What is alimony?

Alimony has a very specific definition in the eyes of the IRS. Alimony can be paid to a former spouse (in the case of a divorce) or current spouse (if legally separated). Alimony is specifically defined as “a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument.” In other words, giving to or receiving money from your former spouse “just because” is not alimony and will not be taxed as such (though it may be taxed as a gift if it’s large enough).

Alimony must take the form of cash payments made for the benefit of a former spouse. Typically, alimony is a flat amount or percentage of the higher-earning former spouse’s pay that is paid to the lower-earning former spouse each month or year. It may not take the form of a property or other non-cash settlement, and must stop at the former spouse’s death. Child support or a one-time payment at the time of the separation are NOT alimony.

Do you have to pay taxes on alimony?

Alimony is taxable to the recipient in the year it is received. The alimony payer may deduct the same amount from his or her income. The taxation and deduction does not take place unless payments between former spouses exactly fit the definition above. In addition, the two parties may not reside in the same household or file a joint return.

If you are receiving alimony for the first time this year, your income (and thus taxes owed) may be substantially higher than last year. You may owe a penalty to the IRS if you wait until the end of the year to pay taxes. To avoid this, adjust your withholding or make quarterly estimated payments to account for the increased amount.

If alimony ends or substantially decreases within three years of the first payment, the payer may retroactively lose the deduction and the recipient may be able to recover some of the taxes paid. This is known as “alimony recapture.”

How do I calculate the tax on alimony?

Alimony is taxed at your regular income tax rate. If you receive alimony you must file your taxes using Form 1040, and report the amount received on Line 11. You cannot use a shorter tax form. The alimony will be added to your other income to help determine taxes due. To calculate the taxes specifically owed on alimony, simply multiply the alimony amount by your marginal tax rate.

Alimony payers must also use Form 1040 instead of a shorter tax form. The deduction can be claimed even if you do not itemize deductions, and is reported on Line 30.

You can use the tax calculator to compute your taxes; alimony income and alimony paid are both included in the calculator.

Read more

• IRS Publication 504: Divorced or Separated Individuals
• Topic 452: Alimony Paid

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As I update all of our investments for year end (it takes me until April, because many of our accounts don’t send year end statements until then), I like to compare our investment returns.

The stocks and index funds are easy, as Quicken computes the IRR. But I like to be able to compare our other investments too, like our real estate.

Unfortunately, it seems as if there are so many formulas to evaluate real estate returns, (ROI, ROE, Cash on cash, etc) pinpointing just one to use as a comparison is difficult. And everywhere I look, I find differing opinions on which formula to use. So, I’m going to work through multiple formulas:

Return on Equity

First up is return on equity. The return on equity formula I’m using is the ROE for properties beyond the first year of ownership:

ROE = Cash Flow After Taxes (CFAT) / (Property Value – Mortgage Balance)

For the first real estate investment we purchased (the house), I get this for 2011:

ROE = $1705 / ($248162 – $200926)

For the property value, I use the estimated fair market value on our tax bill, less the cost to sell the property.

The cash flow before taxes for this property was -$56 this year, but the -$5680 tax bill at 31% brought the CFAT up to $1705.

If the property was in the first year, you can divide by the initial investment in the property.

ROE = 3.61%

Another Return on Equity

However, it seems like the first ROE calculation is ignoring the change in equity from the prior year in the denominator, which I think actually should be part of the return. The principal is reducing, and the value is increasing (hopefully), without any additional contributions from us.

So, I calculated ROE method 2 for last year:

ROE(2) = CFAT + Principal Reduction + Appreciation / (Property Value Last Year – Mortgage Balance Last Year)

ROE(2) = $1705 + $2866 – $658 / ($248820 – $203792)

ROE(2) = 8.69%

Internal Rate of Return

So that brings me to internal rate of return (IRR). If I calculate the IRR for 2011 in isolation, using the following calculation in excel:

• -$45028 on 12/31/2010 (equity at beginning of year)
• $1705 on 12/31/2011 (CFAT)
• $47236 on 12/31/2011 (equity at end of year)

In excel, my formula looks like =XIRR(A1:A3,B1:B3). The amounts are in the first three cells in column A and the dates are in the first three cells in column B.

XIRR = 8.69%

The IRR matches the ROE(2), but only because I lumped the cash flow into one payment at the end of the year.

