It’s no secret that there are federal tax credits available for many people who are looking to buy a home.  Both first-time and non-first-time homebuyers now can play the game.

The people who are among most aware of the credits, of course, are people wanting to sell a home.  It’s not difficult at all to find For Sale signs also advertising the $8,000 tax credit, and, as I may find out soon, it will probably enter the conversation at the negotiation table.

Especially if the initial offer is a lowball offer:

“Why, Mr. M.B. Hunter, that offer is awfully low. Perhaps you aren’t aware of the $6,500 tax credit you and your lovely wife are eligible for, as qualifying second-time homebuyers?”

To which I can reply:

“Ahh, yes, Ms. Realtor®, that’s very true!  But if my job takes me away from the area and I have to move within three years, then we have to pay that $6,500 back!”

(I’d like to claim credit for thinking of this, but it was actually from a financial planner I know.)

Actually, as of right now, I’m just assuming that I’ll have to pay it back under that circumstance.  The law is new enough that IRS Form 5405 doesn’t reflect the situations of the long-time homeowner.  But if I were a first-time homebuyer (taking advantage of the $8,000 tax credit) then I’d definitely need to be paying that back if I moved within three years of the purchase.

Just as it’s a bad idea to mention your trade-in when you’re buying a car, it’s a bad idea to let tax credits enter real estate negotiations.  Why?  Because the tax credits only enter the equation after the sale, not before. It’s a red herring.  Additionally, it’s unlikely that the bank will take potential tax credits into account when they underwrite the mortgage, because it’s a bit of a financial wild card.

Happy lowballing!

Liz Pulliam Weston had an article today on the new tip-jar economy — that new business practice of putting out the tip jar, raising the “customary” tipping percentage, and adding other tip-like fees that are no longer discretionary, but mandatory.

Her take regarding the tip jars was, in essence:  Ignore the tip jars at businesses where the employees shouldn’t be tipped as a matter of custom, unless you have a good reason to tip, such as really superior service.

I have a few more thoughts on why they’re coming out in force:

• Tip jars and “mandatory gratuities” are a way of raising prices without looking like they’re raising prices. The massage parlor can still advertise prices of $35 for a massage, but tack on a mandatory $10 tip to raise the actual cost of the massage to $45.
• Tip jars are ways of paying employees more without actually paying them more. Employers have fixed costs for labor, including wages and mandatory taxes for Social Security, Medicare, and unemployment.  By setting out a tip jar they are relieving themselves of the burden of providing a raise to their employees.  (All other things being equal of course:  They could very well lose business because customers feel put upon.)  Dishonest employers that just tell the employees to divide up the tip jar at the end of the shift without counting it themselves are also getting out of paying these taxes on the tip income (which they are obligated to pay under most circumstances).  Oh, and it leaves the employees on the hook for keeping track of it themselves, as they are obligated to pay tax on those tips.
• Tip jars are a gentle form of social conditioning. People used to pump gas for us.  Now it’s rare when they do (unless you live in New Jersey).  Just like “20% is the new 15%” pretty soon tip jars will be acceptable just about everywhere — and employees will give you a disapproving look if you don’t chip in.

Ultimately, though, I have to support a business’s freedom to do this kind of thing.  If the business were my livelihood, I’d do whatever I needed to (within the spirit of law) in order to keep things going.  A tip jar buys a little bit of time for a business owner.  It isn’t quite as noticeable an affront as raising prices, but it’s not unnoticeable either.  It’s more a sign of the times:  The costs of doing business are going up, and business volume is going down, so do what you can.

I just mailed out my 2008 taxes this past week.  I really hate doing taxes.  It costs me money, it hangs over my head, it’s a pain in the butt.  And they’re finally out the door.

My mother-in-law today recounted a statement that the pastor at one of her previous churches made.  It was with regard to those things in life that we’ll do just about anything to avoid.  What he said was this:

If you have a plate of ugly frogs in front of you, eat the ugliest one first.

Somehow I knew instantly what she was talking about.  Frogs aren’t the best eatin’ anyway, but ugly frogs?  Oh man.  My taxes were the ugliest frog on my plate, and I let it sit there until it was really good and smelly.

But I still had to eat it.  It really would have been a lot better had I just gotten that ugly frog off of my plate in, oh, February.

Taxes may not be that big a deal for some people.  It could be any number of things:  cleaning out the gutters, sitting down to plan a budget or retirement, going to the doctor or dentist, doing inventory … any stuff that has to get done, but can be put off temporarily.  It’s rarely a good idea to let such tasks sit on your plate, because it takes its toll mentally.  It constantly reminds you that it’s there, and robs you of some of your attention, so why let it?

Just eat those ugly frogs, man!

Bargaineering addressed some tax consequences of the CARS (”Cash for Clunkers”) rebate program for Maryland.

