Our 2013 Tax Rate

Last year, for the first time since getting married, my husband and I entered a new tax bracket for our federal taxes. We were interested to see what this would do to our effective tax rate, which in previous years had been in the single digits.

Of course, 2013 was anything but a traditional tax year for us. I went from a full-time freelancer to a W-2 employee; my husband changed jobs not once, but twice; we sold one house, moved to a new state, and bought a new house. So it was a complicated filing for us, to say the least.

What did that do to our effective tax rate, which was just 6.7% for the FY2012? Let’s find out…

First, you need to find your adjusted gross income (AGI). This is the portion of your earnings that will be taxed by the IRS. You’ll find it on Line 37 of your 2013 1040 form. Now, I’m not going to share my exact income – that’s a little TMI, if you ask me – so we’ll just call it AGI for short.

Next, you’ll need to find your total tax responsibility. That’s on Line 61 of your 1040. Again, I’m not going to share what my total tax burden was for FY2013, so instead we’ll just call it “T” for short.

Now, to calculate your effective tax rate, divide your total tax responsibility, or “T,” by your adjusted gross income, or AGI:

T / AGI = Effective Tax Rate

For my family, our effective tax rate for 2013 was 9.3%. Still in the single digits, although significantly higher than the 6.7% effective tax rate we paid during the 2012 fiscal year. However, considering the fact that the marginal tax rate for married couples filing jointly was 25% for our income level last year, I guess things could have been worse.

What was your 2013 effective tax rate? How did it compare to your previous tax returns?

Workplace Lessons in 365 Days

This week, I celebrated my first “work-a-versary” at my new job; although, I guess that I’ve been with my job for a full 12 months now, it’s not all that “new” anymore. When I chose to return to the workforce after several years as a freelancer, I wasn’t sure what to expect; after all, it was more than just a new job – it was really a new career, in a completely different industry, doing a completely different kind of work. And unlike my old job, where I’d spent virtually all my time in a traditional workplace, my new career would have me working remotely.

Over the past year, I’ve learned many workplace lessons – even though I don’t work in a “traditional” office setting. For example…

  1. The “traditional” workplace is changing. Although I’m the only employee in my division who works from home all the time, everyone has at least one or two days a week when they telecommute. And this isn’t specific to my industry: I have many friends in a variety of professional settings who have the opportunity to work from home on a regular basis.
  2. A “40-hour workweek” is never 40 hours. This wasn’t necessarily true at my old job – 45-hours a week was pretty standard for me there – but my schedule itself was fairly predictable: in by 9, out by 6. Now, there are some days when I put in 5 hours, and other days when I’m working from the crack of dawn until long after the sun has set. Sure, it might average out to 40 hours a week, but rarely do my days look the same.
  3. Traveling for work comes with the territory. Until I took this job, I’d never taken a business trip. During my first year on the job, I took 6. I have some friends who are on the road for work week in and week out, but for me, a business trip every other month or so is more than doable – it can feel like a vacation!
  4. But business travel isn’t as luxurious as it once wasI’ve seen this change happen over the course of the past year. My first business trip had me staying at a 4-star hotel in a trendy part of one of America’s most glamorous towns; now, our corporate travel adviser (I work for a huge company, and we’re all required to book our travel through a specific agent) tends to put us in significantly less-glamorous digs. Even the per diem has been drastically cut over the past year, and is no longer based on your destination (in other words, a trip to NYC gets you the same per diem as a trip to the significantly less-expensive Detroit).
  5. A smartphone is no longer an “option.” No, it’s not an option – it’s a necessity. I spend just as much time working off my phone (my clients would rather text than email) as I do working on my computer. Thankfully, my employer pays for my mobile plan, as well as my home Internet.

What workplace lessons have you learned on the job over the past year, whether it’s with a new job or in a position you’ve had for far longer?

Disney Rich, Cash Poor

I assume you’ve heard the phrase, “House Rich, Cash Poor.” It refers to the idea that someone’s overstepped their family’s finances when it comes to purchasing a home, meaning a lot of money is tied up in real estate and leaving them little liquid assets. I swore I’d never fall into that “Cash Poor” category, and even with the purchase of our new house, I’ve managed to live up to my word.