More Formulas

If you are working through the same exercise for your real estate, the other calculations I used to begin are:

• Cash Flow Before Tax (CFBT) = Net Operating Income (NOI) – Debt Service – Capital Improvements + New Loan Amounts + Bank Interest Earned
• Cash Flow After Tax (CFAT) = CFBT – Income Tax
• NOI = Income – Operating Expenses
• Debt Service = Principal and Interest Payments

Here are my numbers I used in the formulas if you are following along at home:

CFBT = $14716 – $14772 – $0 + $0 + $0
CFBT = -$56

Income Tax = -$5680 X 31%
Income Tax = -$1761

NOI = $32356 – $17640
NOI = $14716

When you calculate the returns for each of your properties using the formulas above, what did you get?

Note: I ran all of these calculations at our partnership level, and didn’t factor in my use of credit card balance transfers which covered some of my personal equity in the properties, and provided additional leverage. I wanted to start with the basic calculations first before I make them over complicated!

Our Other Real Estate

I ran the same calculations for our other real estate, the condo and the vacation rental.

The condo has a better ROE(1) at 4.01%, but a negative ROE(2) and IRR at -16.02% last year, largely because the fair market value of the property went down. I also calculated the IRR since we bought it: 37.7%. Because it was bought at an auction, most of the equity that we have is from appreciation in the first year, which makes the total IRR much higher. The IRR since we purchased the house is 1.3%

The vacation rental on the other hand breaks the calculation, with the negative cash flow, and the impact of the vacation home tax rules. I’m still trying to find a way that we’ll be able to compare that one in the same way after removing the impact of our personal use.

What is My Return?

I’m still trying to figure out if I can really use either the ROE(2) or the IRR to compare to our other investments. Is there a better way to compare on an apples to apples basis?

I know that some of you are heavily involved in real estate investments, so I’d like to hear from you! What do you think of my approach? Feel free to offer another way to evaluate the return. I tried to include all of my numbers for you to play with!

How do you calculate the return on your real estate investments? And how do you compare it to your stocks?

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The $75 sign up bonus from Chase has one of the lowest amount of spending requirements we’ve seen in awhile.

How to Get Your $75 Statement Credit

1. Apply for the Chase Slate card.
2. Use the card to spend $300 within 3 months.
3. After 6-8 weeks, you’ll see a $75 statement credit on your account!

Chase Terms and Conditions

• No annual fee.
• One-time bonus offer & valid only for first-time cardmembers with new accounts.
• Previous and existing cardmembers/accounts are not eligible.

More on Chase

0% Intro APR. For those with good credit, Chase is offering a 0% intro APR for 15 months on purchases and balance transfers. For those with average credit, there is 6-month 0% intro APR offer. However, remember the balance transfer offer has a 3% fee.

Chase Blueprint. The Slate card offers Chase Blueprint, a unique set of features that can help you avoid interest, pay off balances faster and see spending trends at a glance.

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The new refinance plan is supposed to save homeowners an average of $3,000 per year by helping homeowners take advantage of the current, low mortgage rates.

The new Obama refinance program will be for homeowners previously not covered by the making home affordable program: homeowners who are current on their payments, but can’t finance because they are underwater or have a loan not owned by Fannie Mae or Freddie Mac.

Responsible Homeowner Refinance Plan

Here are some of the highlights of the refinance plan from the fact sheet released by the White House:

The refinancing program will be open to all non-GSE borrowers with standard (non-jumbo) loans who have been keeping up with their mortgage payments. The program will be operated through the FHA.

Simple and straightforward eligibility criteria: Any borrower with a loan that is not currently guaranteed by the GSEs can qualify if they meet the following criteria:

• They are current on their mortgage: Borrowers will need to have been current on their loan for the past 6 months and have missed no more than one payment in the 6 months prior.
• They meet a minimum credit score. Borrowers must have a current FICO score of 580 to be eligible. Approximately 9 in 10 borrowers have a credit score adequate to meet that requirement
• They have a loan that is no larger than the current FHA conforming loan limits in their area: Currently, FHA limits vary geographically with the median area home price – set at $271,050 in lowest cost areas and as high as $729,750 in the highest cost areas
• The loan they are refinancing is for a single family, owner-occupied principal residence. This will ensure that the program is focused on responsible homeowners trying to stay in their homes.

