals, they might lose them and originals aren’t necessary). Bring only what they ask for! If they ask about certain charitable deductions, bring documentation of those deductions and nothing else. You don’t want them digging around and asking other questions. That’s not because you have anything to hide but because more questions mean more time and this is time consuming enough.

Also, you might have only received a CP2000 clarification letter, which is commonly known as a correspondence audit, which is the simplest type of audit. They call it a mail-order audit because a face to face meeting isn’t necessary, you only need to send in the documents they request.

Treat It Like A Trial

You should be cordial with the auditor but don’t treat them like your friend. At the end of the day their job is to find tax cheats and they’ve identified you as a potential cheater. It’s important that you review this IRS document that outlines your rights as a taxpayer under examinations and ensure that your rights aren’t violated.

The document also outlines the auditing process, or examination process, including a reference to Publication 556, which as details on appeals. If they disallow a deduction that you feel is rightfully yours, pursue it. Don’t let the IRS intimidate you, flex your muscles and arm yourself with the knowledge you need to prevail.

Consider a Tax Professional

If you have a particularly difficult situation that isn’t solved by offering up a forgotten 1099 or some other form, you may want to hire a tax professional who has experience dealing with audits. Audits can be very time consuming so you’ll have to select the tax professional very carefully but their expertise in dealing with numerous audits should aid you in getting as favorable an outcome as possible. It also helps that they aren’t emotionally invested in the process so they can make smart decisions.

In the end, getting audited sucks even if you don’t end up paying an additional cent in taxes. They are time consuming, stressful, and prevent you from doing something else (that you enjoy!). If you are well prepared and know how to respond, you can minimize both the cost and the time.

(Photo: wiredwitch)

How to Survive a Tax Audit from personal finance blog Bargaineering.com.

A mortgage accelerator program is a fancy name for a program that promises to help you pay off your loan faster than you would making regular monthly payments. With the recession and with falling housing prices, advertisements for these types of programs are popping up everywhere. The real question, though, is whether they work and I have to go back to a tried and true adage – “If it sounds too good to be true, it probably is.”

These programs promise to help you pay off your loans in half the time. Half! They remind me of those ads where someone with $150,000 in IRS tax debt gets it renegotiated down to $50 (you know those ads right?) or how $10,000 in credit card debt was settled for $150 and a high five. They smell like scams but if we just left it at that, we wouldn’t really know the real answer right? (this is how debt settlement works, it’s not necessarily a scam but it’s very very dangerous)

So let’s find out what mortgage accelerator programs are and whether they’re scams.

Mortgage Accelerator Programs

After a little bit of research on the web, it’s pretty clear that most mortgage accelerator programs are not necessarily scams, they’re just overpriced programs designed to automate something you can do yourself. The idea behind a mortgage accelerator program is that you should make mortgage payments every two weeks, instead of once a month. This accomplishes two things:

• With 52 weeks, you make 26 half-mortgage payments… which adds up to 13 actual mortgage payments. That’s one additional mortgage payment per year.
• By making biweekly payments means interest accrues a little slower. It’s a small difference, much smaller than the extra mortgage payment each year, but a factor.

So you won’t pay your 30 year fixed mortgage in 2 years, but it certainly will be finished earlier than 30 years. The rub with mortgage accelerator programs is that you will have to pay them a fee to set this up for you. That fee will not be a small one and when you look at the do-it-yourself alternatives, I think you’ll agree it’s better to put that fee towards your mortgage.

If you want to read more about it, check out Dan Melson’s great writeup of mortgage accelerator programs. Dan knows his stuff so if you want the dirty details, that’s where I’d go to read more.

DIY Mortgage Accelerator Program

So you want to roll your own mortgage accelerator program but think paying someone a few hundred bucks sounds absurd? Excellent, fortunately it’s very easy. Just try one of the following:

• Ask your bank or loan servicer if you can go onto a bi-weekly plan. They may do it for free or they may charge you for this service. Either way, it’ll probably be cheaper than some third party mortgage accelerator plan.
• Pay more than the minimum to help pay down principal. We add around $200 to our mortgage payment each month to help pay down the principal just a little bit faster. It’s an amount that we’ve increased each year to reflect pay increases and inflation. It actually works out to more than one extra mortgage payment a year (our is around $1300 a month) so it’s in a way better than the biweekly strategy.
• Send in a payment. The bank won’t turn away money, I guarantee you that, so why not send in a payment and tell them you want to put it towards the principal. Your monthly payments won’t decrease but the length of your loan will.

