Infographic: U.S. 2012 Budget Proposal

Here’s another infographic from the New York Times illustrating the proposed budget for 2012. Rectangles are sized according to the proposed spending. Color shows severity of cut or increase from 2010 (green increase, red decrease).

If you like such visualizations, check out Death and Taxes 2011.

Tax Software Giveaway: H&R Block At Home

H&R Block contacted me to help give away six copies of their H&R Block At Home tax preparation software (formerly TaxCut). Specifically, you will get a free code for H&R Block At Home Premium edition ($49.95 retail value), the level above Deluxe, which has added guidance for the self-employed (Schedule C) and those with rental income (Schedule E). Federal E-file is included. State filing is $34.95 extra.

First, please consider my other H&R Block At Home findings:

  • has H&R Block At Home Deluxe Federal + Federal E-File + State for $24.99. State E-file looks to be another $19.95 extra. (If you are willing to download directly onto your computer, it’s only $21.99. Here are the direct download links for Windows or Mac.) Premium is $44.77.
  • If you are okay with mail-in rebates, you can get H&R Block Deluxe bundled with some anti-virus software for $20 + $2 shipping, and get a $20 prepaid VISA card via rebate at TigerDirect. I couldn’t get the rebate form to download.
  • Until February 15th, you can visit a physical H&R Block location and get your return done for free, but only if you qualify for a 1040-EZ. (No itemized deductions, no dependents, no capital gains.) Otherwise, you’ll have to pay significantly more than the DIY software. Considering the 1040-EZ is only like a page long, if you qualify your taxes should pretty easy to do yourself anyway.
  • You can save 25% off all the online versions here.

If you’d like to be entered for the giveaway, just leave a comment with a valid e-mail below by 11:59pm Pacific on Tuesday, February 15th. Name not necessary. I’ll randomly pick 6 winners and contact you via e-mail.

Chances of Getting Audited? IRS Audit Rates 2010

With doing our taxes properly on our minds, what are the chances we’ll get caught if we don’t? Well, there are several ways that the IRS can detect if your return is suspicious, especially if your inputs don’t match up with their W-2 and 1099 records.

Here are the number of IRS audits and the respective probabilities for individuals and businesses during 2010. Large corporations and wealthy individuals have the highest chance of getting audited, which makes sense since they offer the largest potential payoff. If you are an individual making under $200k a year, then your overall chances are 1 in 100. However, I’m sure if your tax return is clean and you didn’t claim to donate $10,000 in used clothing, your actual odds are even better.

Source: IRS, Businessweek

Anyone out there get audited last year?

eBay,, PayPal, Sellers: 2011 IRS 1099-K Regulations

I just received the following e-mail from, where I occasionally sell used books:

We’re writing to let you know that starting with transactions occurring on or after January 1, 2011, new Internal Revenue Service (IRS) regulations require (and other businesses that process payments) to file a Form 1099-K for all sellers with more than 200 transactions and $20,000 USD in sales per year.

If you’re a high-volume seller who has met or is close to meeting the IRS thresholds, we may need to generate a Form 1099-K for you. If you have multiple accounts, we’ll take all of them into consideration when calculating your volume status. If you exceed the IRS thresholds, we’ll send your first Form 1099-K to you in early 2012. Your Form 1099-K will give you a consolidated report of all payments received through for 2011. This information will also be reported to the IRS.

Apparently, as part of new legislation designed to help track down (and tax) unreported income, starting in 2011 any credit or debit card payment processor with clients that have more than 200 transactions and $20,000 in sales per year must file a 1099-K with the IRS.

In addition to, this also includes individual sellers using services like PayPal and Perhaps also sites like Etsy and Zazzle? This won’t affect me, but I think it’s a pretty good idea. I do feel that lots of eBay income goes unreported, and the limits are reasonable. If you’re clearing 200 transactions and $20k in payments, you should be tracking your income and expenses like a business. This 1099-K won’t really matter as it just reports gross amounts.

