Refunds & UN-Automating Your Life

April 25, 2011 by Birmingham Tax Professional, Martha Echols, CPA 

Success is not measured by what you accomplish but by the opposition you have encountered, and the courage with which you have maintained the struggle against overwhelming odds.
- Orison Swett Marden

Last week, I posted my Note about automating your investment savings. After posting it, I did some more thinking about the whole notion of automating our lives, and I realized that there are some times when "automation", as such, can actually HINDER our financial growth.

Call it the hidden costs of convenience. And, in my opinion, it’s quite real.

But before I get to that, a few tax-related items:
1) Your Refund Status: Make sure you have a copy of your tax return on hand or know your "filing status", SSN and the exact dollar amount of the anticipated refund.
* Online: Go to IRS.gov and click on "Where’s My Refund". (http://www.irs.gov/individuals/article/0,,id=96596,00.html?portlet=4)
* Automated Phone: Call 1-800-829-4477 24 hours a day, 7 days a week for automated refund information.
* In-Person Phone: Call 1-800-829-1954 during the hours shown in your IRS form instructions.

2) "Do I need to keep a copy of my return?"
Yes, for a *minimum* of three years. There’s all kinds of contexts where it’s useful. We do keep one on file, on your behalf, but it’s just smart and safe for you to keep one in a secure place at home. (I’ll soon have a Note about Amended Returns, and you will need a copy for that process, as well.)

As for the supporting documents from your return, anything that relates to a home purchase or sale, stock transactions, retirement, business or rental property, should be kept much longer than the three years.

Now … I have a humble suggestion for you this week, and as always, I’d love your thoughts!

Martha Echols’s
"Real World" Personal Strategy
The Benefits of De-Automating Your Personal Finances
Small business owners know what it is to write checks for quarterly taxes, and, I believe, they have deeper sense for what they are paying, as a result.

In fact, I think our country would be a different place if everyone had to write a personal check and send in their taxes like this. When people really see what they pay (or don’t pay) I think they would feel differently about their tax burden!

This is a common refrain among certain political observers — but it has me thinking about what it might mean for YOUR family…

In fact, this is part of the genius of financial guru Dave Ramsey’s "envelope system" for family budgeting (whereby you place cash into specified envelopes, and pay only as much cash as remains in the envelope for different budget categories). "Automating away" our obligations can lull us into financial slumber.

Which is why I now propose that you REMOVE automation from certain checks that you write each month. (Again, this is aside from automated savings, as discussed last week.)

[But a word of caution: The only danger to this approach is that you run the risk of focusing too much on scrimping pennies. I certainly advocate wise budgeting, but it's important to remember that thinking over much about saving money can constrict your mind away from important "risks", which can often be worth taking -- like starting that business, making a new investment, etc. Don't let this technique keep you from expanding your financial mindset!]

So, a few suggestions for what you might DE-automate:
1) Just once, receive your paycheck in cash (instead of ACH’d), or cash the full amount when you receive it. Because, have you ever HELD one paycheck’s worth of money before?  It’s really hard to fully comprehend how much you’re bringing in until you physically feel those stacks of $20s in your hand.  I can guarantee you it’s a lot harder to spend it when you’re seeing it in person rather than online.  And it hurts frittering it away more, too.

2) Paying your mortgage manually. Feel the burn of this large check, every time you write it. It will trickle into how you think about the other bills which you pay such that even if this is the only bill you take off of "auto-pay", you’ll be wiser with your remaining funds each month.

3) Only purchase vehicles for cash. If you had to pay outright, wouldn’t you end up with a cheaper car?  Probably. Just because many are used to setting up loans and payments for vehicles, does NOT mean it’s wise — in fact, this is one of the primary markers for the "quiet millionaires" (those who are getting ahead financially, even on relatively smaller salaries). Yes, your pride might suffer when you’re not rolling around in a 2011 Lexus … but considering the real cost of that pride-booster does wonders for ameliorating your egotistic tendencies.

