No One Can Afford to be Poor

Hey Paul: What is the “ghetto tax”? I heard this mentioned on a blog about poverty in cities and how the poor are taxed more than others. Do we have a ghetto tax in Jessamine County?

The name “ghetto tax” is a bit misleading and it doesn’t necessarily apply to a “ghetto” and is definitely not a tax imposed by the government. The concept was popularized about a decade ago by a study conducted by the Brookings Institute. The study focused on the urban poor — “ghetto dwellers”.   The main idea is that the poor often pay more for things because of lack of access to the same deals as the middle-class or rich.

The study listed the following ghetto taxes that are better described as poverty premiums and a tally of what it may cost the typical poor person:

  1. Check Cashing: Using a check cashing service rather than a personal checking account costs 1% to 5% of the check’s value. Suppose you cash $1000 in checks each month with a 2% fee – this would a $240 annual ghetto tax.
  2. Pay-day Lenders: The fees can be upwards of 15%. The larger problem with this type of loans is that they are a temporary solution that creates a permanent problem as the loans are rolled over. Suppose you take out just one pay-day loan for $400 to pay your winter heating bill and fortunately a Christmas miracle pays it off when due paying fees of $60.
  3. Tax Refund Services: The advance payments of the tax refund could have implied interest rates of 70% to 1800%! Suppose you are due a $1000 refund but take $800 for immediate cash – you are down $200.
  4. Car Prices, Loans, & Insurance: For the exact same car and driving record the poor paid $50 to $500 more, an extra 2% on car financing and $50 to $1000 more for auto insurance! For a modest $5000 car suppose you get a good deal on the price but have to finance at 10% rather than a customer with good credit who would get an 8% auto loan. This will cost you about $70 each year over a five-year loan.
  5. Home mortgages & Insurance: The poor pay on average about 1% more on mortgage rates and about $300 more for home insurance. Suppose your 30-year mortgage on a $100,000 home is at a 5% rate rather than 4%. This is costing you an extra $700 each year in housing payments.
  6. Furniture, Appliances & Electronics: Renting-to-Own any of these is an expensive proposition. One example cited in the Brookings study was that a $200 TV ended up costing $700 once the interest charges were factored into the cost. Suppose you got a widescreen TV and the finance charges are $100 a year for five years.
  7. Grocery Prices: The lack of personal transportation forced some urban poor to shop at local grocery stores that tend to be smaller and with higher prices.  In Wilmore we’ve got the iconic Fitch’s IGA and in Nicholasville Walmart and Kroger’s each with competitive prices. So let’s suppose there is no ghetto tax on groceries.

The grand tally of the “ghetto tax” for this hypothetical poor Jessamine resident is $1370! Yes, it could be less if you do not “own” a home but it could easily be double or triple this amount if one finds himself in the throes of a pay-day-lender spiral or falls deeply into one of the other poverty premium traps.

So the answer to your question is yes, there is most definitely a ghetto tax that is subtly draining money off the local poor. Is there anything we can do to reduce or even completely avoid these financial dings? Yes, but it will require rethinking how we approach our finances.

A common theme through these poverty premiums is that the poor have to take on debt and then consequently pay higher rates due to weak credit scores or simply not shopping around for a better rate. My suggestion is plain and simple – if you do not have money to buy it with cash, then do not go into debt. This applies to cars, couches, appliances, electronics, clothes, and vacations. Buy used items or accept used furniture or appliances from Southland or one of many other local churches who pass along perfectly acceptable items.

A home is a bit different as very few will ever save up enough to pay cash; but if one can save enough to put down a 20% down payment and has no other debt then you may very well qualify for the best mortgage rates.

To save on tax processing you can do a few wise things. First, you should have no Federal or state taxes taken out of your pay check – it’s coming all back the following April if you are anywhere close to poor. In fact you can also be prepaid the Earned Income Tax Credit if you qualify. Second, do your own taxes using a free online software. If you can’t do this then bring your tax documents to the Jessamine public library early in the year for free tax filing sponsored by the AARP. You can file in early February and have your refund check within a week.

