Why AmeriCorps?

I started this blog shortly after I started AmeriCorps, in part to chronicle my year or service and in part to regurgitate what I was learning.  I figured this was important stuff and more people need to know about it.

But let's reflect on my AmeriCorps year itself.  The pay was minimal, the rewards: great.  Good thing I was straight out of college.  I didn't completely notice how poor I was, because the stipend I received was more than I was making in college! Now that I actually make a normal salary, I feel very grateful for my current job and can really appreciate its value.  With that out of the way - I really enjoyed my year of service for many reasons.  Not only did I learn a lot about personal finance at SparkPoint Marin but I made great friends, learned how to live on my own, and came away with it equipped with great transferrable skills and experience.

At SparkPoint Marin I learned how to budget, to save, and to file taxes.  Now I volunteer every year during tax season to help people file their taxes and file my own for free as well!

Here are some of the resources I learned about that could be useful to you too:

• 211 - Call it and they will help you find what you need. 
• Health and Human Services 
• Food Banks
• Women's Initiative 
• Get Money Smart 
• Consumer Credit Counseling Service
• Low Income Home Energy Assistance Program

Since we were a pretty small team I definitely bonded with my co-workers as we all embarked on our own financial planning while developing a program from ground zero that would benefit the larger public.  I also made friends with other AmeriCorps people stationed in organizations around my area.  The great thing was, we could all go out and be cheap together, because none of us could afford anything too fancy! When everyone around you is financially conscious, it makes it really easy to do the same.  It's a great built-in support system. 

Lastly, I finished my year empowered and ready to take on more challenges.  I came away with marketing skills, organizational skills, enhanced customer service skills, confidence in voicing my opinions and sharing ideas, and lastly, the ability to analyze programs, find the inefficiencies, come up with solutions and implement them. 

I definitely recommend it to anyone and everyone.  Not saying it was easier finding a job afterwards, but I did have the skills to actually land one.  Finding a job will almost always take time, effort and lots of motivation. 

Why You Should Get a Roth IRA

I decided to write a post on this, because I realized last month that some people are still on the fence about it.  Specifically, my boyfriend, who just got hired on by Apple Inc., was trying to decide what type of retirement plan to set up when he asked me to explain the difference between the Roth IRA and the traditional Individual Retirement Account.  You may have heard that each type of account works best for certain individuals: namely, the traditional works best for older, high income people who will benefit from the tax reduction and the Roth works best for young people, who do not have a high tax rate to begin with... But there's more! 


It's not black and white
Either way you're going to have to pay taxes on the money you're putting away.  It's just a matter of deciding when.   For young people OR people making under about $75,000 it would not be that beneficial to be contributing to a traditional account, because the tax difference is not that big.  It may seem big right now, because you're paying it.  But, think about when you're retired and have no more earned income AND you have to pay taxes to use your retirement savings. That sounds worse to me.  Plus, your tax rate will most likely be higher then, then when you put the money in initially.  I mean let's hope by the time you retire you'll be in a higher tax rate than when you started your career, right?!   


You don't have to choose
I would say why not have one of each? If you rely on the tax savings currently, and could not face paying more taxes, I understand.  But could you start a separate Roth IRA (there's a $5000/year limit anyway) and start contributing to that as well? That way you will have a bunch of money available to you, tax free, when you retire.  This is especially great for stay-at-home spouses, who may be depending solely on their partner for retirement savings.  Starting a Roth for yourself is perfectly acceptable and a great way of protecting yourself. 


Other benefits
Besides the tax issue there are other reasons Roth IRAs, specifically, are cool.

• no penalty to take the money out early if you have good reason. Those reasons are: 
• buying a house
• medical emergency 
• no penalty to take your principal contributions out, penalties only apply to money you earned from interest
• protected funds from most public benefits programs (will not count towards your asset limits), but you would have to check each one individually
• safe place to practice investing - well as safe as investing can be! But at least you won't have to deal with tax issues around capital gains/losses. 

If you have basic questions regarding Roth IRAs such as who is eligible, when you can take the money out, what type of Roth you want, etc. check out this useful overview: You Need A Budget - Roth IRA

I'll follow up on this, with some extra tips on Roth IRAs once this is digested. =)

Relationship between Accounting and Personal Finance

It's the norm these days to expect your personal financial advisor to be a CPA. But, why is that?

