8 Ways to Save on Auto Insurance

Mistakes can be costly.  With that being said, there are two ways to get out of a financial crisis.  The first strategy involves assessing the amount of money being brought into a household on a monthly basis and employs a multiple stream of income approach to increase a family’s finances.  The second tactic involves a disciplined plan of attack that decreases expenses and pays down debt.  Each step is crucial for long-term sustainability.

Without an adequate amount of money coming in, men and women have a tough time sticking to a budget.  Items that once were paid for with cash now get put on charge cards which generate interest and cost a person more in the long run.  Add late fees, overdraft charges, and penalties and you have a recipe for disaster on your hands.

These financial blunders damage budgets and halt progress economically.  Not entirely avoidable in some cases, they are:

• Cashing in your 401K plan early. If you withdraw funds from a retirement plan before you reach 59 ½ years of age in most cases, you are subject to a 10% additional tax on early distributions.  This is on top of the taxes you would normally pay on the amount of money taken from the account.

• Not filing your taxes on time. The IRS charges a penalty for filing taxes late to the tune of 5% for each month or part of a month that a return is late.   This amount never exceeds more than 25%.  The penalty is based on the tax not paid by the due date and disregards extensions. Filing is easy and often free with TurboTax.

• Paying exorbitant interest rates on your credit cards. A lot of people fail to read the fine print.  Credit card companies entice consumers with promises of low introductory APRs and rewards programs.  Once you accumulate a balance, however, things change rather quickly.  Amendments are made on policies and percentage rates slowly rise.  Grace periods are shortened and late fees are charged.  Rewards points become harder and harder to redeem.

• Not getting a fixed rate cell phone plan. Extras like pay-as-you-go text messaging and internet access add extra costs to skyrocketing usage charges.  Choose a carrier with unlimited local and long distance calls for a fixed rate to avoid overages.  Know the conditions of your plan and ask for a discount.  You can save yourself up to 30% with one phone call to customer service.

• Spending more than you make and living beyond your means. Many people experience lifestyle creep with dual incomes.  Bills increase as income increases.  Rather than pay off the debt already owed, men and women continue to spend ridiculous amounts of money buying new things.  Higher mortgage and car payments are taken on and the amount of money being put in savings remains at a standstill.  If one of the dual income earners loses their job, they have a hard time staying financially afloat.  Without the recommended six months of living expenses saved, many couples have their vehicles repossessed or lose their homes to foreclosure.

You can avoid making these costly errors by employing multiple streams of income, paying off debt, reducing your costs of living, maximizing your retirement savings, and filing your taxes on time.

A savvy person is one who knows how to stand up to life’s challenges.  Overcoming financial obstacles becomes easier with a plan.  Make yours today and reap an abundance of rewards including more financial freedom and less dependency on credit.

Another Friday, another roundup. Before we get to the links I have just a couple of reminders. First, you have until 9 pm EST tonight to get an entry in for a $25 Amazon gift card. That’s right, make sure you leave a comment on the question I asked earlier in the week: what would you do if you had a million dollars? There aren’t that many entries yet so your chances of winning are pretty good.

Next, I wanted to remind you about the Generation X Finance email newsletter. You may have seen the signup form at the bottom of each post, but I just wanted to draw your attention to that once more. I’ve spent a bit of time in recent weeks polishing up the newsletter and now you’ll get a new article delivered to your inbox each week. This is an original and unique piece that isn’t just a copy of a post I made on the site earlier in the week so the only way to get it is to sign up. You will also be the first to know when there are time-sensitive deals that come along. I occasionally get special coupon codes or offers that may only last a short time so I’ll always let subscribers know about them first. So, at the bottom of the post below all of the links make sure you enter your information to get all the latest updates!

Choosing a Financial Planner – Thinking of hiring a financial planner? Not all planners are created equal. There are a few things you should look out for, some questions to ask, and credentials to be aware of before trusting someone with your money.

Six Common Myths about Stock Market Returns – If the past decade has shown us anything, it’s that the stock market isn’t what many of us thought. Just ask Dave Ramsey. According to him you should invest in growth stocks and earn 12% each year. Right…

Turbo Tax Free Trial! – Thinking of using TurboTax to file your taxes this year? Well, why not give it a spin for free! Ben tells you how, and also gives you some opportunities to win a free copy.