Finally open up a free or low cost ($5 a month) checking account. Talk to my friend Steve Smith at Town Square Bank or Jess Correll at First Southern National about an automatic savings strategy. Build up a $1000 emergency fund so you aren’t dragged under a pay-day-lender debt avalanche.

In summary by avoiding debt, not overpaying taxes, and using a bank for banking the poor and the rest of us can avoid the dreaded “ghetto tax”.

 

 

 

Refinancing is Worth a Look

Hey Paul: What do you think will happen to mortgage rates this summer? We have a 30-year mortgage that we have 22 years left paying on. Our mortgage rate is 4.75%. Should we refinance our home?

 The refinance question comes up a lot and there are certainly plenty of blogs and mortgage calculator apps out there to help you answer your question. But like always, who do you trust? Well hopefully you can at least think about trusting what I have to say as I don’t have a skin in the game.

Let’s start with a few mortgage myths.

Myth #1: Mortgages are “good debt”. No, there is no such thing as good debt just as there is no such thing as a good cancer or good divorce. Yes, it’s better than credit card debt as you have a home as collateral and the rate is reasonable but a mortgage is a liability not an asset.

Myth #2: Since mortgage interest is deductible the rate is quite a bit lower than the stated rate. The simplest example of this is a 4% mortgage rate for someone in the 25% tax bracket. If they have enough other deductions such as state income taxes, property taxes and charitable giving to surpass the standard deduction than this myth has some validity. However most middle-income households do not get the full deduction impact from their mortgage as they simply don’t have enough other deductions.

Myth #3: It is always better to have a 15-year rather than 30-year mortgage if you can afford the higher payments. This actually has some truth to it as you’ll get about a 1% lower rate and obviously be freed up from mortgage debt in half the time. The fact is that you if (and this is a big if ) you can earn the same rate on investments as your mortgage rate then at the end of three decades you will have exactly the same wealth no matter what term you choose for your mortgage.

Myth #4: If you refinance you have to restart over at 30 years or fit into one of the standard length terms like 15 or 20 years. Not so. In your case you could go with a 15-year mortgage but the payments may be more than you can comfortably handle. An alternative is to go with a 30-year mortgage but immediately pay down the balance to leave only 22 years remaining while keeping the monthly payment at the scheduled rate. Another method is to pay extra each month to pay down the balance faster. The lender can tell you this amount – or I’ll calculate it for you.

Is this the lowest rate we can expect or will they drop even lower in the next few months? My hunch (and keep in mind the track record of economists making predictions) is that right now is as good as it will get. I’m surprised rates have hung around this long at historic lows.

For your 4.75% mortgage you can expect to knock about a percentage point off your rate with a new 30-year mortgage. A 15-year mortgage rate is almost 2% points lower – if the finances (and wife) are alright with it consider chopping seven years off the housing debt schedule. Of course the best rates are for those with excellent credit and the income capacity. If your credit or earnings have taken a hit since your original mortgage then you may not be able to lower your rate with refinancing.

There are at least a couple local lenders who have very reasonable refinancing costs. Suppose your closing costs (e.g. appraisal, title work, etc.) are only $500. This probably means the bank is eating some of the costs. If you have a $150,000 mortgage balance then a 1% rate saving will roughly save you $1500 of interest expense in the first year. So in about four months you have recouped your refinancing costs and your mortgage will be about $90 less per month.

Any local bank can provide you with a good faith estimate of the costs. If you have any “special circumstances” then working with a local lender is usually beneficial. If you don’t mind dealing online then go through BankRate.com or Zillow.com to search for the best deals nationally. I wish the best in your mortgage journey.

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing fee-only financial advice. He is available to provide free workshops to churches, local businesses and other groups.

 Contact him at Paul.Hamilton@Asbury.edu or www.USA-Economics.com

 

 

Seven Quick Money Fixes

Hey Paul: What are some of the easiest (and free) ways to improve our financial picture?

 I like your approach to tackling what may be big financial challenges by starting with the quick, simple and free actions. These small steps can in some cases solve or ward off much bigger problems. So without further ado here are some quick fixes.

