Hybrid Car Tax Credit / Deduction

In 2004 or 2005, hybrid car buyers can claim a $2,000 one-time deduction on your 2004 or 2005 tax returns.

From 2006 on, a revised federal tax incentive program for hybrid cars takes into effect. The new incentives—full-dollar tax credits—are more valuable than the current tax deductions, which are a reduction of taxable income. It uses a formula to calculate the tax credit, which considers both relative fuel economy and the total amount of fuel saved -- a system that favors large vehicles. The amount of the tax credit also depends on when you buy, and from which company, further complicating consumers' purchasing decisions. The tax credit is cut in half for each manufacturer three months after the company sells a total of 60,000 hybrids.

New 2005 Car Donation Tax Laws

If you are planning to donate a car or boat to charity before the end of this year, you'll still qualify for a tax-deductible contribution if you itemize your deduction -- but the deduction may be a lot smaller than in the past.

Beginning Jan. 1, 2005, when a taxpayer donates a vehicle for which the claimed value is $500 or more, the precise deduction he can claim will depend on how the charity plans to use the vehicle.

If the auto is sold by the nonprofit, then the taxpayer will be able to deduct only the amount of gross proceeds the organization got from the sale. And the donor will have to depend on the charity to let him know the donation amount by the individual tax-filing deadline. Because charities go for quick turnarounds and most vehicles are sold at auction, you'll probably be stuck with the lower wholesale price.

If, however, the non-profit group plans to use the car for what the law deems as "significant" tax-approved charitable work, the donor would be able to claim the fair market value of the donated vehicle.

My New Year Budget

ITEM
Income	Expect salary (less tax) for the year
	Expect interest from banks etc
	Dividends from companies
	Other income
EXPECTED NET INCOME FOR YEAR
EXPENSES
House Expenses	Rent of house
	TV - Dish
	Electricity
	Gas
	Telephone
	DSL
	Cell Phone
	Other house payments
Personal Expenses	Groceries
	Clothing and shoes
	Preschool expenses
	Medical expenses
	Restaurant
	Entertainment (Movie, rental, parks, toys, ect.)
	Miscellaneous
Car Expenses	Fuel
	Registration
	Insurance
	Licence
	Repairs, servicing and tyres
Optional Spending	Holiday (air-fares, accommodation etc.)
	Buying a car
	Furniture
Expected Total Expenses for Year
Expected Surplus for Year
SAVING	401K
	Saving Account
	CD
	Bond
INVESTMENT	Stock
	Mutual Fund

Top Ten Features of a Successful Budget

1. Categories that fit your personal situation and your spending habits.
2. Accurate income projections.
3. Enough categories to give you a meaningful picture of where your money goes and where you might be able to cut costs.
4. Inclusion of expenses that don't occur on a monthly basis, such as car registration, insurance, etc.
5. Regular review of categories and expenses, and see if you can trim costs in each category.
6. Cash expenditure tracking and recording.
7. A line item for savings so you treat a contribution to your savings account just as you would a bill you owe.
8. Realistic written goals. Budgeting isn't about tracking your costs; it's about setting financial goals (saving for a down payment on a house, buying a new car, getting out of debt, saving for retirement, putting your kids through college, traveling, etc.) and finding ways to meet them.
9. Identification of spending patterns you may not have been aware of when you weren't tracking your spending.
10. Most importantly, internal motivation and a positive attitude!

Child Tax Credit

In 2005, with the Child Tax Credit, you may be able to reduce the federal income tax you owe by up to $1,000 for each qualifying child. Because Congress passed a law in September 2004 to keep the credit at $1,000 until 2010.

According to IRS, a qualifying child is a child who:
1. Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them,
2. Was under age 17 at the end of 2005,
3. Did not provide over half of his or her own support for 2005,
4. Lived with you for more than half of 2005 and
5. Was a U.S. citizen, a U.S. national, or a resident of the United States.

But there are two limits on this credit:
1. You can't claim a child tax credit that is more than your income tax liability. But you may be able to claim some or all of the difference as an "additional" Child Tax Credit.
2. Depending on your filing status, the phase out of the credit begins at the following levels of modified AGI:
Married Filing Jointly: $110,000Married Filing Separately: $55,000Other Filing Status: $75,000

To claim the Child Tax Credit, you must file on form 1040 or 1040A. You can't claim the credit on Form 1040EZ.