Unfortunately, nobody told me that a trip to Disney World could leave my family just as cash strapped as buying a too-big, too-expensive home.

Don’t get me wrong; a trip to Disney was in my family’s vacation budget. We’d planned – meticulously – for this trip for about a year (almost as soon as we got back from our last Disney trip in 2012) before actually turning our dreams into a reality. And we’ve got some really good deals, too; but therein lies the problem. That’s because in our attempt to get the best deals, we’ve ended up putting a lot of money down up front, even though our trip is still months away. In other words, all our cash is tied up in a vacation to Florida that we won’t even get to enjoy until weeks and weeks (and weeks!) from now.

On one hand, I like that everything will be paid for – including just about all of our food and souvenirs, which I’ve bought online at a discount – in advance. We’ve even paid for groceries to be delivered to our hotel room, so we won’t have to pay for snacks or breakfast during our trip. Each kid will be bringing some birthday and Christmas money they’ve saved up to pay for any must-have souvenirs; other than that, I anticipate spending less than $100 out of pocket for the whole week.

But until then, I keep freaking out when I see how small my checking account looks right now; we’re definitely “Disney Rich, Cash Poor.” I know that once the vacation comes and we don’t have anything else to pay for, my bank account will be happy (and growing steadily), but for now, I can’t help but wonder if I’ve made a mistake!

So therein lies my question for all of you: have you ever purchased something that’s left you “Cash Poor”? How did it make you feel? Were you able to recoup your losses?

What’s the Big Deal: Why Credit Matters More than You Think

When you’re young, credit seems like this mystical concept, something that only adults who make bad decisions have to worry about. But the truth is that it’s very easy to find yourself in a bad situation that can easily destroy your credit rating. So before you brush off that credit score as something you can worry about later, think of the few things you’ll definitely need good credit to do.

  • Get Money During Emergencies – Credit is one of those things that you don’t need until it’s too late. When you find yourself laid off from a stable job, that’s when you need an emergency stash of money to pay for all those things you were easily paying for before. That’s also exactly the time when no credit card company is going to want to touch you because you have no proof that you’ll pay them back – unless you have a stable credit history that shows you’re good for it. There are emergency payday loan providers like wonga.com that can help you out of a bind if you find yourself creditless, though short-term loans should only be used in emergencies. But because they make it easy to apply online and choose a repayment time frame that fits your schedule, it’s always a great option to have on the table.
  • Find a Job with No Complications – Some people have found that having no credit or bad credit can actually hurt their chances of landing a job. More and more companies are starting to run credit checks on their employees before offering them positions because your credit score or history of repayment can speak volumes about how responsible you are. Unfortunately, this can lead to snowball effect where applicants aren’t able to pay off items on their credit report because they don’t make enough money and don’t make enough money because they can’t find work. The best way to avoid this problem is to simply never let yourself get so far behind that it becomes an issue. Stay on track of your finances, build credit in a responsible way and you’ll find yourself in a much better place.
  • Make Big Purchases You Can’t Afford Outright – Unless you’re one of a very few lucky people out there, you’re probably never going to have the money to buy a house outright. The average person doesn’t make enough money to do this, even with years of saving, which is why loans exist to help you out. The same can be said for schooling and automobiles. And you need that credit to prove to the banks lending you money that you’re able to pay them back in a responsible manner. You’re also looking at higher interest rates if you have bad credit or no credit because the bank is taking more of a risk on you. Don’t let your bad credit or lack of credit stop you from being able to buy the things you want in life.

Still don’t understand why credit is such a big deal? Take a look at a few more ways having bad credit can have an impact on your life. You’ll be grateful to yourself when the day comes that you need to buy a car or home and can do so without complications at all.

Hannah Williams is a London based freelance writer, covering the realm of financial news and personal finance. She aspires one day to break into mainstream financial journalism.

Forgetting to Forward Mail

“THEY DON’T LIVE HERE ANY MORE!” I scrawled atop the envelope from AARP in big, angry, red marker, borrowed from my daughter’s collection of kindergarten art supplies. Probably a little over the top for a message to the USPS, but I was at my wit’s end; something had to be done.