In short, paying in cash (or with a manual check) helps you to consider the following questions:

* Is this ____ still WORTH it?
* Is there a way I can cut it down a bit?
* What’s the best way to pay for it right now? (c/c, check, cash?)

Again, some of this could literally take seconds, but the point of it all is that you STOP to do it. With automation, you don’t get the "ping" every month because it’s already doing the thinking for you.  You’ll learn a LOT more about the financial "you" this way than you would otherwise, I’m certain. It’s really about paying closer attention.

Enjoying the slowdown around our offices, but still thinking of YOU!

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A Simple Tweak, Which Can Really Help

April 18, 2011 by Birmingham Tax Professional, Martha Echols, CPA 

You have to see opportunity before you can seize it.
- Greg Hickman

I think this week’s Note can really help every one of my clients and contacts. I’m excited for you to read it.

But as I write, it’s tax day (Monday, April 18th), and we are pushing hard during this final stretch! Procrastinators are streaming through our doors (after all, we welcome them here), the phone is ringing off the hook, and my email inbox is overflowing.

Another year, another tax day.

So, here’s my confession: I didn’t write the below article this morning. I hope you’ll forgive my lack of timeliness. But I *did* prepare it earlier, because I KNEW that today wouldn’t allow me to. However, I’m a pretty decent planner, so I had this one all set up and ready.

That said… I’m quite proud of this one, and I think you’re going to really enjoy it. It’s admittedly a little on the technical side–but I really believe it’s worth your time to read and consider. Would love your thoughts on it!

Roger Menden’s
"Real World" Personal Strategy
Automatic Investing As The Basis For Real Wealth
Yes, it may be a cliche, but the greatest engine to generate real wealth is saving and investing. And the best way to ensure that your default is saving & investing is to automate the process. Pay yourself first, and your savings will grow exponentially.
 
Effective money management is based on the idea that very small changes can yield enormous gains in your family’s finances. This process, both easy and simple, is worth millions. Unfortunately, only a tiny percentage of American families take advantage of the tools available to implement this automated technique.
 
So here’s how you pull this off:  Have all income flow into a joint taxable investment account. Make saving and investing your default. Putting all of your money in this account helps ensure that you move only the money intended for some other purpose into a different account.
 
For working families, this means an automatic deposit of paychecks into their joint account. Banks will try to entice you into setting up automatic payroll deposit into their checking account. They will offer you additional interest if you do so. Resist. The additional interest is not worth the failure to not only save but to save and invest. Your taxable investment account should be the default.
 
For retired families, this means an automatic deposit of Social Security checks. It also means their required minimum distributions (RMDs) from their individual retirement accounts (IRAs) should be deposited first into this account.
 
From this account you can then withdraw what you need for daily expenses. Do this by setting up a regular transfer of funds from your joint investment account to your checking account. Make sure the transfer matches the amount you have allocated in your budget, ideally 65% or less of what you need to support your lifestyle. The other 35% should remain in your joint taxable account, much of it to be invested.
 
Part of what remains is the 10% you have designated for "unknown unknowns". In the ideal world, this money will not be needed, but few families can anticipate every possible expense. Each stage of life presents new challenges. Having the financial margin to absorb some of life’s shocks is simple wisdom and offers financial peace of mind.
 
Because the time horizon for this emergency money is unknown, invest it in a balanced portfolio. If unused, your emergency money will double in 7 to 10 years and provide a greater safety net for your family. If you have to dip into this fund, keep track of the amount. If it approaches the full 10% every year, you are using your emergency money to extend your budget, not simply for unanticipated expenses.

The less you use this account, the more quickly you will reach financial independence. These funds are mixed with your other taxable investment savings and continue to grow your net worth. If you are meeting all of your expenses without any major surprises, these funds can be used to purchase a home, start a business or for additional charitable giving.
 
Another portion of what remains in your taxable investment account will be the 5% you are specifically designating as taxable savings. Because this 5% gets mixed in with charitable giving that is being invested and your unknown expenses, the entire portfolio should be balanced. If an emergency arises, any portion of the portfolio could be sold to furnish the needed funds. Similarly, when you want to gift appreciated stock, any portion of the portfolio could be gifted.
 