Municipal Bond Fund

Municipal bond fund, also called muni fund, is a mutual fund that invests in municipal bonds. These bonds are issued by a state, city, or local government to raise capital for its day-to-day activities and for specific projects that it might be undertaking (usually pertaining to development of local infrastructure such as roads, sewerage, hospitals etc). Unlike income from bonds issued by corporations or the federal government, income generated by municipal bonds is exempt from federal and sometimes state income taxes. Given the tax-savings they offer, muni funds are often bought by people who have large tax burdens.

In general, muni funds are considered safer than corporate bonds, since a municipality is far less likely to go bankrupt than a company. If there is a rate spike and Treasury bond prices take a tumble, muni funds hold their value better. However, yields on muni funds are often lower than corporate or Treasury bonds with comparable maturities.

Here are some ideas on muni funds investing:
1. Don't put muni funds in IRAs or 401(k) plans because these accounts are already tax-sheltered.
2. Choose the happy medium. In a jittery market, intermediate-term muni funds with durations between 4.5 and seven years have returned about 90% as much as long-term offerings, but with only about 70% of their volatility over the past five years. As with most bond funds, a muni fund’s value rises and falls depending on interest-rate changes. A long duration usually means greater potential for short-term gains and losses.
3. Favor funds with average credit qualities of AA. They have enough high-quality bonds to skirt most credit scares but are still flexible enough to snap up higher-yielding, lower-rated issues.
4. Choose a single-state fund if you live in a high-tax state. Otherwise, go national for the diversification benefits.
5. Invest in a muni fund with an expense ratio of less than 1%.
6. If you're concerned about the AMT, choose a muni fund that avoids bonds subject to the tax.

Tax Software Comparison

Brand	Version	Price			Federal / State Tax	Extra Feature
		Web	Download	CD
TaxAct	Standard	Free	Free	$5.95	Federal tax
	Deluxe	$7.95	$12.95	$18.90	Federal taxes
	Ultimate	$15.95	$19.95	$25.90	Federal & State
TurboTax	Essentials	$9.95			Federal tax	Free to try. Pay when you done.
	Basic	$19.95			Federal tax
	Premier	$39.95			Federal tax
TaxCut	Standard	$9.99			Federal tax
	Deluxe	$29.99			Federal & State	Free Microsoft Money 2006 Standard after rebate.
	Premier	$49.99			Federal & State

There is a discussion about these three software in FatWallet. The unofficial vote count results as to 12/21/05 is
TaxCut = 12

TaxAct = 11

TurboTax = 4

Brokered CD

Brokered CDs are CDs issued by banks that are made available to the customers of a broker/dealer. The CDs are registered with the Securities and Exchange Commission. The deposits are obligations of the issuing bank, not the broker/dealer. Brokered CDs generally have all the features of CDs available directly from banks, and are eligible for the same FDIC insurance. Usually, FDIC Insurance covers up to $100,000 of principal & interest per customer per banking institution.

Advantages of Brokered CD:
1. Brokered CDs often pay higher rates than CDs from your local bank.
2. These CDs are more liquid than bank CDs because there are no early withdraw penalty, the CDs can be traded on the secondary market before maturity. Brokered CDs often have call options.

Brokered CD does have some hidden risks:
1. Market risk: If you liquidate your CD prior to maturity and trade it on the secondary market, you may lose some money.
2. Call risk: Callable CD's will typically pay a higher interest rate compared to a non-callable CD with the same maturity. If a CD is called, the customer will get back their principal at 100 cents on the dollar and all interest accrued up to the call date.

Actually, I think its better to get the broker to check the value of a Brokered CD on the secondary market and at a lower price.

How to Deduct IRA Losses?

In limited and unusual circumstances, losses from an IRA can be treated as a deductible loss.
1. You must withdraw the entire balance from all your IRAs of the same type;
2. And the total distribution is less than after tax basis.

How to decide the after tax basis of your IRA?