Start by Filtering out the Noise. Do you get inundated each and every day with junkmail, spam emails, robo sales calls, and credit card applications? To reduce junkmail go to www.dmaconsumer.org I also suggest setting up a token email account like My.Name.Junk@gmail.com to use for those one time signups requiring an email address. To opt out of credit card and debt relief solicitations go to www.optoutpresecreen.com/. To sign up for Do Not Call register at www.donotcall.gov. These won’t cut off all unwelcome marketing but it will dampen the noise allowing you to better hear the signals.

Money can only go one of three places – spent, saved or taxed. There are several popular, free apps such as Mint and Personal Capital that can track your spending and net worth. There is about 1 in a 1000 people that can manually keep a budget. Today’s technology takes over most of the legwork – if you are willing to trust access to your finances to the cloud.

A Big tax refund could have helped earlier. Suppose that just this week you got a check from the U.S. Treasury for $1000 – Myrtle Beach vacation or new couch? But suppose you’ve got some really nasty credit card debt sitting at 29.99% for over a year. If you had an extra $85 a month in your paycheck rather than giving the IRS an interest-free loan, you are paying down debt in this case saving roughly $300 in interest. You can adjust your withholdings at any time by filing an updated W4. Unfortunately the W4 doesn’t let you directly select the dollar amount of tax withholdings. The IRS and tax preparers have online calculators that can do this calculation for you. See http://www.hrblock.com/get-answers/w-4-calculator.html.

Doubling your money happens much more often through your employer’s retirement matching plan than at Keeneland. Not everyone works for an employer who will match their retirement contributions. Typically the employer matches your contribution up to say 3% of your earnings. There are variations in the plans such as vesting over a few years and the level of matching. I realize that some budgets are so tight that devoting even $100 a month to retirement may seem impossible. But if you can find that money by taking on that side hustle job or trimming back the entertainment or restaurant tabs, you will have effectively doubled your money with each retirement contribution.

Cash transactions remind us how long it took to earn that money. The convenience of credit cards or even debit cards or writing a check blur our wants and our ability to afford those toys. You don’t need to use cash for fixed transactions like your mortgage or utilities. Start by paying cash for the budget busters – restaurants and clothes.

Credit, Loans, Mortgages, or Capital are just nice names for Debt. I suggest cutting (literally) back to at most three credit cards. Preferably you primarily use a debit card that draws on your bank checking account. To see all your debt related accounts request your free credit report at www.annualcreditreport.com. It’s also good to know your credit score that can be purchased for less than $10 or is offered free with many credit cards.

Do you have an exit strategy in place?   Every adult needs a will. I have used the Nolo.com online software to create my will and a living trust. A living trust typically keeps your estate out of probate saving your heirs about 5% of the assets – maybe ask them to spring for the money to put a trust in place. There are a few different health related documents that are simple to complete (other than the contemplation of the scenarios when these would become effective) such as a living will and health and financial power of attorney.

Challenge yourself by completing one of these tasks today!

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing financial coaching to middle-class Americans. He is available to provide free workshops to churches, local businesses and other groups.

Contact him at Paul.Hamilton@Asbury.edu or www.USA-Economics.com

 

Who Needs a Financial Advisor?

Hey Paul: We are a middle-class family with three children the oldest headed off to college next fall. We are halfway through a 30-year mortgage but otherwise do not have any debt. All our retirement savings of about $300K is in our employers’ 401(k). Do we need a financial advisor? What would be the benefits as we plan towards retirement and other life goals?

It’s a great blessing to have people in your life that you can rely on for trusted advice and accountability. The trick is, of course, how to identify those people with the skill set and character to deliver advice at a reasonable price.

The truth is that almost anyone can call himself or herself a “financial advisor”. If they provide “investment advice” then generally they need to register with the state and undergo background checks and have achieved a certification such as being a Certified Financial Planner (CFP). But that fact that a person is not a criminal and has some book knowledge of money doesn’t necessarily make them a good financial advisor.

A recent commercial (http://goo.gl/bG0tB5) features a Chase Financial Advisor visiting various retirement parties where his clients profusely thank him for making this all possible. While I am all for being grateful for those who have helped us along life’s journey, it is preposterous to claim that it was the advisor rather than the client who put in 40 years of work that is owed the lion’s share of the credit.