In addition, borrowers won’t have to submit a new appraisal or tax returns. Eligibility will be based only on the banks confirming employment.

Underwater loans will be eligible, but the LTV doesn’t appear to be set yet:

The Administration will work with Congress to establish risk-mitigation measures which could include requiring lenders interested in refinancing deeply underwater loans (e.g. greater than 140 LTV) to write down the balance of these loans before they qualify.

Now the plan must get approval from Congress…

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But honestly, for many people, this can be the most stress-inducing time of the year as their tables become covered with numbered forms like 1040s and 1099s. Thanks to a dizzying array of deductions, credits and exceptions, navigating the tax code, rules and regulations can be very frustrating.

Of course, the terminology of even basic concepts can be difficult to grasp. For instance, consider income, something that most people believe is easy to calculate. However, the Internal Revenue Service has a variety of definitions with respect to income, such gross income, total income, adjusted gross income and modified adjusted gross income. It would be a joke if it were not so serious. And believe it or not, we still didn’t even mention taxable income, the definition actually used to calculate tax!

Thankfully these terms are not as intimidating as they may first appear. Let’s walk through income as it relates to filing your tax return. And for simplicity let’s skip the official IRS definitions of income; I’ll do my best to explain them in regular words!

Definitions of Income for Your Tax Return

1. Gross Income: Gross income, is the term most people would associate with income: the total amount of money a person earned in a given year. Among other things, this includes salaries, wages, tips, interest and dividends. Your gross income is the money you earn at your job before all of the deductions on your paycheck. For example, if you work at a job and are offered a $50,000 salary, which is referred to as your gross income.
2. Total Income: When you begin filling out your tax return, contrary to popular belief, you do not start with your gross income. In our example, if you have a job where you earn $50,000 gross, but you put $5,000 into your 401k, you’ll actually report only $45,000 of total income for your salary. Luckily, your employer will help you compute this by issuing you a W2 form. Box 1 on your W2 will have the correct amount of total income for your job. In addition, you’ll get 1099s to help you determine the rest of your total income.
3. Adjusted Gross Income: However very few people will actually pay taxes based on the amount of total income they have earned. This is because there are a variety of deductions you can take in order to reduce your income. This is just what adjusted gross income (AGI) specifies: the amount of gross income after adjustments. Although this can be a complicated chore, it does reduce your total tax burden. Some adjustments that are normally used to calculate adjusted gross income include business expenses, education costs and IRA contributions. In our example, if you paid $1,000 in student loan interest, your AGI would be $44,000. You can see more adjustments in the AGI adjustment list.
4. Modified Adjusted Gross Income: With AGI out of the way, we can now calculate modified adjusted gross income. Modified adjusted gross income (MAGI) is used to determine your eligibility for contributions to tax advantaged accounts, such as IRAs. The contribution limits for Roth IRAs and the deduction for traditional IRAs are both based on MAGI. To calculate your MAGI, you’ll need to add back in various deductions to your AGI including the student loan interest we deducted earlier.
5. Taxable Income: Once you determine your gross income, then calculate the total income to be reported for taxes, make adjustments to get your AGI, and finally determine your MAGI to make your retirement contributions, we’ll begin working on taxable income. To get your taxable income, you need to subtract your deductions (standard or itemized) and exemptions from your AGI. Once you know your taxable income, you can use the tax brackets to calculate your tax due. Of course, it won’t be the final amount you’ll pay, as you can still deduct your tax credits.

Hopefully, the definitions of income aren’t as scary as they look! I always think it’s easier to define various terms when we walk through an example to link each definition to the next one.

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To help you accomplish your purchase planning this year, here is the Discover More cash back calendar for 2012.

2012 Discover More Rewards Calendar

After reviewing the Discover rewards calendar, there’s one thing I just can’t figure out. Why are they giving 5% cash back on movies every quarter? Anyone have any ideas?

More on Discover More Calendar

Cash Back Limits. The 5% cash back is for spending up to $1,500 each quarter in the bonus categories during the first two quarters. Discover hasn’t announced the cash back limits for 3rd and 4th quarter yet.

Activation. Don’t foreget you’ll need to enroll each quarter to get the cash back. Even though the Discover More 2012 calendar is available in advance, you have to wait to enroll each quarter.

How to activate. To enroll, you’ll need to login to your account online. From there, you’ll find the link to activate your quarterly bonus category.