Two things to be aware of if you go this route – double check that there are no prepayment penalties on your mortgage and, if you do send in an extra payment, indicate that you want it to apply towards the principal. Loan companies, most by default, will apply it to the next payment because that’ll earn them more interest.

I’m a big fan of doing things yourself where it makes sense and this is one where it makes perfect sense.

(Photo: revdancatt)

What are Mortgage Accelerator Programs? from personal finance blog Bargaineering.com.

Get a fast cash loan and pay through your nose!

There are many of you that can’t wait to file your taxes each year because you are expecting a decent refund. Unfortunately, it’s only too often that families in need of some fast cash will not think through the consequences of getting a refund anticipation loan. And it is precisely that lack of patience which ends up costing people a lot of cash at a time they can’t really afford to waste any money.

Have you heard of a refund anticipation loan? Many people haven’t — and that’s a good thing. In this case, ignorance would be bliss! Here’s a quick definition: refund anticipation loans (or RALs) are short-term loans that tax payers can take against their refund amount. Taxpayers often request this option if they want access to their expected refund amount as quickly as possible, as soon as they’ve filed their returns. They want the money quickly since most regular tax refunds take 6 to 8 weeks to be accessible.

A Waste of Good Money?

In the past, RALs may have made a bit more sense than they do now; these days, we have technology and electronic direct deposits that have made it much easier to receive our refunds promptly and which have taken the place of paper checks in the mail. However, people in need often don’t think past the fact that they need cash right now. They neglect to consider the true cost of what taking such a loan involves. Some lenders will charge anywhere from 30% to 200% in interest. Highway robbery! Taxpayers end up losing a big chunk of their money just to get cash a week or two faster than they would with direct deposit. I really doubt that people would fall for such loans if they truly understood what they are signing up for with RALs. Failing to read the entire contract of the loan is what leads to the costly loss of cash, and the reality only hits when the refund comes back smaller than anticipated.

RAL loans are still popular but there is an increase in the negative press surrounding them. Consumers are being warned to read the fine print and the IRS is becoming more vigilant about how the loans are marketed to taxpayers. New guidelines are being sent to tax preparation services and companies that outline responsibility to their clients. It will still take some time for the government to stabilize the tax industry with regards to ethics, so consumers considering a refund anticipation loan need to take it upon themselves to ensure that they are not getting ripped off.

Alternative Choices

Taxpayers expecting a refund who are in need of fast cash do have other options outside of the loan arena. For instance, filing online through electronic forms will return a refund faster than traditional paper methods, especially if you do a direct deposit to your bank account. Also, in preparation for the next tax season, taxpayers who traditionally get a large refund back each year should amend their tax withholdings to get more money back through their regular paychecks instead of through a lump sum refund.

Know Your Tax Preparation Company

If your tax preparation company heavily pushes refund anticipation loans, you may want to rethink your plans. While not all companies are looking to take advantage of your need for cash, many new preparation services and agencies spring up around the nation to do just that. For those who are really in need, my suggestion is that you inquire about those different options for getting refunds faster that don’t involve loans. If you do need to take a loan to access your refund quickly, you should first read your RAL contract thoroughly and be sure that you are clear on how much it actually costs you to rush a refund. A tax company representative should be willing to explain exactly what your contract states and should allow you time to decide if you can really afford the potential high cost of a refund anticipation loan. If you are looking for a new service to do your taxes, stick with reputable companies that have good reviews from the Better Business Bureau.

This guest post is by Arjun Rudra, who writes for Investing Thesis: Credits Towards Financial Freedom. For more of his insights, please consider subscribing to his feed.

Beware of the Refund Anticipation Loan!

