How To Generate and Issue Your Own 1099-MISC Forms

Did you as a small business pay another person or business more than $600 total in 2009 for services rendered? You may have to provide them a 1099-MISC form. There are lots of rules, see the 1099-MISC Instructions for complete details. Here’s a summary:

The Internal Revenue Service (IRS) requires businesses (including not-for-profit organizations) to issue a Form 1099 to any individual or unincorporated business paid in excess of $600 per calendar year for services rendered. This is required whether these payments are spread out over the course of the year or are paid in one lump sum payment. The most effective way to obtain the information needed to prepare the Form 1099 is by requiring that an IRS Form W-9 be completed prior to any payment being made. The penalty for failure to file Form 1099 can be as much as 50% of the amount paid for services.

If you’ve got your own accountant or payroll service, then you can pay them to generate the proper forms and send out these 1099s. (They are supposed to be sent out to independent contractors by January 31st following the end of the tax year in which you made the payments.) But if you’re a micro-business or a one-person show and still do all your own taxes, you can easily generate a few 1099-MISCs yourself.

You can get blank forms sent to you for free from this IRS order form. You’ll need at a minimum, Form 1099-MISC and Form 1096. You cannot use the PDFs that you find online; they are only examples. The page says it may take 4-6 weeks, but I got mine in less than two weeks. If you need them faster, you can buy them from any office supply store like Staples or OfficeMax. As noted above, get a W-9 form filled out by the person you paid, and follow the directions.

Finally, if you buy TurboTax for Business (not the personal edition), the software can also generate both 1099 and W-2 forms for you.

Posted in Self-Employment, Taxes | 8 Comments »

H&R Block At Home 2009 Deluxe Discounts (TaxCut)

I don’t know how long this will last, but right now former H&R Block TaxCut fans can get H&R Block At Home 2009 Deluxe Federal + State for only $25 from Amazon, including five federal e-files and free Super Saver shipping. Retail is $45.

From the description: This is the Deluxe version, which handles things like home interest tax deduction, donations, and investment income. Imports data from TaxCut, TurboTax, Quicken, and Microsoft Money software. Compatible with both Windows and Mac OS X. Includes H&R Block Audit Support.

* You can save another $1.26 and download it directly onto your computer if you have Windows.

Posted in Deals & Offers, Taxes | 4 Comments »

TurboTax 2009 Discounts For Early Birds

Ready to do your taxes already? Wow, not me. My usual advice for cheap tax software is to check the Sunday newspaper ads. Every year, the office supply stores will eventually sell them for essentially free after rebate. But if you’re not into rebates or just can’t wait, here are some current discounts for TurboTax. It does seem like TurboTax has been shifting their profit margins onto their state software. For reference, TurboTax Deluxe Online for Federal is $29.95 retail with free eFile, but TurboTax Online State retails for $36.95 with eFile. Total: $66.90.

Free TurboTax Federal for 1040EZ (Simple Returns)
If you have a simple return with no itemized deductions, and don’t have any state income tax, then you can get the TurboTax Free edition with free eFile.

Free TurboTax Federal w/ Income Restrictions and Military
If you meet the income and/or military status requirements, the TurboTax Freedom Edition is free for Federal including eFile. Covers all the forms, not just 1040EZ. State filing may also be free for those in AL, AR, AZ, GA, IA, ID, KY, MI, MN, MO, MS, NY, NC, ND, OK, OR, RI, SC, VT, WV. Otherwise it is $14.95.

Free TurboTax Deluxe with State Farm Bank
If you have a bank or credit card with State Farm, you get free TurboTax Deluxe (log-in required). I can’t tell if this includes State? In any case, not a bad perk.

25% off through Vanguard, Fidelity, or everyone via State Farm
Site visitors all can save 25% off TurboTax online for both federal and state. Anyone can be a “site visitor”. This results in final prices of $22.45 Federal and $27.70 State. Total: $50.15

If you’ve got Flagship status at Vanguard (usually $1M in assets), then you get TurboTax Federal and State online for free. One day!

35% off Federal only via Bank of AmericaSite visitors can get 35% off TurboTax Federal, for a final price of $19.45. However, there is no discount on State, making it cheaper to go with the offer above unless you only want Federal.

25% off Desktop Edition via Amazon.com
You can buy the desktop edition for Mac or PC from Amazon.com for $44.99 total, which includes Federal w/ eFile + State. According to the description, it does not seem to include eFile for state.

