How Bad Is the U.S. Economy?

There is a campaign afoot by a conservative minority to downplay the state of the U.S. economy. The U.S. economy not so bad? It’s a tough sell, but this fragment is nevertheless trying to sell it.

And since a new president is now talking about our economy frankly, i.e., that the economy is indeed in dire straits, this conservative minority is not only downplaying the seriousness of our economic situation but is now denigrating the new president in order to do so.

Look at Bradley Schiller’s outlandish Feb. 13, 2009 Wall Street Journal column as a case in point. The column’s title? “Obama’s Rhetoric Is the Real ‘Catastrophe.’”

Schiller begins with the ludicrous statement that “Obama has turned fearmongering into an art form” because Obama mentions today’s economic crisis and “Great Depression” in the same sentence. Forget the rhetoric of other administrations in recent years—“Axis of Evil,” “Saddam is training al-Qaeda,” “Iraq is a nuclear threat”¹—because “Great Depression” is worse . . . but that’s a different column. And forget that economists, CEOs, and regular Americans across the board compared the crisis to the Great Depression long before Obama.²

Besides peddling ridiculous claims, Schiller’s main point seems to be that unemployment is the criterion for a declining economy, and since the unemployment rate in the 1930s peaked at about 25% compared to today’s 7.6% and 1982’s 10.8%, 2009 doesn’t compare to 1930. . . .

What Schiller doesn't mention is today’s mortgage crisis, the financial system collapse (about one-fourth of our GDP) and multibillion-dollar bailout, the $10 trillion national debt,^{3, 4} the decline of the U.S. dollar against the Euro, the high price of oil as the dollar declines, the war in Iraq and the newly expanded war in Afghanistan.

As noted above, Schiller likes to quote the year 1982, a year which he thinks was a little bit worse than today. For fun, let’s give him that:

OK, let’s say today’s crisis is nearly tied with the 1981–82 crisis for second-worst-economy-ever after the Great Depression. Even if we concede that, so what? What has Schiller proven? That the economy is very close to being as bad as it was 30 years ago? And that the economy is approaching with no signs of letting up its level during the Depression nearly 80 years ago? Therefore, there's nothing to worry about and no need to make any changes to the current system?

Are our standards for progress so low?

So how bad is the U.S. economy? The important thing is that it’s bad enough that something needs to be done about it.

Be on the lookout for similar claims from the conservative minority that Obama is mongering economic fear. What's the purpose of Schiller and Co.'s bombastic rhetoric? Well, besides simply trying to garner attention (i.e. higher ratings which lead to fatter paychecks) for themselves and endearing themselves further to the Republicans who perhaps give them their paychecks, one purpose is to try to counter Obama's economic recovery plans, plans that might curb the kind of reckless trading and borrowing that has concentrated U.S. wealth and that has devastated the U.S. economy, bringing it close to, yes, another Great Depression.

But why, you may ask, would they want to do that? Do they want our economy to continue to suffer? I'll offer some answers to those questions in my next post. Stay tuned.


[1] For more rhetoric from the last decade or so that aimed to monger fear, see The Center for American Progress, “Claims and Facts: Rhetoric, Reality and the War in Iraq.”

[2] No citation necessary. But for fun, see economist Mark Gertler quoted in “Worst Crisis Since ’30s, With No End Yet in Sight,” The Wall Street Journal, Sept. 18, 2008. Also see economist Paul Krugman, “Fighting Off Depression,” The New York Times, Jan. 4, 2009.

[3] See our Jan. 13, 2009 post “Tired of Paying to Continue Being Poor” for info on the 10 trillion national debt.

[4] In the U.S. “[b]y 2007 total indebtedness was three times the size of the gross domestic product, a ratio that surpassed the record set in the years of the Great Depression” (Barry Gewen, “What Ails the American Economy? Everything, and There’s Worse to Come.” Rev. of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, by Kevin Phillips. The New York Times, Apr. 21, 2008).

