Reader Mailbag: Taxes

Today is the official due date for federal income tax returns in the United States. It’s also the due date for the first quarter of estimated taxes for those of us who are self-employed or run small businesses.

Thus, for a lot of us, April 15 is the most expensive day of the year. It certainly is for us – we had to pay in on our returns and pay the quarterly estimated tax. Ouch. It always hurts to watch that much money go away.

Not only that, the whole process is overly complicated, with all kinds of rules and deductions and exceptions. Frankly, if one’s taxes are even remotely complicated, I don’t know how a person would do them in reasonable time without a tax preparer or without tax software (we used TurboTax).

But enough about that. Here are some good ol’ fashioned reader questions.

I’ve been a long time reader and learner of your blog and I was wondering if you ever posted an update regarding high yield savings accounts. I currently only generate 1.10% on my ING Direct account now, far below what they used to give. Is this still the most effective way to save for my ROTH IRA contribution? I am 23 and currently making $35,000 at a tech startup with stock options. Basically I was wondering if you had an updated thought on savings accounts.
– Anthony

The yield on those online high yield savings accounts isn’t anywhere near as good as it used to be. Unfortunately, there isn’t really a greener pasture elsewhere – no accounts are offering above 3% at this point and the only ones offering anything much at all are doing it promotionally.

The reason for this is our friends at the Federal Reserve. As their rates go down, banks lower the rates that thy offer to customers on their savings accounts. Most brick-and-mortar banks still just hold their rates really low – at 0.5% or so – no matter what the Federal Reserve does. Online banks, though, have to keep their rates lower than what they could simply borrow at will at the Federal Reserve rates, otherwise why bother with the expense and hassle of offering savings accounts?

Don’t worry, as the economy takes off, most such banks will begin raising their rates again.

On one level, it’s kind of crazy. When the economy is bad, the interest rates are low but more people have the initiative to actually save. When the economy is good, the interest rates are high but fewer people have the initiative to save.

My 31-year-old boyfriend is currently at a place in his career as a graphic designer where he either needs to find a new workplace or take a break and get his B.A. He is the manager in his current position but doesn’t enjoy being a manager and did not get a pay increase for his most recent promotion. As a graphic designer, he doesn’t need a B.A. to get work but would like to get his degree for job security and personal goals. However, he recently paid off all of his debt and is worried about incurring more loans for school (and delaying his career and his savings to buy a house). What advice would you give him to help with this decision?
– Joely

He needs to decide what’s more important to him – buying a home or going for what he wants to do in terms of his career. Given that he’s debt free and has a good job right now, there really isn’t a “right or wrong” answer here. It has much more to do with what he wants to do.

It’s going to take some soul searching. Both choices have serious risks. Choosing the current job and the house risks severe job dissatisfaction, and given that our job takes up half (or more) of our waking hours and often invades our thoughts in the other half, such dissatisfaction can really poison one’s life. On the other hand, going back to school means giving up that steady job and getting some student loan debt as well.

I encourage him to think about his life in five years. Which side of that fence would he rather be on?

I’m 33, a single mother of two young children, and currently owe $175k on my first mortgage and $39k on a second mortgage. I have about $10k in credit card debt and receive, at best, $800 per month in child support from my ex (my ex is unemployed so I receive a portion of his unemployment check). I have a decent job and make around $50k per year. I have no savings and my 401k only has about $5k in it. To offset my mortgage payment, I have a renter who pays me $400 per month as the home I live in with my children is large. Despite this, I’m completely house-poor. The problem is that my children and I love our home, we entertain and have friends and family over all of the time instead of going out for dinners, etc. The house has been on the market for 6 months, but I haven’t received any offers. I recently found out the company I work for may be laying people off. Am I better to foreclose on the home and start over by living with my parents (who have generously offered to let us do so), or continue to scrape by each month in hopes I can sell my home? Should I consider only making partial payments on my mortgage and put the rest into an emergency fund, again, in hopes that the house will sell?
– Kristine

I think this really depends on the situation with your mortgage. Do you currently owe more than your home is worth? If you do, then talking to your mortgage holder about simply selling the house to pay off the mortgage in full might be the best move. This might also be true if you’re close to even or just barely in the profit.