Additional Notes – IRS FreeFile and TaxAct
Not devoted to TurboTax? You can also check with the IRS FreeFile site to see if you qualify for other free software, usually restricted by income or military status.

Then there’s always the best no-hassle deal around: TaxACT, which again offers a free Federal return + free Efile + $14.95 for State. Total for both: $14.95.

Posted in Deals & Offers, Taxes | 31 Comments »

2010 Roth IRA Income Limits Effectively Removed

Okay, let’s try this again. There are no longer any income phase-outs on Roth IRA conversions from Traditional IRAs. As in previous years, individuals or couples with a modified adjusted gross income (MAGI) over a certain limit are ineligible to contribute directly to a Roth IRA. In 2010, the phase-outs begin at $105,000 for single filers and $167,000 for those married filing jointly.

However, with no conversion limitations, people with any income can simply contribute to a Traditional IRA and then convert that to a Roth IRA immediately afterwards.

This is great news for those higher income earners who have been previously unable to contribute to a Roth IRA. In addition, if you have been contributing to a non-deductible Traditional IRA in previous years, you can now finally convert those already-taxed funds into a Roth IRA, which is almost as good as retroactively contributing to a Roth IRA. You’ll only have to pay taxes on any gains you earned on the contributions, not the actual contributions themselves since they were already taxed before. (With the recent market performance, that isn’t much of a problem for most of us…)

One additional wrinkle is that if you have a mix of pre-tax and post-tax contributions inside all of your combined Traditional IRA funds, you cannot convert them separately. For example, if you have a mix of 50% pre-tax and 50% already-taxed funds, then any converted amount will be assumed to be 50% pre-tax and 50% post-tax. You can’t just convert the post-tax part. This could be one reason not to roll over all pre-tax 401k funds into a Traditional IRA whenever possible.

More info: IRS Publication 590, “What’s New for 2010″

Posted in Retirement, Taxes | 20 Comments »

2010 Roth IRA Income Limits Removed

Due to stupid errors in my original post, I have gone ahead and written it over. Please see my updated post: 2010 Roth IRA Income Limits Effectively Removed.

Posted in Retirement, Taxes | 25 Comments »

2010 Tax Brackets – Federal

Here are the new 2010 federal income tax brackets, as formatted for my own future reference. Due to low inflation, they only differ very slightly from the 2009 tax brackets. These tables are based on taxable income, which is not the same as the gross income on your paystub or the adjusted gross income (AGI) listed on your tax return. Taxable income is after taking any deductions and other exemptions you are eligible for.

The value of each personal exemption stays the same as 2009, at $3,650. The standard deduction also remains $11,400 for married couples filing a joint return and $5,700 for singles and married individuals filing separately. Heads of household get slight $50 bump up to $8,400.

Since we’re married, I always pay attention to the point where you jump from 15% to the 25% bracket, which this year is $68,000. If you assume we only take the two personal exemptions and a standard deduction, this would work backwards into a gross income of $86,700.

More info: IRS.gov

Posted in Taxes | 28 Comments »

California Increases Income Tax Witholding By 10%

California has come up with another “creative” way to get some money from its residents. First, I had to figure out how to redeem my California IOU. Now starting back on November 1st, the state increased the income tax withholding on regular wages by 10%. There is no actual accompanying tax increase, they are just looking for an interest-free loan from now to when you file your income taxes.

According to the Franchise Tax Board, previously a single taxpayer making $51,000 a year and claiming one withholding allowance would have had $40.58 a week withheld from his or her paycheck. After Nov. 1, withholding increased to $44.64 a week, an increase of $4.06. Taking an extra $20 a month from someone making $51,000 a year seems more annoying in principal than anything else.

If you want to “undo” this gimmick, you can increase the number of withholding exemptions you claim on form DE-4, Employee’s Withholding Allowance Certificate, from your payroll department. You can also increase the exemptions on your W-4 form as well, but that just decreases the amount of federal tax withheld.

Fool around with the calculator at PayCheckCity and see how changing the number of allowances changes things (I don’t know if they’ve updated their calculators to include this change, but you’ll get the general idea). Just be sure that you’re paying enough income taxes to avoid underpayment penalties.

A much more detailed (and long-winded) article can be found at SacBee.com. Thanks to reader Sharon for the heads up.