Interning: Don't do it for free

Image by Corey Holms via Flickr

There are certain industries (art/design, publishing, journalism, media, etc.) where entry into the field almost requires interning first. Don't get me wrong, working as an intern can help you gain loads of practical experience and hands-on learning. The problem is that companies now often want you to work for free.

Unfortunately, most of the time they find people willing to take a nonpaying internship, especially now since unemployment is so high--people think an internship is a stepping stone to a real job. Often it is, but just as often, it's not--it's just a way for businesses to get free assistants.

When I first started out in my field, I interned for a medium-sized company (in England, where I happened to be living at the time). The pay was minimal, but enough for me to live off (though I pretty much lived as cheaply as humanly possible during that time). Then, two weeks into the internship, they offered me a junior position, which came with a significant raise. Why? Because I worked hard, was good at what I did, and they wanted to keep me around. It's great when it works out that way.

The bad news is that it's usually not that easy. A couple years ago a younger friend of mine who was trying to break in to the same field (though in a different department) took a nonpaying internship at a similarly sized company, having heard that this company sometimes hired their interns after the internship time was up (six months in her case). Obviously, investing six months, even part time, at no pay for something you're not sure of is a risky venture, but she felt she didn't have many other options. Long story short, even though she was an enthusiastic, hard-working intern, at the end of the term they dropped her and got another kid to intern for free.

The thing to remember here is that if you do decide to take an internship, make sure it's really worth it.

Here are some tips for evaluating internships:

1. Pay and hours: If they want you to work full time, there is no way in hell you should do it for free, but you should expect to get significantly lower than entry-level pay. If it's only a few hours a week, however, the experience might be worth it for a small amount or no pay.
   
   
2. Learning experience: I say might above because sometimes all an intern gets to do is make copies, sort mail, and maybe do some simple administrative tasks like invoicing. For the most part, this was the case with my friend in the above example. To avoid having that happen to you, make sure you find out up front what sort of things you'll be doing. The best way to ask this, whether in a preliminary e-mail or at the interview, is simply to say, "Can you tell me what my responsibilities will be?" or "Can you describe a typical day for an intern here?" If it sounds like you won't be learning much except what kind of coffee everybody in the office likes, just say no.
   
   
3. Opportunities for future employment: This is something else you just have to ask about. If you don't want to ask directly, you can say something like, "Have many of your interns gone on to work with the company in another capacity?" You should also try to find out the size of an internship's window of opportunity for other employment. Consider the following:


• Will the things I learn here make me more desirable to other companies in the field? or What will this experience add to my resume other than the word "internship"?
  
  
• Will I make valuable contacts within the industry? Will there be lots of opportunities for networking? Are any of these connections really likely to get me hired?
  
  
• How well established is the company? If it is well established and known for quality work, will the name recognition help me out?
  


4. Expenses and hassle: You need to weigh the value of the internship against the costs associated with it. If you snag that fancy internship in NYC or LA, can you afford to live there? Is the pay, experience, and promise of future opportunity worth the high cost of living and/or cost of commuting? Are they offering a living stipend in lieu of or in addition to regular pay?
   

With more and more businesses trying to snag free workers by offering unpaid internships, it's imperative that intern candidates don't give in to working for free. If (collectively) you do, you're not only hurting yourself, but everyone else looking for entry-level work too.

We want to hear from you. If you've interned before (or had an intern), leave a comment below and weigh in.

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Avoid the Common Pitfalls of Shopping

Do not be this person.

Shopping. We all have to do it sometimes—well, maybe not all of us, I suppose there are people out there whose mothers still shop for them—but never mind them. Some people hate shopping, others love it, and if you fall into one of these groups you're probably not getting the most mileage out of your dollar. Even if you fall somewhere in the middle of that continuum here are some tips to help you shop smarter.

Don’t Avoid the Inevitable
Haters only go shopping when they absolutely must, which doesn't sound like a bad idea when you're trying to save money. Except that by the time you absolutely must buy a new pair of slacks for work—because one of the two pairs you own has worn through in the butt and everyone can see your choice of underpants—you're not looking for a deal. If you had taken the time to start looking a few weeks earlier (be honest, you saw the rear-exposure debacle coming) you could have found a store with a sale, or browsed through some clearance racks, instead of buying the first pair of pants that remotely fit you. Part of being a good bargain shopper is being in the right place at the right time.