If you owe a lot less than the house is worth, I’d still try to sell it. I’d probably lower the asking price a bit. One thing you might want to do is research similar homes in your area that have actually sold and see what they sold for. You might simply be pricing your home too high.

All things being equal, I would try as hard as I could to get out of the house sooner rather than later. If the house is simply too big for you and the bills are, too, you should be making every effort to change that situation as the payments for all of that unused space is eating far too much of your finances.

My husband and I have been into science-fiction, gaming, comics, etc. for many years, and we’ve accumulated a lot of stuff. We have been paring down on some items through yard sales and giving to friends (some nice Star Trek costumes went to the local club), but some things I’m at a loss as to where to sell them (example: we have LOTS of Magic: The Gathering cards). What websites or venues would you recommend?
– Lisa

The real question is how much time you want to invest in these sales.

I sold off several collections when I first got into financial trouble. At first, I was like you – I have a collection of things that, according to price guides, is worth $X, so I should be getting $X for that sale.

Of course, as you’re now seeing, the problem is finding someone willing to pay $X for the item. That takes time. Stores with a large inventory of items have the time to wait on a buyer willing to pay $X because they have thousands of items on sale and each of those items finds buyers every day because of a steady flow of customers. That’s a convenience you don’t have.

In order to sell them, you have to put in the footwork to reach the customers, and that can be quite time-consuming. After looking at a lot of options, what I wound up doing is essentially eBaying most of my collections. I took out the individual items that had significant value on their own and sold them individually. The rest I sold in large lots.

28 year old Married couple with no kids.
401k – both maxing out
Emergency saving – 6 months of living expenses
Additional savings – 40k

Liabilities and Upcoming expenses:
Home Mortgage – Loan1 – 280k@ 5.2%, Loan2 – 35k @8.7%
Booked an apartment in the home country for 52k. Advance of 10k paid two years back. Monthly payment of $600 starts by Dec 2010. We dont’ want to pay monthly payment. We want to either buy it with cash or cancel our booking loosing the 10k deposit.
Driving an old car, planning a used car purchase for 20k
Planning to have kids next year.

Our biggest dilemma is which way to spend the additional savings of 40k. Can you give your inputs and thoughts on which is better ?

1. Buy the apartment for long term investment. Take 10k loan for car purchase and cope with child related expenses starting next year.
2. Cancel the apartment losing 10k and finish off the second loan that will save us $275 a month (can be used for child expenses). Buy the car with cash next year.

– Anu

You’re spending $20,000 on a used car? I spent less than that on a new Prius not all that long ago.

Anyway, if you’re about to have a child, you’re about to experience an abrupt change in your way of life. Whenever an abrupt change happens, the best thing you can do is insure that your cash flow is stable and that you can handle any changes in that cash flow.

One thing I would certainly do is sit on that apartment deposit until December and see where you’re at then. Are you still anxious to have children in the coming year or two? If you are, I’d forget about the apartment. If you’ve decided that a child perhaps isn’t the right choice right now, I’d buy the apartment, since you have an emergency fund and a good grasp on your expenses.

Look at it this way: your $10K is water under the bridge at this point. You’re not getting it back – all it has done is change the options you have now. Look at your options right now and ignore what you once paid.

Anyways, here’s our background: DH -55 – recently laid off. Me-SAHM. Daughter – in kindergarten.

Mortage is under 100K at 5%. We currently pay $1400 month, which is about $200 more than we are required to do. We have no debt other than the mortgage. We have about $100,000 in liquid savings and probably close to a million in stock investments, etc. We have about $50K in daughter’s college fund. DH is working on trying to find a job in his field. He’ll get 6 months severance. I haven’t tallied our bills yet to see what we would need to live on…but we live pretty frugally. We don’t eat out too much, I bake bread from scratch, daughter gets second hand clothing. DH and I are in agreement on not spending more than we make…but not living a pauper’s life, either. We are blessed and we know it. Many people who have been laid off do not have the savings we do.
Our question: should we pay off our mortgage now? It would be nice not to have to factor that $1400 into what we need to live on. If we don’t pay it off, do we re-amortize it and pay just the minimum?

– Linda

This question again boils down to cash flow.

It seems to me that you have plenty of savings and assets to get you through almost anything that might be thrown your way. If I were you, I would try getting by without paying off the mortgage. Make a sincere effort not to tap your saivngs and see how things are going.