Perhaps the small print of the commercial should include Vanguard founder, John Bogle’s take on financial advisors:

“Our hypothetical fund investor has earned $1,170,000, donated $700,000 to the mutual fund industry, and kept the remainder of $470,000. The financial system has consumed 60% of the return, the fund investor has achieved but 40% of his earnings potential. Yet it was the investor who provided 100% of the initial capital; the industry provided none. Confronted by the issue in this way, would an intelligent investor consider this split to represent a fair shake? “ In other words your advisor brought you a bottle of wine to celebrate your retirement and drove up in the Porsche that you bought him.

Now that I have thoroughly bad-mouthed my own (side) occupation, let me provide some brighter views and various alternatives to getting good financial advice. There are several opportunities to obtain solid financial advice. For those who work in a company with a Human Resources office, some basic but very important guidance can usually be gathered on selecting a health insurance plan, flexible spending accounts, and opportunities to contribute (often with a company match) to the employer retirement account.

A second resource is your tax preparer particularly if they are a CPA. A CPA’s forte is tax planning but some have developed expertise in financial planning. Since they would be familiar with much of your finances from your tax return, turning to financial advice is a natural compliment to their services. My mother-in-law has been relying on David Hudson, CPA for many years for both tax and financial advice.

To truly receive comprehensive financial planning one must typically turn to a “financial planner” which as I mentioned earlier can mean many different things. The Hatfield and McCoy feud in financial advising is between those who are fee-based versus those who are commission based. I won’t drag you into all the gory details but much of the challenge is that people are reluctant to pay for advice but will accept a “free” financial review that almost always concludes with a sales pitch for an annuity, permanent life insurance &/or long-term care insurance. These aren’t necessarily bad financial products but often are riddled with exorbitant fees.

The fee-based financial planner is not necessarily a viable option for middle-class households. A typical comprehensive plan will run you around $2000 and for those assets they manage for you there is around a 1% annual fee. [Shameless self-promotion warning] In my own practice I charge $1000 for the plan and show the client how to manage their assets using Betterment.

Let me ask you something. When you’ve been at a restaurant and got a so-so meal did you complain to the manager? No, probably not. Your ‘problem’ is that you are too nice. And when your supposedly trusted advisor puts the hard sell on you won’t be able to say no or ask the tough questions and expect full answers.

What would be some tough questions to ask your advisor? If I invested the funds in an index fund instead of buying this financial product, what is the probability that I’d come out ahead? [No advisor will answer this. Watch out for a mildly related fact such as ‘70% of seniors rely at some point on long-term care.’] How much is your compensation for selling this product? [Could easily be more in an afternoon than you make in a month.]

Fortunately an imminent ruling by the Department of Labor is going to impose a ‘fiduciary standard’ on all financial advisors. A fiduciary is required to put the client’s interest above their own – a modern version of Love Thy Neighbor as Thyself.   The DOL fiduciary ruling will dramatically change how financial planners provide advice and sell products.

Do you need a financial advisor? You know it sounds like you’ve got some enduring financial principals figured out on your own – living within your means, avoiding debt, and working hard. My first advice would be to self-educate by reading a general book on finances as well as religiously turning to my More-Than-Money column each week. A second piece of advice is to seek out a fee-based planner and pay an hourly fee to get specific advice such as financing your child’s college education.

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing financial coaching to middle-class Americans. He is available to provide free workshops to churches, local businesses and other groups.

 Contact him at Paul.Hamilton@Asbury.edu or www.USA-Economics.com

 

 

 

 

 

 

 

 

Prepare to Plan Your Taxes or Plan to Pay More

Hey Paul: What is the difference between “tax planning” and “tax preparation”? Are they the same thing?

These two terms are closely related and I suppose could mean the same thing to some people. For those who are procrastinating doing their taxes until April 18th could claim to be in the planning stage – collecting W2’s, charitable gift receipts, etc. But tax professionals would refer to everything you do to get your 1040 done as “tax preparation.”