The last portion might be the 10% for funding your retirement accounts each year. Many people put this money directly into a retirement account as part of the payroll process through a pretax deduction. If that is the situation, you don’t need to flow anything through your taxable investment account. But you may want or need to fund your retirement outside of a payroll deduction. One example is funding your Roth IRA each year. In this case you may want to collect the money in your taxable investment account and then transfer it to a Roth account.
 
If you want to fund a Roth IRA account for the maximum $5,000 (in TY2011), you could transfer the entire amount once during the year or set up a monthly transfer of $416.66. The money from your paycheck would provide the cash, either letting it build up throughout the year or supply the funds for each month’s transfer.
 
Busy people forget to make the necessary transfers each year. That’s why a monthly transfer is preferable. Saving and investing should be automated so it occurs regularly without any additional effort. Whatever is in your checking account you are likely to spend. Whatever is in your investments you are less likely to spend.
 
Automating the process of saving and investing is like damming a river to form a reservoir. The alternative is the manual process of hauling buckets of water from your stream to a water tower. You will never grow rich by hauling buckets, and it’s much harder work.
 
No matter what income you have, you probably already have enough to grow rich! Saving and investing just $10 a day builds a million dollars over your working career at average market returns. You build wealth by what you save and invest, not by what you spend. Automating the process of saving and investing grows your wealth while you sleep.

Sending you our affection, through a haze of tax forms!

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Valentine’s Day follow-up

February 16, 2010 by Birmingham Tax Professional, Martha Echols, CPA 

“Lots of people want to ride with you in the limo, but what you want is someone who will take the bus when the limo breaks down.”
- Oprah Winfrey

So, this is the big question of the week: how did Valentine’s go?

Some say it’s a “Hallmark Holiday”, but well–some spouses think otherwise, right? Well, if you blew it, I’ve heard that it’s NEVER too late. Make this week count, my friend.

Now this past weekend’s festivities aren’t the only experience I have with the language of love. You see, we meet with married couples almost every week in the course of preparing taxes and handling other such matters. It’s part of what we do–and, as we do so, we get sort of a crash course in marital communication.

Before you get worried–know that we don’t pass judgment on anybody’s marriage! Everyone has their own, unique relational dynamic. And every marriage works a little bit differently–it’s part of what makes it a wonderful institution.

That said, however, I’ve noticed that *finances* can be a major sticking point in a good marriage.

But there are simple steps you can take (five, by my count), which will ensure that you don’t ever fall into the trap of letting a good marriage be spoiled by money miscommunication.

Read on, and leave your comments! And, of course, if you need help with any of this, that’s exactly what I’m here for!

“Real World” Personal Strategy
Financial Communication In a Marriage

Money problems can ruin the love affair with your spouse. The work of blending two lives in harmony requires certain basic commitments. It’s a fact that many families today are financially troubled. 

Most of these are in denial. The rest of them are looking for a quick fix. Even a financial planner can’t help unless the couple is willing to make five simple commitments. You can always choose to find something to fight about. But if you are serious about removing the financial obstacles in your love life, you should commit to the following money management rules. 

1) First, take the time to provide open accounting to your spouse. Most financial arguments are not about how to spend your money–but about how the money was actually spent. Just like every publicly traded company is required to give a public accounting of its finances, couples should do the same. In the public sector, it’s considered a scandal when a corporation fails to provide its financial information in a timely fashion. The same rules should apply at home. Financial accountability, openness, and honesty are essential in marriage. 

2) Next, make saving investment in yourselves your first priority. Pay yourself first. Couples should agree on a savings and an investment rate and should prioritize their savings above all other budget categories. Savings should be automated and protected from impulse spending habits.  
I’ve come to believe that savings should even be prioritized above debt reduction. I’ve found that couples that are in debt cannot seem to get out of debt because they are using what should be going into savings to service their debt, rather than adjusting their lifestyle so that they are spending less than they make. 