When I learned about E*Trade selling their banking business to Discover, I knew my days with them were numbered (I later learned that only bank accounts with no brokerage relationships were moving… but alas the ball was already rolling). Brokers are finding it increasingly difficult to differentiate themselves and when you can get good customer service at a cheaper cost elsewhere, even the pioneers are going to find their businesses suffering. Those who have been reading for a while may remember me mentioning my investments at E*Trade and how I’ve been doing any new investing with TradeKing. My original approach was to leave my assets at E*Trade until I sell them, but a recent offer changed my mind.

TradeKing has a promotion where they will reimburse new accounts, defined as opened in the last thirty days, up to $150 in transfer fees. My account is far older than that but I asked a CSR if they’d be willing to extend that offer to me and they agreed! (had they not agreed, I wouldn’t have transferred…) E*Trade has a $60 full account transfer fee, much less than the $150 reimbursement limit, that is paid using account assets. I’m not sure what would happen if I had $0 cash, but the simple solution was to transfer $60 into the account prior to initiating the transfer. If you plan on doing this, be sure you have the amount of the fee in cash or you might not like what the brokerage does on your behalf!

ACATS

The process, surprisingly, was painless. Anytime you want to transfer your assets, you need to fill out a form with the receiving brokerage because they are the ones that initiate the transfer. For a full account transfer, TradeKing has a short ACATS form you must send along with your most recent account statement. When you want to transfer assets from one brokerage to another, you need to keep one acronym in mind – ACATS. ACATS stands for Automated Customer Account Transfer Service and that’s a system setup by the National Securities Clearing Corporation (NSCC) to automatically transfer assets from one trading account to another.

Historical Transaction Data

The only tricky part of the transaction has to do with historical data. When I transfer my account assets from E*Trade to TradeKing, the historical data isn’t included. I will need to go into my TradeKing account and manually enter the historical transaction data for those shares. I’m not sure how this will play out whenever I do my taxes but I’ve kept electronic copies of trade confirmations so I can prove, if the IRS requests it, when the shares were acquired. Since I’ll be closing my E*Trade account, I suspect they won’t be retaining those records.

Why am I transferring my assets? Simplification. I have a few holdings in E*Trade (shares of Apple, Southwest, M&T Bank, and Costco) and when I closed my E*Trade bank account, I was considered closing my brokerage account so I would have one less account to deal with. Obviously that’s a terrible reason to sell stocks, so the alternative was to transfer it to my main brokerage, TradeKing (#1 reason for them being #1 is price, $4.95 per trade). There’s nothing wrong with E*Trade, I’ve always been satisfied with them, it’s just a matter of another broker being slightly better.

One more account scratched off the list! (it’s looking pretty slim now)

Transferring Brokerage Assets from E*Trade to TradeKing from personal finance blog Bargaineering.com.

I, like many other personal finance bloggers, am a huge fan of IRAs because they give you a tax-advantaged opportunity to save for your retirement. Both types, the Roth and the Traditional, offer tax benefits that are hard to find anywhere else. The Roth IRA offers you to reap the growth of your retirement assets tax free while the Traditional IRA gives you an immediate tax benefit for contributing to your own future.

There’s a reason why the IRS puts contribution limits on IRA accounts. As many of you know, you have until April 15th to make a contribution to your Traditional or Roth IRA for the 2009 tax year. What you may not know is how much you’re able to contribute.

IRA Contribution Limits

In addition to the current year’s contribution limit, I’ve also included some historical limits to put the current IRA contribution limit into a bit of perspective:

Tax Year	Contribution Limit	Catch-Up
2006-7	$4,000	$1,000
2008	$5,000	$1,000
2009	$5,000	$1,000
2010	$5,000	$1,000

Roth IRA Phaseout

With the Roth IRA, your contribution is limited by your modified adjusted gross income. Rather than explain all the math, I created a calculator that does the math for you. May I present this very simple Roth IRA phaseout calculator. If you provide your modified adjusted gross income and your filing status, it will tell you how much you can contribute.

(Photo: dawnzy)

Roth and Traditional IRA Contribution Limits from personal finance blog Bargaineering.com.

The mortgage interest deduction is one of the most celebrated tax deductions in all of tax deduction-dom. It’s cited as one of the benefits of homeownership, right behind “you’re not throwing your money away,” and that fact is repeated over and over again. Unfortunately, I believe it’s misrepresented. It’s not as good as you think and I’ll explain why.

