(1) “Compounding interest is one of the greatest assets you have going for you in a retirement plan. Over time, the interest and gains on the money in your account snowballs and can accumulate significantly. When you pull money out of your retirement account, you are reducing the amount of money that can compound.”
(2) “When you default on a 401(k) loan and have not reached the age of 59 1/2, the IRS treats the loan as a distribution which would not only be subject to income taxes, but an additional 10% early withdrawal penalty as well.”
I have seen the consequences of (2) with many clients over the years. In most of these cases a taxpayer changed jobs with an outstanding balance due to his former employer’s 401(k) from to a loan taken out many years earlier. The outstanding balance was reported as a “premature withdrawal” in a Form 1099-R and was fully taxable to both “Sam” and New Jersey, plus he was hit with the 10% penalty. A $10,000 balance could result in over $4,000 in total tax due, with no corresponding current income from which to pay the tax.
“The Treasury Inspector General for Tax Administration issued a report last week with some startling figures on how many taxpayers report improbable Schedule C "sole proprietorship" losses for amazing lengths of time. The report says 70,000 taxpayers with six-figure incomes reported Schedule C losses for four consecutive years (2002-2005) where the business expenses were at least five times revenues. Another 30,000 taxpayers claimed schedule C losses for four straight years with no gross receipts at all, losing an average of $5,456 each over that period.”
I have seen many of such Schedule Cs over the past 35 years. In some cases the taxpayer was actually making a legitimate effort to earn money with a sideline business.
The bottom line? Joe suggests, “We can expect legislation, but it's far from certain that Congress is capable of drawing a 'bright line' that shuts down true ‘hobby losses’ without clobbering legitimate businesses that happen to have a bad year or two.”
* THE HAPPY ROCK blog suggests an interesting concept in his post “Simple Tip For Spending Less - Think About Pre-Tax Dollars”. For NJ taxpayers the amount is probably $1.44 (using 25% federal and 5.525% state tax rates), and not $1.33, for every dollar you spend. A tip of the hat to Kristine of FINANCIAL TIPS FOR WAHMs for bringing the post to my attention.
* Kay Bell of DON’T MESS WITH TAXES provides a brief overview of ways taxpayers can get help paying for “post-secondary” expenses from Uncle Sam in her post “Education Costs 101: Tax-Saving Ways to Pay for School”.
Kay makes the good point that, “A credit, which lets you reduce your tax bill dollar-for-dollar, usually is better. But, and you knew that was coming since this is about taxes, everyone's situation is different, so a deduction might be the better choice for some.”
Another reminder – 100% of all awards, grants and scholarships must be applied to tuition and fees when calculating the amount eligible for an education credit or deduction. The same applies to Veteran’s benefits and employer-paid benefits. You cannot allocate these items between tuition and room and board.
* While I will not publish the figures until they are officially released by the IRS, CCH has released what it anticipates the 2008 federal tax brackets and inflation adjustments to be. They are usually on the money. I will be creating a WHAT’S NEW FOR 2008 Page with the final numbers on my website in mid-October.
* Check out my “comments” on Trish McIntire’s posting “Come Out, Come Out, Wherever You Are!” at OUR TAXING TIMES.
* A 30-something married mom provides some good advice in her post “You Never Know Until You Ask” over at I’VE PAID FOR THIS TWICE ALREADY (the trials and tribulations of getting out of debt… and someday beyond). This was one of the postings included in the 3rd installment of the "Carnival of Everything Finance", in which I was also represented.