JoeTaxpayer

The Law of Unintended Consequences will sprout up in most changes implemented in our financial system. I’d think the guys at Freakonomics would appreciate some of the times this becomes obvious. In Barrack Obama’s tax plan he offers:
“The IRS would send prefilled tax forms to 40 million workers who take the standard deduction and have a bank account. They would simply have to sign and return it, which Obama estimates would save more than $2 billion in tax preparer fees, 200 million hours of work and “an incalculable amount of headache and heartburn.”

Now, I’m all in favor of simplifying our tax code, but looking at these numbers, the math says the average return costs $50 (can that be right?). So these certainly aren’t being done by CPAs, more like H&R Block storefronts with seasonal help. If these people make $25 an hour, that’s 40,000 people (assuming a seasonal job that runs just 1000 hours a year) out of a job. Simplify the return, put 40,000 part time workers on the unemployment line. There’s a trade off, I’d say. This is one topic, The Law of Unintended Consequences, which, among others, I plan to revisit. It’s easy to find if you just look.

JOE

written by JOE

I enjoy the copy of some of the advertising promoting gold:
“in 1920 a man could buy a suit with a $20 bill or $20 gold coin. But in 2006, $20 won’t buy a shirt, and a gold coin, now worth over $500 will buy a suit.”

So what? At 12% (the S&P return during this time according to the MoneyChimp) , your money will double every 6 years. Over 86 years, that’s more than 14 doublings, or over 17,000 times your investment, $340,000 for your $20 bill.

Someone tell me how an ad can make an ‘investment’ that will grow from $20 to $500 in 86 years, an annual return of 3.8%, look good when the alternative (the S&P) would return 680X as much.

From the 1980 peak, gold would have to exceed $4800 to outperform stocks over the same period. I look at the 35 year chart:

and I’m no technician, but ‘down’ looks far more likely than up. Within my market timing article, I discuss how buy and hold will profit if you are patient. Even buying at the market high reached in August of 1987, right before the crash would be profitable if you held long term, returning nearly 8%/yr up to the market bottom of 2003. Now, if you bought gold at $850, in 1980, and were patient, reinvesting dividends* along the way, by now, er, nearly 28 years later, you’d still be short of breaking even.

(*Gold offers no dividend of course. How could it?)

JOE

written by JOE \\ tags: gold, Investing, Retirement

I wrote recently about donating IRA money and received a couple questions. So a clarification and a thought. First, this only helps you if you were planning to donate money anyway, I am not promoting any particular charity, nor am I preaching that one should feel compelled to share. That’s certainly a personal decision. There is a financial benefit to you only if A) you were about to make a donation anyway, and B) you only take the standard deduction, so you are unable to take the donation as a charitable deduction, i.e. you have no schedule A.

That said, this great opportunity was only placed into the tax code for 2006 and 2007. You have 3 more months to benefit from this law. Here’s my thought; Both Schwab and Fidelity offer charitable gift funds, which allow you to make a gift to the fund now, and disburse it to the final charity of your choosing at a later date. If you are in a high tax bracket, say 33%, you may take advantage of the law before it goes away, making the donation now, and passing it along over the next two or more years. This suggestion is strictly about tax planning and finding the opportunities within the tax code. All comments are welcome.
JOE

written by JOE \\ tags: donation, investment, IRA, Taxes

Sometime back, I read a blurb on Andrew Tobias’ website titled as above, I added the congratulations. The article linked to Global Rich List a site that allows you to enter your income and see where you stand, ranked against everyone else on the planet. What I found so shocking is that the median income of the world is $850. Per year. The allowance I give my 9 year old ($9/wk) is an income greater than 16.8% of the world’s population.

On the other side, you have household US income data that show median household income at $48,201, which if plugged into the Global Rich List put you in the top 99%. This is worth repeating. Half the people in this country live better than 99% of the rest of the world.

Next time I look at this data, I’ll discuss “why do we feel so poor?”

JOE

written by JOE \\ tags: distribution of wealth, income data, Investing, money, wealth

I wrote about a zero interest credit card offer I accepted, and received some feedback and a couple questions from a reader:

Besides possibly affecting your credit score (by having too much available credit), presumably you’ll want to cancel the account(s) at some point… right?

I’ve read canceling too many accounts in too short a time period also negatively impacts your credit score.

Then there’s the impact on your score from new repeated credit inquiries, etc.

Indeed the answer to the above is yes, mostly. Let’s look at what impacts your FICO score;

By the way, the above is from a PBS special, “Secret History of the Credit Card.” Mrs. Taxpayer is still kidding me how a show with such a title can get my interest.

FICO formulas are still a bit of a secret, but the above is a good start. As I’ve read more about each of these criteria, I understand that ‘amounts owed’ are a ‘percent available credit used’ more than total dollars. So accepting a new card and instantly using the entire line may have a bit of an impact, but this is where unused credit on other cards actually helps bring down the total percent used. Of course, applying for too many cards in a short timespan also will impact your score. Canceling cards can hurt you in two ways, raising the ‘percent credit used’, and reducing average age of accounts, so you are correct, these are concerns.

Now assuming all that doesn’t scare one away from accepting free money, what about the tax impact on the earnings you’ll receiev? Once you subtract the income tax, the $50 transfer fee, and the temporary possible credit score damage, do you think it’s still worth it?