(1) Traditional IRAThere is only one way to get basis in your traditional IRA account: making nondeductible contributions to your traditional IRA account in prior years. If you have never made nondeductible contributions to your traditional IRA account, you don't have "basis" in the IRA. If you don't have basis in the IRA, you'll never have a deductible loss. A loss in value of your IRA is in no way deductible.

(2) Roth IRAIt is much easier to claim a loss on a Roth IRA because, by definition, contributions or conversions, or both, to a Roth IRA are considered nondeductible contributions. Thus, all of those contributions would add to the basis of the Roth IRA.


How to claim your loss?

Any allowable loss from either a traditional or a Roth IRA is only deductible as a miscellaneous itemized deduction (not as a capital loss) and subject to the 2% of adjusted gross income (AGI) rule.

So, be aware of the following two points.
1. The deduction is available only if you itemize. If you do not itemize your deduction, then the loss would actually be meaningless from an overall tax saving standpoint.
2. Miscellaneous deductions aren't allowed for purposes of the alternative minimum tax (AMT). That means you could lose the benefit of the deduction (or some of the benefit) because of the AMT rules. This type of AMT situation doesn't give rise to an AMT credit you can recover in future years, so any part of the deduction that gets swallowed up in the AMT is lost forever.

The last thing to mention here is that you have to act soon enough to liquidate the account by December 31 if you want to claim a deduction this year.

Advantages and Disadvantages of Mutual Funds

Mutual funds can offer the advantages of diversification and professional management. But, as with other investment choices, investing in mutual funds involves risk. And fees and taxes will diminish a fund's returns.

Advantages:
· Professional Management — Professional money managers research, select, and monitor the performance of the securities the fund purchases.
· Diversification — Spreading your investments across a wide range of companies and industry sectors can help lower your risk if a company or sector fails.
· Affordability — Some mutual funds accommodate investors who don't have a lot of money to invest by setting relatively low dollar amounts for initial purchases, subsequent monthly purchases, or both.
· Liquidity — Mutual fund investors can readily redeem their shares at the current NAV — plus any fees and charges assessed on redemption — at any time.

Disadvantages:
· Costs Despite Negative Returns — Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive — even if the fund went on to perform poorly after they bought shares.
· Lack of Control — Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.
· Price Uncertainty — The price at which you purchase or redeem shares will typically depend on the fund's NAV. In general, mutual funds must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.

---- from http://www.sec.gov/investor/pubs/inwsmf.htm

Traditional IRA vs. Roth IRA

Individual Retirement Accounts (IRAs) are a great way to save for the future because of the tax advantages they provide. The tax advantages you gain will depend on your annual income, whether you are covered by your company's retirement plan, and whether you contribute to a Traditional IRA or a Roth IRA.

What’s the difference between a Traditional IRA and a Roth IRA?

	Roth IRA	Traditional IRA
Deductibility	Contributions are never deductible.	Contributions may be deductible, depending on tax-filing and active-participant statuses, as well as income amount.
Age Limitation	No age limitations on contributions.	No contributions allowed after and for the year the taxpayer attains age 70.5.
Income Caps for Contributions	Income caps may prevent taxpayers from contributing.	No income caps will prevent taxpayers from contributing.
Treatment of Earnings on IRA Investments	Earnings grow tax deferred. Qualified Distributions, such as being over 59-1/2, and having the account for at least five years, are tax free, including distribution of earnings.	Earnings grow on a tax-deferred basis. Earnings are added to taxable income for the year distributed.
Distributions Rules	Principal contributions can be withdrawn any time without penalty. Distributions are tax and penalty free if qualified. No Mandatory Distribution Age.	Withdraws begin at age 59.5 and are mandatory by 70.5. Distributions will be treated as ordinary income. All funds withdrawn (including principal contributions) before 59.5 are subject to a 10% penalty (subject to exception).
Required Minimum Distribution	Owners are not subject to the RMD rules. However, beneficiaries are subject to the RMD rules.	IRA owners must begin distributing minimum amounts beginning Apr 1 of the year following the year they turn age 70.5. Beneficiaries are also subject to the RMD rules.