Other Calendards

To see the other calendars for 2012 to compare, see the 2012 Chase Freedom Rewards Calendar.

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Something else it includes that I haven’t paid much attention to until now is an illustration of a sturdy three-legged stool. This stool represents what the state of Texas sees as the three legs of any healthy retirement plan: Social Security benefits, a 401(K), and our pension. Recently, I have begun to wonder about the sturdiness of this three-legged stool.

I have heard of many bankruptcies by both companies as well as governments over the last two years. Also, the last time I checked my statement I noticed an asterisk beside the health plan benefits. The asterisk stated that the health plan was not a guarantee and that basically the state has discrepancy to do away with health insurance benefits in retirement should it see fit. This had me thinking, for those of us who are fortunate enough to be offered pension plans (only 31% of employees were offered a pension plan in 2010), how safe is our pension should our company or agency declare bankruptcy between now and when we are ready to retire?

Your Private Sector Pension has Insurance

Pension plans may run out of money, the company may liquidate and there is no new company to take the plan over, or perhaps the current company can continue to operate but not while maintaining its pension plan. All of these scenarios spell trouble for workers who are counting on their pension benefit. Fortunately, there is insurance for your pension. The Pension Benefit Guaranty Corporation (PBGC) was formed in 1974 to insure private sector pension plans from the scenarios listed above.

This insurance is not funded by taxpayer money. Instead, companies must pay insurance premiums set by Congress. Other funds are received from investment income, assets from pension plans taken over by PBGC, and recoveries from the companies formerly responsible for the plans. To give you an idea of how much is collected, in FY 2011, $2.4 billion was collected from single-employer and multiemployer programs, and as of September 30, 2011, the PBGC had an investment portfolio worth almost $70 billion.

PBGC Limits Types of Benefits and Amounts

The PBGC has its limits including the type of payout and the amount of payout. For example, the PBGC does not guarantee health or welfare benefits, life insurance, vacation pay, severance pay, or benefits payable because of disability that occurs after the guarantees take effect.

Maximum Pension Benefit. Also, the maximum benefit payout for a life annuity with no survivor benefits for 2011 is:

• $54,000 yearly ($4,500 monthly) at age 65
• $42,660 yearly ($3,555 monthly) at age 62
• $24,300 yearly ($2,025 monthly) at age 55

Notable Bankruptcies and Pension Failures

Since its inception, the insurance plan has funded pensions for 1.3 million workers and retirees in 4,140 terminated single-employer plans. Generally air transportation and the metals industry account for 50% or more of all pension failures. However, with the decline in the auto industry and multiple automaker bankruptcies during the recession, automotive parts manufacturer Delphi Corp. became the second largest pension failure in the PBGC’s history in July 2009 with 69,402 vested employees.  The liability assumed by the PBGC was a staggering $6.1 billion. Other notable bankruptcies that resulted in failed pension plans includes United Airlines with pension liabilities of $7.4 billion (2005), Bethlehem Steel with pension liabilities of $3.7 billion (2003), and US Airways with pension liabilities of $2.8 billion (2003).  In recent news, PBGC is currently protecting the pension plans of 63,000 former Kodak employees as Kodak files for Chapter 11 bankruptcy.

Currently (as of the end of 2008), the PBGC is underfunded by a staggering $10.7 billion, a figure that continues to grow. This is due to the high number of company bankruptcies over the last three years.

So what does this mean for me and my public-sector pension plan? It turns out that if the state of Texas declares bankruptcy at some point between now and 30 years when I will be hoping to retire, my pension will not be insured by the PBGC (only private sector pension plans are insured). However, most public sector pension plans are protected by state laws and constitutional amendments. As for Texas, it looks like I will be fine.

Do you have a pension? Is it a private sector or a public sector plan? 

Other Articles You May Enjoy

• 5 Weird Bankruptcies Declared During the Recession
• Company is Going Bankrupt. What About My Pension?
• Brand Names that Kicked the Bucket During the Recession

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You’ll get 30,000 Delta miles with the American Express card.

How to Get Your 30,000 Mile Sign-Up Bonus

1. Apply for the American Express Gold Delta SkyMiles card.
2. Spend $500 within 3 months of opening the account.
3. Get 30,000 bonus miles – good for a free flight!