Don’t Need It? Don’t Get It!
Most people who like shopping invariably find that they buy something every time they go out. This behavior reinforces their love for shopping because having new stuff is nice. Stop it. You don't need that third blue sweater, or an extra set of Allen wrenches, no matter how well it matches your eyes. If you feel the need to shop all the time you have a bigger problem: oniomania, the medical term for compulsive shopping. Now assuming that you're not at that level, and if you are please seek help, try to remember that you're shopping for a reason, there is a particular item that you want or need and that is your objective. Don't settle for something that will pretty much do the job; only buy what you set out for. This may involve returning home with zero bags. Zero.

The Evil Lure of Sales
Sales can be your best friend or your worst enemy. You can save a ton of money if what you're looking for is on the sale rack, but you can also get sucked into buying things simply because they're cheap. Remember this rule of thumb: Don't buy something on sale unless you'd be willing to buy it for full price. No matter what.

Step Away from the Labels
Brand names are a myth. Except for the über expensive items hand-crafted by blind Italian octogenarians, most American goods are made in the same factories by the same people getting paid the same wages. Don’t get sucked in by the fancy marketing. You can find the same item in a discount department store for less, and the quality will be the same. When you pay extra for the brand names all you’re paying for is the glitz that goes along with it. If the glitz is worth it you can stay home eating processed foods high in sodium, but they’ll probably make you gain weight and then you won’t be able to fit into those “wicked awesome” jeans anymore anyway. The choice is yours.

The Moral of the Story
Think before you shop, or don’t shop. Look for deals but don’t get seduced by them, and don’t forget that it doesn’t matter who made your shoes if you have no money to go out in them.1

Economical Tax Filing Options

So, you've collected all your paperwork, taken a deep breath, and are ready to do your 2008 income taxes. Where do you start? Here's a quick rundown of the most economical and practical filing options:

Mail-In Forms
The most obvious method, of course, is to skip down to your local library, grab the federal and state forms you need (or download them from the IRS website), gather your calculator and a pencil, and get down to business. This method probably takes the longest, but personally I think it's the best way (along with the e-file option below) since, in the process of researching which forms you'll need and reading through all the instructions, you'll learn a ton and possibly discover some savings that tax software might not alert you to.

IRS E-file
This is the quickest DIY option. It's the same as above, except you fill out the forms and submit them electronically. 37 states plus DC currently participate in the IRS's Federal/State E-file.

IRS Free File (online software, federal taxes only)
If your AGI is $56,000 or less, you can visit the IRS website, where you can choose from a variety of tax prep software to use for free via the IRS's Free File Alliance.

TurboTax Free Edition (online software)
TurboTax Free is a decent option for filing your federal taxes if you're in a hurry, don't care to learn how things work, and are eligible (and want to) file the 1040EZ (see MDT's recent post for more info on the EZ form). Filing your state taxes with TurboTax will cost you $25.95.

H&R Block TaxCut (online software)
TaxCut Free is pretty much the same deal as TurboTax Free (above), but they'll charge you $30 to file the state return.

TaxAct (online software)
The most economical and most functional free software I've found is TaxAct Free. They don't restrict federal filing to the simple forms, and while they do charge for state filing, at $13.95 it's significantly less than what the above two companies charge.

Get Someone Else to Do Them for You
If you're lazy (or concerned about screwing something up) and have money to throw around, you can of course hire an accountant to do your taxes for you. This is the least economical but certainly the easiest way to get your tax returns taken care of.

If you're concerned about screwing something up and don't have money to throw around, you might want to check out the IRS's Volunteer Income Tax Assistance Program, which offers free help to people who are not able prepare their own tax returns and whose yearly income is less than $42,000.


Last of all, don't forget to sign up for the direct deposit option (if you're getting a refund) for quickest delivery.