Posted in Taxes | 26 Comments »

How To Redeem California IOUs (Registered Warrants)

Back in July, the state of California started issuing what they called Registered Warrants, aka IOUs, to taxpayers, vendors, and local governments to whom they owed money. Due to a “cash-flow infusion” from JP Morgan Chase, the redemption date was moved up a month to as early as last Friday, September 4th. Through August 31st, the state had issued 457,238 IOUs totaling $2.37 billion. Here’s mine

(click for larger version)

Since I had to figure this out myself, I’ve tried to collect all the disparate information about how to redeem these IOUs below. The interest rate for these IOUs was set at 3.75% per year. You can estimate the interest accumulated on your IOU using this Excel calculator. Each $1,000 of IOU issued on July 2nd would have only accumulated about $6.70 of interest by now.

In Person

If you live near Sacramento, you can redeem your IOU with all accumulated interest in person for a check (not cash) at the State Treasurer’s Office located at 915 Capitol Mall, 1st floor.

Walk in hours are Monday through Friday from 8:00 a.m. to 4:00 p.m. Third parties redeeming IOUs by mail must include a notarized bill of sale signed by the person to whom the IOU was issued.

Via Snail Mail

You can also mail your IOU to the State Treasurer’s Office. According the state, IOU holders should receive their checks in a week to 10 days including mail time. Mail to:

Attention: Registered Warrant Desk
State Treasurer’s Office
915 Capitol Mall
Sacramento, CA 95814

It seems like you just mail the IOU by itself, although one press release said to be sure to include a return address. This makes sense especially if your address is different than the one printed on the IOU.

Pay Your Other Tax Bills

You can also use it as direct payment towards current and past due personal and corporate tax obligations. It is not clear if they will account for interest earned, but I can only guess that they won’t.

To pay a tax liability with an IOU, endorse the IOU on the reverse side with the phrase “Pay to the order of Franchise Tax Board” and your signature then mail it with the tax bill or estimated tax voucher. By law, FTB cannot deposit the IOU until it is payable, but FTB will credit the taxpayer’s account on the date the IOU is received to stop the accrual of interest. If the IOU is not sufficient to pay the outstanding balance, taxpayers should send an additional payment for the difference. Otherwise, the taxpayer will receive a bill reflecting the new balance due.

Deposit Directly At Bank

Some major banks with a presence in California, as well as many local community banks and credit unions are accepting these IOUs from their customers. Whether they will cash IOUs from non-customers, or if they will credit interest earned, is something to verify directly with them. If they do credit interest and you have an account with them, this would be the easiest and fastest method.

The following major banks will accept IOUs from their customers:
Bank of America (starting Sept. 9th)
Bank of the West
Citibank
Union Bank
US Bank (starting Sept. 8th)
Wells Fargo

The following major banks will NOT accept IOUs from their customers:
Chase

Wells Fargo and Bank of America have publicly stated that they will credit interest paid by the state to their customers’ accounts. BofA will accept the IOUs on September 9th, and then will credit the interest owed by the state on these items to customers’ accounts within approximately 30 days (I suppose when they redeem it themselves). WF will only credit if the interest amount exceeds $5. Wells will stop crediting customers for interest due after September 30th, but will continue to cash them for face value after that date. BofA will accept the IOUs through October 9th.

Sources: State Comptroller’s Office, CA Treasurer’s Office, Franchise Tax Board, FTB release, BofA press release, Bizjournals

Posted in Taxes | 13 Comments »

Should You Keep Your Emergency Fund In Your 401k?

Before you jump to an answer or nasty comment, please give me a chance to elaborate. Recently, I ran across an interesting article in the Bogleheads Wiki titled Placing Cash Needs in a Tax-Advantaged Account. Essentially, because of the way the U.S. tax code works it can often be better to keep certain asset classes like cash inside tax-advantaged accounts like IRAs and 401ks. Therefore, if your emergency fund is cash, why not put it inside as well?

I’ll use the example given. Let’s say you have a 401(k) with a balance of $10k and also taxable assets of $10k, for $20,000 total. You choose to have $10k in stocks, $5k in bonds, and $5k in cash for your emergency account. The “traditional” placement for an emergency fund is in your regular taxable account, perhaps in a bank savings account. The rest of the assets are distributed according to this tax-efficient placement chart.