Tax Planning typically refers to the development of tax saving strategies that precede the tax preparation stage. Tax planning takes place in the calendar year before taxes are settled the following mid-April — after December 31st there isn’t much you can do about last year’s finances.

The following is a list of “tax strategies” you can think about implementing this year – or perhaps serendipitously you can use for 2015 taxes if your story fits.

  • Contribute to qualified retirement accounts: By making an IRA contribution or other tax-deferred income such as to a 401(k) during the year you will delay taxing that income. For the roughly half of the U.S. households who pay no Federal income tax, contributing to a Roth IRA will result in little or no additional Federal income tax now and tax-free withdrawals in the future.
  • Cover health care expenses pre-tax: For those with employer-provided health insurance, you can pay no Federal, state, or payroll taxes on your share of the premium. Flexible Spending Accounts (FSA) have similar tax benefits and cover out-of-pocket medical expenses including dental and vision. Starting last year FSA plans have an option to rollover up to $500 of unused funds; in the past it was a use-it-or-lose-it fund. Health Savings Accounts (HSA) need to be coupled with high-deductible health insurance and are essentially a bigger version of an FSA.
  • Itemize rather than take the standard deduction: The major categories are charitable giving, taxes (property, state income or sales taxes), and mortgage interest expense. For single and married households the standard deductions are $6300 and $12,600, respectively. These are high hurdles to cross if you don’t have a mortgage. One strategy is to lump deductions into a specific year by making early property tax payments or high charitable giving.
  • Start a side business: Small business owners love their write-offs – home office space, cell phone, business related mileage, etc. Landlords are infamous for having accounting losses due to depreciation of the home while actually having a fairly profitable rental business. Put your child to work as part of the family business and they will pay no taxes on the first $6300 of their income — more importantly you turn an allowance into an earning.
  • Give money away: Giving is not only good for the spirit but also to avoid taxes. If the gift is to a qualified non-profit than it may be deductible as an itemization. Another strategy is to gift (up to $14K!) to anyone. Give away assets that have losses or small gains since you acquired them and try to leave highly appreciated assets as part of your estate when they will escape capital gains taxation. To whom should you give? One idea is to set up a Roth IRA or 529 College Savings plan for a child or grandchild. These investments grow tax-free and withdraws are tax free if used for retirement or college. You can also give directly (up to $100K!) from your tax-deferred retirement account to a charity – this escapes taxation entirely on that income.

For the rich-and-famous tricks such as characterizing business income as a capital gain that is taxed much lighter than regular income and avoids payroll taxes. This is one way Wall Street hedge fund managers and CEO’s pay less tax than their secretary. If your patriotic ties aren’t binding you could move to a foreign country – or at least shift your assets to the Cayman Islands. At some point we cross the line from tax avoidance to tax evasion!

If you missed the opportunity to purposely reorder your 2015 finances to qualify for lower taxes there still exists the opportunity to make the most of what naturally occurred last year. Here are the things you can do to be a smart tax filer:

  • File your taxes – it’s the law and you may actually get 1000’s of dollars from the IRS. In my estimation there is a much more money left on the table by those who don’t file or miss obvious tax savings compared to those who don’t file thinking they are beating the system.
  • Use low-cost tax software, free tax prep such as offered by the AARP (Mon. and Wed. mornings at the Jessamine Public Library) or a tax professional. I would highly advise against the old-school method of pencil, calculator and tax instruction booklets!
  • Take the tax credits that you qualify for – EITC, child tax credit, various college education credits, retirement contribution credits and many other tax savings are potentially there for you. Tax software or a qualified preparer will (almost) certainly catch all of these as long as they know your story.
  • Contribute up to $5500 (or $6500 if over 50) to an IRA. This will delay when the income is taxed which may be lower in retirement than in your working years. You can make an IRA contribution up to the tax deadline and have it count for 2015.

So by spending a few hours a year preparing taxes you can save a few hundred dollars in fees; By spending a few a few hours in tax planning you can potentially save much more by choosing the favorable actions and timing to minimize your tax liability.

