Look for your tax rebate in the mail soon, if you didn’t earn too much last year.

The details of the tax rebate are not all out yet, but here is what I can collect:
1. The minimum earned wage needs to be $3000 for you to qualify for at least the $300 per person rebate, or $600 per couple, plus $300 per dependent child.

2. The maximum before phasing out is $75000 for individual, and $150K for couple. As far as I can tell, those numbers are AGI or adjusted gross income. Therefore, all itemized or standard deductions don’t help you in this case. The phase-out goes pretty quickly. Once you reach $187K for couple, you get zilch or nada. But if you have children, the phase-out limits are higher. But I can’t find that number from all the press releases.

3. There seems to be an exception to #1. If you’re a retiree, and only have investment income, it appears that if you have paid some taxes, you can still get the $300 to $600 tax rebate. There was one example from marketwatch.com, and that’s about all that I can find.

Obviously, not all tax rebates will be spent. But this is probably a more fair way of dropping helicopter money. And I must applaud the quick actions by President and the Congress. Anything that is too late will not be useful at all.

A more important thing for the financial markets is that the loan limit on Fanni Mae and Freddie Mac will be raised to $729,750 or 125% of the median house price in the area. That is a huge increase. So it will help the jumbo loan interest rates, if you qualify for the payment. I tried a loan amount of $600K, with $150K or 20% down. Using 30 years fixed at 5.5%, $15K property tax, $1000 home insurance, and $200 monthly HOA fee (about the ballpark for the single family prices in 2006), one must fork out $5000 per month for housing. Since one needs to pay some payroll tax, if not income tax, plus one needs to eat and drive, I assumed that the monthly pre-tax income probably needs to be $12K per month, or $144K annual salary.

Again, I truly wonder how people can afford those homes a few years back (if it wasn’t negative ARM).

I have been watching for the AMT bill for sometime. The AMT bill affects me personally since my family income is right at the window of a middle-upper class income for a Californian, not too high to be called rich, but high enough to pay A LOT of AMT taxes (about $5000).

$5000 tax bite would definitely make some difference to a paycheck to paycheck Californian, and I think that will worsen the falling California housing market. I’m sure no one has ever planned for such a tax hike of $2000 to $5000. Without the patch, the AMT exemption was going to fall from last year of $62550 to $45000. Insignificant change, but meaningful dollars. Now that it appears that the tax bill would be passing, the AMT exemption would increase to $66250 instead.

Because of realized capital gains this year, I’m earning ZERO income for my last 5 biweekly paychecks for the remaining year, so that I can pay extra federal and state taxes for the realized capital gains. If I need to pay AMT taxes, it would put my long term capital gain at about 20% federal bracket, instead of normal 15% for long term gain. Of course, the california tax of 9.3% is on top of everything. Effectively I must pay about 25% on my capital gain tax, even when I don’t need to pay AMT tax.

Anyway, tax & inflation. That’s the game that we have to play as defense versus government.

This year I still have about $2000 left for my charity giving budget. But I haven’t found a good charity to donate to. I only have about one month left to do it, because I will be traveling internationally to visit my parents at the end of the year.

The biggest problem that I have with charities is that their CEO is paid way too much. Many are paid north of $150K up to $200K. Some are even paid more than $300K to $500K. Charity Navigator did a study on 2007 CEO compensation study for charities. The average salary is $145,270. The charity may say whatever they want, but the fact is non-profit also means no-profit. A CEO (or superintendent for a school district) for non-profit organizations is after all very different from a for-profit organization. There is no gross margin or pricing issues for products. The only effect from a better paid CEO and/or less efficiently organization is that the target that they serve ends up with less money. Taking money out of what poor people would receive is much easier than taking money out from a competitive and capitalistic marketplace of products.

I’m sure the salary is justified for some of the CEO, but I don’t have time to sift through all the details. Furthermore, when I need to justify for why I’m not spending my $2000 on my wife for jewelries or on my kids for more fancy toys, I must really spend my charity money for a VERY GOOD purpose. Every year, I easily donate more cash to charity than my total spending on jewelries for my wife and toys for my kids. But my wife understands that charity donation is spent for good purposes. Departing from your own cash is difficult certainly, but it is just part of the process needed to learn the truth about how every human being is part of the God’s family.