3) Set a limit on what you can spend without first getting the approval of your spouse. Each spouse must sign off on spending that might be a budget buster. If you are young or your finances are in trouble, the amount should be fairly low. As you get more experience and your finances are in harmony, you can raise the amount. Any purchases above that amount should require the agreement of both spouses. 

In the same way, any purchases beyond what was budgeted should require the agreement of both spouses as to which budget category is going to be reduced in order to make up the difference. If your spouse asks you to wait before making the purchase, lean toward waiting graciously. Ask what you would do if you did not have the money at all. Then, do that instead. Delaying a large purchase even by a month can significantly increase your financial health. 

4) Set rules for the acceptable use of credit. In my experience, the easy use of credit cards ruins much financial harmony. It is better when the use of credit cards is limited to only certain required budget items. Using a credit card for groceries or gasoline may be harmless. But when credit cards are used for clothes or eating out, optional spending is unnecessarily inflated. 

There are several advantages to using credit cards. But each of these advantages becomes powerful disadvantages for a family struggling to make ends meet. Credit allows couples to avoid asking the tough question about what they would do if they did not have the money. Credit makes spending easy and simplifies check-writing. These advantages are as helpful as giving an alcoholic a place to sleep in the back of the bar. 

Either spouse should be able to veto the use of credit cards entirely. Only if both parties agree to the use of credit cards, should they be allowed – and then only within certain guidelines. 

Credit should only be used for specific required monthly categories, and then only by the spouse who is less apt to make extra purchases on impulse. If you are struggling with your finances, stop using credit cards entirely. 

5) Lastly, agree together that ignorance is no excuse! Both parties must be willing to learn. Just like a good love life, finances cannot be handled well by just one party. Many problems stem as much from ignorance and abdication by one party than spending by the other. If you don’t have the time or the interest to be involved in the family’s finances, then you may be the problem. Ask for help and start learning.

Look, I’m not a marriage counselor. But I DO know good communication when I see it.

I hope this helps.

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Who ‘dat preparing your taxes?

February 10, 2010 by Birmingham Tax Professional, Martha Echols, CPA 

“Don’t wish it were easier, wish you were better. Don’t wish for fewer problems, wish for more skills. Don’t wish for less challenges, wish for more wisdom.”
- Earl Shoaf

Congratulations to the Saints–the Super Bowl was a lot of fun to watch (for a change!), and I think almost everyone is happy for New Orleans (except, perhaps, Indianapolis). Oh, and in case you’re wondering, “Who Dat” is the Saint’s rallying cry–I didn’t have a sudden grammar breakdown (because I KNOW I would hear from a few of you, if I didn’t make that clear!).

And, the ads didn’t completely disappoint either. My favorite was Betty White clamoring for the football in a huddle (Snickers)–which was yours?

So…moving in to your world a bit closer, I wanted to first ask you: Do you have any questions about getting your taxes prepared which I can answer? A big part of why I post these weekly blogs is to ensure that YOU have a “lifeline” when it comes to getting your taxes handled properly.

So please do feel free to drop me a note with any questions–and your thoughts on my blogs are welcome, as well.

You’ve probably figured out that I’m not your “normal” tax professional. “Normal” is a bit more like what most *other* families have to deal with, and I address it in this week’s Strategy Note…

“Real World” Personal Strategy
Mistakes Made During Tax Season  (Part 4)
Choosing a Tax Professional Who Doesn’t Relate to YOU

Most people don’t realize this, but many tax professionals live in a whole different world. 

It’s a world with its own language, and it can be mind-numbing for the normal tax professional. “Schedule C”, “Offer In Compromise”, “Comparable Contributions”…blah, blah, blah. And when you sit down to talk with these guys, that’s all that comes out of their mouth! Which is why I mostly try to avoid other tax professionals.

Many CPA’s have a ton of experience in complicated accounting practices, doing very complex audit work and usually doing a really great job helping some large business or very high net worth rich guy with diverse investments and tax havens.  But, for most tax returns that are filed each year … nah.  