American Express Terms and Conditions

• $0 intro annual fee for the first year, then $95.
• Receive double miles on Delta purchases 1 mile for all other eligible dollars spent.
• Start redeeming with as few as 10,000 miles for $100 off a Delta ticket, with no blackout dates or seat restrictions.

More on Delta’s American Express Card

Delta Perks. Check your first bag for free on every Delta flight & receive Zone 2 priority boarding on Delta flights. Plus, receive 20% In-Flight Savings on food and entertainment. Also, you receive a $99 Companion Certificate annually.

More Card Options for Delta Flyers. The American Express Platinum Delta SkyMiles Card offers 20,000 bonus miles with your first purchase (5,000 of which are Medallion Qualification Miles) & the Delta Reserve card offers 10,000 Medallion Qualification Miles (MQM) after your first purchase. However, both of these cards come with a higher annual fee.

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We’ve made it no secret that my husband works for health insurance. Our original long term backup plan was access to my husband’s health insurance, which we would have access to for life in 7 more years. However, the writing on the wall says it’s time to let go of that backup plan and move on.

Enter private health insurance. We’ve done all the quotes for individual policies, but since my background is in insurance, I know that unfortunately the quote you get or the first year premium has little to do with your renewal premiums in the future.

Health Care in the Future

Obviously, a lot of the future health care costs may hinge on the health care reform and what it will look like if and when it’s actually implemented.

There is an interesting Kaiser calculator that predicts what individual health care will cost in 2014 with the tax subsidies. Based on the calculator, you could make some reasonable assumptions for future costs.

But obviously, (even leaving politics out of it) it doesn’t make sense to make any financial decisions based on that law. So we’re back at square one for predicting health care costs.

How Much Do You Pay for Health Care?

So as we do some planning to move into the individual health care market, I’d like to hear from you. Let’s talk about money. How much do you pay for health insurance?

For the group insurance plan we’re on now, we currently pay about $200 in premiums per month for a family HMO plan. In addition, the plan has a 10% coinsurance.

How much do you pay for health insurance? How much do you think it will cost in the future? If you plan to retire early, how much have you budgeted annually for health insurance costs?

Retirement

• Why I Hate Target Date Mutual Funds and You Should, Too
• It’s Not Too Late to Max Out Your 2011 IRA Contribution in 2012
• 12 Month Calendar and Task List For A Secure Retirement

Frugality

• Discount Grocery Stores: Are They Worth the Savings
• Frugal Living Basics: How to Cut Back
• Top 10 Couponing Tips from the Lazy Couponer

Investing

• How to Invest with Just $25 A Month
• Why I Don’t Use a Dividend ETF for my Leveraged Portfolio
• Claiming Investment Losses on Your Taxes
• Morningstar Mutual Fund Star Rating Review 2012

And More!

• Living on $50,000
• 12 Things Successful People Do Differently
• A Bird in Hand, or Two in the Bush
• Carnival of Wealth
• Festival of Frugality

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But how are you supposed to avoid these scams, especially since at the time when you are being approached you are most likely feeling vulnerable and extremely eager to get out of your present situation?

Below I’ve outlined clear signs and things to avoid when dealing with loan modification and other companies that deal with foreclosures.

How to Avoid Foreclosure Scams

• Objectively Go Over the Offer: One of the best ways to avoid a scam is to objectively look at what you are dealing with. Take the emotions out of the circumstance (no matter how difficult it will be to do this), and go over the deal with the same gusto as you would when comparison shopping for a car. What is your gut telling you? Do you have any sneaking suspicions, and is the person you are dealing with answering all of your probing questions?
• Know the Limits of Help: No one can help 100% or even 90% of homeowners facing foreclosure. Always be suspicious of guarantees in this industry, and realize that you might be in a situation that will need to run its course (without the help of a company).
• No Information Should be Hidden Up Front: Companies offering you a deal have an obligation to tell you how it works before you sign up. If the offer sounds like you need to pay for something in order to receive more information, then walk away.
• Get it in Writing: According to the FTC’s MARS Rule, it is illegal for a company to charge you anything before giving you an offer for a loan modification or other type of loan relief in writing. On top of this, they must also provide a document from your lender showing the changes to your loan if you decide to accept your lender’s offer, as well as disclose all fees to you. All of this information should make you feel good about dealing with a company; any lack of this information should leave you suspect about who you are dealing with. It should be noted that a lawyer can charge you an upfront fee, so long as they meet certain requirements, such as they are licensed in the state where you live or your house is located, as well as they put any fees collected into a client trust account and notify you of any withdrawals.
• Scrutinize Ads for Suspicious Language: No company can guarantee a modified loan to you. Any language in an advertisement with a guarantee, or that says 90%-100% of clients receive help is very suspect. In addition to this, filing a bankruptcy will not stop your foreclosure; if a company is promoting this, it is fraudulent.
• Scrutinize Ads for Language Mandated by the FTC: According to the FTC, a company advertising for help with mortgages must use certain language, such as declaring that the company has no affiliation with the government, the company has not been approved by your lender or the government, and the company must disclose that your lender may not approve a loan modification. Even though the company may advise you to stop making mortgage payments, they are required by law to tell you that this may result in you losing your home and it may damage your credit. For a complete listing, check out the FTC’s website.
• Read All Documents Thoroughly: Do not go into robo-sign mode when signing any type of contract. Read through all of the pages, and write down any questions you have. Make sure you get answers to your satisfaction before signing onto anything.