A note on state taxes:
If you live in one of these states, you don't have to worry about filing state taxes since they don't impose state income tax.

Darwin Award Nomination: the blogger that advocates overturning Roe v. Wade to save the economy

So... somehow I stumbled upon this douchebag's "personal finance" blog, saw a post titled
"Abortions Will Need to Stop to Pay for the Financial Collapse,"¹ and thinking it was an instance of astute political humor, clicked on it. Nope! The guy's serious. Amused at its ridiculousness and stupidity as I was, I felt the need to offer this dude a spoonful of reality and posted a comment. In case he's deleted it, I'll post it again here:

This has got to be the most ridiculous thing I've heard in a long time. Oh, of course! The solution to the failing economy is more children people can't afford to take care of! Yes! How could we all have missed that? And of course, the solution to increasing the already exponentially growing population that the environment obviously cannot support is to set women's rights back several decades and outlaw abortion! Brilliant!

First of all, there are WAY too many unwanted children in this world already, and you want to mandate that more be produced? Second, the US may have land, but it's owned already! Hence, it would need to be bought--with money. Money that people don't have because, as you may have noticed (though perhaps not since your IQ, judging by this suggestion and the numerous glaring grammatical errors coating your website, seems to be on par with that of a rutabaga), there are more people than jobs right now. And you want to mandate the creation of more. Third, are you crazy? Have you not heard of women's rights? Since when is it your decision whether or not someone else has a child? Are you really so arrogant as to think that you have the right to force a woman to change her entire life and undergo nine months of pregnancy against her will? Honestly....

All right. I suppose I've used up my ration of indignant sarcasm for the week. That's all folks.



[1] I'm loathe to link to this guy's blog since there's a chance he'll receive advertising revenue from the extra hits and I'd hate to help fund a member of the religious right no matter how insignificantly—but I suppose it's a necessary risk.

Deal Alert: Free Diet Dr. Pepper

OK, so soda's bad for you, I know. And there's those claims that artificial sweetener in the diet stuff possibly causes cancer.... Well, we all do things that are bad for us. For those of you who choose to do so, here's a link for a coupon for a free 20oz bottle and/or a free 2 liter bottle of Diet Dr. Pepper (my personal favorite soda-vice).

Deal Alert: CVS

Save $15 off $60 for any non-prescription online order (free shipping too!) http://tinyurl.com/bqw83s

Also, automatic 30% off all CVS brand products (online).

Review: Mint.com, free online personal finance service

If you haven’t heard of it yet, Mint.com is a free, online personal finance service (and according to their "About" page, “#1 in America”) that organizes all your bank accounts, loans, and investments—including retirement plans, brokerage accounts, vehicles, and real estate—in a place where you can view them all together. You can’t actually conduct transactions through Mint, but it allows you to use one login to view all the transactions, balances, etc. of all your accounts and to categorize your transactions for budgeting purposes. It can make organizing your tax deductions a hell of a lot easier, too, since you can tag your transactions as tax-related so that when you’re ready to file, you can easily find and list them all. And did I mention it’s totally free (and without any annoying ads or pop-ups)? I’ve been using it since November, and for the most part, I’m a fan.

Services
The most valuable service Mint offers is its highly visual budgeting features. It’s quick and easy to set up your own categories and specify spending limits for each category. Once you’ve done that (providing you do a good job of categorizing your transactions), Mint creates a bar graph of your spending for each month and even a date marker so you can see how much of your budget you’ve spent proportional to the time length of the budget. I find this very helpful in preventing the easy trap of overspending early in the month that leaves you without enough budget to get through the rest of the month. If you want, you can also have Mint send you alerts when, for example, you’ve gone over budget, your credit card bill is due, or one of your accounts has a low balance.

There’s also a Flash-powered pie chart you can view under the “Trends” tab that shows how much you’ve spent in each category (even in ones you didn’t list in your budget) relative to the total amount you’ve spent. This is a helpful feature, but it can be misleading because it doesn’t account for returns, refunds, or other income that specifically offsets your spending in a certain area. I’ll talk more about this towards the end of the article.