How to Claim Your Home Buyer Tax Credit – Do you remember that tax credit for new home buyers? I sure do, and even with the amendments to the credit we still got screwed with our new house purchase last year. But most of you will be far more lucky, so learn how to claim your credit this year.

The Ultimate Frugal Home Office – One thing I’ve been paying attention to more now that I work from home full-time is my home office. It’s a disaster, and I have a new desk on order and can’t wait to get organized.

Our Debt to the Future and Past – Did you receive financial assistance or items from your parents when you were young? Does this obligation automatically translate forward to your own children? Steve has some interesting thoughts about the subject.

How To File Taxes For Less – For many people, filing taxes costs money. There are a few ways you can file for free, or at the very least save some money. Here’s how.

Become Master of Your Financial Domain – Have you struggled with money in the past? Learn how to become the master of your financial domain.

Don’t Invest In The Stock Market – I always love Jim’s Devil’s Advocate posts. The titles always sound a bit absurd, but when you read the arguments there are usually some valid points.

Tax Tips for the 2009 Tax Year (And Some Giveaways!) – It might be 2010, but that doesn’t mean 2009 is completely behind us. Most of you still have taxes to do, so make the most of it. And don’t forget to sign up for some of the tax software giveaways.

Where to Turn When Your Adviser Does You Wrong

While I’m not a big fan of how many people quickly jump on the litigation bandwagon for almost anything these days, there are legitimate situations where you may have a case against a bad broker or advisor. Even so, keep in mind that you can’t sue just because you lose money on an investment they have recommended. Certainly, losses may be a part of some underlying illegal activity, but the fact that you lost money is not enough to seek legal action.

It’s also important to note that just because the finance professional you’re working with may have put you into an investment that didn’t do as well as expected it doesn’t mean they are doing anything wrong. Especially after the latest market meltdown where it was nearly impossible to find a safe place for money it should be clear that the likelihood of losing money out there is real. That being said, there are times when your broker or financial advisor are not exactly working with your best interest at heart which may give you some legal recourse.

Omission and Misrepresentation

If you sit down with someone and they explain to you that a particular investment guarantees a certain return and then fails to perform as such, the broker may be misleading you. In fact, any time someone tells you that an investment is guaranteed and they aren’t talking about something like a certificate of deposit or other guaranteed fixed income instrument, be very cautious. Even if there are guarantees for the investment it probably comes with significant fees and/or long holding periods which are not in your best interest.

There is also the case where a broker may simply omit information completely. A common example of this is when they advise you to purchase a mutual fund that has a front-load, yet they fail to mention it prior to the sale. Any time they don’t properly disclose the fees or commissions associated with a product you may have a case of omission.

Account Churning

This isn’t as common unless you have an account where the broker or advisor has authorization to place trades within your account on your behalf or if they are managing it on their own. For most people, these types of accounts aren’t something to be concerned with, but a lot of people want a completely hands-off approach and give their advisor the ability to make trades as needed. Generally speaking, the broker or advisor then makes a commission on each sale, which can lead to excessive trading within your account so that they can generate higher commissions. Even if the returns are good, this excessive trading is prohibited.

Unsuitable Investments

This is where it can become a bit subjective, but that is what makes it an area that is easily abused. Unless you specifically tell your broker or advisor to buy X number of shares of ABC stock, any recommendations that they make must be within your suitability. There are a few different criteria that can be used to determine investment suitability:

• Time horizon
• Risk tolerance
• Investment objective
• Liquidity

For example, let’s consider a 65 year old retired person that seeks investment advice regarding a way to generate a relatively steady stream of income with the ability to access their principal at any time. Just by looking at the client’s age, investment objective (to generate income), and need for a liquid investment, it is pretty clear what type of investment vehicles would be suitable. Even so, the advisor may make an argument for adding stocks or mutual funds to their portfolio, or even worse, lock the person into an annuity which generates fixed income, but lacks liquidity for a number of years. In cases like this, the advisor is probably not following suitability requirements.

Most brokers and financial advisors will do a basic suitability test and gather information about your financial situation and goals before making any recommendations. If you meet with someone and they hardly ask you any questions about your income, investment objectives, risk tolerance, or anything of that nature, be extremely cautious. How can someone honestly make a suitable recommendation if they know little or nothing about you?

Of course, good advisors will keep meticulous notes during your meetings and will keep risk tolerance and other suitability information in your file. So, if they have gone through the suitability process and you find yourself with an investment that just isn’t performing as well as you’d like, you may be out of luck. Legal recourse is only for when they completely disregard or don’t even consider your situation before making a recommendation.

What to do if You Experience One of These Offenses

There are two ways you can go about it–through the legal process with a securities lawyer or through arbitration. Attorneys who specialize in securities law can certainly help determine whether or not you have a case, but they can be expensive. Most attorneys will require an up-front, or contingency fee, before taking your case. In addition, they will likely seek somewhere between 20 and 40 percent of the damages collected.

What you may not know is that when you open an investment account with a broker or advisor, you probably entered an agreement to go to arbitration in the event something goes wrong. Arbitration is a dispute resolution process which is an alternative to the traditional lawsuit in court. Rather than have a matter decided by a judge and jury, participants to an arbitration proceeding have their dispute resolved by impartial persons who are knowledgeable in the areas in controversy. Those persons are called arbitrators.

Arbitration is generally a much cheaper and quicker process than the traditional legal process. Not only that, but you can generally represent yourself during arbitration, which can save a lot of money on legal fees. Once both sides present their case, the arbitrators make a final decision. Neither side can rebuke or appeal. For more information, visit the American Arbitration Association.

You Can Avoid and Successfully Fight a Tax Audit

The tax audit. Probably one of the most feared phrases in finance, but it doesn’t have to be. Yes, if you or someone you know has ever been audited, you know it’s right up there on the list of things you want to do with a root canal. An audit might not be fun, but it’s a fact of life for many. A fact of life that can usually be avoided. It’s true. The IRS doesn’t exactly randomly pick out taxpayers to harass as if it’s the worst lottery in the world to win, but they do select people that fall within a few certain categories compared to others.

For the most part, if you have regular W-2 or 1099 income and accurately report the income each year, there’s very little chance of being the subject of an audit. In fact, only a tiny percentage of all tax returns are subject to an audit. The problems begin to arise if you 1.) fail to report income on your tax return that was subsequently reported to the IRS, and 2.) you score high on the IRS scoring system that determines how likely it is you’re not reporting taxable income. It seems easy enough to stay out of the IRS cross-hairs if you simply report everything and play by the rules, but there are plenty of other red flags that can increase the likelihood of an audit.

Audit Red Flags

If you play by the rules there’s a good chance you’ll never have to worry about an audit. But, if you make even a few simple mistakes it could be enough to trigger the heavy hand of the IRS. So, here are a number of red flags that can trigger additional scrutiny of your tax return.

• Incomplete return – It should go without saying, but if you don’t fill out your return with all of the required information it’s going to trigger some sort of follow-up. In most cases it’s a forgotten signature, a wrong Social Security number or other minor error that can be easily fixed once the IRS lets you know of the mistake. But even so, this usually requires a human to look at your return after a computer spits it back out. The human touch may be just enough to catch a bigger problem. If you use a tax preparer or tax software such as TurboTax it’s unlikely you will miss data, but that doesn’t mean the data was entered correctly.
• Not including all of your income – Again, this seems like common sense, but it snags a lot of people each year. If your only source of income is a single job that issues a W-2 this is probably a non-issue, but if you have side income, bank interest, or dividends paid out by stocks in a taxable account it can be easy to overlook a small amount of income. If the income numbers don’t match what the IRS expects you can bet they will be contacting you to find out why.
• Charitable contributions – If you donated a few hundred dollars to a local charity and have a receipt to prove it there’s nothing to worry about. But if you have a large number of charitable donations, especially if you never gave much to charity in the past, the IRS might want to know why. It’s great to give money to charity, but just be careful and keep track of all contributions with valid receipts so that you can back up your claim.
• Self-employed business losses – If you own a business or simply make money on the side and show a significant loss (usually upwards of $10,000) that results in a lower tax liability you better be careful. While it is perfectly accepted to have a business loss, if the loss is sudden and large, or you consistently lose money year after year you’re a prime target for the IRS.
• The home office deduction – While the self-employed get many tax breaks, it also means more chances to make a mistake and get audited. One of these deductions is the home office deduction. There is a lot of room for abuse with this deduction and it’s easy for people to deduct too much. Take this deduction if you’re entitled to it, but make sure you really do have a space in the home that is dedicated to business and the items you’re deducting are for business use.
• Bragging about your taxes – Don’t go on Facebook or Twitter and brag to your friends about how big of a refund you got because of your creative deductions. The IRS is watching. The same goes for talking about income and other major financial decisions you make. Somebody might see that and put two and two together to realize your tax return may not be 100% accurate. So, just keep quiet.

What If You Get Audited Anyway?

Even if you try to follow all of the rules there are times when it just won’t be avoidable. But there is still good news. Not all audits are created the same. In fact, most audits aren’t even what you think they are and don’t involve an IRS agent coming to your house and rummaging through all your files.

The Correspondence Audit

This is the type of audit I have experienced, and it’s the most common type. In fact, many people receive these each year without even realizing it’s what most audits consist of. The correspondence audit is simply a letter sent to you by the IRS that identifies a possible error, information regarding the error, and instructions on how to remedy the problem.

In some cases this may result in actually receiving a larger refund, but more often than not it means you’ll owe some additional money unless you can prove otherwise. This correspondence also includes information for how to challenge the IRS’s claim and what information you might need if you want to fight it.

Either way, these audits are relatively painless unless you’ve done something major such as failing to report something significant. As long as you take care of the problem in a timely fashion you’re not likely to encounter any further action by the IRS.

The In-Office Audit

This is one of the audit types that people usually think about and fear. In these situations, you actually have to gather information and take it to an IRS office to prove that your return is accurate. The auditor will schedule a date and time to meet and suggest what documentation you should bring so that you can substantiate your claim.

It’s obvious to see how this can be something to fear. If you haven’t kept good records or have lost receipts or other important documentation, you obviously know that it can be difficult to prove your claim. Depending on what the IRS asks for, it could be as simple as showing a few expenses to trying to verify that something like your home office actually qualifies for the home office deduction.

Of course, if you have good records and aren’t trying to pull a fast one, even these audits are relatively painless. The IRS may see something differently than you do, but this is your chance to prove it and hopefully fix the issue before additional penalties are enforced. This is where having a tax attorney or accountant can be beneficial.

The Field Audit

The final type of audit isn’t typically going to happen to an individual. The field audit is one where the IRS sends an agent into the field to meet with a taxpayer on-site. These audits are most commonly done on businesses or self-employed individuals making a lot of money. These audits are also the most feared.

If you do happen to be subject to a field audit, it’s imperative to have legal counsel. There may be significant sums of money at stake and tax laws can be complicated, so having someone on your side that specializes in tax law can potentially save you or even your business.

What to Do Once You’ve Been Audited

First, don’t panic. It isn’t the end of the world, and if you’re like most people it’s simply a matter of clarifying a mistake. If it’s just a correspondence audit you can probably handle the issue by yourself by finding the piece of information they are questioning and making the appropriate changes. Maybe you forgot to sign your return, you transposed some numbers, or simply forgot about that late 1099 that came in after you already filed. Either way, as long as you kept good records it probably won’t be that big of a deal.

If you’re completely lost and have no idea what they are asking for or why the numbers aren’t adding up, it’s time to seek out help. If you used tax software like TurboTax orH&R Block at Home, they provide you with some basic audit information, but typically you need to purchase additional audit support if you want them to handle the audit process for you. If you worked with an accountant or CPA you’ll want to contact them so that they can work with you to deal with the IRS and track down the error. This is one of those times where deciding to get a CPA to do your taxes can really pay for itself.

This is also why it’s important to keep important tax documents for at least three years. Generally speaking, the IRS will only initiate an audit up to three years after a return was filed, but that doesn’t mean I’d throw all your tax stuff out after three years. You may have supporting documents that go back beyond that, so in my opinion, keep those documents for much longer. Those returns and receipts don’t take up that much space, so it won’t hurt to hang on to them for a few more years.

Finally, while we’re talking about supporting documentation, don’t give the IRS any more information than what they specifically ask for. If they want to see a certain expense or a source of income, that’s all you want to show them. Don’t go and attach all your receipts or unnecessary documents they didn’t request. You may feel like you’re being extra helpful, but all you’re doing is giving them an opportunity to find more errors. So, stick to what they ask for and nothing more.

If you have followed the steps to minimize the chance of an audit and have taken care to follow the instructions if you are audited you’ll have little to worry about and get through the situation without much trouble.