Have you or a family member been offered foreclosure help, only to find out it was a scam?

More on Foreclosures

• 4 Foreclosure Scams to Watch Out For
• 7 Ways to Fix Your Credit After a Foreclosure
• Buying a Foreclosure
• 5 Scary Foreclosure Fiascos

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© My Dollar Plan

For example, what if you know you want to make a big purchase (a big home improvement purchase, airline tickets, a large electronics purchase…), but you have some flexibility in when you want to purchase it. If you knew the purchase category would be on the list for a future quarter, you might want to hold off on your purchase until you can get 5% cash back.

To help you accomplish your purchase planning for the year, here is the Chase Freedom cash back calendar for 2012.

2012 Chase Freedom Rewards Calendar

More on Chase Freedom Calendar

Cash Back Limits. The 5% cash back is for spending up to $1,500 each quarter in the bonus categories.

Activation. Even though the Chase Freedom 2012 calendar is available in advance, you have to wait to enroll each quarter. Enrollment for each bonus category starts on the 15th of the month prior to the new quarter. For example, for 2nd quarter, you can sign up for the 5% cash back beginning on March 15.

How to activate. To enroll, you’ll need to login to your account online. From there, you’ll find the link to activate your quarterly bonus category.

Other calendars. Stay tuned, and we’ll put together calendars for other 5% cash back programs to help you plan out your purchases this year. In addition, I’ll still remind you each quarter to switch out your cards and we’ll review all of the cards at once.

Action Plan

Using the cash back rewards calendars should help those of you with a spendy spouse. For example, if my husband comes up with a new electronic gadget he really wants… I can remind him he’ll have to wait until 4th quarter to make the purchase so we can get 5% cash back. Of course, delaying the purchase that long might actually help avoid the purchase altogether, which will save even more money!

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But contrary to popular belief, you do NOT pay the same tax rate on all of your income. Instead, your tax bracket tells you exactly how much tax you will owe on income falling within the limits for that tax bracket. Any income below the threshold for that bracket will be taxed at a lower rate. Confused? Read on.

Finding your Tax Bracket

Federal tax brackets are based on income and filing status. Each taxpayer belongs to the 10%,  15%, 25%, 28%, 33% or 35% tax bracket. There is a minimum and maximum income for each bracket, as shown in the table below (all numbers refer to 2012 tax rates).

To find your tax bracket, first locate your filing status across the top of the table (you can check your filing status if you’re not sure). Once you have located your filing status, locate your income in the appropriate column. Look to the far left to find your tax bracket. So, for instance, if you are married, filing taxes jointly with your spouse and have a combined income of $100,000, you will fall into the 25% tax bracket. If you are single and have an income of $100,000, you will fall into the 28% tax bracket. This is referred to as your marginal tax rate.

Calculating Taxes

Once you have located your tax bracket, you can calculate your initial tax liability. You do not apply your tax rate to all of your income. Instead, you apply the appropriate rate for income in each bracket. So let’s say the married couple making $100,000 wants to see what they might owe in 2012.