If you find that you’ve reached a point where you’re purely living off of savings, then I would strongly consider dipping into your assets to pay off the mortgage. This way, you’ll eat through your more liquid savings much more slowly – $1,400 a month more slowly. You also have the time to think about what assets you want to sell instead of having your back against the wall and being forced to sell quickly without careful consideration.

I am a 25-year-old young professional and I love kids, I grew up in a large family, and I have lots of experience (but am not certified in any way). A few times a month I babysit for coworkers, friends and sometimes new people through referrals. I do this partly for fun and partly as a small boost in spending money, so I’m not looking to make gobs off of it or use it as income I depend on. So far I have left it up to the parents to decide what to pay and I am never dissatisfied (usually around $6-8/hr). However, I know that I could probably ask for more, but I just don’t know what the “going rate” is for babysitters who are older than the young teen age range. I am on a pretty tight budget right now while I work on paying off debt so maximizing this income stream could help me out a lot.

Often when new people ask me to care for their kids, it’s awkward for both parties coming to a conclusion because I don’t want to ask too much, and they don’t want to offer too little (especially if they haven’t had many babysitters before and don’t know what’s fair either). I feel like having a set rate would make things easier for everyone, it’s just so darn awkward to discuss. Any thoughts? Might be useful to note that I live in a small/medium-sized city in the Midwest.
– Noelle

Given that you live in a small to medium sized city in the Midwest and the babysitting work is not your primary source of income, I think the $6-8 range per hour is reasonable. I would probably raise it a bit in other areas of the country and also if it is your primary source of income. I would lower it a bit if you were younger.

Part of the challenge here is that you’re babysitting for coworkers. If you suddenly started asking for a high rate, you might end up poisoning a valualbe workplace relationship.

If I were you, I would pick a rate in the range that you’re talking about – say, $8 an hour – and then just make it clear the next time you’re contacted about sitting. Simply tell them that in order to avoid confusion and uncomfortable discussions, you just decided to set a clear rate for everyone.

My hubby and I just became parents recently. As part of our daughter’s baptism this past weekend, we ended up receiving some money from relatives. I didn’t even think people gave presents for a baptism, but here we are…..Now, I wonder how best to save the gift money for her future….I would like to avoid weird paperwork, and/or being forced to use the money for XYZ college “or face huge penalties”.

Any ideas??

If I set up a simple interest bearing account in her name, can she avoid paying taxes on the interest?
– Rachel Rose

If you set up a simple interest bearing savings account in her name, in most situations she would be responsible for taxes on the interest. Of course, unless your relatives gave amounts totaling in the six figures, we’re talking about a small amount here. If you put $10,000 in an account earning 1.5%, she would make $150 a year and pay taxes on that at a 15% rate – $22.50. If the $22.50 is breaking you, take the money out of the $150 in interest earned.

The best choice would probably be in an open-ended 529 savings plan that allows you to use the saved money for any form of education spending. The College Savings Iowa plan that we use is open to everyone, run by Vanguard, and is easy to sign up for. Money accumulated in that account isn’t taxed. When you withdraw the money for use on any approved educational expense (textbooks, tuition at any school, etc.), you don’t have to pay taxes then, either.

I was wondering if your website is now your source of income, or do you still have a day job?
– Jeremy

Our family’s income is based on The Simple Dollar, other projects that I take on (like my upcoming book), and my wife’s current 9-to-5 job.

The biggest benefit of this is flexibility. My schedule is extremely flexible at this point, enabling me to take care of lots of things.

The biggest drawback is very, very uneven income. We have to budget incredibly carefully to make all of this work.

What do you eat for breakfast? You’ve mentioned how you eat breakfast each day to get yourself going and I’ve seen a lot of news about how it’s really good for you. But I haven’t eaten breakfast regularly since I was six! What do you eat each morning?
– Allie

Most mornings, I eat a piece of fruit for breakfast, like a banana. Sometimes, I’ll eat something like a bagel or something like that if the situation calls for it.

The biggest reason is convenience – it’s really easy to just grab a banana or an apple and munch it as I begin my daily routine. Along with that is the health reason – eating fresh fruit is pretty good for you.

On Sundays, we usually have a larger family breakfast, but those are the exception rather than the rule.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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