When you move – whether it’s across town or, like us, across the country – you have a lot of things to do. You have to find a new place to live; you have to get all your belongings from Point A to Point B; you have to set up all your new utility services; you may have to find new health care providers, new schools for your kids, heck, even familiarize yourself with new grocery store chains. And something else you have to do? Fill out one of those “Forward Mail” slips with the USPS.

Our move was complicated. Our old house sold so quickly that our plans for our new home weren’t even close to finalized; we didn’t have a new address for the Postal Service to forward mail. So we rerouted our mail from our old address to an interim one (my parents’ house); then, a few months later once we were established in our new home, we had our mail forwarded there. All in all, I filled out 6 different change of address forms with the Postal Service in two different states and three separate towns. I covered all my bases; and yet, we were still receiving forwarded mail fully 10 months after moving out of our old home.

The people who’s old home we now live in… well, they weren’t quite as thorough.

Last summer, as we were settling into our new digs, I let it slide when we got mail addressed to the former homeowners.

At Christmas, I found it unsettling that we were receiving their Christmas cards (don’t you tell your friends and family you’ve moved?).

But when we started receiving their tax forms in January, including a plethora of documents I can only assume had vital statistics on them (had I opened them, which I didn’t, thank goodness), I got annoyed.

Hadn’t they filled out a change of address form? Weren’t they forwarding mail to their new house? Didn’t they care that nobody seemed to know they’d moved? Didn’t it concern them that sensitive tax documents were being mailed elsewhere?

So the giant, angry, red scrawling messages to my Postal carrier – whom, I’ve learned, is named Steve – began. After a few weeks, Steve came up to my front door one afternoon and rang the bell. As it turns out, the former homeowners had only filled out a temporary change of address form (um, did that mean they were planning on moving back in to the house they’d sold us?). So every month, the USPS would send them a reminder to fill out a new form to ensure their mail made it to the right place. But apparently, one month they just stopped filling out those forms. Steve knew The “W” Family did not live in our house, but he only worked 5 days a week; on his off day, a sub would deliver our mail, and that’s when their mail would appear in our box, only for Steve to find it tagged with graffiti the next day.

I don’t know if the old homeowners are running from something, if they have something to hide, or if they’re just forgetful people. But to me, this boils down to more than just a lazy character trait; it’s about money. When companies with which you do business, former employers, and even the USPS don’t know where to find you, your financial documents can end up in the wrong hands. They’re lucky all this material – including, at one point, a replacement credit card – ended up in my hands, and not someone with malicious intentions. (For the record, I called the credit card company whose name appeared on the outside of the envelope, and they instructed me to open it – which I did – read off the card number – which I did – and then shred the card – which I did – while they closed the account to ensure no fraud would occur.) Over the past year, I’ve received not only credit cards, but phone bills, tax documents, Christmas cards, birthday cards, tuition statements… you name it, I received it. And I didn’t do a thing with it, other than slip it back in my mailbox with the hope that it would somehow make it to the right people.

When Money Becomes Like A god

Take a look at that title again – and please note the lower-case “g” on the word “god.” There’s a reason for that.

As a Catholic gal – not just one of those Christmas & Easter Catholics who take up the front pews during high holy days while skipping out on mass the rest of the year, but a true, practicing Catholic – I’m well-versed in the idea of sin. We Catholics spend a lot of time talking about sin, praying about sin, asking for forgiveness for our sins, repenting for our sins, and then (all too often) committing that sin all over again. It’s a vicious cycle.

One of the sins I struggle with the most is also one of the so-called “7 Deadly Sins” – Greed (note the upper-case “G” on that word!).

In fact, each time I go to Reconciliation – the Catholic sacrament of asking for God’s forgiveness – I find myself talking to the priest about my struggles with greed. And what I always come out realizing (and what I tend to forget in the days, weeks, and months that follow) is that when I’m at my weakest, I can put my love of money ahead of my love of what’s really important: family, friends, and (for religious folks like me) God.

A few examples -

When I first started my new full-time job last year, I was loathe to give up all the freelance work I’d accumulated. Instead, I found myself working 70 hour weeks, all in pursuit of the mighty dollar. I largely did this at the expense of quality time with my family, friends, and even started skipping on Sunday mass as I struggled to find the time to finish all this extra work I’d taken on.