Let me preface this with the fact that I enrolled in an online basic accounting class and am half way through, earning an A right now (!).  From what I've learned, so far, the stuff you learn to become a CPA doesn't have a lot to do with managing personal finances....Maybe that comes later, but what I've been learning is how to be accountable to investors and the government if I ever have a business and want investors or lots of deductions.  Will that change in more advanced classes?

You need to know A LOT about accounting to pass the CPA, but not to manage your personal finances (unless you make so much money you run multiple businesses within your net income, and thus need to account for it).  Personal finances seem so daunting and highly complicated, especially when you get closer to tax season, but really you don't have to be a CPA or an accountant to figure it out.

The only thing I would seek advice for would be for investment or retirement accounts.  If you don't know what you're doing and you have a significant amount of money to invest or manage, it would be good to have someone look it over. Having said that, professional investors don't actually know more than you do.  They cannot predict if the stock market will plummet tomorrow.  If that's the fear holding you back, an investor may make you feel more confident, but in reality cannot predict the future.  Secondly,  I know a couple professional investment bankers and I don't think they are CPAs.

So that leads me back to the original question.  Do you need a CPA to help you manage your finances? Or maybe just some help getting organized?

Double your Tax Refund by Preparing

I mentioned earlier that I would write a post focusing on tax tips for self employed people. Actually, some of these tips could apply to everyone.

Awesome ROI

Let me start off with telling you why it’s so important to be prepared to do your taxes when you’re self-employed.  A study by the Foundation Communities in Austin Texas & CFED saw that there was a quite clear positive correlation between self—employed taxpayers who were prepared and the amount of their refund.  As you can see by the chart next to me, the extremely prepared received up to $1158 more in tax refunds than those not prepared.  Check out the Center for Economic Development’s blog post on it.

So let's get you prepared to get that big refund!

Really the main take-away from the study is to come to your tax appointment having done you due diligence.  Knowing what to track and what to prepare will ensure that big check.

First thing you can do is track your mileage.  Even though the miles you use to commute are not deducted, the miles you use to go from one work to the next do! Depending on how your business is set up that could be a lot of miles and having an accurate count will benefit you.  I know I would have a hard time estimating how many miles to deduct for a whole year on the spot...

Keep track of ALL business expenses.  Even though you won't be able to deduct everything, it will be better to have all the info available than (again) try to remember how much you spent on replacing that office chair last year....Imagine you forgot about buying it, and you don't deduct it! How horrible!

Tricky deductions

Most deductions are pretty straight forward. Cleaning supplies, mileage, machinery, etc. As the IRS says, business expenses need "to be deductible, a business expense must be both ordinary and necessary (D. Stoica's Blog).  Some are a little less straightforward.  For example, deductions for use of your home as an office are only applicable if you have a dedicated space in your home that is labeled the office, and that is NOT used for personal use.  If you meet these conditions, go fot it!  Travel and meals are also great to deduct...if they meet the requirements.  Travel expenses such as hotel, flight, car, and even dry cleaning is 100% tax deductible, but meals are only 50% tax deductible - while traveling.  Meal expenses while at home have a different set of rules. You can only deduct meals (while not traveling) when:

a. "Entertainment took place in a clear business setting, or 

b. Main purpose of entertainment was the active conduct of business, and you did engage in business with the person during the entertainment period, and you had more than a general expectation of getting income or some other specific business benefit." (IRS)

For a list of common deductions check this blog by Bankrate.com.

Should I Itemize Deductions this Year?

Ever wonder what the actual effect of a charitable deduction really has on your taxes? Does it really make a difference? When and how?

You might wonder what that has to do with itemized deductions. Well everything actually. While charities like to advertise the tax deduction benefit to incentivize you, this benefit only applies in certain cases. It only decreases your tax liability when you're itemizing your taxes.

Charitable deductions are one of many items you can deduct if you choose to itemize. However, for most people the standard deduction will end up being higher. Before you make any decisions it’s good to know what the actual standard deduction is.

2011 Standard Deduction:
· Married, Filing Jointly: $11,600
· Head of Household: $8,500
· Single: $5,800
· Married, Filing Separately: $5,800
· Blind or over 65 and married: $12,750
· Blind or over 65 and single: $7,250

As you can see these deductions are pretty high and unless you've been tracking your expenses all year or had a major expense, you will be better off taking the standard. So now lets look at the two major reasons you should consider itemizing:

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1. High Medical Costs
Medical expenses are tricky. The problem here is that not all expenses count and you can’t deduct dollar for dollar. Medical expenses you can deduct include: insurance premiums, prescription drugs, and treatments that are not covered under insurance. Secondly, you can only deduct expenses that exceed 7.5% of your AGI. That means, for example, if your AGI is $40,000, your “7.5% limit” is $3000. Once you add your expenses, you need to subtract $3000 and that’s how much you can actually deduct. Check the IRS website for a more detailed explanation of both requirements.

