Checkpoint, How’s Your Withholding?

July 26, 2010 by Admin Roberg · 2 Comments
Filed under: Jobs

I recently read an online forum where a fellow wanted to sue his employer for not properly withholding the man’s income taxes from his wages. While I felt sorry for the man and his looming tax debt, given some of the information he posted, I wasn’t convinced that the employer was at fault. But the tax code and the forms are all pretty confusing, so how do you know that you are withholding correctly? Fortunately, there is help.

First and foremost, if nothing has changed about your job or life situation and you’re happy with your refund/balance due situation, this isn’t for you. If everything is fine, why change? But–if you owed too much last April, or you had a job or lifestyle change, then you really should do a mid-year evaluation to make sure that your withholding is on track. It’s a whole lot easier to change your withholding now than it is to make adjustments in December or after the year is already over.

What you need to do is have a copy of your latest pay stub and your last tax return handy. You’ll need both to answer the questions in the calculator. Then you’re going to click on the link to the IRS withholding calculator:

http://www.irs.gov/individuals/page/0,,id=14806,00.html

Now I’m going to be honest, the first time I looked at this I went, “Oh gee, who’d want to bother with this?” But seriously, it’s the best program for figuring out where you stand for your taxes. For most situations, I like it better than some of the fancy professional tax projection programs I’ve used. Most importantly, you don’t need any special training to use it. Just answer all the questions. Sometimes you may have to guess, but do your best. You really do need to have your latest pay stub and last tax return to do this though. If you’re just estimating, it’s not going to be helpful.

The program will tell you, based on what’s actually been taken out of your check, how much your refund or balance due will be. And, if you are expected to owe, it tells you how to change your withholding so as not have a balance due.

So let’s say you ran the program and it does recommend that you change your withholding. What next? That’s easy, take the information to your employer (or the payroll department) and fill out a new W4 form. Unlike some other paperwork that can only be completed annually, you are allowed to change your W4 any time during the year.

So about that guy who wants to sue his employer? I’ll leave that up to the courts. As for me, I’d rather catch a problem before it gets out of hand, and the IRS withholding calculator lets me do that.

Tags: Employee Benefits, tax documents, taxes, withholding

Strategies for Paying This Year’s Tuition

July 8, 2010 by Admin Roberg · Leave a Comment
Filed under: Uncategorized

I’ve written in the past about saving for college, but what about if you’ve got that tuition payment coming due this fall? Here are a few tips to help you maximize your tax benefits.
The biggest tax advantage for tuition payers is the American Opportunity Credit which will still be available for 2010. It’s worth up to $2,500 in tax credit-that means $2500 is written off your income tax bill. It starts to phase out if your income is $80,000 ($160K if married filing jointly) and is completely erased by the time your income reaches $90,000 ($180K for MFJ.) So how do you make sure you qualify for this credit? If your income is near the phaseout limit there are some things you can do now to keep your income in line.

First, the easy thing is to reduce your taxable income by contributing (or increasing the contribution) to your company’s 401(k). Many companies have their benefit sign ups in November so you may have already missed the boat. But some companies are more flexible so it’s worth checking out. The maximum you can contribute to your 401K plan in 2010 is $16,500 (or $22,000 if you’re over 50.) Of course, you’re also trying to pay tuition and perhaps eat once in awhile, so reducing you income by $20,000 might not be an option. But knowing ahead of time gives you to option to plan.

In addition to 401(k) plans, some companies have exempt cafeteria plans for health care or day care. If you can take advantage of those programs it could be helpful.

Another side to this equation is that sometimes people who make less than the tax credit threshhold take money out of a retirement plan to fund education. You’re okay if you take the money from a Roth, because if won’t increase your income, but money from a tradtional IRA will. You always hear that if you take money from your IRA to pay for school, you won’t pay a penalty–what you don’t always hear is that the IRA money is taxed. It also raises your Adjusted Gross Income, and that can affect your ability to claim the tax credit. Additionally, the financial aid application takes your taxable income into effect, so by taking money from your IRA, you’re also hurting your financial aid application for next year. A word of caution,paying for college with your 401k will not only cause you to pay taxes but you’ll also get hit with penalties (unless you can claim a different exception.)