Virginia’s sales tax consequences are similar to Maryland’s:  Sales tax is assessed on the full price, not the price after being reduced by the voucher.  In this way it’s similar to the way grocery store coupons are handled some places.  “Just because the manufacturer is offering 75 cents off doesn’t imply that I have to tax you less.”

Other states assess tax on the post-rebate price.

It’s already clear that the rebate is not treated as income at the federal level, so the open issues will be how the rebate is treated at the state and local levels.  What happens at the state and local levels will depend on how the individual states’ tax laws are worded, and whether the legislatures enact adjustments to what is already on the books.  (Here is a running chart of where the states stand now.  Maryland isn’t mentioned in this chart, but Jim’s right.)

So, if you took advantage of the Cash for Clunkers program, any of the following could be true:

• You’ve already paid sales tax on the voucher. (This is the case in Virginia and several other states.)
• You didn’t pay sales tax on the voucher.
• You might pay state income tax if your legislature enacts an add-in.
• You might not pay state income tax.

In short, you might be looking at a few hundred dollars either way if you took advantage of the program, but you won’t know for sure until you do your 2009 taxes.  So, enjoy your new ride and don’t worry about this now.

You probably guessed what I’m going to write about from the title and the date:  Income Tax Procrastination.  It’s kind of a deadline myopia.

About the only thing that’s pleasant about filling out tax forms is the realization that I have income from which to pay taxes.  Beyond that, I’m not really sure why I put this ritual off as consistently as I do.  Not a whole lot motivates me to get the stupid returns in.  Not even the realization that every day I put it off costs me a little bit of money.  Maybe it’s just a general lack of discipline.  I don’t know.

At least I have some assurance that I’m not alone.  The most popular form at the moment from the IRS Website is Form 4868: Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.  It’s even more popular than Form 1040.  (The other forms I’m filling out are three copies of Form 7004: Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, one for each of my LLCs.)

I may be able to get away without filing extensions for my Virginia returns.  The state income tax isn’t due until May 1st, and the pass-through returns are granted automatic extensions.

Oh well.  There’s always 2009.

One of my relatives would give away a lot of money — and give away a lot of her labor without pay.  This isn’t a bad thing by itself, but one of the motivations she had was that she was afraid of being put into a higher tax bracket.  It wasn’t the only reason, but it was one that she mentioned more than once.

I told her that a little extra income wouldn’t give her a huge extra tax bill because of getting bumped into the next tax bracket.  The US Federal Income Tax is a progressive tax, meaning that higher earners pay a larger percentage of that income in tax.  The tax brackets, though, are called marginal tax brackets.  Here are the ones for 2009:

This means that the it’s only the portion of income above the threshold amounts that is taxed at the given rate.  As an example, if I’m filing singly and had an adjusted gross income (AGI) of $40,000, I’d be in the 25% tax bracket, but my actual tax is far less than 25% of $40,000.  It would be $6,187.50, or 15.4% of $40,000.  The reason is that only $6,050 of my income (the amount over $33,950) is taxed at 25%.

What could cause a big difference in tax for a small amount of extra earned income is crossing the threshold for the Alternative Minimum Tax.  The rules are fairly involved for determining whether this tax applies, but when it does, the tax bill can be substantially higher because a lot of exemptions and deductions are disallowed.  This means a jump in the taxpayer’s AGI as these exemptions and deductions are added back in, which means a higher tax bill.

In a lot of cases, though, the tax difference in earning an extra few thousand dollars is hardly noticed.  So don’t let that be an excuse not to earn more. Keep on top of those income streams. 

When you’re filling out your taxes, it should be taken seriously.  They’re not a laughing matter. The IRS is kinder than it used to be, but it still can make its presence known if you try to get away with something, intentionally or otherwise.

One civic organization I belong to had to file a tax return for last tax year.  Our treasurer is meticulous, and he tried as best as he could to get answers to his questions regarding the tax returns we needed to do.  Despite his best efforts, he wasn’t entirely comfortable with all of the numbers.  As treasurer, he is personally liable for any consequences of filing an incorrect return.  I remember getting really hot under the collar at a board meeting when other members dismissed this as the treasurer’s problem and were reluctant to allow him to get professional assistance.  (He eventually had it looked over.)

Your tax return isn’t something to be cavalier about.  Jeff Schnepper’s article, 8 types of income the IRS can’t touch, is a good article.  But after listing a number of types of compensation from your job that weren’t taxable (or at least didn’t hit your adjusted gross income) he added a little phrase that might encourage people to take some liberties:

You get the idea.

Wrong advice.  What if I don’t “get the idea” and make a mistake and don’t claim some income that I should have, and the IRS finds out?  Then I’m in trouble.

If you don’t understand everything you’re putting on your tax return, shell out the money to get it looked over by a competent professional.  It really isn’t worth it to guess.

