Making Work Pay credit

Most employees will receive a $400 ($800 for joint returns) tax credit in tax years 2009 and 2010. You should see this credit almost immediately in the form of reduced taxes withheld from your paycheck throughout the remainder of 2009. The IRS has revised the withholding schedules that your employer uses to calculate taxes withheld from your paycheck. You should receive the credit automatically. The tax credit begins to phase out if your income is above $75,000 or $150,000 for joint returns.

First-time Homebuyer credit

First-time homebuyers that purchase between January 1, 2009 and December 1, 2009 may be eligible for a credit of $8,000. Unlike the 2008 credit, the 2009 credit does not have to be repaid. The definition of a first-time homebuyer is more generous than you may think. To be eligible, you must not have owned a principle residence within the three year period prior to the purchase in 2009. Just like the Making Work Pay credit, this credit also begins to phase out if your income is above $75,000 or $150,000 for joint returns.

New Vehicle Sales Tax Deduction

If you buy a new car, truck, motorcycle or motor home between February 17, 2009 and January 1, 2010, you may be eligible to deduct the sales taxes. The limit of the deduction is $49,500 and begins to phase out for tax payers with modified adjusted gross income above $125,000 and $250,000 for joint returns.

The Obama Stimulus package encompasses many different areas. In fact, President Obama referred to it as the “most sweeping economic recovery package in the nation’s history.” Meet with your tax advisor to discover if these or other parts of the package can help you.

1. Choose your attorney with caution

If you can end the relationship without a legal fight, you will begin your new life with far more money. Legal battles are very expensive. A good attorney can prevent you from making a major financial mistake, but be cautious, because it’s easy to be taken advantage of during a divorce. There are many ethical attorneys practicing family law, but there are a few that will take advantage of people when they are most vulnerable. Because of the design of our legal system, attorneys may provoke fights between spouses that result in long, drawn out, legal battles that will drain your assets. These stressful battles rack up fees that, if prevented, could have been used for retirement, education or bills. Consult with many attorneys until you find one you are comfortable with and who is interested in efficiently resolving the divorce. You do not want an attorney that will drag you and your spouse through an unnecessary battle.

2. Leaving debt in your spouse’s name

During marriage you probably obtained credit that was also in your spouse’s name. It’s very important to pay off or refinance debt so it’s only in the name of the spouse that will be obligated to pay the debt. Often one partner takes responsibility for joint debt which leaves the other at risk of negative credit ratings from late payments. Even if payments are made on time, the other spouse may worry about the payments which can lead to stress and arguments.

3. Staying in the house

For some reason, during a divorce spouses will fight to the end to keep a house. There is probably a scientific reason for this, but I assume it’s because we want to maintain some stability in what is otherwise an out of control situation. The income that used to support your family must now support two. Keeping the home that was probably a stretch on the finances before now spreads the budget even thinner. More often than not, selling the home allows both parties to downsize until they are able to reestablish themselves. Sometimes we take one step back to take two steps forward. So try not to fall in love with something (a house) that can’t love you back.

4. Not considering the tax consequences

Divorce may force you to make the largest financial decisions you will make in your life. You may need to sell or refinance your home. Your retirement accounts may be split or used for other expenses and you may have alimony and child support obligations that last for decades. These transactions can have huge tax ramifications that affect both of you. You should not let taxes drive your decisions, but it is prudent to seek professional advice from an accountant or a fee-only financial advisor before making decisions. Attorneys are not expected to analyze your divorce decisions for the tax impact, so it is up to you to seek professional tax advice. More than likely, the fee you pay these professionals will be more than offset by the savings their advice provides.

5. Ignoring Insurance

An often overlooked, but important consideration in divorce is insurance. As soon as your divorce is final, notify all of your insurance providers that you are divorced and no longer living together. Changes in address can affect your coverage. You may also need to apply for individual health insurance or pay COBRA rates. Finally, do not forget to change beneficiaries on life insurance policies if appropriate. Very often people forget to make life insurance beneficiary changes and mistakenly leave the first spouse as the beneficiary even after a second marriage. Be cautious of making changes during the divorce because you can violate court orders, so it’s best to seek advice from your attorney before making these changes.

BONUS

I know the title said five pitfalls, but this last one is so important that I will share it as a free bonus. It’s the most important and may also be the most difficult for you to implement. Although ending a relationship is emotionally hard, try to separate your emotions from the financial side of the divorce. Do not try to win, because there are no winners in a divorce. The harsh reality is that the financial side of the divorce needs to be a business decision. Unfortunately, it doesn’t matter who was at fault in the divorce or who is to blame. The more you are able to look at the finances as a business transaction, the smoother it will go and the better off you, your spouse and children will be.

The truth is, when your taxes are prepared, you are merely documenting the past. There is not much that can be done to save money, when compared to early tax planning. With tax planning there is so much more you can do to dramatically reduce your tax bill.

I agree it’s exciting to get a big, unexpected tax refund, but what do you normally spend it on? It’s human nature to spend unexpected sums of money. If you have not mentally accounted for the money, it’s easier to view it as a surplus and spend it frivolously. Do you remember what you spent last year’s refund on? Was it something you’re still glad you bought?

Many argue this works as a forced savings account and enjoy the large refund. While I understand, I disagree this is the best way to save money. I’ve found that most frustration over money comes when you don’t feel in control of it. It’s common to believe that your employer, credit cards or the IRS are in control of your money. This out of control feeling is what causes stress and arguments over money.

By planning your taxes, you will begin to take control of your finances which is very comforting. You will never again dread tax season because there will be fewer surprises. By going through the tax planning process you will gain better awareness of where your money is going and then be able to direct it toward what’s most important to you.