If you can know a charity that is involved with children and/or hunger (the causes that my wife and I are most interested in), and that 95% of the money goes to non-admin and non-advertisement activities, and the CEO’s salary is about $100K or less, please let me know. I would really appreciate it. Many thanks.

Any good ideas on how to collect an uncollectable personal debt?

I loaned $5000 to my friend back in 2001. It was meant to get him temporarily thru a job loss. So I never asked for any interest on my loan. Maybe he had a series of bad luck, or something. He found another job, and then got laid off again. It was during those high-tech recession. Later he managed to pay me back $500, which obviously wouldn’t cover any interest money that I would have lost. In any case, I counted it towards the principal.

As months and then years gone by, he is still unable to pay me back, and ran up his credit card debts. In fact, his credit scores were so poor that he couldn’t get any more credits nor even open a new bank account. Throughout these years, as a good friend to him, I have always being lenient to him by not giving him any pressure at all in repaying me. I only reminded him twice probably in 6 years that he should have a repayment plan. I also made it clear to him that requiring him to come up with a plan is really meant to get him in some financial order, rather than repaying me. Without a plan, an undisciplined person can’t go anywhere.

Then I sort of given up on him ever repaying me back. I simply asked him to help me document a personal loan loss with his social security number, plus signing/back-dating this loan document. This way I can properly deduct a long-term capital loss on my Schedule D, which would be allowed for this category, if such loan were not interest-free, and not meant to be a personal gift. I told him that he doesn’t need to pay me back, and that the worst consequence financially to him would be that he would have a personal and taxable gain of $4500, on which he most likely doesn’t need to pay any taxes (since it appeared that he didn’t have income that was taxable).

Throughout the entire process, I have never felt upset by him, but rather felt very sorry for him about his financial state. What was very unfortunate for him as a person was that he didn’t help me at all on documenting this. Rather, several months later, he simply disappeared. His phone number nor his address worked.

What a friend that I had! Despite this, I would still treat him as a friend if I see him again.

Of course, this unpaid loan hasn’t made my wife happy at all. Especially when my friend was buying the latest notebook computer, while I still had desktop, and that he has been using cell phones for years, when I had none. But given a choice of consuming my way to bankruptcy or saving my way to great wealth, I will always choose the latter option.

This is not another tax scam, but a tax law change. In 2008, if you qualify, you can pay 0% capital gain tax on your stock gain. But of course, this is not for everyone. If your marginal tax bracket is in 10% or 15%, you can pay 0% capital gain for any amount of stock gain before you exceed the 15% bracket. The maximum potential tax saving is about $3250 if you use $65000 for married filing joint, and all of the income comes from stock gain, which would be taxed at 5% in 2007, but will be taxed at 0% in 2008.

Although this doesn’t apply to me now, I was in 15% tax bracket only 7 to 8 years ago. I am sure that some of the younger readers here may take advantage of this, especially young couples. Even though you may not save much tax in total since you only pay 0% tax on the portion before your AGI (adjusted gross income) exceed the 15% bracket, it sure feels good. At the minimum, beating the inflation will be some 15% easier.

This tax saving however does not apply to kids under 19 or 24 if they are full-time students and dependent on their parents. But hey, who says that you must put your children as your dependents. You may save a lot more taxes if they (>19) simply file the returns on their own, paying a lot less capital gain, beating the kiddie tax at your own marginal bracket. Of course, this case is rare, but it would have applied to me, if not for the fact that my children are not more than 19.

Kiddie tax is a tax paying at the parental rate when the child’s income exceed $1700 (in 2007). For the first $1700, the tax that you would pay is 0% on the first $850 and 10% on the second $850, which amounts to $85. Assuming your marginal tax bracket is at 28%, that’s a tax saving of $391. But $1700 is not much at all after years of inflation. If you have a $34000 bank CD in your child’s name, you will have $1700 interest. And let’s say if your gift your appreciated stock to your child, which has returned you 25% total accumulated gain, you are due paying kiddie tax when this stock investment is valuing at $8500 (while your original cost was $6800, giving a 25% gain of $1700).