The winner of the first TaxCut giveaway, chosen randomly by random.org, is Kathryn! The past three years she’s gifted her children’s accounts with a match for what they earned in the family business.  All parents should encourage thrift like this.  Congratulations!

Since we’re approaching tax time I’ll give away the other two rapid-fire.  I’ll mimic Nickel and Jim and make this a Twitter giveaway.  Again, this is for a copy of TaxCut Premium + Federal e-file.  You may enter through Monday, March 9th, 2009, at 9:00 PM EDT. Here’s the procedure:

• Follow me on Twitter if you haven’t already.
• Tweet me your best financial tip for one entry.  I’ll include the good ones in a future post.  Include #mbhtc so that I can track your entry.  The full tweet should look like something like this:  @mbhunter #mbhtc <INSERT YOUR FINANCIAL TIP>
• Spread the word for another entry.  Again, include #mbhtc so that I can track your entry.  It should look like this.  The URL at the end points to the post you’re reading now:  #mbhtc Tweet your best financial tip to win a copy of TaxCut: http://tinyurl.com/chqwdu
  
• There will be two winners.  One will be chosen randomly from the valid entries.  The other winner will be the one that submits the best financial tip.  What will constitute the best financial tip?  My wife will choose!  That way it’s out of my hands!
• Again, you must enter by Monday, March 9th, 2009, 9:00 PM EDT (Eastern Daylight Time).  I will contact the winners via Twitter.

Though I don’t anticipate any issues with you receiving the product should you win, I’m not responsible if something happens.

Oh, and have fun!

The folks at H&R Block have generously offered three free copies of TaxCut Premium + Federal e-file to give away to my readers!

Here is some information provided by the sponsor for TaxCut Premium + Federal e-file:

• Report investments, dividends, retirement income and home sales.
• Includes videos that help explain specific situations such as home office deductions and the Alternative Minimum Tax.
• Supports Schedule A for itemizing and Schedule C for self-employment.
• Only from H&R Block: One Ask a Tax Advisor session included. An H&R Block tax professional can help answer your tax question via a 1-on-1 phone or e-mail consultation.
• Only from H&R Block: Worry-free Audit Support® offers guidance plus an H&R Block enrolled agent to represent you in the event of an audit.

So, you want some? Here’s what you do:

• Just comment on this post and you’re entered!  One entry per person.  The winner will be chosen randomly.
• Optionally, tell me your favorite tax-time ritual. It can be practical, funny, weird, sweet, whatever.  (But keep it clean!)  I’ll read them and list my favorites in a future post.
• The first giveaway will be over when I announce the first TaxCut winner.  Then I’ll get the next giveaway rolling!
• You must leave an e-mail address in the appropriate field in your comment if you want me to contact you to tell you that you’ve won!
• At that point, I’ll ask the winner for mailing information so that I can pass it on to the sponsor, who will mail the product to you.  I presume this will be a smooth process but I assume no responsibility if it doesn’t reach you for some reason.

Enjoy!

A jumbo-jet-sized $787 billion stimulus package was signed into law on Tuesday in the US by President Obama.  Since it’s tax season here are some of the tax-related implications of the stimulus package:

• A tax credit of $400 per worker or $800 per couple, coming over the next two years, either through decreased withholding or through checks.
• A reprieve on the Alternative Minimum Tax “snare.”
• A $2,500 tax credit for college tuition over the next two years, which is phased out for high-income households.
• An increased child tax credit for low-income families.
• An expanded Earned Income Tax Credit for larger, low-income families.
• A modification to current law that changes an $8,000 loan for first-time home-buyers to a credit.
• A new deduction for sales tax paid on new cars, light trucks, recreational vehicles and motorcycles through the end of the year.
• Decade-long tax incentives for various renewable-energy expenses and expenses aimed at increasing energy efficiency.
• An accelerated depreciation schedule for certain business equipment purchased this year (this allows the equipment to be written off faster than normal, giving more tax savings this year).
• A tax increase for banks involved in bank mergers.

I won’t comment on all of these but I will on a few:

• The $8,000 credit is good for first-time buyers.  Prices are better than they have been over the past few years.  I’d still look for a great deal from a distressed seller — there are plenty of those — and make the credit the icing on the cake.  Please be wary of using the tax credit as an excuse to over-extend yourself with a house.
• Making new vehicle sales tax deductible sounds like a way to reduce some of the excess inventory at the big three.   If the sales tax is 5% and you’re in the 20% tax bracket, this is only a 1% savings on the vehicle — at most a few hundred dollars.  A recent-model used car will save you far more at the outset and may do just as well for you as a new car.  Buying used when it makes sense is the best money-saving tip I can give.
• The tax increase for the banks is estimated to be $7 billion over 10 years.  That’s $700 million per year, for all banks involved in mergers.  This doesn’t seem like it would hurt that much?

Anyway, put your stimulus money to good use when it comes!