How can it be free?
Mint makes its money from referrals to banks, investments brokers, and credit card companies through the “Your Ways to Save” bar, which is unobtrusively placed at the bottom of the overview screen. If you’re interested, click on it and see what kind of deals Mint is advocating; they only suggest accounts that are “better” than your current accounts of that type in interest rate, cash rewards, etc. Of course, if you’ve already done your homework and gotten accounts with the best deals for you¹, Mint’s sponsored suggestions might not offer much improvement. Personally, I check the suggestions every once in a while, just in case they’ve found something I haven’t, but for the most part I ignore them.

Room for Improvement
I only have a few complaints about Mint’s services. First and most importantly, there are a few banks/investment companies they don’t connect with. They’re constantly adding connectivity, so hopefully this won’t be a problem for much longer, but at the moment it’s quite frustrating. I have my savings account with Dollar Savings Direct, and while Mint has recently added a link and form with which to add accounts from that bank, the link doesn’t work. (The error seems to have something to do with the way the Dollar Savings login page works, which is fairly complicated.) Not being able to add one of your accounts to Mint really screws up its functionality because you’re missing a big part of the equation.

There are two other malfunctions on Mint that are troubling as well. One is that, in my experience at least, sometimes the category labels you attach to individual transactions revert to default. I don’t know why this happens, and it doesn’t happen often, but when it does it’s definitely aggravating. The second is that there seems to be a fairly sizable delay in the display of transactions; transactions will show up on the online banking pages of my account institutions as much as two days before they show up on my Mint page.

This last complaint is more of a suggestion for added functionality than a gripe about existing malfunctions. As I mentioned earlier, several factors can throw off the pie chart, including returns and refunds. This problem could be solved easily by offering an option to factor in categorized “income” (or have it done automatically). It would also be nice to have an option to view a pie chart of average monthly spending by category and to be able to view or exclude selected categories from the mix.



[1] See the specific suggestions and how-to’s for each type of account on TiredofBeingPoor.net

Another Tip for Tax Season: EZ ≠ cool

For a few years at the beginning of tax season the IRS would mail me the federal 1040EZ form, and for lack of a known alternative I’d fill it out and send it back. And chances are if you’re relatively young and don’t make much money, then the IRS mails you a federal 1040EZ form to file your taxes as well.

The form’s titled EZ because using it to file is just that, easy--the 2008 form is barely half a page worth of accounting. Does the IRS think the cool abbreviation is right up young people’s alley? Who knows? But for young taxpayers--especially college students--who’d rather get tax season over with, with minimal thought, the quicker the better, the 1040EZ might be a little too easy.

Because if you’re using the EZ form by default, you might be overlooking some major tax adjustments, adjustments which could lower your gross income and possibly get you some decent cash.

Take for instance the Student Loan Interest Deduction. Every penny you paid in interest for a year on your student loans can be subtracted from your gross income. But you won’t find that tidbit on the 1040EZ form.

Take, for another example, the Tuition and Fees Adjustment. Every penny you spent on college tuition and college fees in one year can also be subtracted from your gross income, even if that tuition was covered by loans. Again, you’d be none the wiser if you were adhering to the 1040EZ form.¹

Try instead form 1040 or the 1040A. The 1040 is for you if you plan to “itemize your deductions,” as the IRS calls it. Use the 1040 only if your qualified expenses add up to more than the IRS’s standard deduction.² The 1040A, on the other hand, is for you if you don’t want to itemize deductions, i.e., if the IRS’s standard deduction is more money than all of your qualified expenses. And although the Student Loan Interest Deduction and the Tuition and Fees Adjustment I mentioned are certainly deductions from your income, the IRS lets you use them while still claiming the standard deduction, and you can do so with the 1040A. In other words, if you pay tuition or student loan fees, use the 1040A.

