Advanced Personal Finance

Every year, I make my ‘tax document checklist.’  It’s crude but effective.

I take out a blank sheet of paper, write ‘Tax stuff’ at the top, then write down all the documents I expect to come my way that I’ll need to file and hope I don’t leave something out.

I should probably have a better system, so this is my effort to improve.  Below I’ve listed the things that are typically on my tax document list.  Yours may be longer or shorter.  If you find it useful, here’s the list in PDF format.

Income

I break the list down into two, not very original sublists.  Income’s the first one.  (Bonus points if you can guess the second.)

• W-2s - Think hard about any second job’s you’ve had during the year.  If you’ve changed primary employment, you’ll be getting a couple as well.
• Bank interest 1099-INTs - This one can be tough if you have accounts all over the place trying to ‘optimize’ your banking.  Me, I just do everything at USAA.
• Stock dividend 1099-DIVs.  Whether through a mutual fund, or by owning individual stocks.  You get one from each fund company or brokerage house.  What a pain.
• 1099G for state/local income tax refund
• Miscellaneous income - Again, tricky.  It’s easy to forget some of these.  Just a few: prizes, scholarships, jury duty pay, unemployment benefits.

Expenses

• Mortgage interest statement
• Real estate tax statement
• Student loan interest paid
• Gifts to charity
• Education expenses (post-secondary education)
• Child care expenses
• Miscellaneous expenses - Could include moving expenses, expenses related to looking for employment, volunteer work, tax prep, home office (if you’re taking that deduction)

I’ve left off stuff from this list because it’s my list.  But since I’m a regular kind of guy, I think it suffices for many people.  Besides, if you’re claiming farm income or trust income, you probably aren’t doing your own taxes anyway.  That said, if there are any glaring omissions, please leave a comment and let me know.

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Just a quick thought on the ’stimulus package’ the federal government put together.

Cheap money courtesy low interest rates.

Cash in everyone’s wallets thanks to the ‘rebate.’

Isn’t that how we got in this mess in the first place???

Not to beat up on the Fed some more, but isn’t cheap money the root cause of things like housing bubbles?  Won’t very low interest rates further hurt the already pulverized U.S. dollar?  Haven’t we seen this movie before?

And about those checks you won’t be getting until June.  According a Brookings Institution study on the results of the last time they did this, about two thirds of the average check was spent (the other third paid down debt or was saved).  Of that two thirds, much of it was spent on clothing.  When was the last time you bought a piece of clothing made in the U.S.?  Why don’t we just box up some more money into shipping containers and send it to China et al?   I don’t get it.

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With the floor dropping out of stock markets around the world, I’m amused by the reactions I see.  From the media, to bloggers, to neighbors and family - they all have an opinion and they all react in sometimes surprising ways.  But if you’re anything approaching a normal person, the recent market decline just isn’t that bad.

I’m okay.  You’re okay.

Here’s something to keep in mind when you’re hyperventilating watching CNBC.  Unless every dime of your net worth is in the stock market, you’re not taking the bath you think you are.

Yes, U.S. equities are down like 17% for the year.  But do you have 100% of your net worth in U.S. equities?  Almost certainly not. 

For example, if you have a ‘reasonable’ asset mix of 70% stocks and 30% bonds, your losses are decidely not 17% for the year.

If you’re like a great many Americans, much of your net worth is in your home.  Are average home prices down since their peak?  Yes they are.  But did you buy at that peak?  Probably not.  So even though houses have come down something like 10% from their peak price nationwide, you haven’t suffered a 10% loss.

More ways it’s not so bad

And think about a couple of other factors.  Inflation is rising.  Whether you believe the federal government’s specific numbers or not, the value of dollar continues to decline over time.  Yes, that means you’re paying more for stuff.  But it also means if you have debt (e.g. student loans, credit cards, car loans) you’re paying your creditors back with cheaper money.