Look, does this sound like your tax return?  I didn’t think so.  You are not alone.  The majority of regular middle income folks don’t want to wade into the swamp of all the stuff that other CPA’s and tax professionals deal with. They just want it done right, get the most money back from Uncle Sam, and they want it done fast.

Am I saying all these guys don’t know what they’re doing?  Absolutely not.  There are some Certified Public Accountants who take the time to keep up with the latest tax laws and are still able to speak the language of the client.  But, in most cases you are better off finding a tax preparer who is good at doing what *you* need done.  And in this case, if the tax professional prepares a lot of middle income tax returns already, that’s even better.  

Think of it this way:  Would you use a sledge hammer to hang a picture frame?  (I didn’t think so.)   

Remember:  Go with a tax professional with TAX preparing experience, not just auditing or accounting or something else that doesn’t relate to you! 
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I hope all this helps.  To your family’s financial and emotional peace…

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Don’t forget the love

February 1, 2010 by Birmingham Tax Professional, Martha Echols, CPA 

“Character is doing the right thing when nobody’s looking.  There are too many people who think that the only thing that’s right is to get by, and the only thing that’s wrong is to get caught.”
- J.C. Watts

Well, I wanted to start off by giving you a little “nudge” to make sure you at least *remembered* that the big V-Day is coming. Look–you may call it a “Hallmark” holiday, but your spouse may think otherwise. So, just…don’t forget!

And further, before I get into this week’s Strategy Note, I did also want to say one last thing re: the Haiti earthquake: 

Congress has just passed legislation letting you take a 2009 deduction for contributions of cash (but not property) on behalf of earthquake relief before March 1, 2010. That new law also eases recordkeeping requirements for “accelerated” deductions, especially for those you make by phone. If you give by text message, for example, your phone bill satisfies the new requirements if it shows the name of the organization, the date of the contribution, and the amount of the contribution.

So–if you need to get your tax bill down, that’s a nice way to accomplish two things.

Moving on to this week’s Note, many in our profession are leery about guaranteeing their work. We accountant-types can be a fussy bunch (which is probably appropriate, given our work). But I wanted to go out on a limb here, and give you some thoughts on what to make sure you’ve got from someone who’s handling something as sensitive as your tax info…

“Real World” Personal Strategy
Mistakes Made During Tax Season  (Part 3)
Working Without A Net

Do you have an accountant that guarantees their work…in writing? 

Sure, some guys might say: “We’ll make it right if we screw up”, but then the stuff hits the fan and they fight you every step of the way.  

I’ve heard too many horror stories about taxpayers getting a letter from the IRS, then they take it to their accountant, and then the letter sits on a desk gathering dust.  

Or stories about the CPA who makes some calls on your behalf, but then you get charged an arm and a leg in the process.  Or sadly, a taxpayer doesn’t get any help from the person who prepared their taxes for them so they “go it alone”, call the IRS themselves and figure out what to do and not to do during this normally ugly IRS correspondence … THIS can be a nightmare!   
      
Don’t let that happen to you. You need to have a written understanding with your tax professional that you won’t be left in the lurch. Oh, and also-does this guarantee actually do something you want it to?

I’ve seen some accountants guarantee they will file your taxes for you by April 15th or they will file an extension for you.  Well…great!  That sure makes you feel good in the morning, doesn’t it?   Other weak guarantees I’ve seen in the tax industry are, “We guarantee we will begin preparing your tax return the same day we meet with you.”  

That means nothing to me.  I don’t care when you start preparing my taxes.  I want to know how long it is going to take you to finish it and do so without leaving out silly errors you know you should have caught.  
 
So remember:  the guarantees should be in areas you care about, like:

Tax Return Accuracy … Speed of Service … Most Money Legally Yours … Ongoing IRS Protection For Years After Filing … 

These are the things YOU care about!  Make sure the tax professional you choose stands behind these critical areas of tax filing so you get the most out of your tax filing experience.
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I hope all this helps!  To your family’s financial and emotional peace…

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Do You Procrastinate?