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing financial coaching to middle-class Americans. He is available to provide free workshops to churches, local businesses and other groups. Contact him at Paul.Hamilton@Asbury.edu or www.USA-Economics.com

 

Your Tax Bracket is Likely Zero

Hey Paul: My accountant told me that I’m in the 15% tax bracket. What does that mean? Am I paying 15% of my income to the IRS?

 Bracketed in Nicholasville

The concept of tax brackets doesn’t come up too often unless you are talking to your CPA, financial advisor or an economics professor. The simplest and most important thing that your tax bracket can tell you is how much tax you paid on the last dollar you made in the year. Unless you are right on the edge of a tax bracket it also tells you how much each additional dollar of income will be taxed.

In your case you paid 15% in Federal taxes on part but not all of your income.  Most of your income is untaxed or taxed at 10%. Putting all these taxes together means your average tax rate will be much less than 15%.

Putting some numbers on this will help. Suppose you are single and have gross income of $50,000. There are six general steps used in calculating the net tax liability.

Step 1: Your Gross Income of $50,000 is reduced by any “adjustments” to income. The primary one for many people is contributing to a tax-deferred 401(k) or IRA. Suppose you contributed $6000 to your 401(k) –- this will bring your Adjusted Gross Income (AGI) to $44,000.

Step 2: The Federal government does not tax the first $10,300 for singles – you are eligible for a $6300 “standard deduction” and $4000 “personal exemption.” You don’t have to do anything special to qualify for these deductions. If you do have state and property taxes, charitable gifts and mortgage interest expense that collectively exceeds $6300 you can itemize and deduct the higher amount. Assuming you just take the default deductions your “taxable income” will be $33,700.

Step 3: There are seven Federal taxes brackets ranging from 10% to 39.6%. The taxes are applied in a staircase fashion – as your annual income rises it can put you in a higher tax bracket. For Singles the first $9225 of taxable income is taxed at 10%. From $9226 up to $37,450 of taxable income is taxed at 15%. Since your taxable income is $33,700 the 15% tax rate would be applied to $24,475 of income that falls in your top tax bracket. Your tax at this stage would be about $4594.

Step 4: The Federal government subsidies many things society supposed wants more of – children, college education, green energy, etc. Credits are a terrific bonus as they are a direct dollar-for-dollar reduction in tax liability. The one catch is that many credits are “nonrefundable” – that is they can only reduce your tax liability to zero. Suppose you bought a Tesla this year and are eligible for a $7500 credit. However since your tax liability is only $4594 the credit only wipes out $4594. The good news is that you are living in America for free!

Step 5: Well almost free. The IRS makes a few adjustments such as tacking on Social Security and Medicare taxes that weren’t paid during the year. The IRS may also ding you for early (before age 59.5) retirement withdrawals and the infamous Obamacare mandated “health care individual responsibility” tax penalty.

I’ll assume none of these apply to your situation.

Step 6: Settling up – the IRS looks at what you’ve already paid in taxes you’re your pay check or estimated quarterly payments. The 1040 oddly adds in refundable credits as part of Payments. Most households overpay and look forward to a large refund upon filing their taxes. In your case let’s assume you paid $2400 in Federal taxes out of your paycheck in 2015. Since you don’t have any tax liability you can expect the tidy sum of $2400 directly deposited into your bank account.

So in what might seem like forever ago you asked what it meant to be in the 15% tax bracket. That was the highest tax rate applied to your taxable income in Step 3. However your actual net Federal tax liability is zero! In fact if you head earned $63,125 instead of $50,000 your tax liability would still be zero!

Of course there are other taxes that you’ll be paying – Social Security at 6.2% and Medicare at 1.45% of gross income. Kentucky state income tax brackets are lower than Federal rates but you’ll likely pay a few percent of your income to Frankfort. So your true “tax bracket” is more like 10% as you are hit with payroll taxes and state income taxes while keeping below the Federal government’s tax threshold.

For those who prefer to work crossword puzzles rather than solve math problems, keep in mind that several of the top tax preparation companies offer free or low cost tax software. See last week’s More-Than-Money column for more info and links.