I’m more scared about the upcoming changes in 2012 that says that a business has to file a 1099-MISC for any person or business it pays more than $600 in a calendar year. Corporations are no longer exempt. That’s a ton of 1099 forms swirling around. I’m going to have to send W-9 forms to everyone from Staples to my web hosting company. I still hope they’ll change this rule before it goes into effect and swamps tons of small businesses.

More info: CNN Money, Journal of Accountancy,

New 2011 Tax Plan Highlights: 2% Payroll Tax Reduction, Extension of Current Tax Rates

Our tax rates for the next two years have been decided, a two whole weeks before January 1st! Just in time for their winter break, what a coincidence. 😉 The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” was signed into law last Friday. There’s a lot of stuff in it, as with any tax-related it seems, but here are the two big highlights for individuals:

Payroll Tax Cut

The employee portion of the Social Security tax is reduced to 4.2% in 2011, down from 6.2%. This lasts only for one year. The employer portion remains unchanged at 6.2%. The limits on wages subject to Social Security tax remains at at $106,800 for 2011. Medicare taxes remain unchanged at 1.45% each for employers and employees.

For example, someone earning $50,000 will pay 2% less towards Social Security, for a tax savings of $1,000 spread out over a year of paychecks. The maximum savings per person is then $2,136. Your future Social Security benefit is not directly affected by this change.

However, what has been expired is the “Making Work Pay Tax Credit” of 2009 and 2010, which was a refundable tax credit 6.2 percent of earned income, up to $400 (single) or $800 (married filing jointly). This meant that if you were single with earned income of at least $6,452 in 2010, you got a $400 tax credit. Married couples filing joint returns earning over $12,903 got $800. Note that this tax credit was phased out for taxpayers with modified adjusted gross income in excess of $75,000 (single) or $150,000 (married couples filing jointly).

Net Benefit
Here’s a chart from the Tax Policy Center showing the net difference in tax savings from two as a function of earnings.

As you can see, our example of a single person earning $50,000 would be paying approximately $600 less in taxes in 2011. (Gain of $1,000 payroll tax cut, loss of $400 MWP tax credit.)

Current Individual Income Tax Rates Extended

The current income tax rates, sometimes referred to as the “Bush Tax Cuts”, are extended for everyone for two years. Although the exact income ranges are not set, here are projections from the tax software provider CCH Group. They are slightly higher than the 2010 Federal tax brackets, due to inflation.

For the curious, it is estimated that an individual earning $50,000 in 2011 will paying $890 less in federal income taxes as compared to what would happen if no action was taken (even though that was highly unlikely).


  • The top rate of 15% for qualified capital gains and dividends is extended for another two years, along with the 0% rate for taxpayers in the 10 and 15 percent income tax brackets.
  • Another last-minute patch was made for those subject to the Alternative Minimum Tax because the brackets were not mandated to be adjusted with inflation. The 2010 exemption amount will be $47,450 (single) and $72,450 (married filing jointly).
  • Extended unemployment benefits are to be continued at their current level for 13 months.

Since we know that the income and capital gains tax rates will stay the same for the next two years, the standard end-of-year tax actions should apply. The general idea being to take any deductions you can right now, and defer as much income as possible until next year.

Volunteers Wanted For NPR Article About Taxes

Here’s an e-mail I got yesterday from a reporter from National Public Radio, looking for some volunteers for a story that requires someone who is both willing to be open about their finances and who also keeps a close accounting of things.

Jonathan – I am working on a story for National Public Radio about taxes. […] We want to track all of the taxes paid by one average American. All the taxes. Property tax, income tax, sales tax (as best we can), hotel taxes, airline taxes, capital gains taxes…

We just want to give listeners a sense of all the taxes we pay. The theory is that we might be surprised at how much we pay in non-income taxes. […] Perhaps one of your readers would fit the bill.