All too often, I find myself judging others based not on their innate, God-given qualities – ie, someone is a child of God – but because of their status. And what’s the most powerful status symbol? Money – what car do they drive? How big is their house? What kind of clothes do they wear? I start valuing their net worth more than I value their actual worth in the eyes of God (FYI – we’re ALL worthy, whether we’re sinners or saints).

In all these situations, my sin is replacing God with money. And, if you’re a believer in the 10 Commandments, you can probably see the obvious: that I’m worshiping a false idol and putting something (money) above God. Those are two BIG no-nos.

And this isn’t just a problem if you’re “religious” like me. Any time we put money – or the pursuit of it – ahead of what’s really important in our lives (hint: personal relationships!), we’re doing a disservice not only to ourselves, but to the people we love.

Can you think of any situations when you put money above those you love?

5 Common mistakes struggling businesses make

In the first quarter of 2012 there were over 4,000 compulsory liquidations and creditors’ voluntary liquidations in England and Wales, according to The Insolvency Services. A flatlining economy is adding to many companies’ worries but there are common mistakes that a struggling business can make that are more likely to make it a statistic.

Delaying action

Except in the most dramatic of circumstances, very few businesses go bust overnight. It is usually a more gradual process and there are usually warning signs. A sustained drop in sales, problems with cashflow, issues with banks and funding and internal strife and low morale can all be signposts that a business is in trouble. There are often steps that a business can take if it becomes insolvent but recognising a problem and taking steps to deal with it early can often help a company recover before it reaches that point.

Failing to recognise the problem at all

Even worse than being slow to react to building problems is failing to recognise that there is a problem at all. It may be a case of simply not recognising the signs or it may be a case of burying your head in the sand and refusing to recognise that the business is struggling and take appropriate steps. Waiting for that next big contract or a miraculous upturn in fortunes is rarely better than taking positive action.

Failing to get appropriate advice and help

If a company has a strong, opinionated leadership, especially one that has built the business from the ground up, they are often reluctant to seek outside help. Turnaround practitioners and other experts can bring a more objective, less emotionally involved view to a business, and may help to identify problems and solutions that are not always clear from close up.

Failing to implement suggestions

Solutions offered from outside can often be painful to implement, especially if they involve restructuring ingrained business practises, selling assets and downsizing staff. It’s never an easy thing to let people go but sometimes the solutions offered are the only alternative to eventual liquidation, which is usually a far worse outcome for all involved.

Slipping back into bad habits

If a business has been turned around by restructuring the way it operates, it generally makes sense to retain those successful practises. This doesn’t mean that you can’t, for example, rehire or expand but if over-extension was your root problem to begin with, avoid making the same mistakes.

 

Saving for Retirement vs. Saving for College

As we sit here today, I owe roughly $14,500 in student loans. Sounds like a lot, doesn’t it? Actually, it’s a paltry sum compared to the gargantuan amount of debt I racked up during my five and a half years in college and grad school – I did go to Duke, after all, where tuition expenses alone topped $40,000 this year. And although I was able to consolidate my student loans to a measly 1.25 percent, I’ll more than likely be writing a $140 check to American Education Services every month until I die. My father’s a financial professional, working as the CFO for a multi-state corporation with a hundred-million dollar operating budget – so why did I need to take out loans to pay for college in the first place? It comes down to a basic matter of priorities, and in my parents’ eyes, saving for college wasn’t one of them.

Instead of saving for college on my behalf, my parents chose to pool their investments into several retirement accounts. Saving for retirement – ensuring they wouldn’t be a financial burden during their retirement years – was a priority for my mom and dad.

The Case for Saving For College

These days, saving for college usually means opening up a 529 plan in your child’s name. Of course, Congress didn’t establish the 529 system – named for section 529 of the IRS code – until 1996, so my parents had far fewer options when it came to saving for college on my behalf (one being CDs, check CD Rates here). Today, 529 plans are the most popular type of college savings plan in the United States, and they come with a slew of benefits:

  1. Every state, as well as the District of Columbia, has at least one 529 college savings plan. Since all but five states give you a tax break for contributing to a plan based in your home state, this gives you flexibility to find a plan that works for you and your finances. However, you don’t have to invest in the 529 plan based in your state.
  2. Multiple people can contribute to the same 529 plan. For example, in lieu of birthday presents, you could ask your children’s grandparents, aunts and uncles to make a contribution to their 529 instead. New Jersey’s 529 plan comes with easy to fill out forms the donor can use to make a direct contribution to the beneficiary’s account.
  3. All investments grow tax free. As long as you use the contributions for qualified educational expenses, you can withdraw from the account without incurring taxes, similar to a Roth IRA account.

