How to Save Hundreds of Dollars with Tax Credits

Awareness of Tax Credit

Being unaware of tax credit is like losing on a pay check and sad to say, several individuals are not aware of it. Each dollar of credit is equal to a dollar in tax savings, for instance in a federal income tax bracket of 28% and getting a buck’s worth of additional write-off could save one with 28 cents. Individuals tend to miss out on tax credits mainly due to the fact that they seem to be in a hurry when the dreaded tax filing deadline is near. Credits tend to fall through these cracks since they panic resulting in making complicated calculation or filling out additional forms. Setting aside more time on your return could help you to net several hundred dollars or could be more. For example –

Foreign Tax Credit - If a person has worked in a foreign country or would be having substantial income outside U.S, they must be well aware about the foreign tax credit which is intended to save you from being taxed by the two different countries on the same income. If the person tends to invest in some international mutual funds they could collect credit due to the fact that it is likely you paid foreign taxes the previous year – knowingly or not. A closer look at the statement on the fund summary of the previous year will provide you with some calculations in order to know the exact amount of foreign taxes which should show up on Forms 1099-DIV and 1099-INT. Presuming that the foreign taxes are from these sources totalling to or less than $300, one can claim the credit on Form 1040, Line 48 and have around $600 of foreign taxes and continue to follow the easy procedure if filed jointly. In other cases, one could file Form 1116 to claim your credit, though it could be a bit nasty.

Dependent Care Credit - When a person is paid to take care of an under-age child of 13 while the parents are out at work, one could be eligible for the dependent care credit where the credit percentage could range from 20% to 35% based on qualifying expenses and depending on adjusted gross income – AGI. Maximum credit possible for a child could range from $600 to $1,050 and for two or more the range would be $1,200 to $2,100. One should also be eligible if expenses were incurred in taking care of any other dependent that could be physically or mentally incapable of taking care of themselves, a disabled person. For high income taxpayers, the credits have not been phased out though lower dollar limits mentioned could be applicable. Form 2441 – Child and Dependent Care Expenses could be filled and credits claimed on Form 1040, Line 49 on furnishing the name as well as the Social Security number of the care provider failing which the IRS would disallow the credit with recomputed tax and would either reduce the claimed refund or sent a bill for the difference.

Moreover the Form 2441 also informs the IRS if one owes the Nanny Tax if they have an in-home care provider. One needs to be careful in taking credit if they have also contributed to a pre-tax dependent care flexible spending account – FSA the previous year through their employer. The pre-tax FSA is usually a process since it could reduce the taxable salary cutting federal as well as state income taxes together with Social Security and Medicare taxes as well. The tax saving rate could exceed the 20% effective tax savings rate which could apply to several people claiming the dependent care credit.

Elderly/disabled Credit – is applicable to individuals who have reached the age of 65 at the end of a particular year or one who has retired on permanent and total disability. Strict income limits are applicable and the credit is not available to most of them. Credits could be claimed on Form 1040, Line 54.

Adoption Credit - is when an underage of 18 years in adopted, you could qualify for a 2014 tax credit up to $13,190 for the adoption expenses and if married, a joint return to qualify could be filed. Phase-out rule, for 2014 could cause the credit to vaporize between AGI of $197,880 and $237,880. On qualifying for the same, credit could be claimed by furnishing details on Form 8839 – Qualified Adoption Expenses, with one’s 1040 with the credit amount on Line 54.

Credit for Overpaid Social Security Taxes – is where there has been more than one employer in 2014 and the earnings have crossed over $117,000 with combined salary, one has withheld too much Social Security tax. Recovery of the excess can be done by reporting the overpaid amount on Form 1040 Line 72 which is treated as a tax repayment and the effect on the tax bill is that of a credit.

Money Lessons for Children

It's been around a year since I've given my children an allowance of $10/month and they've saved up a lot. But, they wouldn't have been able to save as much if I had not given them simple rules of spending. Spend $20 after they've saved up $100. I'm planning to increase their income to give/contribute and grow/invest to enrich their experience with money.

I've had many conversations with them, and they have learnt to cherish their savings. So much that every time I joke if they should contribute for purchase of theme park tickets, they would choose to save for purchases they would like to buy. Toys. 

They are learning about opportunity costs from their monthly allowances. But the problem is, I want to take them to the theme park! Well... maybe I want it more than they do, but I'd like them to spend on experiences rather than toys that only give temporary satisfaction rather than memories. (memories they might forget at their age of 8 and 5)

I'd like them to contribute to the family. Eating out and entertainment costs money. Maybe they didn't ask for it, but they should chip in. The outcomes I hope to have through their lessons in contribution is a feeling of responsibility. I hope when my kids grow up, and they borrow money from me or whomever, I want them to have the integrity to return the money owed. It's a 20 years lesson that I need to keep building on.

