Best stock investments
Ed note: this article was published in mid-March, but readers continue to ask about it so we’re re-posting this teaser solution for you today. The tax filing deadline for those who didn’t apply for extensions is obviously past, though folks often submit amended returns if mistakes were made or deductions missed. What follows has not been updated or revised since it was originally published on March 14, and the original comments from readers are still appended.
Are you really going to get a big ol’ check from the government?
Well, maybe. But it’s not so secret as the Oxford Club folks would like you to believe… and you don’t need them (or their $49 subscription) to learn about it.
You probably don’t need me for that, either, free or not, but quite a few readers have been asking this morning so I’ll try to quickly explain what they’re talking about.
The ad comes from George Rayburn at the Oxford Club…. here’s the basic idea from their ad that got everyone excited:
“If you’re one of the 119 million eligible taxpaying Americans, you have only until April 18.
“That’s the deadline for you to collect on Section 106 of the new Congressional law that…
“Gives Every Taxpaying American the Right to Collect a ‘Cash Rebate’ on Nearly EVERY Single Purchase Made in 2015
“Bloomberg estimates that $42.4 billion will be given out.
“And remember, you don’t need receipts to collect.
“As one U.S. senator put it, ‘we have been trying forever to get something good for the middle class… and this is a jackpot.’”
And then they make it sound even more fantastic…
“This is not a joke.
“I’m talking about an opportunity to collect a ‘cash rebate’ on virtually anything you paid for over the past year.
“A new pair of shoes…
“Your vacation hotel bill…
“Lunch with friends…
“A new leather sofa…
“Christmas presents for the kids…
“Even big-ticket items like an engagement ring… a wedding… or a new car, boat or RV…
“The government is willing to send you cold hard cash for all of it.”
So what are they really talking about? Can you actually get a “cash rebate” from the government just for buying stuff?
Well, sort of. What the Oxford Club is talking about here is the fairly recent opportunity to choose to deduct either state and local income taxes or state and local sales taxes when you file your return with the IRS…. but by “fairly recent” I mean, “passed into law a little over ten years ago.” This isn’t new.
Wait, but they said Obama just signed it in December!
Yes, but what was signed in December was the “permanentization” of that tax break. For the past ten years, this has been an exception that Congress has voted in each year — but it wasn’t part of the “permanent” tax code, so Congress had to renew it each year.
Now, it’s a permanent part of the tax code.
Which doesn’t mean your tax calculation will be any different this year than it was last year or the year before… but it does mean that you should be able to have more confidence that the tax break will remain on the books.
(There’s a summary of this omnibus/extender tax bill here if you’re interested in more detail… it made a few deductions like this permanent, and extended others for a year or more, but there’s nothing big or new in the bill that I’m aware of beyond that.)
What does this “rebate” (sales tax deduction) really mean?
Well, this is mostly a way that Congress has tried to make Federal taxes more fair — those who itemize deductions on their Federal returns have always been able to deduct state and local income taxes and real estate taxes when calculating what we owe to the Feds (at least, for as long as I’ve been paying attention), but for many folks without state or local income taxes there wasn’t a Federal tax deduction to offset what they pay to keep their local government services running.
Every state has bills they have to pay, and, just as with the Federal government, that money overwhelmingly comes from individual taxpayers (except maybe for you, Delaware… and you, Alaska) — but states can mix up the way they collect taxes, whether they want to put a larger burden on sales, or on property, or on income, or some combination of the three. Florida, for example, can make itself attractive to retirees by not taxing income… and make up for a lot of that with a sales tax that is partially paid by their huge numbers of tourists (though they do have above-average property taxes as well).
There are only nine states that don’t have state income taxes, but some of them are big (or politically powerful), like Texas and Florida, and all of them except New Hampshire and Alaska have state sales taxes… so for residents of those states there is now a new (since 2004, at least) tax deduction: They can deduct their sales taxes just like most of the country deducts their state and local income taxes. It’s right there on your form 1040, Schedule A — question 5 that asks what you paid in state and local taxes, and you enter either (a) income taxes or (b) general sales and use taxes, whichever is higher.