To claim the mortgage interest deduction, you have to itemize your deductions. For those who aren’t familiar with the idea of claiming itemized vs. standard deductions, you have two options when you file your return. You can either list all of your deductions, such as the mortgage interest deduction, or you can just claim the “standard,” which requires no proof.

The reason why the deduction is a myth has to do with the size of the standard deduction, which you get even if you don’t own a home. Here are the standard deductions by filing status for 2009:

• Single – $5,700
• Married Filing Jointly – $11,400
• Married Filing Separately – $5,700
• Head of household – $8,350
• Qualifying widow(er) – $11,400

I recently received my Substitute IRS Form 1098, which is a form my mortgage lender files with the IRS. The form lists, among other things, all the interest I paid towards the mortgage last year – $11,521.87.

If we didn’t have mortgage interest, we would claim $11,400 as our standard deduction and we get that for free. To claim the $11,521.87, we have to pay $11,521.87 to our mortgage company! If you assume we’re in the 25% tax bracket (2010 IRS tax brackets), here’s how we make out from a cash flow perspective:

	Married Filing Jointly		Single
	Itemized	Standard	Itemized	Standard
Interest Paid:	$11,521.87	$0	$11,521.87	$0
Deduction:	$11,521.87	$11,400	$11,521.87	$5,700
Tax Refund:	$2880.47	$2,850	$2880.47	$1,425
Net Cash:	-$8641.40	$2,850	-$8,641.40	$1,425
Difference:	-$11,491.40		-$10,066.40

Interest paid is how much money was spent throughout the year for each case, so $11,521.87 for the homeowner and $0 for the renter (to use simpler terms). The deduction compares the mortgage interest deduction, of $11,521.87, against the standard deduction of $11,400 or $5,700, depending on filing type. The tax refund is simply 25% of that, since we are assuming the 25% tax bracket. The net cash is to the taxpayer. Take the refund they received and subtract the interest they paid. The delta is the difference between the homeowner and the renter.

As you can see, in both cases, the homeowner pays more. Much more. (and interest, unlike equity, isn’t something you get to keep)

Did you know that you can deduct real estate taxes if you claim the standard deduction? It’s Line 7 of Form L and you can deduct up to $500 (single) or $1,000 (married filing jointly) of your real estate taxes. This makes the mortgage interest deduction even less appealing since you can deduct part of your real estate taxes and claim the standard deduction.

Of course, that’s not the whole picture because there are many other factors. There are tax deductions made available to you whenever you itemize, such as charitable deductions. Also, when you rent, the idea of “throwing your money away” does have a bit of truth in it because you pay for a portion of the mortgage interest and property taxes without getting the deduction for it. Of course, at this point it is more a debate about the broader qualitative and quantitative aspects of the rent vs. buy question.

When you look strictly at the mortgage interest tax deduction, it just doesn’t add up financially.

Thoughts?

Mortgage Interest Deduction Myth from personal finance blog Bargaineering.com.

Last week, Rich Preece, Director of Product Management for TurboTax, gave me a quick run through the new features of TurboTax for the 2009 tax year. Since I haven’t been using TurboTax to prepare my returns (I use an accountant because of the business), I wanted someone at TurboTax to walk me through the features that were different from last year. While the bulk of tax preparation doesn’t change from year to year, features change, move around, and in order to capture the important ones, I’ll need the help of someone who plays with it everyday.

To Rich’s credit, it was a very straightforward demonstration of the features with an explanation of why things were done a certain way (for example, why they added flagging/bookmarking) without any cheerleading or attempt to paint things more favorably.

Stimulus Package

Rich told me that the stimulus packages of the last few years affected 95% of households and some to the tune of nearly $13,000 in total available stimulus money. When you consider the various first time homebuyer credits, Making Work Pay, Making Home Affordable, etc., it’s really not surprising to learn that this year’s tax return is probably going to be one of the most convoluted and complicated ones in recent memory. TurboTax has accounted for that by adding in alerts for all of the various stimulus package items and makes a point to ask you about them.