Which one is better?
One factor that determines whether a Roth or Traditional IRA is better for you is your income, which dictates your eligibility to contribute to a Roth IRA. To be eligible, your income must be the following:
1. no more than $160,000 if you are married and file a joint tax return.
2. no more than $10,000 if you are married and lived with your spouse for any period during the tax year, but filed a separate tax return.
3. no more than $110,000 if you file as 'single', 'head of household', or 'married filing separately' and did not live with your spouse at any time during the tax year.

From a general tax perspective, the Roth IRA is the better choice --
1. If you're in a low tax bracket when saving, the Roth IRA is likely to be better.
2. Conversely, if you're in a high tax bracket when you contribute and expect to be in a much lower tax bracket when you withdraw your earnings, a traditional IRA may be the better choice.

HSBC Online Saving Account: 4.25% APY

HSBC Online Saving Account just increased its rate to 4.25% APY.
No minimums. No monthly fees.

Using the following link to open a new account and get $25 bonus.
www.hsbcdirect.com/start
promo code: start

I-Bond or CD?

Where to put your extra money, I-Bond or CD? Here are some comparisons between I-Bond and CD.

Rate
I-Bond: A fixed rate combined with an inflation rate, which changes twice a year. Current rate for I-Bond through April 2006 is 6.73%.
CD: Fixed rate. The highest rate for a 5-year CD as of 12/15/05 is 5.5%.
Early Withdraw Penalty
I-Bond: Can be cashed after 1 year. Before 5 years, forfeit 3 most recent months' interest. After 5 years, no penalty.
5-year CD: The penalty is usually 6 months’ interest.
Minimum Requirement
I-Bond: $25 is purchased via TreasuryDirect. (Maximum $30K per year)
CD: It depends. To get a higher rate, you need to deposit more than $10K.
Tax
I-Bond: Interest earnings are exempt from State and local income taxes and may be excluded from Federal income tax when used to finance education
CD: Interest earnings are subject to federal and state income tax.

In conclusion, I-Bond is a low-risk, liquid savings product. I think it’s better than CD. I usually purchase and manage I-Bonds via TreasuryDirect (https://www.treasurydirect.gov/indiv/indiv.htm).

Online Saving / Money Market Rate

Some FDIC insured good online saving accounts info (as of 12/14/05):

Presidential Premier Saving (www.presidential.com)
Current APY: 4.12% up to $35k, Balances in excess of $35k earn 2.82%
Minimum Balance Requirement: $5k

Emigrant Direct American Dream saving (www.emigrantdirect.com)
Current APY: 4.0%
Minimum Balance Requirement: No

Capital one High Yield Saving (www.capitalone.com)
Current APY: 4.0%
Minimum Balance Requirement: No.

HSBC online savings account (www.us.hsbc.com)
Current APY: 4.0%
Minimum Balance Requirement: No

UFBdirect high yield money market saving (www.ufbdirect.com)
Current APY: 3.80%
Minimum Balance Requirement: No

ING orange saving (www.ingdirect.com)
Current APY: 3.75%
Minimum Balance Requirement: No
Bonus: $25

Virtual bank eMoney market (www.virtualbank.com)
Current APY: 3.55% ($0-$49999), $50k and above, 3.45%
Minimum Balance Requirement: No

MetLife Money Market (www.metlife.com)
Current APY: 3.50%
Minimum Balance Requirement: 5K
Bonus: $50

Estimated Taxes

Federal

The federal income tax system is a "pay as you go" system. In general you're required to pay tax over the course of the year rather than waiting until April 15.

The rule is you have to pay estimated tax if your withholding doesn't cover 90% of your tax liability. But there are exceptions:
1. No estimates are required if the amount due after subtracting withholding and credits will be less than $1,000.
2. In general, no estimates are required if your withholding and credits add up to at least as much as your prior year's tax. This is called the prior year safe harbor.
3. If your adjusted gross income above $150,000 on the prior year’s return ($75,000 if married filing separately), you need to pay 110% of the prior year’s tax (not just 100%) when applying the prior year safe harbor.