I’m still trying to be anonymous, but if you’re interested, please e-mail Tamara Keith directly at tkeith -@t-

Mortgage Loan Refinance Breakeven Points

Sometimes saving money just involves being lucky. I don’t really keep up with mortgage rates anymore, but last week an e-mail subject line just happened to catch my eye that mortgage rates are at “record lows”. I always figured that my 5.125% rate was so low that another refinance or loan modification probably would never be worth it, but it turns out that rates are so low they just might. Here’s a quick snapshot of rates from a Wall Street Journal article on 7/16/10:

The 30-year fixed-rate mortgage averaged 4.57% in the week ended Thursday, unchanged from a week earlier and down from 5.14% a year earlier. Rates on 15-year fixed-rate mortgages were 4.06%, extending the lowest point since Freddie started tracking it in 1991, and down from 4.07% last week and 4.63% a year earlier. […] To obtain the rates, the mortgages required payment of an average 0.7 point. A point is 1% of the mortgage amount, charged as prepaid interest.

has ads now for 4.25% fixed for 30 years and 3.75% for 15 years. As for me, I might be able to get my interest rate below 4.75% and have a “breakeven” period of less than 3 years. I’m awaiting official paperwork. Ask your loan servicer and/or mortgage broker what they can do for you. Can’t hurt to ask!

Meanwhile, I was playing with the Refinance Breakeven calculator over at DinkyTown and found out that there are multiple definitions of “breakeven period”. Before, I simply figured that a refinance would cost X dollars upfront in fees and closing costs, but would save me Y dollars per month. Divide X by Y, and you’d have a breakeven point. For example, if it cost you $2,400 in fees but saved you $100 per month, you’d break even in 24 months. Past that, you’re saving $100 every month. In this case, if you plan to keep your mortgage for longer than 24 months, then refinancing makes sense.

However, there are actually four possible breakeven methods presented:

  1. Monthly payment savings. The simple formula described above. The number of months it will take for your monthly payment reduction to be greater then your closing costs. Doesn’t take into account that you may be making more monthly payments.
  2. Interest savings (plus PMI if applicable). The number of months it will take for your interest and PMI savings to exceed your closing costs.
  3. After-tax interest savings (plus PMI if applicable). The number of months it will take for the after-tax interest and PMI savings to exceed your closing costs. This takes into account that the interest and PMI being paid may be tax-deductible, while the closing costs are paid with after-tax money only. Depends on your income tax rate.
  4. Total after-tax interest savings vs. prepayment. This is the most conservative breakeven measure, and will result in the longest breakeven time period. This method considers that you could take the amount spent on refi closing costs and instead make a large prepayment on your existing mortgage. Then, it calculates the number of months it will take for the after-tax interest and PMI savings to exceed both the closing costs and any interest savings from prepaying your mortgage.

Which method is best?

First, I should add that you could complicate things even further by assuming any money not paid out immediately could earn a rate of return (savings accounts, CD, etc.) But that would make my head explode, so I won’t. The calculator suggests that methods #2 and #3 are most commonly accepted, and I would tend to agree. If you are sure that your interest is 100% tax-deductible (you exceed the standard deduction provided by the IRS without it), then you should use the value from #3. Otherwise, something in between #2 and #3 is probably the most accurate.

Method #4 compares with another theoretical situation that only applies if you really want to make a lump-sum prepayment and keep the higher monthly mortgage payment over a shorter mortgage term. For many people, the goal is to lower the monthly outlay and improve cashflow as well as save money on interest.

Undo a Roth IRA Conversion For Profit – Tips & Tricks

Did you know that if you do a Traditional to Roth IRA conversion, that you can undo it? This “do-over” process is called recharacterization, and can come in very handy if the value of your investments drop significantly after your conversion since you owe income taxes based on the value of the IRA at the time of conversion. With the recent market volatility, this may apply to many investors as it did previously in 2008/2009.

Take the example below, from a 2009 CNN Money article but still applicable. Let’s say you had a Traditional IRA valued $150,000 at conversion, which later on drops to $100,000. At the end of the year, you’d have to pay taxes on $150k of income and also be stuck with the lower account value. By performing an “undo” and “redo” the conversion, you could pay income taxes on only $100,000 of income instead of $150,000 – a savings of $14,000 at the 28% tax rate. (Find your 2010 tax bracket.)