And yes, as you can imagine, the recordkeeping obligation could easily be overwhelming if you were expected to keep all your receipts for stuff on which you paid sales taxes… 18 cents at CVS for that box of tissues, $11.83 for your dinner at the restaurant, etc. — but the IRS, thankfully, has made it quite a bit more simple than that. They have a website with a handy-dandy calculator that you can use to provide an estimated and “IRS approved” number for your state and local sales taxes, based on your income level and your zip code. You can even add on to that for a few specified large purchases — primarily vehicles or homes (ie, cars, boats, planes, RVs, new home or substantial addition or renovation if you pay normal sales tax on it… not all places tax homes and construction the same way). Or, of course, you can actually try to figure the real number on your own if you think your spending is well above average… but for that, you’d need to have documentation since you’re not going with the average estimates the IRS calculates for you.
It might even be worth looking into for folks who do pay state and local income taxes, since it’s possible that if your taxable income was relatively low but your purchases were relatively large the sales tax burden could have been larger than the income tax burden for any given year.
I am NOT NOT NOT a tax expert — I hire an accountant to do my taxes, and when my tax situation was simpler I used TurboTax. If you use any sort of assistance, either human or software, to do your taxes, then you’ll very likely have already had these numbers checked for you in past years and it will be part of your calculations for 2015. This is, I assume, a very basic consideration for almost anyone who itemizes their deductions, it’s not a secret or a surprise…. though I suppose some folks might have overlooked it.
My guess (again, NOT an expert) is that the biggest group who might have missed this tax break over the past decade are those who retired to Florida recently and who do their own taxes without any help or computer support and aren’t accustomed to the sales tax deduction… or those who have relatively low taxable income (like some retirees, for example) but who made a large purchase, like a retired couple who lives in Massachusetts and pays state income tax but has relatively low income because their investments didn’t do well and they withdrew the minimum from their retirement accounts. If they use some of their nest egg to buy a $100,000 RV, they could have higher sales taxes than income taxes for that given year and perhaps skipped over that “did you buy anything big this year” question from their preparer at H&R Block because they didn’t think it was important (assumptions: a couple with $55,000 in income would pay about $2,500 in income tax in MA and only about $500 in calculated sales taxes… but the $6,000 sales tax on a $100,000 RV would push them to the sales tax deduction for that year). Both those hypothetical examples are well within the core marketing demographic for the Oxford Club, which, like all investment newsletters, doubtless finds its most fertile hunting ground among the relatively affluent Americans who are retired or near-retirement.
You do have to itemize your deductions to get this tax deduction — just as you do with the existing real estate or income tax deductions. Most Americans with low-to-medium income levels don’t itemize deductions on their taxes (only about 30% of households itemize, on average) — and in some cases might overpay just because they’re unaware of existing breaks that could push some of them over the standard deduction, or simply don’t have the time or acumen to follow TurboTax (or other) instructions for a couple hours to see if there’s something they’re missing. It’s really not until you get to incomes of close to $100K that everyone (or 95%+, at least) takes full advantage of itemizing. The sales tax deduction is probably not likely to be enough to push you over the line from “standard deduction” to “itemizing” all by itself if you’re “average,” though it might help push you over the line if you also do have a mortgage or other substantial deductions (medical costs, theft, property damage by natural disaster, etc.)
I just did the IRS sales tax calculations for myself — and, as expected, the IRS calculates that I pay far more in state income taxes than I do in sales taxes… and I haven’t made any massive purchases to erase the difference (no Ferrari, no RV, etc.), so no surprises: I still deduct my state income taxes. (I live in Massachusetts, state sales tax is about 6.25% and income tax 5.15% — you don’t need to know that for the calculator, the IRS knows your state tax rates).
And you’ll be pleased to know that this is one case where the calculating is pretty easy — just go to the IRS Calculator here and follow the steps. They say it will take five to 20 minutes, but you’d have to read pretty slowly or look up all the numbers from your files to have it take more than five minutes — getting a rough estimate will take you no time at all.
So there you have it — I expect lots of you were already fully aware of this, or blissfully unaware because it will never impact on your lives or your tax obligations, but it is real and it has certainly made a difference for folks in no-income-tax states and a few other folks in non-typical circumstances. And it’s also been the law of the land for about ten years, and has recently been made permanent so you won’t have to be on pins and needles each Winter as you watch to see if Congress extends the break another year.