However, in this scenario all your interest earned on your cash will be taxed at your marginal ordinary income tax rate, which can be as high as 35%. See table of 2009 Marginal Tax Rate Brackets. Meanwhile, your stocks will mostly give off dividends, which are taxed at a current maximum rate of 15%, and possibly quite less. So why not put the cash into the 401k?

Emergency!

You may wonder what happens if you do need access to that $5,000. You would simply sell $5,000 of the stocks in your taxable account, and simultaneously buy $5,000 of stocks in your 401k plan. This way, your final asset allocation will look exactly the same as if you just spent your cash from the traditional setup:

If you happen to sell your stocks at a loss, then you may be able to deduct a loss if you avoid a wash sale. You can do this by not purchasing a “substantially identical” security within 30 days, but you can buy something very similar. For example, you might buy the S&P 500 ETF (IVV) and sell the Russell 1000 ETF (IWB). They are very strongly correlated, as shown in this chart. This may or may not be worth the hassle depending on how big a loss you’re looking at.

If you happen to sell your stocks at a long-term gain, then you’ll again only paid long-term capital gains taxes of at most 15%. If you sell at a short-term gain (held less than a year), then you’ll have to pay ordinary taxes on the gain. So it might be good to wait a year to institute this new setup.

The Catch
So there you have it, there is an argument for some people to put their emergency funds into their 401ks! However, for most people I don’t think this idea is very practical. For one, most people have relatively small emergency funds, so the difference in taxation scenarios won’t be very high. This is especially true in the current low-interest rate environment. The highest potential tax savings would go to those with large 401k balances and high income tax brackets.

Finally, besides a few stable value funds that I’ve seen, the yields on money market funds found inside retirement plans are rarely the best available. I can usually find much higher interest rates outside my 401k, usually by at least 2% APY or more.

Posted in Investing, Retirement, Taxes | 27 Comments »

Picture of California Tax Refund IOU (Registered Warrant)

You may have heard that California is broke, and is sending out IOU slips instead of checks for income tax refunds. I thought that I would be safe as I usually owe taxes, but due to an amendment of my return, I ended up getting one in the mail as well. Here is a scan for historical preservation:

(click for larger version)

Of course, I receive it the day after major banks like Bank of America stopped accepting them. There are some local credit unions that still accept them from members, but as they pay 3.75% interest I might just wait and see how things go.

Hopefully this doesn’t turn out to be really historical, as in “remember when California started printing its own money and the state government imploded?”…

Posted in Taxes | 33 Comments »

Creating Your Own Three Legged Stool of Retirement

You may have heard the term “three-legged stool”, taken from the idea that a stool needs three legs to maintain balance. (Photographers use tripods, no duopods or quadrapods. Even a four-legged chair will likely wobble.)

Old Three-Legged Stool of Retirement

Traditionally, the components of the three-legged stool of retirement have been presented as Social Security benefits, Pensions, and Personal Savings (401k, IRA, and other assets).

image via Michigan.gov

This is partially supported by data from the Social Security Administration:

image via Pbs.org

The Qualified Retirement Plans slice combines pensions, 401ks, and IRAs together, making it hard to see the breakdown. The Other Assets include income from other investments like capital gains or dividends from taxable accounts and real estate. We observe that a quarter of all income in retirement is still from working for a paycheck.

Shaping Your Own Retirement Legs

These are just averages, and each of us will have their own path to retirement. If you’re planning on retiring early, you won’t have Social Security yet. For people born after 1960, the full retirement age for benefits is already 67, and expect it to rise even further the younger you are. I think some form of SS will still be around when I’m 70, but who knows.

1. Flexible, reliable, part-time income
We already saw that lots of people over 65 still work. Even though I want financial independence early, I’ve also come to realize that I’ll never stop working. Ask yourself what are you really going to do in retirement? In addition, I think it would be stressful to stare at a big pile of cash and think to myself – “Crap, I hope this lasts for 30+ years!” Maintaining a part-time job and the related skills would help my cashflow, and also ensure that I could return to the workforce if disaster strikes.

I would want a part-time job that could provide some socialization and a sense of improving your community or helping others. Most of my imagined jobs involve teaching, coaching, sporadic technical consulting, or something tourism-related. It can’t be 9-5, and I’d want to be able to take months off at a time. This won’t be easy to find, so I need to start developing more “fun” skills as well as personal relationships now.