If you can afford to give away money to your child, I would guess that $8500 is not that much. It is almost guaranteed that you will be hit by the kiddie tax. The only way was to sell the stock with gain beyond the age of the kiddie tax, which was 14 and then changed to 18. But now it has been effectively changed to 24.

Here is from thestreet.com:

Last year, the age limit was raised, requiring children under age 18 to be taxed at the parents’ rate. Now, starting in tax year 2008, the age limit will apply to children under age 19 — or to “kiddies” who are full-time students under the age of 24.

My own child paid more than one thousand dollar in kiddie tax last year from the stock gain. Tax sucks. There are just very little ways for savers to get ahead. Especially when the income tax rate is high like mine is at 40% marginal bracket, sometimes it is very hard to motivate myself earning more money. I only get 60 cents out of every $1 anyway. Even my long term stock capital gains/losses are marginally taxed at almost 30%. No wonder America likes to consume instead of working for the government 5 months (~40%) in a year every year. Maybe I really need to change my state of residence.

If your tax deduction is too much out of the range for your income, it may raise a red flag to IRS. Here is a link to the latest tax statistics excel spreadsheetdirectly from IRS. I modified the spreadsheet a bit so that it is showing the actual dollar amount PER filing, much easier to read. You can look at my spreadsheet here which contains the original IRS numbers (46 million returns in Fall 2006), and my modified sheet, converting “number of returns” to “percentage of returns”, and “(total) amount” to “dollar amount per tax filing”.

The most interesting column to me personally is the non-cash charity donation. It is amazing to me that these non-cash amounts are so large across all income range. For example, non-cash donation averages $1178 for 64.82% of the returns with AGI from $100K to $200K. I’m way under that amount. I really wonder how much “valuable junk” you can donate to charities. And even 23.45% of the filing with AGI less than $5000 can “think of” $562 non-cash donation. My cash donation to charity is right at the ball park of my income. I guess I’m not comparatively stringy nor generous among my peers.

If you are interested, you can also calculate out how many percentage of people who have adjusted gross income above $500K? I calculated at the bottom of column B. Just 1.33% of people who pulled in more than $500K. But there were 4.78% who earned $200K to $500K, and 18.94% who earned $100K to $200K. Note that these numbers are per Filing. So it can be incomes from two wage earners in married joint filing.

I am not at the top 6%, but I made it to the top 25%. Are you just starting or have made some progress on this income ladder already?

Posted by “Frugal” at My 1st Million At 33.com

It was no secret that I’ve got $11781.91 dividends for year 2005. For year 2006, my dividends are $11646.15, not counting $2200 in royalties, more than $500 dollar from MLP cash distribution, and also not counting about $860 dividends in my children’s custodial accounts. These amount look great on paper, but actually this year I got slaughtered in some of these dividend stocks, and incurred a net realized or unrealized capital losses of about $12000 in 2006 in these, which pretty much erased all the gains from dividends + royalties. I incurred this huge loss in my dividend portfolio because I didn’t stay diversified enough, and had sold out all of my MLP positions due to their lower yields. The ones that I sold last (MMP, EPD) have gone up by 20+% instead of falling 20+% for some Canadian royalties. I did trade MLPs for PM stocks at the lowest point which have gone up 32% so far.

There is nothing to brag about (especially this year due to the surprising Canadian tax law announcement), but I really just want to share with all of you some “potential” money making tips. Everytime a company management pays out some dividends, they have absolutely no intentions of bringing down the stocks by distributing cash out, but rather believing that such dividends are sustainable in the long term.

By the way, producing such dividend stream does not require investing millions of dollars especially if they are paying 10+%. Currently, I have less than 10% of my portfolio invested in such dividend stocks.

Check out some of the investing series on My 1st Million At 33.com if you have not done so. Just my “two-cents” investing tips.