2. Mortgage Interest
The home mortgage interest deduction is a lot simpler to figure out. Basically, if you pay interest on “loans to buy a home, home equity lines of credit, or construction loans,” you are legally liable, and it’s only on your main home and a second home you can deduct the interest paid (Taxes, William Perez).

Very rarely will it be worth it to itemize if you do not have one of these two expenses, but here is a good list of deductions you can include.

TIP: if you realize you have enough deductions and you wan't to itemize, start gathering your documents and remember to keep track of your expenses for next year!

Want to eliminate the stress of filing taxes?

Now that I'm in my second year of VITA (Volunteer Income Tax Assistance a program of the IRS) I feel like I've observed and learned enough to decipher what a person can do to make the tax return process a whole lot easier.

BE ORGANIZED
The best thing you can do to make filing your taxes a more painless experience is to come organized. This is especially important if you are a small business owner or filing itemized deductions. If you have a small business, keep track of your receipts, track your mileage, and add up your income before you get to the site. The same goes for people filing a schedule A - itemized deduction. It’s ok if you don’t know exactly what you can deduct and what you cannot, but if you’re planning on using it, keep all the receipts and organize them. A tax preparer’s worst nightmare is a client walking in with a shoebox of papers and receipts, expecting the preparer to go through each and every item  with the client.

If you want to be completely prepared (which will be beneficial to you, because the return will have a higher chance of being correct – there’s actually a study on that), I will write a second post on how to determine whether or not to file itemized deductions and a third post on tips for small business owners.

BRING LAST YEAR’S RETURN
If you want to hurry the process along, bringing your previous year’s taxes is the best way. Even if you’ve had many changes in the past year, having last year’s return will give the preparer an idea of what will need changing. It can trigger more questions to make sure you’re filling correctly and can answer questions about this year’s taxes (such as: was your EITC disallowed last year? did you itemize last year? did you claim dependents last year?) These questions may sound simple or obvious to you now, but often time people start second guessing themselves or maybe someone else answered them the year before. Oh and another reason you should bring last year’s return: sometimes the way you write your name or the way it is written on the Social Security card does not coincide with your taxes. Thus, brining last year’s taxes could prevent a reject and get you your refund faster!

GET A BABYSITTER FOR THE KIDS
Seriously, get one…or at least bring something VERY entertaining for your kids (age 0-6). Having children at the tax site brings a high level of stress to EVERYONE.  I realize sometimes it’s unavoidable, but if there were any way you can leave them at home, everyone would appreciate it. When neither the client nor the tax preparer can hear each other over a screaming child, or they are distracted because the child is making photocopies of their hand, it will take a lot longer and become tiring very quickly.

LAST THING
If you make around $50,000 or less, go to a VITA site! It's completely free and a volunteer, trained by the IRS, will be taking you through the return. If you live in the Bay Area, check out earnitkeepitsaveit.org for a site near you.  No one will be charging you extra fees for a refund or an extra form that needs to be filled out. All sites file electronically so you will be able to get your refund fast, and most sites are nonprofit i.e. really friendly people who are most likely going to offer you other free services while you’re there!

Having faith in the stock market

Here's one of many reasons I have been slacking on my Roth IRA savings: I lost my faith in the stock market. I had spent all the time exactly a year ago researching different stocks and mutual funds to invest in and actually started finding some stuff perfect for me and my investment risk level. But I lost momentum, you can probably guess why!

there's no way you get that kind of return anymore...

So anyways, I have been feeling guilty about not saving regularly in my Roth IRA for a while now, but I invest because I felt conflicted.  All the news this past year about the unstable stock market was NOT encouraging. But then something, well someone changed my mind. I learned from a CPA that when it comes to your retirement account, you're looking for long term growth not the day to day fluctuations. So you invest regularly in order to average out the fluctuations. Instead of investing $1000 once a year when you think the timing is perfect, you invest $100 a month and if some are during bad times, others will be at good times so things eventually even out. So to cut things short, I decided to start an automatic payment plan to my Roth IRA. Finally, I am surmounting the courage to invest regularly!