On that note let me give a shout-out to the AARP Tax Prep team who are offering FREE tax preparation with a target audience of moderate-income, senior citizens but they will assist any age or income level. They do have limits on the complexity of the returns (e.g. no farming income or business with an inventory like MaryKay). The AARP offers tax preparation Monday and Wednesday’s from 8:30 to 11:30am at the Jessamine Public Library up to the week before this year’s tax filing deadline of April 18.

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing financial coaching to middle-class Americans. He is available to provide free workshops to churches, local businesses and other groups.

 

Contact him at Paul.Hamilton@Asbury.edu or www.USA-Economics.com

 

 

The Taxman Pays People to Live in America

Hey Paul: As a single Mom of two kids and a modest income I don’t have any taxes withheld from my paycheck. I won’t receive a refund as I didn’t pay any taxes.

My total income for the year was about $22,000. Do I need to file a tax return by April 15th? If I do how much will it cost?

 Living Free in America

I’ve got good news and better news for you. The good news is that you do need to file a tax return as only those with very low incomes are exempted. Why is this good news? As former Presidential candidate, Mitt Romney, callously noted four years ago – 47% of Americans pay no Federal Income taxes. The even better news for you is that many households with modest incomes like yourself actually get paid to live in the greatest nation in the world!

What does it cost to file? More good news – FREE! That is, it won’t cost you any money to file using any of the major tax preparers’ online forms. This includes TurboTax, H&R Block, and TaxAct (the one I personally use). These three companies also offer free KY state income tax returns! For a complete list of free providers and the income limits see http://revenue.ky.gov/FFAOffers.htm

As the recent commercials by TurboTax remind us – you don’t have to be a genius to file your taxes. However you do have to take some self-initiative to become part of the DIY crowd. The first step is collecting your information – you’ll have to do this regardless of whether you DIY or have a paid tax preparer. H&R Block has a comprehensive list of forms – see goo.gl/WdAvJp. The long list can look imposing but most people have only a handful of items to collect – for workers like yourself a W2 from your employer or 1099-MISC for contract work are the most important items. You could have other items like alimony received, IRA contributions, “Obamacare” forms and perhaps a few others.

Retirees may have social security (SSA-1099), pension and retirement withdrawals (1099-R). Business owners are required to document revenues and expenses. Investors with dividends or gains or losses from sales will have various 1099 forms. If you have relatively significant mortgage interest expense and charitable gifts then you may deduct these through itemization. Sounds messy but just answer the questions the tax prep program asks!

I realize that you like many people may be apprehensive about trying to do your own taxes. I can picture my Mom working skillfully through the paper forms with pencil and calculator at the kitchen table when I was growing up. If you had to navigate today’s tax code by reading the IRS instruction booklets then I’d say pay someone to save you several hours of work and the strong likelihood you’d make an error.

However today’s online software makes it easy – if you’ve ordered a pizza from Papa John’s you can do your own taxes. Once you’ve got your information organized it will likely take less than an hour to complete the online tax forms. That may save your over $200 in having someone else do your taxes – not a bad deal for an hour’s effort.

If you truly have math or technology anxiety then there are several terrific local services that provide free tax preparation services. Check out the United Way site

http://www.unitedway.org/myfreetaxes/KDVA or call 1-855-MY-TX-HELP to see when and where free tax services are provided.

To give you an idea of how things will turn out I ran what I know about you through TaxAct and have the following positive news to report. You are entitled to Federal “refund” of a whopping $6648 and a KY tax owed of $276. The key to your federal refund is the Earned Income Tax Credit (EITC) of $4724 – the government subsidizes work rather than taxing it over a range of modest incomes. Secondly, for each child a tax credit of up to $1000 applies that is refundable as your income is high enough. These tax credits are not big secrets yet a lot of people in your situation do not file or file incorrectly and miss out on a lot of money. If you have missed out in past years it is possible to file amended returns and recoup the full tax refund due to you.

I’ll be holding tax preparation workshops at the Jessamine Public Library Saturday mornings in March at 10:40am. Bring your laptop or tablet and we’ll work through the details together.

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing financial coaching to middle-class Americans. He is available to provide free workshops to churches, local businesses and other groups.

 Contact him at Paul.Hamilton@Asbury.edu or www.USA-Economics.com