Follow by Email

Monday, June 4, 2012

Tax refunds: when bigger might be better

Theoretically, you want to minimize your tax refund by claiming the correct withholding on your W4 so you can invest that money throughout the year instead of letting Uncle Sam keep it interest free. However, there are times when it makes sense to keep getting that large refund and not claim all your allowances to help reach your financial goals.

First things first: I am a huge proponent of claiming the correct withholding on your W4 so that you can make your money work for you instead of getting an interest free refund every year.

But I also want to get real. I was reading an article on Identity Theft where thieves were filing tax returns and then getting the refunds. Many of the victims are people that count on their tax refund every year. While the ID theft story was interesting (and frightening), the realization for me was that these folks are getting thousands of dollars back and this is truly a great saving vehicle for (some of) them.

For those of us that claim the correct allowance on our tax withholding and are diligent about saving that extra money, that's great, and the financially proper thing to do. On the other hand, there are folks that are not claiming the correct allowance, getting huge refunds, and then blowing it at the casino or on something that they can't afford. Then, there are the people that just can't seem to save monthly for whatever reason, so they purposely claim a low allowance to ensure the largest refund possible, and they use that as a savings vehicle. While it doesn't make as much financial sense to save your money this way. its the only way some people will save at all. So while they may not be receiving interest throughout the year, once they actually get the money, they might throw it in a CD or pay down their mortgage which is financially smart.

The Takeaway
You will get the most bang for your buck if you claim the correct withholding on your W4 (see this post for more info) and then invest your extra cash monthly in some sort of savings vehicle. If you blow your refund habitually- minimize the refund; your personality style would be better suited to getting more in each paycheck and setting up a automatic savings plan. However, if you know yourself and your habits, and you know that you just can't seem to stick with a consistent savings plan month to month... by all means, wait for that large refund, as long as you are smart with it. In this scenario, if you fail, don't  keep try, trying, again year to year and lose out on valuable time to save some green. Just do what works.

Sunday, June 3, 2012

Fun Savings: "Love" money, "Play" money

Saving money is always more productive when you have dedicated savings accounts for different goals. This is a given when it comes to retirement, education, and emergency funds, but what about the other stuff?

Many of us lump our savings into one place for use on.. well, whatever comes up. It's important that we have some fun too! If your savings are all bunched together, sometimes it's hard to justify taking some out for fun without feeling guilty.

Make it Fun
A great way to have fun with savings is to have a physical place for your extra cash (assuming you can find some). Think coffee can, spaghetti sauce jar, or just about anything that will hold currency (I prefer transparency so I can see how we are doing). Then pop a colorful label that states clearly what this fun money is dedicated to (whether its words or a picture your kids draw). You and your signot (significant other) can have "love" money for hitting the town and your kids can have "play" money to contribute for whatever they decide. If you don't have the energy to clean out a dirty jar, you can find some fun ones at The Find!

Guilt-free and a Teachable moment
This is a great way for you and your partner to rid the guilt of going out when you are on a tight budget and a great way for your kids to learn to save and to learn delayed gratification. Of course, you can do this in an official savings account as well, but let's be honest, its fun to see that money grow on your counter too.

Some other ideas:

Love this concept: see what your cost-cutting measures have saved you. Another idea: when you go to the grocery store with all those coupons, get a subtotal before the coupons and then throw the cash in your jar with whatever those savings were!

The Takeaway
The next time you save some cash with coupons, clean out the couch, or find extra change in your pockets or purse- throw it in a fun (and visible) place and watch it grow!

Saturday, June 2, 2012

Can you claim a loss on your taxes for real estate?

Is your family outgrowing your house? Are your offspring expanding while your walls seem to be closing in? Do you and your signot (significant other) just want to get out of dodge? What do you do with your house now that you can't sell it (at least not without a loss)?

First off, I am not a tax expert. However, I have done some research whether or not you can claim a real estate loss on your taxes. You may know (or not) that you cannot claim a loss on your primary residence. If you sell below your cost basis (what you bought it for plus improvements) you are out of luck. Many of us are in a situation where our homes are worth less than when we purchased them so this would be nice, but not true. So I was thinking... what if you converted your home into a rental property, and then sold it?

This could work, but only under certain circumstances. First, the property must be a rental property for at least one year. Second, (and this is the kicker) the cost basis that you use in determining whether you have a loss is the fair market value of your home when you convert it to a rental. So if you bought your house for $250,000 and now it's worth $175,000 (and this is when you convert to a rental), the cost basis you use when you sell your home will be that lower number. So if you sell it at $200,000 a year later, you will actually have a gain of $25,000. Now if you switched your property to a rental several years ago (before this whole mess), you may be in business to claim a loss on your taxes.

There are a lot of other tax issues to consider when renting your home. So if you are thinking about renting your primary residence-do your research! If you are willing to read long, boring jargon, the IRS website has an abundance of information on the topic (of course). Here's a good article to get you started. If you are more comfortable with just a Google search, just be aware of the source of the information; you do not want to make a decision based on a 13 year old "expert" posting on some random website or fall into a sales scheme of some kind! Happy hunting!