Added Business Intelligence

TurboTax will analyze your return, as you complete it, to try to find things you may have forgotten along the way. I don’t know what they call it but I think of it as business intelligence. The software knows your situation and should take advantage of common scenarios to give you suggestions. Some examples of this feature are – if you tell TurboTax that you own a home but you don’t put down property taxes, it’ll ask you about property taxes. If you say that you started a business, it’ll check to see if you took a deduction for business mileage and medical insurance.

Bookmarking

One new feature of TurboTax is the ability to flag certain parts of your return so you know to return to them. You flag it and a listing appears in the sidebar, so you know you need to return to it.

TurboTax learned that a lot of people, to move from screen to screen, were putting in dummy data as placeholders. Sometimes you would need a social security number that you didn’t have or perhaps there were additional 1099’s you hadn’t received it. In fact, when I was preparing my 2006 taxes, I put in a placeholder figure for 1099-MISC income and promptly forgot about it! (I had tofile an amended return)

Audit Risk Results

This isn’t a new feature but it’s been revamped using data from thousands of tax returns to give you a better idea of where the red flags are in your return. Rich said the goal isn’t to scare you into not deducting something but to direct your attention to it so you don’t make a silly mistake that causes you to get audited.

Here’s the prime example of something simple that will automatically trigger an audit. If claim a dependent, you’re required to put down the social security number of that dependent. When the IRS processes returns, it records each social security number as they are claimed and automatically flags returns that claim a social security number its already seen. Let’s say you’re filing a married filing separately return, it’s not uncommon for the two filers to both claim the same dependents. If you don’t community, one of your is going to get audited. One phone call and you can avoid an audit.

Live Community

Those were the big blockbuster types of additions to the package. Another feature that I think has been fleshed out a lot more is their Live Community bulletin board system. As you prepare your return, there’s a little Live Community widget in the sidebar that has various questions (and answers) related to the section you’re in. When I used TurboTax a few years ago, this area was pretty barren and it seems like this year it’s far more active.

Anyone can answer a question but when you see a PRO label beside their name, it means they’re an accredited tax expert of some kind (either a CPA or an enrolled agent). If you see SUPERUSER, it just means they’ve been recognized by the community as having given some good answers.

I think that about covers all the biggest changes to TurboTax, I’m sure the TurboTax people will be monitoring this post so if you have any questions, leave them in the comments.

TurboTax Tax Year 2009 Review from personal finance blog Bargaineering.com.

Many people who need a fast loan apply for refund anticipation loans (RAL) when filing their income taxes. In fact, about 10 million people received these loans in 2008, according to the New York Times. But in most cases it’s better to skip using these quick loans and wait a couple weeks for a refund check from the government. Here’s why.

Fast Loans Equal Unnecessary Fees

Why should a person pay someone else to borrow their own money? That’s exactly what happens when people get refund anticipation loans.  The cost of borrowing money until a refund check arrives can range from $30 to $90, which is like paying an annual percentage rate (APR) of 60% to 700% and up, according to the National Consumer Law Center. That cost is on top of any fees paid for tax preparation and electronic filing.

The companies that offer such loans often aggressively target folks with low and moderate incomes who are desperate for money. While it may seem like a good idea to get one of these loans, it doesn’t make sense to pay such fees when it generally doesn’t take more than two weeks to receive a tax refund from the IRS.

Skip the Loan

The best way to avoid having a tax refund eaten up by unnecessary fees is to have the patience to wait for the check from the government. Consider the following tips to avoid losing money to these loans:

• File tax returns electronically. E-file allows tax returns to be submitted securely and speeds up the amount of time to receive a refund. About 90 million people used e-file in 2008, according to the Connecticut Better Business Bureau.
• Providing a checking account number can make the process even faster, and refunds generally are deposited in about 10 days or so.
• Avoid using check cashers to cash tax refunds or refund anticipation loans. Check casher fees for this service average 3% and can go as high as 7%, according to the National Consumer Law Center.
• Look for free tax filing services in the local community.
• Avoid getting tax refund debit cards that have hidden fees that can be as high as $20 per transaction. These cards also may limit how much money can be accessed at any one time, further robbing people of their cash.

Get Reliable Help

Tax filers should only work with tax preparers at reputable firms. Anytime it appears that a tax preparer is more interested in pushing refund anticipation loans or other products, it’s best to avoid working with them and find a different firm.

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