1. Calculate 10% of income up to $17,400. The couple makes more than $17,400, so calculated 10% of the full amount ($1,740)
2. Calculate 15% of income between $17,401 and $70,700. Once again, the couple makes more than the maximum amount so calculates the entire potential tax. In this case, you have to subtract first: $70,700-$17,401 is $53,299. Then apply the 15% rate to get roughly $7,995.
3. Calculate 25% of income between and $70,701 and $142,700. In this case, the couple makes $100,000 and does not need to calculate the potential tax on the full income covered by the 25% bracket. Instead, calculate $100,000 – $70,701 to get $29,2999. Then multiply by 25% to get $7325.
4. Finally, add up all of the results from steps 1 -3. $1,740 + $7,995 +$7,325 = $17,060.

The couple could owe the IRS as much as $17,060 on their $100,000 in income. Note that even though they are in the 25% tax bracket they do not owe 25% of their income – instead they owe a maximum of 17%.

However, with deductions, exemptions and credits, their actual owed tax will likely end up being much less. To project your own tax liability (and potential refund), you can use our tax calculator.

Using Tax Brackets to Your Advantage

You can use the tax bracket thresholds to do a little tax planning. For instance, the couple above was making $100,000. In order to pay less than 25% on every single dollar of income, they would have to reduce income by nearly $30,000 – which is possible if they are taking full advantage of maxing out their 401ks.

At the same time, they can make $42,000 more and pay the same rate on their last dollar of income as they are paying now. Only once they hit $142,702 in income will they start paying 28% on their last dollar of income. So if they think they might bump up against the higher bracket in 2013 but have the chance to shift rental, investment, freelance (1099) or other income into 2012, they should do so. If they were making $141,000 in 2012 and thought they would make less in 2013 they might want to shift income out of 2012 to avoid paying the higher rate. If they made just over $142,700 they might want to make some extra payments to incur deductions and thus remain in the lower bracket.

You can use tax brackets to your advantage in other situations. For instance, if you know you are in a lower tax bracket this year than you will be in years to come, it’s a great time to consider a total or partial Roth IRA conversion. If you already converted and found yourself in a lower bracket than expected this year, you could reverse the conversion and then reconvert. You could also use your current and projected future tax brackets to help you decide when to harvest investment losses – take as much loss as possible (an amount equal to capital gains + $3,000) in years when you fall into a higher bracket.

Do you understand how tax brackets work? How do you use them to your advantage in tax planning? Tell us in the comments!

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The $200 from Citi is one of the offers we gave you a sneak peak into last week… did you catch it?

How to Get Your $200 Sign Up Bonus

1. Sign up for the Citi Dividend Mastercard.
2. Spend $500 within 3 months of opening your account.
3. Earn $200 cash back!

Citi Terms and Conditions

• No annual fee.
• $200 cash back & cash back earned on purchases through the Citi Bonus Cash Center are not subject to an annual maximum.
• You have to enroll for the quarterly 5% cash back but it only takes one click & in my experience, Citi has always sent me reminder e-mails about it.

More on Citi Dividend

Rotating Categories. Citi offers 1% cash back on all purchases plus 5% cash back on rotating categories on a quarterly basis. Jan-March 2012 is fitness, health care & utilities – that seemed a good reason for me to pay some of my utilities a few months in advance this month!

Cash Back Maximum. You can earn up to $300 per calendar year from purchases but you can get unlimited cash back at leading retailers through the Citi Bonus Cash Center and that does not apply to the $300 max.

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Joe, who is 37 years old and married, says:

I’ve used zero-fee, zero percent balance transfer offers to pay off my last home and current home mortgage. In a nutshell, I took out roughly 40K in balance transfers (I knew I could cash flow these and pay them off before they came due) between 2 credit cards and applied that money towards my mortgage.

I was hooked, and couldn’t wait to hear more from Joe about it. He loves telling this story, so he was happy to share the details with us (thanks Joe!).

How to Payoff Your Mortgage with a Credit Card

Joe used the strategy twice. Here’s more on how Joe did it the most recent time with his current house:

• Joe took out 2 no fee balance transfers, similar to the Discover More and Chase Slate offers right now.
• He paid off $38,598 of his 6% mortgage with the 2 credit cards (he used a Countrywide card and a Commerce card at the time), leaving $62,000 on his mortgage.
• He then made payments to the credit cards, and because there was no longer interest on the balances, every payment went 100% to the principal.
• He paid off the balances when the 0% rate expired.

Using a mortgage calculator, Joe determined that he saved over $20,000 in interest (at 6% over 15 years).