As I posted, I will gross $450 in profit. With median (household) income at $48K or just over $24 an hour, I do think it’s worth it. I dropped off the cash advance check along with other business I had, so no wasted time there. I set up 5 payments of $200 on my automatic bill pay through my bank, and marked my calendar to make that last payment in full. Maybe 15 minutes effort. I’m not planning to spend time scouting out these deals, but I won’t turn them away. I am 45 years old and remember when $450 was the pay for 150 hours of work. Would I do this to gain $50? No. $250? Sure.

To wrap up, I’ll say that if you are in the market for a mortgage, you’ll want to check your credit report and be very careful not to do anything that might hurt your chance of getting the best rate you can. I wouldn’t want to trash my credit rating, but I can afford a small hit. My fixed mortgage was closed at the bottom of the last cycle and so I doubt a refinance is in my near future. Thank-you JAL for reading my blog, and being the first to comment on one of my posts. I hope I answered the questions you raised.

Edit - I recently found an article “Five Mistakes That Hurt Your Credit Score” by Jeffrey Strain of TheStreet.com which adds to the thoughts I presented here.
JOE

written by JOE \\ tags: Credit, fico, interest, loan, money, wealth

Last month I commented on the volatility that struck the market. I stated that “this recent blip will look just like any other, meaningless in the long term.” I stand by that remark. Today we closed at 1529 on the S&P, just 1.7% off the high reached in mid-July.

If you had the clairvoyance to sell at 1555, and buy back in at the bottom of the August dip, you are either a liar, or one of the few people who can do this. Truth is, few people can get it right twice, selling, and then buying back at a lower price. It’s a sucker’s game I choose to avoid.

JOE

written by JOE \\ tags: Investing, S&P, stocks, volatility

The Federal Reserve dropped rates, both the Fed Funds rate and the Discount Rate, by 50 basis points (.5%). The market certainly liked the move, the S&P gaining 43 points or just under 3%. But what does this mean for you and me? If you are one of the poor souls who was drawn in to a variable rate mortgage, and are feeling the pain as your loan adjusts to current interest rates, this move will likely have little impact. At the bottom of the cycle in 2004, the one year T-Bill was down to under 1%. We now have a one year rate of 4.08%, not low enough to keep the sub-prime meltdown from progressing. The rate change may help the lack of liquidity in the credit market be reduced enough to allow a continued business expansion and reduce the risk of recession, but the mortgage crisis is still with us, and we will have at least six more months of loan defaults, foreclosures, and finger pointing to look forward to.
JOE

written by JOE \\ tags: Finance, Investing, money, Mortgage, subprime

You can go to annualcreditreport.com and request to view your credit report from each of the three nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. Since each one permits you you view your report annually, you are able to view a different one every four months. I’ve not seen the value in paying for ‘credit protection’ since your credit cards’ liability limits you to $50 so long as you repost a card stolen soon after you are aware it’s missing. Even those protection services cannot save you the time it will take to get your life in order if you are the victim of true identity theft.
JOE

written by JOE \\ tags: annualcreditreport.com, Credit, Equifax, Experian, fico, identity theft, lend, loan, TransUnion

I received an offer for a credit card with zero interest on purchases or balance transfers for the first six months, and for the first time, took the lender up on the offer. I found myself with a card having a $20,000 credit line and a blank check for a balance transfer. The fine print showed the transfer was subject to a 3% fee, but capped at $50, so I wrote a check to my brokerage account and deposited $19,950 into a money market fund earning 5%. For the effort of writing that check and making the payment back in 6 months, I’m ahead $450. I’ve read there are people that manage to find offers such as this one on a regular basis, making a few thousand dollars a year just by shifting this money around. I’d think there are only so many banks making such offers, and at some point too much available credit will impact one’s credit rating, but for now, I’ll take the $450, and be sure to make the payment in full when this becomes due.
JOE

written by JOE

Time has a way of ticking by, and it’s not too early to think about the financial moves you want to make before the end of the year.

First, do you have an RMD (required minimum distribution) for your IRA? If you do, and if you make charitable contributions toward the end of the year, but you don’t itemize deductions on your taxes, then consider donating some of your RMD. This is part of the pension protection act passed last year, and this rule regarding RMDs is in effect for only 2006 and 2007. Too bad. If you fall into the small group that would benefit from this, it’s the financial equivalent of taking the tax deduction.

Also, if you are retired, it may be time to consider converting some of your IRA to a Roth. The reasons for this may not seem so simple, but the general goal is. You wish to avoid having your growing RMDs force you into another tax bracket, and/or to avoid having this income subject to the bizarre Social Security tax trap. For example, a married couple finds their taxable income is $40,000, and according to the chart at Fairmark, they are in the 15% tax bracket (i.e. the next dollar taken is taxed at 15%). They may be able to convert $23,000 from the traditional IRA to a Roth, still paying 15%, and that money will grow tax free, with no forced withdrawals. Since RMDs continue to rise as one gets older, this strategy will keep the IRA balance from rising to the point where withdrawals force the couple into the 25% bracket. This example ignores the Social Security tax trap mentioned, and linked, above. More year end ideas to come soon.

JOE

written by JOE