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.

How Much Did Your Tax Return Cost? U.S. Average $229

As CPAs everywhere are burning the midnight oil, the National Society of Accountants (NSA) released the results of their 2009-2010 Fee Survey of nearly 8,000 tax preparers, which showed the average tax preparation fee for an itemized Form 1040 with Schedule A and a state tax return to be $229. The average cost to prepare a Form 1040 and state return without itemized deductions is only $129.

Here’s a link to the full press release. The costs varied by geographic region, with the highest being the Pacific (AK, CA, HI, OR, WA).

They also listed the average fees for preparing other tax forms:

• $212 for a Form 1040 Schedule C (profit or loss from business)
• $551 for Form 1065 (partnership)
• $692 for Form 1120 (corporation)
• $665 for Form 1120S (S corporation)
• $415 for Form 1041 (fiduciary)
• $2,044 for Form 706 (estates)
• $584 for Form 990 (tax exempt)
• $58 for Form 940 (Federal unemployment)

If you used an accountant, how do you compare?

2010 Non-Deductible Traditional IRA Contribution Made

I talked about taking some “action” in my last net worth update. We both contributed $5,000 each to a non-deductible Traditional IRA earlier this week. In doing so, I was reminded of how some folks can be intimidated by the amount of IRS fine print you must read every time you try to achieve some tax savings. Perhaps it is a small minority, especially of people reading this, but still significant.

Just to figure out if we were allowed to contribute took some searching. Per this IRS flowchart, because we are married filing jointly and will most likely have a modified adjusted gross income (MAGI) over $177,000, we are unable to contribute to a Roth IRA. How many people know what their MAGI is? In this world of spiraling credit card debt, how many people are willing to try to figure it out?

However, anyone can contribute to a Traditional IRA, even though it doesn’t explicitly state that anywhere. Then the question is whether it is tax-deductible. From this other IRS flowchart, because we are married filing jointly, covered by a retirement plan at work, and have an MAGI of over $109,000, I figure out that our contribution is not tax-deductible.

Finally, I happen to know in 2010, there is no income limit on the conversion from a Traditional IRA to Roth IRA. I must rely on the many mentions from financial media and investment brokers to know this. Even so, there are even more catches in terms of pre-tax and post-tax bits of the IRA to be converted.

I personally don’t mind all of this. But there must be a study somewhere that shows that every time a person has to walk themselves through an IRS flowchart, the overall IRA participation rate drops something like 5%.

Changing 401k Contribution Rates During Year, Catch-Up Contributions

401k company matches are great ways to boost your retirement savings, but sometimes you have to be careful in order to capture it all. My wife’s company offers a 3% match, but only up to 3% of whatever you contributed that pay period. What if you contribute less than 3% for some period, and then a much larger amount a later period, with the overall total being much more than 3%? With some plans, you are simply out of luck and have missed out on potential money. Other plans offer what is called a “catch-up” or “true-up” contribution. Do you know which one you have?

I wrote about 401k true-up contributions and maxing out 401ks earlier, but finally got my hands on the employer’s Summary Plan Description which addresses it explicitly. Luckily, my OCR software was working, and I scanned it in below:

Is a year-end Matching Contribution provided if I changed my saving percentage during the year?

If you are employed by the Employer on the last day of the Plan Year, a true-up calculation is made so that your Matching Contributions will be maximized even if you changed the percentage of your Compensation that you elected to contribute during the Plan Year. The amount, if any, of the true-up Matching Contribution is the excess of (i) 100% of your Employee Contributions for the entire Plan Year that do not exceed 3% of your Compensation for the entire Plan Year that was paid to you while you were eligible for Matching Contributions, over (ii) the total amount of Matching Contributions already contributed to your Account for the Plan Year.