There are some ground rules, however. The IRS says you can perform a recharacterization until October 15th of the year following the year you converted. So if you converted in April 2010, you have until October 15, 2011. If you want to re-convert, you have to wait either 30 days after the recharacterization or until the tax year after the conversion year, whichever is later. Again, if you converted in April 2010, you’d have to wait until January 1st, 2011 to reconvert. If you wait too long in between, it is possible your account value might be even higher than before. Still, something I’ll be keeping an eye on.

(You must still meet the Roth conversion eligibility rules, previously based upon your modified adjusted gross income. In 2010, there are no income limits. In 2011 and beyond, there currently are no income limits either, but it is unknown if this will remain the case. Also, only for 2010 conversions are you allowed to split the income over 2011 and 2012, which can lower your overall tax bill based on tax brackets.)

More Advanced: Multiple Roth IRAs

How can you set yourself up to best take advantage of this “redo” opportunity? I recently read in a sample issue of Kiplinger’s Retirement Report that you should split your Traditional-to-Roth conversion into multiple IRAs for each asset class you own.

For example, you might split a $200,000 IRA into $100k of stocks and $100k of bonds. If the stocks go down to $80k while the bonds go up to $120k, just to a “redo” on the stock IRA and leave the bonds IRA alone. Assuming the values stay the same upon re-conversion, that would save you income taxes on $20,000 ($5,600 at a 28% tax rate) as compared to not splitting up the IRA since if you just converted it a single IRA, the total value remained $200,000 ($80k+$120k). Tricky!

Traditional to Roth IRA Conversion at Vanguard

So, you’ve done your research, read the articles, crunched the numbers, and you want to convert your Traditional IRA held at Vanguard into a Roth IRA. But, how do you actually do it at There is no explicit “Convert” button or link to run this conversion. After some fumbling around, I managed to figure it out. But why not just share it here in mind-numbing detail and hopefully save folks some time.

You’ll need to have both a Traditional and Roth IRA set up at Vanguard first (mutual fund only). If you don’t have the Roth yet, click on the “Open an Account” link on the black bar on the top of every page and open an account first. Be sure to indicate that the funds you’ll use to open the new account are “At Vanguard”.

After you already have both a Vanguard Traditional IRA and a Vanguard Roth IRA:

  1. Log in to your account online. Click on “My Portfolio” so that you can view all your accounts.
  2. Under your Traditional IRA section, click on “Buy & Sell”.
  3. Next, click on “Exchange” on any of your funds.
  4. Now, you can choose to Exchange from all your Traditional IRA funds, to funds in your Roth IRA. You may need to add a new fund.
  5. For the exchange amount, if you are doing a complete conversion, chose All. You may be asked to verify and accept any redemption fees.
  6. You’ll also need to choose your tax withholding options. In order to maximize my balances in these tax-deferred accounts, I chose not to withhold and to pay the taxes separately myself later from a taxable account. Also, I can spread the taxes due for a 2010 conversion over two years.
  7. At the end of the next available business day, your mutual funds will be exchanged into your Roth at their net asset values. Your Traditional IRA will still show up with zero balances, which you can hide from displaying.
  8. Your conversion is complete! Keep your transaction confirmations for tax time.

Keep on reading below for some of the warnings and notifications that you’ll encounter during the conversion process.

A conversion is a taxable event. Generally, you’ll owe taxes on the amount you convert from your traditional, SEP-, or rollover IRA into a Roth IRA.

When you convert to a Roth IRA, you may elect to withhold Federal and certain state taxes. You can get the most benefit from the conversion if you don’t have taxes withheld and instead pay taxes from a separate nonretirement account. Keep in mind that the money withheld for taxes isn’t part of the conversion, and, if you’re under age 59½, you may have to pay a 10% federal penalty tax on it. You also can’t “recharacterize”, or restore to a traditional IRA, the amount you withhold. If you choose not to withhold, you may need to make estimated tax payments to avoid an underpayment penalty.