Lastly, besides saving and spending, I'd like them to consistently give and grow their wealth.

And establish prayer and give zakah, and whatever good you put forward for yourselves - you will find it with Allah. Indeed, Allah of what you do, is Seeing.

2.Surat Al-Baqarah (the cow; 110)

The example of those who spend their wealth in the way of Allah is like a seed [of grain] which grows seven spikes; in each spike is a hundred grains. And Allah multiplies [His reward] for whom He wills. And Allah is all-Encompassing and Knowing.

2.Surat Al-Baqarah (the cow; 261) 

What is Early Retirement? How many years before I retire?

I routinely get asked by readers of my blog, about my age, how many years I have been saving, and when do I plan to retire.  There are others who write me asking about my definition of early retirement.  Would retiring at the age of 50 be called "early retirement"?  How about if you took a Voluntary Retirement option from your company, and then took up another less demanding job?  Does that meet the definition of early retirement? And so on and on.  Here is how I look at it, and it has nothing to do with your or my age, if you can believe it!!

In my mind the concept of retirement, whether early or just your regular retirement, is simply a matter of three different phases in your life.  In your first phase, you are dependent on your parents, you do not have any earned income, and you are just learning about life through school and college.  Most of us do not focus on any savings or investments at this time, and outside of a part time job or internship, we are not bothered about money or finances in general.  We are completely dependent on our parents to provide for us.  

Once we get a real job, and start earning, and become financially independent adults, we embark on the second phase of our careers.  In this phase, we should be focused on earning, saving, and investing in that order.  Depending on your financial literacy, you may start saving and investing early in this phase, or late in this phase, but no matter what, this is the only time that you have to build your retirement corpus.  Typically in India people spend upto 40 years in this phase of their lives.  For example if you started working at the age of 24, and retired at the age of 64, you'd have worked for a total of 40 years.  It is not uncommon to have people working into their early 60s, and depending on when you started working, you could have easily spent 30-35 years in the work force earning an active income.  I call this the active earning phase.

The third and final phase is after you retire, when you no longer are part of the active work force.  You may choose to take on some part time work in this phase to supplement your income, but you fundamentally do not have a regular source of active income at this time, and are highly if not completely dependent on your retirement corpus for your financial existence.  With growing life expectancy in India, you need to factor in upto 30 years of living in this phase.  For example if you retire at the age of 62, in my opinion you should be prepared for your retirement corpus to last you for 30 years into your early 90s.  You will need to do this to ensure that you or your spouse do not run out of money in the golden years of your life.  I call this the passive earning phase.

With this understanding in place, I simply think of retirement as the point, when you transition from the active earning phase to the passive earning phase.  In my book if you spend more than 35 years in the active earning phase of your life, you have been on the path of regular retirement.  You are no different than the millions of people who work through every hour and every year of their healthy lives striving to earn, and hopefully put together a large enough retirement corpus to last them through their passive earning phase.

However, if you have been proactive in your active earning phase, you will likely do better than having to work for 35+ years.  Below is a table with my thoughts on the number of years you spend in your active earning phase.

So where do I think I am headed for?  Well I have been targeting working for 10-15 years, and then calling it quits.  I have been focused on a high savings rate, prudent and steady investments, and hoping for some small measure of luck!  Currently I seem to be trending to be in the 15-20 years category, which would still be a pretty good achievement if I make it there in one piece. 

I am certain, this will be a rather controversial post, particularly the retirement ratings table.  But hey, somebody had to put it out there!  Write me up and let me know how much and what you agree or disagree to

  

Best Online Company Formation Agent

An online company formation agent by the name of Wisteria Formations in UK is an authorised Companies House presenter for Company registrations. Their online company formation application enables a UK limited company with simple and efficient procedure. The provider offers basic services to incorporate a company instantly at a reasonable cost of £24.99 and can provide support to the business with several optional professional services such as business plan, tax advice, company secretary, accountancy and business advice, registered office and mail forwarding and VAT registration/PAYE registration.

With a dedicated support team on board they have the capabilities of reaching out to their customers with regards to completion of company incorporation, which is equipped by Wisteria Chartered Accountants who beside the completion of company formation also provide services which may be needed thereafter like accountancy or tax issues. The company does not offer a package service and should the customer need extra products or services, all they need to do is to opt for the extra products and services that are required on top of the basic company formation service.