2. Personal Savings: Accumulate 30 times annual (non-housing) expenses
Without a pension or Social Security, you’ll need to live off your own savings. If you invest in a balanced portfolio of 60% stocks and 40% bonds, studies have estimated that you can have a “safe withdrawal rates” of about 4% per year. By being a bit more conservative than that, this means accumulating 30 times your annual expenses.

For example, if your annual expenses are $30,000, then you need to save $900,000. This is a very general rule of thumb. Taxes are tricky, but if your income is only $30,000 per year, you won’t be paying very much income tax. Check out the historical effective tax rate over a past 25 year timespan:

image via krusekronicle.typepad.com

For reference in 1995, to be in the bottom 50% (safely in Q1/Q2) your adjusted gross income had to be under $31,000. And this even includes payroll taxes of about 9%, which you won’t have to pay on investment income. The result: very low taxes (possibly under 5%) if you keep your expenses down! Which brings me to…

3. A Paid Off House
I don’t think everyone needs to own a home. However, I happen to enjoy many of the intangibles of owning a home, I love my house and neighborhood, and plan on staying here a while. The cost of this leg can vary widely, from a $1,900 house in Detroit to… where I live, so choose where you want to live carefully.

Financially, owning a home protects you from future inflation and rising rents. You are still subject to property taxes and maintenance costs.

In addition, not having to pay rent means you need less income from savings, reducing your needed nest egg in #2 above. You also pay less taxes. Withdrawing additional money from an IRA, for example, will mean subjecting them to your marginal tax rate, which could be 25% or higher. So to pay $750 in rent, you’d have to withdraw $1,000. Not very efficient.

So there, you have it, my three-legged stool. Yours may be very different – you may like renting, have a pension, own investment property, or have some other sources of income. I still worry about health insurance, but I’m still hopeful that some positive health care reform will occur that will create affordable health insurance for individuals under 65 not covered by an employer group plan.

* You can read more about the last two legs in my related post A Quick & Dirty Plan To Reach Financial Freedom.

Posted in Frugal Living, Real Estate, Retirement, Taxes | 10 Comments »

Mortgage Interest Tax Deduction on Rental Property

As pointed out by reader Jason, another consideration when evaluating the cashflow potential for a rental property is whether you can deduct the mortgage interest on your taxes. To see what the rules are, I always like to start directly at the source, which meant a stroll through those fun IRS publications.

First, I started with IRS Pub. 936, Home Mortgage Interest Deduction. There is the basic definition of a “qualified” home:

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

Then there is the question of how much you live in the second home:

Second home rented out. If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home. For information on residential rental property, see Publication 527.

If you live in it enough, it is treated as a “vacation” property and you can deduct the mortgage interest. In general, you are limited to the interest paid on the qualified loan limit of $1,100,000 for “home acquisition debt” combined for both first and second houses.

However, for a full-time rental, we are led to IRS Pub. 527, Residential Rental Property, which states:

Generally, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income.

Interest expense. You can deduct mortgage interest you pay on your rental property. Chapter 4 of Publication 535 explains mortgage interest in detail.

Okay, now I’m off to IRS Pub. 535, Business Expenses, specifically the section on Interest.

You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. It does not matter what type of property secures the loan. You can deduct interest on a debt only if you meet all the following requirements.

* You are legally liable for that debt.
* Both you and the lender intend that the debt be repaid.
* You and the lender have a true debtor-creditor relationship.

There are special rules for the capitalization of interest if you actually build the home yourself.

Summary
I am not a tax professional, but from reading the above publications, it appears that mortgage interest on a 100% rental home is not tax-deductible as an itemized deduction as your primary house may be.

However, chances are that it is an eligible expense that can offset your rental income and still reduce your tax burden in a similar manner. If you made $10,000 in annual rental income but paid $8,000 in mortgage interest, and ignoring other factors like depreciation, you’d only owe income taxes on the difference of $2,000. (Dealing with writing-off rental losses is for another post.) The amount paid that lowers your loan principal is not an eligible expense.

As long as you have adequate rental income, this would make the mortgage interest as an expense better than just an itemized deduction, since everyone gets the standard deduction. For 2009, the standard deduction is $5,700 for single filers, and $11,400 for married filing jointly. Only total itemized deductions above that amount would provide added savings.

Posted in Real Estate, Taxes | 59 Comments »