We encourage you to consult a tax advisor about your individual situation. For 2010 conversions only, you have the option of postponing the tax due and paying it off over two years. If you choose this option, taxable income from the conversion gets split evenly between 2011 and 2012. Alternatively, you can choose to pay all the conversion income in 2010.

Moving money out of a retirement account is a distribution, and all or a portion of your distribution may be subject to federal or state tax. You can elect to have either no federal income taxes withheld from your Vanguard IRA® distribution or a percentage between 10 and 100. If you don’t elect to have income taxes withheld from your IRA distribution, you’ll remain liable for income taxes. Tax penalties may also apply if your estimated income tax payments or income tax withholdings are insufficient under federal or state rules.

Inflation As a Hidden Tax Increase

With all of the current government spending, future promised spending, and the huge trillion-dollar budget deficit, there is a lot of talk about impending inflation. Many people are convinced that there is going to be a tax increase as a result, regardless of your political affiliation. However, this reminded me that we shouldn’t forget that the government can increase taxes without ever passing a bill, making you a new line on your IRS 1040 form, or even telling you about it. It simply has to keep pumping more money into the system.

The Wikipedia entry on “inflation tax” focuses on the idea of increasing prices and devalued currency as a increasing burden on people. But rising inflation itself is a hidden tax increase.

Let’s take a simple investment like a savings account or a bond earning an interest rate of 2% a year, but there is no inflation. Income tax is 25%. So you grumble about your low interest rates, pay your 2 x 0.25 = 0.5% in taxes, and keep the other 1.5% as your after-tax “real” return.

What if inflation is 3%, but you are slightly happier because you’re earning 2% above that for a total of 5%. Income tax stays the same, 25%. But now you’re paying 5% x 0.25% = 1.25% a year in taxes, and after 3% inflation you are left with 0.75% as your after-tax real return. Even worse.

Finally let’s say that inflation is now 6%, and you are still earning 2% above inflation. Income tax again is based on your nominal income, so you’re stuck paying 25% of that 8% interest. This leaves you earning 2% above inflation pre-tax, and then going and paying 8 x 0.25 = 2% in taxes. Your after-tax real return is now zero. You’re not making any money, it all went towards taxes.

All this could happen without ever raising the official income tax rate. This fact is sometimes brought up when talking about inflation-indexed bonds, but applies the same to all investment returns.

Infographic: Overall Tax Rates For Single, Married Filers

VisualizingEconomics has a nice series of infographics that explore how various income-based taxes change with your adjusted gross incomes. It uses 2009 IRS numbers, but should still remain relevant to today. Below is a snapshot of a married filing jointly couple with two kids and one income (click to enlarge):

Not you? Check out also:

Death and Taxes 2011: Visual Guide to the Federal Budget

The 2011 edition of the Death and Taxes poster is out, which outlines in spectacular detail how the United States federal budget spends its (your?) tax dollars. View the huge image online, or buy it as a 2 ft. x 3 ft poster. If you haven’t seen it before, you really should check it out.

Due to what the creator deems complexity and size constraints, the poster focuses on the $1 Trillion discretionary portion of the budget. Discretionary spending refers to the portion of the budget which goes through the annual Congressional debates every year, and amounts to about 1/3rd of the total budget. Currently, the biggest chunk goes to defense spending. Want to know how much the V-22 Osprey gets? It’s on the poster ($2.2B).

The other 2/3rds of the federal budget is mandatory spending, which includes programs which are funded by eligibility rules or payment rules. An example is welfare. If you’re eligible, you get it. The only way to change how much is spent is by changing the eligibility rules.

The poster does include a little chart on the bottom right about the total federal budget, but I think it tries to convey too much information in a very small space. Here’s a simpler breakdown from the 2007 budget, courtesy of PerotCharts. As you can see, entitlement programs like Social Security and Medicare are also huge expenses.

And here’s another breakdown of the 2009 total spending via Wikipedia.

As long as take all of this into perspective, this graphic does a great job of making a complex subject accessible. Not sure how long this will last, but right now with code BOGO you can get two posters for $24 + $1.50 shipping.