Now consider time horizon.  You fall into one of four categories:

1. You are nowhere near retirement and your investments have years to recoup any losses they’ve recently suffered.
2. You are near retirement but you don’t have the majority of your savings in stocks, meaning what’s happening to the market doesn’t strongly affect your investments.
3. You are near retirement (or otherwise need money you’ve invested) but haven’t properly allocated your assets, in which case you’ve just learned a very expensive lesson and I can’t help you.
4. None of these applies.  You, like half of Americans, don’t invest in the stock market.  Go back to sleep.

So when you read that the stock market has dropped 5 kajillion points, just remember…it’s not so bad.

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I haven’t paid much attention to the presidential race, but something related to it in the Wall Street Journal caught my eye. Apparently there is such a thing as ‘phantom’ capital gains now and one Rudy Giuliani wants to make sure you’re not taxed on them. So what, you may ask, are phantom capital gains and why should you care?

‘Phantom capital gains’

The term ‘phantom capital gains’ refers to the fact that when you sell appreciated assets (e.g. stocks), you pay capital gains tax based on your basis (the price you paid for them whenever you bought them). Since then inflation has likely eroded the buying power of the dollar. So now that you’re selling them, the cash proceeds you receive are worth less in ‘real’ terms. You must pay taxes on any gains, regardless of that gain’s real buying power. With me so far?

Rudy Giuliani and other anti-tax advocates think people should not be taxed on the full nominal amount of those capital gains. In Giuliani’s plan, the capital gains that are subject to taxation would be indexed for inflation.

It’s a question of who wins and who loses…again

I have to admit, as a stock-owning citizen of these United States, when I first read about it, I was enticed by the idea. Paying less in taxes appeals to everyone’s basest instincts. But as I continued to read the WSJ article, I realized this was a very bad idea indeed.

You see, as I thought about the plan, it occurred to me that although my family owns way more equities than the average person in the U.S., this plan wouldn’t do much for me personally. Most of the stock I own is in tax-advantaged accounts like IRAs and 401(k)s already. Indeed, this is the case for the overwhelming number of people who own stocks in this country at all. Yes, we have a taxable investment account. But its contribution to our overall net worth is relatively small.

And we’re decidedly in the minority of families. Many own no stock at all (about 50% do). Of families that do own stock, many don’t own very much. And, again, most likely they hold it in already tax-advantaged accounts.

Consider that the median (half below; half above) 401(k) account balance in 2006 was $66,650 according to the Employee Benefit Research Institute (EBRI), a well-regarded organization. (There’s a caveat to that number, however. The data only holds for people who held 401(k) accounts for the entire 1999-2006 time period. Many people either don’t participate in 401(k)s at all or did for only part of that time. I don’t want to commit data torture, but you get the point.)

So who would benefit from an indexing of capital gains to inflation? Drum roll please.

Not surprisingly, the wealthy will be the overwhelming winners if a plan like Giuliani’s becomes law.  Doing something like this is the opposite of progress, to me.  It increases rather than decreases wealth inequality.  Whether you agree on whether capital gains taxes are good or bad at all is really immaterial.  A tax like this overwhelmingly benefits those most able to pay taxes.

Let me emphasize at this point that a plan like this would benefit me personally.  That’s important, because I’m not saying “tax the other guy” as is so often the case.  I just think our tax system ought to be progressive and I’d like to see income and wealth inequality in this country shrink instead of grow.

But that’s just me.

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Don’t bother filing your federal income taxes until February 11, 2008 for tax year 2007.  Because your Congress took so long to make changes to the Alternate Minimum Tax (AMT), the IRS will actually reject electronically submitted forms if you use several specific forms.  Don’t hurry if you use these:

• Form 8396 (mortgage interest credit)
• Form 8863 (education credits)
• Form 5695 (residential energy credits)
• Schedule 2, Form 1040A (child and dependent care expenses)
• Form 8859 (first-time homebuyer credit for D.C. residents)

It’s just as well, though because many more financial institutions are requesting extensions on sending out 1099s.  So don’t hurry filing those taxes everybody.

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