Provision of Video Guidance 

Range of some of the extra products and services for the online application procedure comprises of official copies of the incorporation certificate, memorandum and articles of association, company register and share certificates, Company secretarial service, registered office service, VAT registration, tailor-made business plan, registration as an employer, free business planning meeting with Wisteria Chartered Accountants and assistance in opening a business bank account.

 The company is well aware that all company formation agents should adhere with the Money Laundering Regulations 2007 and hence strive to complete anti-money laundering checks prior to sending any application to the Companies House. Forming a limited company with the services of Wisteria Formation is easy and reliable wherein one needs to follow the ten step company formation process which eliminates the red tape from the process of incorporating a company.

 Besides this, the company formation service also enables the customer to check if the name is available with the Companies House. The provider has also made provision with a video guided process explaining each step of their ten step methods, in details for a quick and easy process in Company Formation.

How much should I save before I retire?

The critical question for all retirees is "Have I saved up enough money to last the remainder of my lifetime?"

I had written earlier, about how to calculate the corpus you need to be able to retire financially independent.  The amount you need depends on only 2 factors, your estimated annual expenses, and the number of years you need to live in retirement.  

Here is how I have calculated the corpus I will need, before I can retire.  The first thing I did was to calculate my estimated annual expenses.  I am now estimating that I will need to live in retirement for 50 years.  I know this sounds like a very large number of years, but then the whole idea is to be a little conservative, to ensure that I don't run out of money in my golden years! Then I refer to the table I had worked on earlier, to check how much my retirement corpus should be.  I have reproduced the table here below for reference.

I will assume that during retirement my investments will continue to give me a return that beats inflation by 2%.  I think this is a reasonable rate of return and can be achieved by a prudent mix of equity and debt investments.  So for 50 retirement years at 2% real rate of return, from the table I see that I need to have saved my ~32 times annual expenses.  

I would also like to provide for my kids when they grow up.  We have decided to leave 2 years worth of annual expenses for each kid.  Finally over 50 years it is likely that we will have to spend atleast twice on extensive home repairs.  So we have allocated another 2 years worth of annual expenses to big ticket home maintenance.  So overall this leads to 38 times annual expenses (32 + 2+ 2+ 2) as the magic number that I need to save up, to be ready for a peaceful retirement.

Next week I will write about my journey and current status to reaching this lofty goal of 32 times annual expenses as savings!

A Step Into The World of Investing

I've decided to start investing this year. Small amounts, monthly, put away early. I'll be placing my investments in an Islamic index fund (Indonesia). To my knowledge, there aren't any Islamic index fund in the U.S. but Islamicity.com lists Islamic mutual funds available for Muslims in the U.S. and also the IMAN Fund.

When I compare other funds to the index fund, it doesn't look attractive enough since other's are performing above the index. But, my intention is to start something bigger. I have two kids, one on the way. They're 8 and 5 years old. My hope is to implant habits for them to invest throughout their lifetime as I did not have parents that encourage me to invest early on. InshaAllah, they have many years ahead of them. Who knows what fruits it may bear in 30 years...

4 lessons I learned being an express tour guide



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Providing guidance is a sacred calling. I had a chance of taking care of these lovely ladies to different area in Manila (Philippines) Being a tour guide is not a joke.

Here are my top 4 lessons I learned when you need to accompany people from other parts of the nation/globe

1. Always be ready with your answers

You got your itinerary with you and you know the location even you are not a pro make sure to be excellent with what you are doing. Provide answers to different questions and give them a historical emphasis why this place matters a lot. Don't just bring them to the mall and show them how good is that because there is also a large mall in their place.

2. Be sensitive to their needs.

Never forget that you are also in charge to their safety and security. As a tour guide this is a must factor. Every thing that they need must be available and you should know whether they need something else especially when they are thirsty or hungry.

3. Be ready when something unusual happen

The last 3 hours of the tour ended up with a bang. As a man and a tour guide you need to understand that you are the compass to the ladies you are with. Never ever assume that they already knew exactly the location of the airport because that Is your primary responsibility too. Always be calm and never ever lose your composure. Anger will not give you anything but will surely cost you something.

4. Remember to be grateful no matter what happen.

Regardless whether you flunk or passed as a tour guide you need to recognized that it happened for a reason. Gratefulness will changed your perspective towards things. It will give you something to ponder instead of blaming or killing yourself with what happened just choose to be happy and move on. Please make them feel welcome and leave a lasting impression to the visitor.

 

If you have questions send me an email at david_angway@yahoo.com

David Isaiah Angway is a Registered Financial Planner and a Financial Evangelist