Estimated tax payments are due quarterly, on 15th day of April, June, September and the following January.
When you make estimated tax payments you need to enclose Form 1040-ES, Estimated Tax Voucher. Form 1040-ES comes with a worksheet you can use to estimate how much tax you'll owe for the current year. But you don't have to fill out the worksheets unless you think they'll be helpful. A simplified method is:
1. Look at each number on the prior year's tax return and ask yourself if this year's number is likely to be significantly different. Ignore differences in wages because there will be a corresponding difference in withholding. Use rounded numbers and don't worry about minor changes.
2. Add up all the differences to see how much larger or smaller your taxable income will be for the current year.
3. Apply the tax rates to see how much difference this will make in your income tax. (If the difference results from a capital gain, apply the capital gain tax rates.) Round the number up or simply tack on an added amount if you want to increase your comfort level about avoiding a penalty.


State

Most states require estimated tax payments on the same schedule as the federal payments.

If you itemize deductions, it may be to your advantage to make your fourth quarter estimated tax payment in December, not January, so you can deduct it a year earlier.


California

Generally, you must make estimated tax payments if you expect to owe at least $200 ($100 if married filing separately) in tax for 2005 (after subtracting withholding and credits) and you expect your withholding and credits to be less than the smaller of:
1. 90% of the tax shown on your 2005 tax return; or
2. The tax shown on your 2004 tax return including AMT.


Use Form 540-ES as a guide for figuring your estimated tax.

Payment options:
Web Payment – To make a payment online or to schedule a future payment (up to one year in advance), visit Website at http://www.ftb.ca.gov/ and search for “Payment options.” Do not mail the voucher if you make a Web payment.
Credit card – Visit Website at http://www.ftb.ca.gov/ or call (800) 272-9829. You will be charged a convenience fee of 2.5% for this service. Do not mail the voucher if you pay by credit card.
Check or money order – make your check or money order payable to “Franchise Tax Board.” Write your social security number and “Form 540-ES 2005” on it and mail to the address on the voucher.

Some End of Year Tax Tips

A few moves now may save you big on April 15. Here are some tips.
1. Contribute the Maximum to Retirement Accounts – This can reduce your Adjusted Goss Income (AGI).
401(k) -- $14,000 for 2005 and $15,000 for 2006.
IRA -- You have until April 15, 2006 to make IRA contributions for 2005.
If you did not participate in a company-sponsored retirement plan or if your income falls below $50,000 in 2005 for single filers and $70,000 for married couples, your $4,000 contribution is fully deductible
If you did participate in your company's plan, but your spouse isn't a participant in a company-sponsored plan, and your combined adjusted gross income is $150,000 or below, your spouse can contribute a fully deductible $4,000 to an IRA.
2. Defer (or accelerate) Income to the Year That Will Minimize the Tax Owed.
If next year is likely to put you in a lower tax bracket, then defer income to next year if possible. Otherwise, accelerate income to this year. Defer when in doubt.
If you have a large amount of cash to invest and want to shift some of your income to 2005, consider investing in a short-term CD or a Treasury bill that matures in 2006.
3. Sell Loser Stocks to Offset Gains
You can apply a maximum of $3,000 in net capital losses against ordinary income
Beware of "wash sale" rule. You can't just sell a stock and then buy it right back. You must wait 31 days to buy back the same stock or fund. However, you can buy a similar stock in the same industry.
4. Take Last Minute Deductions
If your itemized deductions are close to your standard, then paying some of next year's expenses in December might give you enough expenses to put you over the line. For example, you can make your annual charitable donation now instead of early next year.
If you itemize deductions on your return and you have bought some expensive items during the year (e.g. house, boat, car), you can choose to deduct the sum of your sales tax instead of your state income tax for 2005.
You can deduct medical expenses only if they exceed 7.5% of your AGI. If you think you're close to the 7.5% requirement but not quite there, you may consider having an elective or necessary procedure before year-end.
5. Consider Possible Tax Advantages From Gifting Opportunities to Children
If you have appreciated assets (e.g., stock) and a child in a lower tax bracket than you, consider the tax advantages of a gift so the tax will be paid at the child’s lower bracket.
6. Use Tax Software to Figure out Tax
If your tax situation is complicated, get help from tax software.
TaxAct (http://www.taxact.com/) offers its standard version for free.
TurboTax (http://www.turbotax.com/) has an online tax estimator calculator.