April 7, 2009 by Birmingham Tax Professional, Martha Echols, CPA 

Through humor, you can soften some of the worst blows that life delivers. And once you find laughter, no matter how painful your situation might be, you can survive it.

- Bill Cosby

Well, I was meaning to write a blog post this morning, but something else came up. I had to go outside and…I don’t know, sit for while.

I mean, writing these every week is a grind! Especially with barely one week left in tax season…I swear I’ll get to it soon though. I know how important it is. But it can wait–for now. Hey, now that I’m outside maybe I’ll go for a walk!

Hopefully by now you realize I’m kidding.

I truly don’t mean to mock procrastination. I’m guilty just as much as the next person, when it comes to things I don’t really want to do. And I’ve heard rumors that (for some unknown reason) people don’t like to file taxes?

It appears that people do NOT like to fill out reams of paperwork only to finally discover how much money they are really giving to the IRS!

This, of course, is why we work so hard–to make this process as painless as possible, and to ensure that you keep all the money you deserve to keep, legally and ethically under the current tax code.

And we’re in full “all-irons-in-the-fire” mode around here these days, with about a week left to go in tax season. Here’s my question–have you been in to see us yet? If you haven’t, give us a call now!

In fact, did you know that many tax firms (and “off the shelf” software companies) actually raise their prices on procrastinators? That’s not how I believe clients should be treated.

But, though I will NOT raise prices this week…I will have a little more fun at their expense (plus an update on an item I wrote about a few weeks ago).

“Real World” Personal Strategy

Procrastination Nation

We in the tax and accounting industry have sort of mixed feelings about Turbo Tax.

Sure, it’s a competitor…sort of. The reason I say this is that every year, we get a bunch of phone calls from frustrated Turbo Tax users who eventually throw their hands up in the air because of the complexity and/or the hassle.

And, of course, every year we get a few people who take us up on our No Charge “Return Review” service after tax season who used Turbo Tax, and we regularly find plenty of missing deductions and additional savings for these (new) clients.

But sometimes the company can be helpful, especially when they share their statistics. They’ve issued a new release which lists the Top 10 Procrastinating Cities in America for online tax filing in 2008.

I wonder how Birmingham will do this year?

Anyway, since we’re so late in the tax season, I thought this little light-hearted tribute to procrastination was in order! Here’s the list… determined by the number of tax returns electronically filed online via the TurboTax Online service from April 13-April 17, 2008 (previous year ranking in parenthesis):

1. San Francisco, Calif. – (#5) Maybe it’s the fog?

2. Houston, Texas – (#3) For some reason, Houston is always near the top.

3. New York, N.Y. – (#2) The Big Apple likely has a bunch of complicated tax returns flying around this year!

4. Chicago, Ill. – (#1) The “Windy City” drops from number 1.

5. San Diego, Calif. – (#6) When it’s sunny and 70’s 330 days out of the year, do you blame San Diego?

6. Phoenix, Ariz. – (#13) Desert living does funny things to paperwork.

7. Seattle, Wash. – (#7) Too much coffee?

8. Los Angeles, Calif. – (#10) Too many movies to watch, people to see?

9. Dallas, Texas – (#11) Everything is big in Dallas, including procrastination.

10. Las Vegas, Nev. – (#8) Gambling winnings and losses can be tricky.

Remember that you still have until April 15th to contribute to an IRA and have it count against 2008 taxes.

Will you miss the deadline? File for an extension. Taxpayers will get an extra 6 months to file (to Oct. 15 2009). But remember…an extension to file is NOT an extension to pay taxes. If you think you’ll owe the IRS money, you still need to pay the bill on time, or you’ll face penalties.

The good news? We don’t penalize procrastinators!

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A note on something I wrote about a few weeks ago…

I got passionate about how we shouldn’t let possible changes in the tax code affect our giving to charity a few weeks back. But here’s even better news! Congress has decided against lowering how much charitable gifts deduct from taxes owed by high-income households. See below.

[http://www.bloomberg.com/apps/news?pid=20601087&sid=aAKl4RpzgwpY&refer=worldwide]

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To more of your money in your wallet!

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