So if not paying more in taxes than you owe is worth it to you, and if the possibility of a refund is worth it to you, try researching the different tax forms that are out there. You aren’t required to use the form the IRS sends you, if the IRS sends you anything at all. Most forms can be found at the public library, and all can be found and downloaded online. Compare the 1040EZ to the 1040A and the 1040³. You might be surprised at what you find.


[1] Also see “Hope and Lifetime Learning Credits” in our January 30, 2009 post “Tax Hacks, Part 1: Give yourself some credit,” for more information on tax breaks for educational expenses.

[2] See the 2008 rates of standard deductions.

[3] For an overview of and instructions for all 1040 forms, see the IRS’s “1040 Central.”

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Take Care of Your Sweetheart

Image by Keith Barlow via Flickr

What to say about Valentine's Day? It feels like it's impossible to get it right. Either the gift you get is too much, or too little, too serious, or too playful. The problem is that you're not just giving a gift to your significant other; in order to be successful you have to give them what they would give themselves.

Disclaimer: TAiMH is not a dating website is not liable for any slapped faces or botched marriage proposals.

So, how to do Valentine's Day on a budget? First of all if you're going to splurge, this is not a bad time to do it. I know that's not what you expect to see here, but let's be honest, everyone wants to be treated well. That being said, some of the nicest, most heartfelt moments are the ones that don't cost a penny.

Out on the Town

This year Valentine's Day is on a Saturday, which means that you have the entire day at your disposal. Go out to lunch instead of dinner, go for a long walk in the afternoon, or cuddle up on the couch with some cheesy movies and a bottle of wine.

If the two of you don't get out much, going to a show (concert, play, dance performance, etc.) can be a lot of fun, but a lot of events can be really expensive so think smaller. Community plays, or local bands, are a great, affordable way to have fun and support your community. Or—if you want to send the signal that you'd like to see more of someone, signing up for dance lessons together can be a lot of fun and the cost is spread out over time.

Heart-Shaped Box

If your lover likes sweets make them something yourself. Chocolate dipped strawberries are incredibly easy to make at home, all you need are strawberries, chocolate chips, and a microwave. Even better, make them together; you might need someone to lick that extra chocolate off your fingers.

Roses are Red, Violets are Blue...

How well tuned is your partner's bullshit meter? If they're not likely to laugh at you and you've got a passing understanding of the English language, writing them a poem, or if you're musical, a song can be a sweet romantic gesture.

Diamonds (even old ones) are a Girl's Best Friend

If you want to get out the big guns, there are two kinds of gifts that will make a big impression, both of which are as close to free as great gifts come. First, things you owned as a child. Guys, do you have a childhood teddy bear hanging out in an attic somewhere? That's all I have to say about that. Second, and this can get dicey depending on how crazy your family is, heirlooms. A pair of your grandfather's cufflinks or a grandmother's broach can have much more meaning and sentimentality than something shiny and new. Just be sure to wrap it up in a nice box, and get them professionally cleaned if need be. Almost any jewelry story will clean something for you, some have a nominal fee, but a lot of the time it's free. Don't limit yourself to jewelry—
depending on your significant other, a well-loved cardigan or any cherished item can be a hit.

Remember to have fun and most importantly enjoy whomever you're with, partner, lover, or friend. Happy Valentine's Day!

Blogger Love News

Jane's post "Going Out Without Going Broke" scored a place on a recent roundup over at the Pimp Your Finances blog.

Tax Hacks, Part 3: Self-Employment Taxes

If you are self-employed, whether you have another job or not, you have to pay Self-Employment (SE) taxes by filing Schedule SE with your 1040. SE taxes include social security and Medicare tax, just like those paid by everyone else, but you're responsible for "withholding" them yourself. (For tax purposes, you are only self-employed if your net earnings (profit) from your self-employment are $400 or more per year.)

For the purposes of this post, we're going to focus on sole proprietorships, businesses owned and run by only one person. As a sole proprietor, you can choose to figure and set aside taxes for every "paycheck" or payment you receive for your services. These are your estimated taxes, and they must be paid quarterly. Yes, that's right. If you wait until the end of the year without making quarterly IRS payments, you could get slapped with a sizable tax penalty. If withholding tax from each "paycheck" isn't practical (e.g. you receive many small payments rather than lump sums), you can simply calculate your taxes on your quarterly earnings.