But the 529 also has its dark side:

  1. Say your son or daughter receives a scholarship for college and doesn’t need the money you’ve put into his or her 529 – then what? Your child has a decision to make: either he can change the name on the account for a new beneficiary, leave the account alone to use on future academic costs (there’s no age or time limit on 529 plans), or he can take the money out for non-qualified expenses and pay a 10 percent penalty.
  2. The amount of money saved in a 529 plan affects your child’s ability to qualify for financial aid. It increases your family’s estimated financial contribution, meaning if you have a large amount of money in your child’s 529, she’s less likely to qualify for grants.
  3. If you don’t chose a 529 plan based in your state, you may be forfeiting some of your tax breaks. For example, the state of North Carolina won’t give you a tax break on contributions made to a 529 held in Illinois.

The Case For Saving For Retirement

It was this dark side of saving for college that compelled my parents to making saving for retirement their priority. The most commonly held piece of advice regarding whether to invest in a college or a retirement savings plan is, “There are grants and loans to pay for your child’s education; no one is going to loan you money for your retirement.” Cliched? Yes. But, as my dad knew, it was also true.

  1. When I was growing up in the 80s and 90s, the economy was booming. On the first trading day of the 1980s, the Dow Jones Industrial Average closed at 824.57; by the time the new millennium dawned twenty years later, the Dow was above 11,000. When the government first introduced 401k plans in 1981, my father took advantage of his employer-sponsored plan. My father’s invested the maximum contribution – $17,000 for account holders under age 50 for the fiscal year 2012, plus another $5,000 a year for those over 50 – just about every year since.
  2. Not only did my dad’s employer sponsor a 401k plan, it also helped to fund it through a company match. For every dollar my dad invested into his 401k, his employer invested an additional $0.50, up to ten percent. While a matching program like this is relatively unheard of amid the economic recession – my dad’s company has scaled back its employer match to just $0.25 for every dollar invested by the employee up to six percent – it’s still free money.
  3. Colleges and universities cannot factor in your 401k, Roth or other qualified retirement accounts when your child applies for financial aid. This means money in those accounts is protected.

The Verdict: My Family’s Decision

Now that I’m a mother of two, I’m just hoping my children follow in my husband’s footsteps and go to college on an athletic scholarship… but I know that’s unlikely. While my parents’ approach to managing investments and saving for some of life’s biggest milestones – like retiring or college – is rather unique, it’s a philosophy I’ve come to embrace as well. Here’s what we do in my family:

  1. Whenever possible, my husband and I take advantage of his 401k match through his employer – it’s $0.25 on every dollar up to seven and a half percent of his income. In other words, we always try to put at least seven and a half percent of his gross income into his employer-sponsored plan in order to take maximum advantage of the benefit.
  2. We try (“try” being the operative word) to max out our 401k contributions to the yearly limits set by the federal government.
  3. After our daughter was born, we opened a 529 account in her name, but we don’t fund it unless we’ve already reached the maximum contribution limit allowed by law on our retirement accounts. This has only happened once in her three years of life. Instead, most of the money in her 529 – and in the one we opened for her little brother last year – comes from family and friends who send the kids money for their birthdays, which we invest on their behalf.

Managing investments is never a one-size-fits-all approach, and my family’s decision may not work for you.

What is your family’s approach to saving for retirement vs. saving for college?

 

Unlimited Vacation Days? I'M IN!

Some people look forward to their yearly raise; others aspire to the corner office. Not me. My favorite workplace “incentive” is paid time off – sick days, vacation days, personal days, holidays. The roughly 17 days of paid leave I get every year is by far the best perk you could give me. I long for the time – 9 years from now, given my current employer’s policy, but who’s counting? – when I get enough vacation days each year to take a full month off.