For example, John was eligible for Matching Contributions for all of 2010. John, who earned $40,000 evenly throughout the year, did not elect to contribute to the Plan from January 1 to June 30, 2010. From July 1 through December 31, 2010, John made Employee Contributions of 12% of his Compensation (12% of $20,000 = $2,400), and received Matching Contributions of $600. His year-end Matching Contribution is calculated as (i) minus (ii), as follows:

(i) 100% of John’s Employee Contributions to the Plan for the entire year that do not exceed 3% of his Compensation for the entire year. 100% x 3% x $40,000 = $1,200

(ii) The total amount of Matching Contributions already contributed to his Account for the year = $600

Year-end Matching Contribution to John’s Account for 2010 = 1,200 – 600 = $600

The year-end Matching Contribution generally is contributed to the Plan within a few months after the end of the Plan Year. hi some cases, IRS rules limit or reduce the amount of Matching Contributions the Employer can make on your behalf if you are Highly Compensated, as defined in Question 1, above. You will be notified if you are affected by this limit or reduction.

An important note here is that, at least for this plan, you must be employed on the last day of the Plan Year in order to be eligible for this catch-up contribution.

E-File Your Federal Tax Return Extension For Free

April 15th is only a month away, and you haven’t started your taxes yet. Time to file an extension! The IRS automatically grants a 6-month extension to anyone who asks. Asking a search engine will often direct you towards websites like that charge upwards of $20 to file the form, but here are two ways that anybody can e-File for free. Apparently, the only thing keeping these sites in business is lack of education!

Method #1: TaxACT
This is how I did my extension last year. Just sign up with TaxACT and e-file your extension for free through them. It’s quick. It’s easy.

You don’t even need to actually use them to file your taxes later, although TaxACT is also free for federal taxes with e-File included regardless of income, and is only $14.95 for state returns including free e-File. That’s cheaper than TurboTax or TaxCut, although if you’re already familiar with those programs it may be worth the extra bucks to stick with them.

Method #2: Free File Fillable Forms
This one’s a little harder to find, but here are some step-by-step instructions. Go to the Free File Fillable Forms site (say that 5 times fast) and click on “Start Free File Fillable Forms”. Click “Sign-in” on the top left, and create a new account.

After you’re signed in, click on “Continue” and pick your form. Go with 1040. On the top right, you should see an icon with the label “File an Extension”.

This will bring up Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, a long title for a really short form. You’ll need to estimate your total tax liability for 2009. This form only extends the time to file, not the time allowed to pay. Overestimate your tax liability to avoid penalties. Here is how I estimated my tax liability.

You can even request your estimated tax payment to be withdrawn electronically by supplying your bank’s routing and account numbers. For identification purposes, you’ll need your adjusted gross income (AGI) from your 2008 tax return.

Got state income taxes as well? Here is a helpful page on manually requesting state-specific tax extensions.

Giveaway: QuickTax Platinum Tax Software For Canadians

I don’t know how many Canadian readers I have, but I do have one free copy of QuickTax Platinum ($69.99 value, download version) available to give away.

The Platinum version is the most fully-featured “personal” edition, and includes assistance with investment gains/losses and rental property, as well as RRSP guidance. Other than that, I don’t know much about QuickTax, other than it is made by Intuit and thus looks a lot like TurboTax in the US. However, there doesn’t seem to a similar product by H&R Block for the Canadian market. Who is their biggest competitor then?

To enter, simply leave a comment with a valid e-mail in the proper field below by Midnight Pacific on Sunday, 2/21. Real name not necessary, you can even leave the actual comment box blank. One entry per reader. I’ll randomly pick one winner. Thanks!

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.

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.

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
You can buy the desktop edition for Mac or PC from 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.

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″

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.

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.

Marginal Tax Rate [Taxable Income] Single Married Filing Jointly
10% $0-$8,375 $0-$16,750
15% $8,375-$34,000 $16,750 -$68,000
25% $34,000-$82,400 $68,000-$$137,300
28% $82,400-$171,850 $137,300-$209,250
33% $171,850-$373,650 $209,250-$373,650
35% > $373,650 > $373,650

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: