Time to take a tax strategy

Unfortunately with unprecedented spending by the new administration, there will be a point when the bill will come due. You can agree or disagree that it is the right thing to do, but one thing remains un-questionable, we will be taxed more heavily. Now, many individuals have taken solace in the fact that the president has said that the increases will only impact people with income over $250K, but this is simply not true. As with all taxes, even those intended for the rich, will find their way down to all incomes. All one has to do is look at the AMT, once a tax to ensure that high income earners “pay their fair share” now impacts people making as low as $50K per year. In NY, the millionaire’s tax now applies to people making nowhere near a million dollars. Finally, add inflation into the mix and individuals will really start to push the limits on the phase outs and policies intended for the wealthy.

So how can you minimize your taxes and keep more of your hard earned cash?

Maximize your 401K holdings

This is probably the simplest way to put money to work for you tax free. The current limits are $16,500 for individuals or $22,000 for anyone over the age of 50. The money goes in tax free and reduces your taxable income in the current year. As your money grows, you do not pay taxes until you retire. At that point the money is taxed as income, but you will have had many years of tax free growth.

Open a Roth IRA

While you do not get an immediate benefit from a Roth IRA, you will over the long term since gains are not taxed and when you retire you earnings will be available tax and penalty free. Unfortunately, if your combined income is over $166,000 you begin to phase out your eligibility and at $176,000 you can not contribute to a Roth IRA.

Don’t worry, if you hit the income levels you can open a Non-deductable IRA. Normally an IRA works similar to a 401K. You put money into the plan and you get an immediate tax savings on your income. In a non-deductable IRA you don’t get the up front tax break, but you do get years of growth tax free. At the end you will be taxed as ordinary income.

(As a side note, democrats do not care for Roth IRAs due to the tax free earnings at retirement. While there has not be any proposed legislation regarding them, it would not be surprising if they are shelved or modified in the next few years given that the democrats control the house and senate. You may have a limited opportunity to open one. Even if you can only spare a minor amount to open one, you will get you in the door and preserve your rights in future years to contribute when your finances change.)

Invest in tax free bonds and funds

Depending on your income, these can have substantially better returns then the market or other options. There are many good funds out there. The key is to find solid funds that have a good track record of returns. Many financial sites can help guide you in your selections.

Offset gains with losses

Unless you are perfect in your stock selections, you will have losses. This is probably one of the most important and hardest strategies to use. The reason being is it is almost always an emotional decision. If you can set aside your pride or feelings of hope, you can take a rational approach that can save you taxes. For example, say you were invested in Pepsi Co. and it is down 20% as the end of the year approaches. If Pepsi is down because of market forces then odds are Coke will also be down. If you sell your position in Pepsi and buy a position in Coke, you will now have a loss to use against any gains plus still be invested in an industry you feel will rebound. It does not always have to be a like industry, remember you are taking strategic loses by moving money into other stocks you feel will give you returns. Also remember don’t sell just to sell. Strategy is key.

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Given the state of the economy and more and more people losing their jobs I am compelled to write this post with the goal to help people at a very minimum remove themselves as obvious candidates for termination.  This is something that is very important to me and one topic that I have coached many people on.

Let me begin by saying that you control your own destiny!  I know there are outlying circumstances where this may not be true, but in most cases how you interact with others, perform your duties, play the game, and prove results determines how you move through the corporate ladder.  There are 100’s of ways to insure success and they are different for each unique job and management structure.  I am not going to cover those.  I think in today’s environment job preservation is key and that it is more important to not do the obvious things that put you job at risk.

With that said lets go through the basics:

• Don’t be obsessed and complain about other people’s performance.

This is simple, no one likes the person that keeps tabs on everybody in the office and complains to others that so and so is not following the rules.  If it does not impact your duties and is not detrimental to the company, then simply ignore the person.  Sure it may not be fair, but if you consume yourself in other people’s business you only make yourself more depressed and bring attention to the things you are not doing.  Another thing to remember is that you don’t know the circumstances of the people that are breaking the rules, maybe they got no raise due to their poor performance, maybe they are in line to be fired but can’t because of HR issues, maybe they have medical reasons for underperforming, maybe they over deliver on something you have no idea about that allows them flexibility, or any host of excuses that should not concern you.

• Things are not fair, live with it and strive to be on the receiving end.

This one is a bit harder to explain, but if you can grasp the concept you will be happier in your job resulting in better performance.  This can typically be directed to two issues, differences in pay and differences in benefits.  One of the most common complaints I hear from employees is how much they contribute to the job and yet the CEO makes 2x,3x, or 4x their salary.  Some people just want to vent and that is fine, however, some people are consumed with it and actually under perform to what they feel their salary is worth.  This behavior only hurts your growth.  No matter what other employees make or receive, you should always do the best job you can.

I know that may sound hard to do, but your efforts are better guided to figuring out why that person makes more than you do.  How did they get there?  What are their responsibilities?  What can you do to match their responsibilities?  Who do they interact with?  How do they manage?  These are questions you need to ask yourself and find differences with your own job and performance so that you can move to a better tract and find ways to get noticed.  It will mean you may have to work very hard at the same salary you are making, but if you take the right path it should eventually pay off.  If it does not, at least you gained new skills that you can take to another company.

• You must want responsibility!

In a market like this, subtle differences can mean keeping you job and losing your job.  Wanting responsibility is one way to stand out from the rest.  Many people perform their job day to day without owning responsibility.  They do a good job, but ultimately it is their manager or someone else that takes responsibility for every aspect of a project, in other words they tell everyone what to do and own the good and bad of the project.  Owning responsibility means taking a chance in an environment by claiming ownership of a project (or a piece of a project).  You become the coordinator and self reliant on your abilities to get the project done.  If you perform well, chances are you will get noticed and managers will see you as a valuable asset because they know they can give you a task or project that you will deliver with out them micro managing.

• Do more than expected!

Again, something that is simple but often overlooked.  This one is easy, be available, offer to help if you hear a problem (even if it is not in your duties), and be willing to learn and take on new tasks.  These are simple characteristics of a star employee.  No one wants to lay off a worker that is extremely helpful to anyone that asks.

• Don’t be Mr. or Ms. Excuse!

Everyone knows this problem.  You may have a great idea but it is quickly put under the table because someone makes some excuse that a system or department is not ready.  Change is ok, just because something has been done one way for many years does not make it an excuse to turn away innovation or new ideas.  Leaders are looking for people that can take an idea, get around the current constraints, and deliver results.  You may not always succeed, but if you try it may lead to better processes, better products, or better systems.  Before you say no to someone’s idea or method, really determine if you can create a work around or a new system.  If you can, you will be seen as the innovator and hence create more value for yourself.

If you have read through this site, you know that I offer many ways to help you figure out if you are getting a good deal on your lease. I also stress the importance of not leasing a car if you are at all unsure of any factors that determine how a lease is done. It is to easy to not know what you are getting and when you are purchasing something such as a Yukon Denali, you are spending $50K. You should know what you are doing, but many people do not.

I decided to sample Yukon Denali leases since most of them come fully loaded and it lessons the chance for expensive upgrades. Using Edmunds.com, I determined that the cost for a fully loaded Yukon Denali with an extra 5K in add-ons (sunroof, larger wheels, DVD, Navigation, etc) should cost about $50,000 not including any rebates. Through some research I was able to collect details from offers and prior purchases of leases.

I sampled 10 Yukon leases and here is what I found:

You can see the payments, terms, and residual payoffs vary greatly. Next I totaled the payments over the term and added the residual to determine the final cost (It does not show any down payment the buyer put towards the car so assume the total price below is lower than the actual total price). I then put in the cost over the same term for a 5% loan based on a fully loaded Yukon with $5K in upgrades costing $50K and compared the two.

You can see the difference. Car 10 ended up over $8,000 higher than the $50K car I put together. In fact, out of the 10 cars I sampled, only 3 came in better, and two of them we would have to assume they had full upgrades and did not put more than $356.00 dollars down. Also notice how bad most of the 39-month leases worked out.

If any of the 7 other cars had put money down, the terms become worse. To make matters worse, the blue book on a 2007 Yukon Denali is $37,000. Wow, look at car 1 and car 10, at the end of the lease term you have to pay nearly what the car is worth today after making 27 payments of over $700 per month. Sound like a good deal? I guess if your spending $50,000 on a car what is an extra 6-10K right? At least you had a nice sales person and your car payment met your budget.

I hope this puts a little more light into how much a lease can cost you if you don’t know all the terms. I would like to say that someone spending $50K knows the terms, but as demonstrated here, that is not the case.

Leasing any car, expensive or not, you can get ripped off. There is a reason all the ads push leases, either do your homework or don’t lease. Remember never buy a car based on a car payment.

If anything know this.
-A lease is simply financing the depreciation of the car. American cars lease bad as they do not hold their value. Cars like Toyota, Honda, and Nissan lease better.
-The more a car holds it value, the better your lease payment.
-Down payments for leases should be very small since any amount is usually applied to the residual (a dirty trick), which if you turn your car in the money is pocketed by the lease company.
-Always know the total cost if you were to buy the car at the end of the lease. Dealers will say this does not compare to a purchase, that is a lie. It does and it should be close to what you would buy the car on a conventional loan under market interest rates.
-You will be upside down on 90% of leases.

Do you have the next great magazine idea but no one to fund your idea? Do you have great writing skills, but no magazine to publish your work? No worries, now you can start your own. MagCloud is a new company that helps you publish your own magazine. They print, mail, and collect the fees for your subscriptions, all you have to do is set a profit you wish to collect and upload a hi-rez pdf. of the magazine you create. Market your magazine and you are off to making money. There are no upfront fees, however, you do have to be invited to be a publisher in the beta release but you can become a member and purchase magazines that people have created.

Another great way to make some extra cash if you have the skills to layout a magazine.

One thing that I have found most common among wealthy individuals is the ability to have and maintain alternate sources of income. Most people concentrate on their primary source of income and that is it. For one reason or another, many people tend to not develop alternate sources of income. Perhaps it is due to time, laziness, lack of desire, or just knowledge. Fact is, if you can find alternate sources of revenue, you become less dependent on your primary source and build wealth.

Before you begin here are a few things to know. There are two kinds of alternate sources that can generate extra income:

Passive Income: This is the best kind. Once you set this income stream up, it takes little work and continues to produce income. Example of passive income would be interest from a savings account, rental properties, or dividends from investments.

Active Income: This requires consistent participation to continue the income stream. This could be a home-based business, selling things on ebay, or consulting.

The secret is to develop as many passive income streams as possible. That off course is easier said than done, but lets take a look at a few things that you could do.

Cd’s, Bonds, and Savings: These are typically very safe investments and can generate anywhere between 2-6%. Not going to make you rich, but a little extra money each month into these types of investments does earn you income and helps increase you total savings.

Mutual Funds: These come with a bit more risk, but they can typically yield a lot better than 6%. A great source to see Mutual Fund ratings is Morning Star or check out Forbes fund guide 2007. They have a great rating system and have further information on the types of funds out there.  If you want to get started you can either contact the fund directly or open and investment account.  I have the best luck with Schwab.com (a bit more expensive but great customer service).

Rental Investments: Property is a great way to increase passive income if done correctly. The biggest mistake I see people make is going for appreciation as opposed to cash flow. If you structure your loans and programs to go for appreciation, you will find yourself in a crunch when the housing market dips down as it is now. If you take the other approach and go for cash flow neutrality with fixed loans, what you get is a property where total value in the short term is not relevant as long as rents remain flat or increase. How do you do this?

1. Buy only with fixed loans. When you do this you know you cost for the life of the loan and will not be subjected to a raising mortgage rate. On investment property, raising payments can quickly turn a property into a cash burning machine and if you can’t cover the negative cash flow you will be forced to sell or lose the house.  More on calculating and comparing loans.

2. If the housing market is going down rents typically raise. Why? Loans become harder to get and less people are willing to jump into a house at higher prices when they think the value is going to drop. This increases the demand on rentals therby pushing rents up.  This is good if you plan to purchase and investment property and your housing costs are fixed.

3. If you are cash flow positive or cash flow neutral and have a fixed loan you are less concerned about property price. This may seem odd, but if you can find an opportunity where you don’t burn cash on a monthly basis your investment is paying for itself. It has been proven over the last 100+ years that over the long run property increases in value. If you are cash flow positive or neutral a temporary drop in housing should not be an issue to you because you strategy is long term. Today’s housing market is tough to find cash neutral properties, but they are starting to surface. Be patient and you will find some.

If done right a good property investment can begin to generate large income in 20-30 years, plus you get the value of the property on top of the income.

Develop anything that has royalties. Do you have a talent like writing music or writing screen plays? If you have something good try submitting it to various organizations or industry people to publish. If you are lucky enough to get a break you could see great passive income. You don’t have much to lose to not try. Just make sure to take the effort to find the right people to get the word out on your work.  Also I recomend filing a copyright.  This can be done by following the instructions at the US copyright office. 

Create proposals and send them to Corporate CEO’s. Think this one is stupid? You would be surprised how well some good thought out ideas are received by corporate CEOs. However, before you go writing you idea on a napkin to send off to a CEO, make sure you do the following:

-Have a clear plan of action.
-Identify where and how your idea can create value to the product or company your are going after.
-Spend time to clearly write and format your proposal.
-Check spelling.
-Don’t reveal the entire story only enough to cause interest.
-Have knowledge of the company, its officers, and its ethics.

Ok, so you have the cure for cancer and your afraid to reveal it to someone for fear of losing the idea. Well that is the risk you must take and if done correctly can yield you great benefits. If it truly is a brilliant idea, then go after it yourself or file a patent. Point is, there are thousands of great ideas that most people sit on for fear of losing them. Usually these people make nothing from their ideas or wait so long that someone else eventually thinks of it. Can you relate, “oh that was my idea”, difference is that other person took action. If you don’t take action you will never succeed!

There are many other ways to develop passive income. I hope that I have inspired your thinking a bit. Now lets look at active income.

The best way to succeed with Active income is to find a way to get paid for doing the things that make you happy. Think about it, how much harder would you try if you were getting paid to play golf or make crafts. The challenging part is finding a way to get paid. If you are clever you could probably find a way to get paid for anything, just depends on how much time and effort you have to put into your idea.

One friend of mine loves to surf. Going to the beach every day does not bring in much income, so he decided to help out with some surf lessons in Malibu. He spent some time developing relationships with the parents and now every summer he has a thriving business teaching surf lessons to kids. He gets to be at the beach in the day and works his normal job on the off days and nights. Just one example how taking something you like and creating an opportunity out of it.

If you are a good writer, there are many companies now that offer paid posts or paid articles. This is another great alternate source of income. Probably won’t make you rich, but maybe bring in extra travel money.

There are many ways to succeed with alternate sources of active income. It is really just limited to your time and ideas.

Hopefully this will inspire you to think of ways to bring in alternate sources of income. Not all of them will be a home run and make you wealthy. In fact, failure is part of the game. However, if you fail at something you also learn and perhaps the next thing you try might be a home run. At the end of the day, if you are not trying how can you ever expect to hit the home run.

I will end with one thing I like to say: “There are no bad ideas, just bad execution”.