To reiterate: I am not a tax expert, I don’t even do my own taxes… but this particular one is fairly simple. And no, it is not a “rebate to 119 million Americans”… but for at least the 24 million or so households in “no income tax” states (or the ~8 million of them who itemize deductions, anyway) it could certainly make (and in all cases where they’ve been paying attention since 2004, probably already has made) a difference on their tax returns.
So there’s your quick answer for the day — yes, there are newly permanent tax deductions out there that you can call “cash rebates” if you want to do some exaggerating… and no, it’s probably not anything new for you (but it will only take five minutes to double check).
And that is, of course, not the only “special secret” the Oxford Club folks are peddling — they’ve come up with a few dozen things that seem, on the face of it, to be exaggerated variations on things that any financial planner or retirement advisor would tell you…
“401(k) Secret #4: How to Keep the Government From Taking a 20% Cut of Your 401(k)” is presumably the quite common advice, “don’t cash out your 401(k) instead of rolling it over, because it will cost you 20%.” I hope most folks know that, but I know plenty of folks who left jobs when they were young and let their employer send a check to them for their small 401(k) balance instead of rolling it over into an IRA, and they missed out on more retirement savings and did pay a tax penalty.
“401(k) Secret #2: How to Add $155,000 to Your Account Total” is indeed a tease for anyone nearing retirement — that’s basically their way of saying “read the fee disclosures on your 401(k), because you’re probably getting ripped off by high fees”… which is particularly important for younger workers or those thinking about leaving their 401(k) with an old employer’s plan instead of rolling it over — but if you’ve been paying into a 401(k) for thirty years, you’re not getting those fees back. Here’s a quick piece about that.
“401(k) Secret #1: How to Become a 401(k) Millionaire on a $35,000-per-Year Salary” is just a reminder of the common-sense rule: Save more, and regularly, and you can end up with a lot even if your salary isn’t huge. The story that most folks quote about this was in Smart Money four or five years ago, you can see it here… here’s a quote from that article to let you know what that “secret” is:
“Though many savers may be scarred by the past decade of lousy returns, getting to $1 million over the course of a 40-year career should be a manageable goal — even for some lower-income employees, says Greg Burrows, vice president of Principal Financial. Someone who earns $35,000, saves 12 to 13%, including a company match, gets an annual raise of 3.5%, and annual returns of 7% would save a million dollars.”
And there are lots of other hinted-at “free money” kinds of programs, the kind of stuff they used to hawk in late night infommercials as ways to legally steal from Uncle Sam… like this:
“Easy Money Secret #4: Get up to $7,500 to Fix Up Your House if You’re Over 62
“If you’re over 62 and planning any sort of specific upgrades to your house… the government might actually GIVE you up to $7,500 to get it done.”
Which, of course, is kinda true — as long as you’re too poor to repay a loan for that kind of work to modernize or renovate your home. That’s the Section 504 Home Loan (and grant) program described here.
And there’s this one: “Easy Money Secret #1: How to Get up to $401,982 in ‘Unclaimed Money’ From the State Treasury” …
… which is just about the unclaimed funds that are often listed in the newspaper or can be searched through state-controlled websites (and some commercial sites that charge fees, so be careful). The Feds have a website linking to various sources here… but the key, of course, is that it has to be YOUR unclaimed money. The example they give for that $401,982 is a butcher outside of DC who got a surprise life insurance settlement and was featured on Inside Edition, though presumably that’s not normal (his father had passed away a decade ago and had a life insurance policy that was never claimed).
We had an unclaimed funds “windfall” a couple years ago as well, which amounted to about an hour of paperwork and something like $50 from some old account that had been forgotten… so there is money out there, but it has to actually be yours and you have to do a little work to search for it and claim it, and oftentimes the amount of money is relatively small (which, perhaps, is why you or your relatives forgot about it at the time). I don’t know what the odds might be of huge amounts of money, but presumably life insurance payments and old retirement accounts would be among the larger sources of the big “surprise” unclaimed funds — so while you’re at it, check out the Insurance Institute’s best practices for updating your own policy, telling your beneficiaries about it, and telling your insurer where to find those beneficiaries.
I didn’t look into all of the “secrets,” but presumably they’re similar in nature — and heck, if you’ve got a favorite “free money” secret, feel free to share it with a comment below.
I can’t imagine you want to discuss taxes, and I can’t provide any great insight, but our friendly little comment box is available below for that, too, if you’re interested in using it… enjoy!
– Best stock investments