Sole proprietors also need to file Schedule C, Profit or Loss from Business, which is part of Form 1040. Alternatively, you can file Schedule C-EZ if all the following are true:

• your expenses are not greater than $5,000
• you have no employees
• you have no inventory
• you are not using depreciation or deducting the cost of your home

In order to be able to file taxes properly (and get the most $ back), a sole proprietor needs to keep immaculate records and hold onto them for at least four years. (The IRS has this thing called burden of proof. . . .)

New Ventures
If you're newly self-sufficient, i.e. have been self-employed for less than a whole tax year, you'll be operating on a short tax year the first time you file. You can find more info on short period tax returns and other topics relevant to new business owners on the IRS's page on Starting a Business.


More Resources:
Publications and Forms for the Self-Employed
Self-Employed Individuals Tax Center
Business or Hobby? Answer Has Implications for Deductions

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This Just In...California to Pay Debts with Monopoly Money

Ever wish you could pay all of your bills with IOUs? Apparently if you’re the State of California you can do just that. California Controller John Chiang announced last Friday that the state will be suspending payments due to a lack of funds and that if no money is available by March or April California will be sending IOUs in lieu of tax refunds, welfare checks, disability checks, aid for the needy and disabled, and student grants, among other payments.

So, if you live in California that sucks. If you live in one of the other 49, it might be a good idea to file your taxes sooner rather than later.

Source: LA Times http://www.latimes.com/news/local/la-me-budget17-2009jan17,0,4472460.story

Tax Hacks, Part 2: More Credits

Qualified Retirement Savings Contribution Credit aka "Saver's Credit" (nonrefundable, a percentage of up to $2,000 in eligible contributions). To qualify for this one, you have to have been at least 18 years old on 12/31/08 and have an AGI (adjusted gross income) of less than $26,500 (again, assuming you're single). You also cannot have been a full-time student for five or more months of 2008.

Qualified contributions include those to an IRA (traditional or Roth), a 401(k) or 403(b), a 501(c)(18)(D), or a governmental 457, SEP, or SIMPLE. You may not include in this amount any "rollover" contributions.

The amount of your credit is computed by multiplying your total contributions by the percentage corresponding to your AGI. You can find this percentage on Form 8880, which you will need to fill out in order to claim this credit.


Limitations on Nonrefundable Personal Credits
All three of the credits we've covered thus far are types of nonrefundable "personal credits." For 2008, the limit of nonrefundable personal credits is your regular tax liability plus your AMT. This is good. It means that your nonrefundable personal credits can offset both your regular tax liability and your AMT (alternative minimum tax).


Earned Income Credit (refundable, max: $438)
Assuming you are single and have no children, the qualifications necessary to claim this credit are as follows:

1. You must be at least 25 years old.
2. Your total investment income must be less than $2,950.
3. Your AGI must be less than $12,880.

The EIC depends entirely on income. You can figure your EIC using the worksheet in the instructions for Forms 1040 or 1040A, whichever you are filing.

For more information about the EIC, see IRS publication 596.



Alternative Minimum Tax
What is this minimum tax business all about? Basically, the AMT laws exist so that high-income individuals don't get away with not paying their share of taxes even if they find a way to adjust their tax liability to next to nothing. Fortunately, AMT doesn't affect most of us because it only applies if your AMTI (see below) is above $42,500.

After you calculate your regular income tax liability, you should then calculate your tax liability under the AMT system; this amount is called your Tentative Minimum Tax (TMT). Your TMT is determined by a series of calculations (additions/subtractions of certain allowable exclusions, credits, etc.) upon your taxable income to find your Alternative Minimum Taxable Income (AMTI).

If you're concerned you may be subject to the AMT, the IRS has a handy AMT calculator that does all the calculations for you. (You need to have already filled out your 1040.)

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