So when paying tuition, how do you get the biggest bang for the buck? If you have a student whose tuition will easily exceed the $4000 required to take full advantage of the tax credit, you don’t really need to think about strategy here. The form you get from the college will show you paid $X dollars for tuition and you won’t have to think about qualifying expenses for tax credits. If you’re lucky enough to get good scholarships or an inexpensive school, you’re going to need to be able to prove you spent money on qualified expenses. Tuition, fees, and books count. If your tuition is only $1500, it’s important to keep those receipts for books and campus fees as well to add to your tuition expense. Room and board won’t count.

{A note about books: if you have an older student and couldn’t claim books in the past because of the restrictive rules, it’s changed for this credit. Now, your student can buy books from a used bookstore, Amazon.com or any other place where student texts are sold, and still use the receipt towards this credit.}

With the American Opportunity Credit, you get a 100% tax credit on the first $2000 of tuition paid. That’s a dollar for dollar tax credit. After that, you get a credit of 25% of the next $2000 of tuition paid. The first $2000 worth of tuition is more valuable than the next. Still, a 25% tax credit is nothing to sneeze at either. Also, if you pay tuition in 2010 for classes that will be taken within the first three months of 2011, that counts towards the credit too. Come December, if you haven’t already exceeded the $4,000 tuition expense amount, it may make sense to pay your next semester a little early.

Which students qualify for this credit? It’s available to students who are in their first four years of college, they must be at least a half time student, they have to be at a qualified institution, and they cannot have a felony drug conviction.

If you’d like more information on the American Opportunity Credit, or other education credits, IRS publication 970 has answers. (It’s 99 pages long, but it does have almost everything in there.) You can access it here: http://www.irs.gov/pub/irs-pdf/p970.pdf

One final thing, because everybody asks me this: if you pay for tuition with a loan, it still counts as you paying tuition. You can still claim the credit.

Tags: American Opportunity Credit, college expenses, college savings, tax credit, tuition

Saving for College

July 2, 2010 by Admin Roberg · Leave a Comment
Filed under: Education, Uncategorized

New parents always want to start saving for their child’s college education. People often ask me what’s the best way to do that? To be honest, for different circumstances I give different answers, but these are some of my standard recommendations.

First, before you put any money into a college savings plan, make sure that you have enough money in your emergency savings fund. You should have enough money in savings to cover at least three months worth of expenses (I prefer to see six.) If you lose your job or have some other financial emergency, putting food on the table and a roof over your child’s head ranks over having money for college. People fight with me over that, they say, “No, I want to have money I won’t spend.” Bingo, that’s why it’s called savings. Think of your savings account as your college fund, it’s just step one.

Once you’ve got that established, I like to see money in a Roth IRA. Once again, this isn’t a college fund, but it makes sense financially. First, a Roth IRA can be used to pay for college expenses penalty free. Also, because you get no tax break for contributing to a Roth, you pay no income tax on the money when taking it out. And it grows tax free, so a Roth is a good vehicle for college savings. Secondly, suppose your child decides not to attend college or manages to get a free ride at a University? Well, then you’ve just got more retirement money sitting around for you. (Sweet.) Third, let’s say you’re not financially able to pay for all of Junior’s tuition and you need to apply for financial aid. Money in a child’s 529 plan is considered to be fully available to pay for college. Money in an IRA is not. Your financial aid package will be better if your funds are in a Roth.

One more point in favor of paying towards retirement before paying for college. When push comes to shove, if there is no money for college, a motivated kid can get a loan for school. But if you’re 70 years old and your only income is your Social Security check, do you honestly think a bank will give you $100,000 to help you with your retirement expenses? It’s not going to happen. It’s kind of like the airplance emergency demonstration, you need to put on your own oxygen mask first, before you help someone else.

So let’s say you have all your bases covered, you’ve got savings and you’ve got retirement money, then what? Now we can start with the 529 plans. Although there are no federal tax benefits for 529 plan contributions, they do grow tax free. Also, many states exempt a portion of your income from tax when you contribute to their state plan. For example, in Missouri, you can contribute $8,000 a year tax free to a 529 plan. If you’re married, both spouses can contribute– giving you a $16,000 tax deduction. Here’s a link to their website:

http://www.treasurer.mo.gov/Most.asp

The most important thing about saving for college is to start. You won’t believe how fast your kids grow up until they’re already grown. By then it’s too late. Good luck.

Tags: college savings, Missouri MOST