Is filing your return for free via tax filing companies a scam?

I got an email with subject line: Submit Your FREE Federal Return!

Main content of the email was: Enter postcard code FEDERAL12 by January 25th 

to receive a FREE Federal tax return**!

Where  **File a State return for only $4.95. Free Federal Return valid for TaxSlayer.com accounts not e-filed in 2011. Not valid with any other discount or promotion. Discount not to exceed $9.95 regardless of version.

I received the similar postcard in the mail.

So I registered before January 25th, but I did not see the option to enter postcard code. So I emailed customer support asking the same. Following is the response that I got from them.

“Thank you for your email request.

That postcard was sent in error. Please ignore. We are sorry for the inconvenience.

Thank you,”

I am not satisfied with this and asked them to allow me to file return for free. Lets see what happens next…

Why limit on IRA contribution is less than 401k contribution?

It’s interesting that limit on 401k contribution is 16,500 and limit on IRA contribution is 5,000. What could be the reason behind this?

Seems like 401k should be better for employees. After all policy makers want employees to prosper and they make most of their policies so the average people would benefit from it. After all it their job. It should be the logical reason why law makers did it this way. But is it really the case?  

A few employers match upto 6% for 401k contribution.  I don’t see any other advantage of 401k over regular IRA.

Employee has to choose from very limited funds available in 401k plans. One can choose whatever he/she prefer in IRA, but it is not the case with 401k.

Why are there very limited choices in 401k plans?

Would employer benefit from a financial institute whose funds are allowed in 401k plan? I don’t know! Would financial institute benefit from it? Most of the funds available in 401k plan come with expense ratios and no matter how that fund perform, financial institute who offered that plan would make money from that expense ratio. So financial institute would definitely benefit from it!

If financial institute is going to be benefited from it, why policy makers did it? Did/do policy makers get benefit from it? I don’t know if financial institutes pay policy makers or not. May be this is one of the reasons why politicians get financial help from financial institutions for their campaign during election!

Wasn’t the purpose of introducing 401k plan was to help employees? Then how did financial institutions and policy makers are benefiting from it regardless employee get benefit or not!?

Sometimes I wish that limit on regular IRA contribution would be higher so that I can contribute it more and choose whatever fund I like!

Big student debts and student debt forgiveness program

If you are working in an industry/position where you are eligible for student debt forgiveness program, all tax deferred accounts become even more important to you.

A lot of student debt repayment plans are income based. All the money you put towards tax differed accounts, are excluded from your adjusted income and your installment amount for student debt is based on your adjusted income. So it should be a good strategy to pay minimum towards your student debt in this situation.

Annual payments for a student debt are 15% of Annual Gross Income.

Let’s understand this with an example:

Let’s say you have massive student debt and 60,000 annual income.

Scenario A: were you are not putting anything into tax differed accounts.

If you don’t put anything into your tax deferred accounts, your annual payment for student debt would be 9,000. By not putting anything into tax differed accounts, you would pay 90,000 towards your student debt over ten years after which your dent is going to be forgiven.

Scenario B: where you are maximizing your tax differed accounts.

401k contribution: 16,500

HSA contribution: 1,200

Total contribution = 17,700

So your annual gross income would be: salary – total contribution = 60,000 - 17,700 = 42,300.

In this scenario your annual payment for student debt would be 6,349.

By doing so you will pay 63,490 over ten year period.

Comparison between two scenarios:

Difference between scenario A and scenario B = 27,000

That’s correct. You will save 27,000 if you maximize just 401k and HSA accounts.

Accounts like 401k, traditional IRA and HSA accounts are most common tax differed accounts.

401k

What is 401k?

401k is pre-tax retirement account offered by employer.

Lets see how does pre-tax retirement account work:

Let’s say you are making $50k a year. For the sake of simple calculation, lets assume that $50k is your adjusted gross income. You will fall under 25% tax bracket if filing single. Your total federal income tax for this year would be 8,625. This is 17.25% of your income.

Now assume that you contribute 16,500 to your 401k. In this case your taxable income will be 50,000-16,500 = 33,500. You total federal income tax for this year would be 4,600. This is 13.73% of your income.

So I person making 50,000 deciding to contribute 16,500 to 401k will pay 4,025 or less for this year in federal income tax.

401k Contribution limit:

Contribution limit for 401k for the year 2011 is 16,500 a year.

Contribution limit for the year 2011 is 17,000 a year.

The employer match in 401k does not count toward this limit.

Iphone Mania

We see more and more people are getting iphone. Apple introduces newer and hotter iphone every year and a lot of us are waiting in line to grab newest iphone and spending a lot of money to do so. If you are one of those who kept buying newer iphone as Apple kept introducing them, you might find that it might not worth to spend all those money in getting newest iphone. If you can afford it, nothing is wrong in it, but if you are not wealthy I don’t see a point in spending hundreds of dollors in buying a phone. With the announcement of iphone 4s, apple also announced that they are selling iphone 3Gs for free. Which means iphone 4 would be free one day and so will iphone 4s be! I am not in hurry and I will get newer iphone when I won’t have to pay extra to get it. I am getting iphone 3GS. I am getting it not because I need it, but I am getting it because it is for free (actually $50 when you include initiation fees and taxes) and I am going to sell my existing iphone for more than $50. So effectively I am not paying anyting from my pocket and I might make some money as it is likely that I will be able to sell my existing iphone for more than $50. This make sense financially, at least to me.

Cash back and other reward credit cards

http://www.nerdwallet.com/ is very helpful site for people who love using credit cards for cash back and other reward credit cards. All you have to do is choosing card type (cash back, point or travel), select your credit type (poor, average, good and excellent) and enter amount for your different spending categories and it will tell you to which card will be most beneficial! You can also personalize these choices further if you are interested. And you dot need to enter any personal information for that.

Working on 1099 vs W2 and self employment tax

Person working on 1099 is required to pay self employment tax. Self employment tax is 15.3. Self employment tax includes 12.4% social security tax on earnings up to $106,800 and 2.9% Medicare taxes.

Person working on W2 pays 6.2% social security tax on earning up to $106,800 and 1.45% Medicare taxes. Employer pays the same (6.2% social security tax on earning up to $106,800 and 1.45% Medicare taxes).

You can get current information regarding these taxes at http://ssa.gov/pubs/10003.html