By using this strategy he was very focused on paying off the debt. Joe adds:

I think it helps you reach your goal quicker (paying off the mortgage) by giving you a set amount that needs to be paid off in a set amount of time…. If you don’t pay the credit cards off by the ‘deadline’, you’ll owe a large amount of interest.

Mortgage Payoff Tips

Extracting the money. When Joe used this strategy, he actually paid off his Countrywide mortgage with a Countrywide credit card (nice one Joe!). Since most credit cards prohibit paying off a loan at the same company, you can use the ways to extract money from balance transfers for ideas.

What about taxes? For those who want to argue with Joe about giving up his mortgage interest deduction, don’t worry he did the math for his situation. Joe found that when he carried his mortgage, he was only able to itemize about $14,000 per year, or $2,600 above the standard deduction in 2010, which meant he would save only $650 in taxes in 2010, much less than the amount of interest he was paying.

Remaining balance. Since Joe was able to eliminate a large portion of the mortgage balance with this strategy, he was also able to payoff the remainder much faster; more money was going to principal instead of interest with each remaining payment.

Available cards. If you are considering something similar, you can use the Discover More card at 0% and the Chase Slate card at 0% to replicate Joe’s strategy.

More on Joe

Obviously, Joe has a lot of disciple when it comes to money. Here’s more on his background, spending habits, and credit card use now that he is debt free:

I don’t play credit cards much more or try to use 0% deals to my advantage. My identity was stolen in 2010, so I’ve tried to cut back on doing credit card deals. I did that Sapphire deal under my wife’s name…. We use two credit cards currently for rewards, and that’s it. Pay them off each month. We don’t buy anything, unless we can afford it, including our 2010 Altima we paid cash for (salvage title, but it was a steal and no body damage). My goal is to pay cash (or put on credit card and pay off every month) for everything from here on out – no more loans, whether it be a home, car or any other big ticket item.

Final Thoughts

Joe shares his final thoughts:

You should not employ this strategy unless you can guarantee you can pay off the balance transfers before the interest starts up (either by free cash flow every month or by investments you could liquidate if you got into a bind, like losing your job). If you cannot guarantee that, it likely is not worth the risk.

Thanks Joe, for sharing your story! It’s such a great one and I hope it inspires readers to think outside the box when it comes to personal finance!

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We just updated the 2011 tax calculator, complete with all of the 2011 tax brackets, credits, deductions, and everything else you’ll need to estimate your tax refund before the tax deadline.

2011 Tax Calculator

The 2011 tax calculator works based on the following inputs:

1. Enter your filing status, income, deductions and credits.
2. Enter your projected withholdings from your W4 (or your total withholding on your W2 if you have it) for the year to estimate your tax refund for April 2012.
3. Select calculate to use the 2011 calculator to estimate your 2011 taxes.
4. Select view report to see the entire tax calculator report.

Tax Calculator Inputs

Please note that this calculator uses 2011 tax tables. All of the tax parameters and definitions used to build the free tax calculator are based on the current tax laws, including the payroll tax cut.

As a reminder for the 2011 tax calculator, the outputs will be based on your tax calculator inputs. Don’t forget to include things like your Roth conversion from 2010 if you chose to spread the taxes on your Roth conversion over two years.

AMT Tax Calculator

The tax calculator also includes the AMT exemption amounts; there is not a separate AMT tax calculator.

2011 Tax Calculator Changes

We have updated the 2011 tax calculator from the original calculator. The original Bush tax cuts set to expire in 2010 were extended into 2011 with the Obama tax cuts. The Obama tax cuts were for everyone and did not use the original Obama tax cuts based on President Obama’s budget extending tax cuts for families making under $250k ($200k for individuals) and limits on itemized deductions.

If you are looking for the original tax calculator we used for 2011 income tax planning last year, the Tax Foundation also has a 2011 tax calculator that helps you project your 2011 income taxes based on all the options Congress was considering before they finalized the current laws.

It includes 2011 tax scenarios for capital gains tax rates and many of the items included in the expiring Bush tax cuts.

2011 Tax Returns

I’m working on projecting our taxes with the updated tax calculator. I still use a manual spreadsheet too, but I think the 2011 tax calculator makes it much easier for all of you to use! By the way, the tax calculator matches my spreadsheet to the dollar, so maybe it’s time for me to finally abandon my old ways!

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