So when I saw this headline on CNBC – about unlimited paid vacation days – my heart skipped a beat. Really? I could take 3 weeks of vacation right now, even though my seniority only allows me 2 weeks? YES PLEASE!

Only a fraction of American companies actually ascribe to this unlimited paid time off policy – roughly 1% of the American workforce is employed by a business that lets YOU determine how many days you will or will not work each year. Among them is Netflix, which claims the flexibility of their unusual policy helps increase worker productivity.

I definitely see their point. I know that I am at my most efficient on the job during the weeks leading up to and immediately following my annual beach trip. I see how much more motivated I am to get through my assignments when I’ve got a 3-day weekend on the horizon. And when I don’t have to worry about coming in sick – or working while my kids are home sick from school – my mind is less likely to be focused on what’s going on at home than on my latest project.

But this “unlimited time off” policy has some potential pitfalls. Chief among them? A huge number of American workers already fail to use all the sick days allotted to them each year. With competition already so rampant in the workplace, I’ve got to wonder if – with no restrictions on time off – employees would try to one-up each other by using as few days off as possible.

Of course, you’re probably wondering – what’s in this for the companies? After all, why take the risk of employees taking off dozens of sick and vacation days each year if there’s no reward in it for The Man? The payoff for businesses comes when you end your work relationship with an employer; without a set number of days in place, companies won’t have to pay employees back for unused paid time off. I know when my husband left his first job, he got a payout check for almost $3,000.

This policy got me thinking: how many days off would I take if I had such a flexible policy? I’d probably take about 3 weeks vacation time; I’d never worry about calling in sick when I was actually sick, and I’d probably take far fewer “mental” health days. I’d likely strive to work 4 10-hour days each week during the summer, so I could have 3-day weekends during the longest days of the year.

What would you do if you had unlimited sick days and vacation days?

 

Making Mistakes at Tax Time

For years, I loved tax time. That’s because my husband and I made a habit of taking out a little too much money from each paycheck throughout the year, ensuring we’d get a nice big refund every spring. Then my father – a CPA – pointed out the absurdity of giving the government a “loan” each year, and encouraged us to put that extra money we’d been giving to Uncle Sam into our 401(k) accounts instead.

And our tax refund began to shrink… substantially.

Then I quit my full-time, W2 job and started picking up freelance work instead. That move really complicated our taxes, and all but ensured that not only would we not receive a refund, but we’d most likely owe the IRS at least a little money at tax time. Last year, for example, we cut the government a check for $800.

This year, though, I am definitely dreading filing our income tax forms. Between moving last year, doing both freelance work and returning to full-time status with a new W2 job, and my husband’s new job, our finances are one gigantic, confusing mess. I was pretty sure we’d avoided a hefty tax bill, though, and had started to breathe a sigh of relief…

Until…

I learned that the HR department at my new job had made a big mistake on my withholdings.

Before we moved, we paid federal and state income tax. That was it. But after our move, our new town collected city tax on our income on top of the state and federal collections. Initially, HR set up the withholdings for this city tax, but somewhere along the line stopped collecting it; I failed to notice, largely because it coincided with a built-in raise to my paycheck. (One of the big downsides to the “digital era” is that, without a paper pay stub in hand, I fail to review my paycheck every other week – that’s my mistake, I know.)

So what does that mean for our tax situation?

My city collects 2% of our post-federal/post-state taxable income and uses it to fund the public schools. Now, my oldest attends those public schools – and I’m a product of those same schools – so I can’t and won’t complain about the extra “fee” I pay. But over the seven or so months in 2014 that I lived in our new home, it meant I owed the city more than $1,000.

Ouch.

I tell my story to illustrate the fact that even those of us who think we’re on top of our financial situation can make tax mistakes. Maybe they aren’t even mistakes that originated with us (in my case, it originated with HR, although my poor oversight allowed it to continue unabated), but we still end up paying the price. It’s why it’s so important that you find someone who is qualified to help you with your taxes, especially if – like my family – you’re new to the area and unfamiliar with local tax laws.

Have you ever been blindsided at tax time by a big bill you weren’t expecting? How’d you handle the situation?