Wisdom of Rich Dad

~ Holly Nicholson, Correspondent of The News & Observer ~

Q: My wife and I were married last year, and we have a question about filing our income taxes. My mother has almost always given me good advice, and she is suggesting that we file married, filing separately instead of married, filing jointly for 2007. She says this will lower our tax bill for last year. Because we are now expecting, this will allow one of us to file as head of household for 2008, which would save even more on taxes.

I mentioned these ideas to my father-in-law, and after a few minutes of sitting there with a blank stare, he suggested that we go to a tax professional.

Our situation is pretty simple, and we’d like to prepare our own taxes, and of course, pay as little tax as possible. Is my mother’s advice sound or off the wall?

A: Congratulations on your marriage, pregnancy, having a mother who usually gives good advice and having a diplomatic father-in-law.

In some rare circumstances, electing the filing status of married, filing separately might result in a lower tax bill.

If one spouse has significantly higher income than the other, you will generally pay less tax if you elect to file your return as married, filing jointly.

If your incomes are about the same, you will generally pay the same amount of tax under either filing status.

If one of you had high medical expenses, casualty losses, employee business expenses or other miscellaneous expenses subject to a percentage limitation based on adjusted gross income, it might make sense to file as married, filing separately, because these expenses will be limited by the adjusted gross income of only one spouse.

Another good reason to file as married, filing separately is liability. Each spouse who signs a joint return is liable for the accuracy of the return and the payment of any tax or penalties owed. A spouse filing separately is not responsible for the other spouse’s tax return and any tax owed.

Some of the disadvantages of electing to file separately are:

* You cannot deduct student loan interest.

* Credits such as earned income credit, child care credit, adoption credit, Hope scholarships and lifetime learning credits are lost.

* Roth IRA conversions are not allowed.

* Unless spouses have lived apart for the entire year, contributions to a traditional or Roth IRA are not allowed if modified adjusted gross income is at least $10,000.

* Capital losses can’t be combined; each spouse is limited to a $1,500 loss deduction.

* The exemption for the alternative minimum tax is lower.

* If one spouse itemizes deductions, the other also must itemize; they cannot claim the standard deduction.

You might want to prepare your 2007 taxes using both the married, filing separately and married, filing jointly elections and see which provides you with the lower tax bill.

The head of household suggestion probably provoked the blank stare from your father-in-law.

If you are married, you must file either married, filing separately or married, filing jointly unless you are considered unmarried, and then you can file as head of household.

To be considered unmarried for tax filing purposes, you must meet several requirements. The unhealthiest one for a good marriage is that you cannot have lived together for the last six months of the tax year. In addition, both spouses would file separately, you would have had to pay more than half the cost of keeping up the home, and the home must have been the main home of your dependent child for more than half the year.

Expenses in later life are proving to be bigger and more unpredictable than many retirees anticipated, says the WSJ in their Money Matters column.

Key takeaways from the article:

[There is a standard rule of thumb that...] your spending needs in retirement will likely amount to 75% to 85% of your pre-retirement salary. [However] …many retirees said their financial needs equal or exceed their spending during their working years.

Among the primary reasons is discretionary spending for far-flung travel and home renovations. “The reality is that when people retire, they want to do more than when they were working and had no time,” says Larry Ginsburg, a certified financial planner in Oakland, Calif. But retirees also are encountering some surprising expenses, like higher-than-expected costs for homeowner’s insurance and health care.

Figuring out how much you need is only one piece of the puzzle. Unsaid, of course, is how you will build up a nest egg to generate that level of income and determining if that is even feasible. If not, and if you figure out this out early enough, you’ll be able to modify expectations and avoid making promises you can’t keep.

If this isn’t spurring you to start your own financial planning you are not alone. Many don’t and those that do plan don’t particularly enjoy it.

Aetna, the health insurance provider did a study that showed 31% of pre-retirees would rather clean their bathrooms or pay bills than plan for retirement. [Link]

But like going to the dentist or getting your annual physical, the fact that it isn’t particularly isn’t a good enough reason not to do it. And here’s one bad side-effect of poor financial planning:

A new Employee Benefit Research Institute survey finds that almost half of today’s workers have less than $25k in savings and investments.

Cashflow 202 e-game takes you to the next step of financial skills. It teaches you the advanced skills of technical investing – make money even when the market is going down with stock and real estate options and short selling.

Here’s a sneak peepinto Cashflow 202 e-game if you have not seen it before:

Baby boomers may not only be less healthy than their parents, but recent research says many could end up worse off in retirement as well.

A new Employee Benefit Research Institute survey finds that almost half of today’s workers have less than $25k in savings and investments.

Older workers — who should have saved the most — are not in much better shape. University of Michigan researchers found in a separate study that the first Baby Boomers — born 1946-1953 — had an average of $151k in net worth. But if $69k in home equity and the value of their businesses was excluded, they had only saved $48k over their working lives.

The situation was far worse for the 25th and 10th percentiles, who have saved essentially nothing over a lifetime.

Overall, these early Boomers, who are now close to retirement age, had about 1/3 of their wealth in the form of home equity — more than previous generations. Numerous pundits believe that when the large Boomer generation sells its housing stock to the relatively small post-Boomer generations, the large supply relative to demand will drive down housing prices.

The Michigan researchers found that a drop from 2004 housing prices to 2002 levels would wipe out 10% of the average household’s net worth.

In many ways, workers haven’t adjusted to the end of lifetime employment with comfortable pensions at the end.

The Employee Benefit Research Institute survey found that “Many workers are counting on employer-provided benefits in retirement that are increasingly unavailable.”

That includes relying on benefits that simply do not exist: “Only 41 percent of workers indicate they or their spouse currently have a defined benefit pension plan, yet 62 percent say they are expecting to receive income from such a plan in retirement.”

To make matters worse, many had unrealistically low estimates for the amount of savings they would need for retirement. And only about 42% had even tried to estimate that amount.

Not surprisingly, the Michigan researchers found that people who consider financial plans were twice as wealthy as non-planners, and that planning seemed to cause wealth — and not the other way around.

The message in the two studies is clear — many could be headed for “golden years” far worse than they expect. They need to make realistic assessments of how much savings they will need in retirement, and how they will get there.

 

The publishers of “Rich Dad’s Increase Your Financial IQ” by Robert Kiyosaki supplied us with the following that you can use to test your financial IQ as gauged by Kisyosaki. (Answers at the end).

What’s Your Financial IQ?

1. Which of the following is not an asset?
a. Gold
b. The Corvette you bought for your 40th birthday
c. A business
d. Wheat

2. On average, Americans save how much of their income?
a. Enough to buy a new flat screen TV
b. Why save when you own a house?
c. They don’t save. They owe.

3. A retirement plan that is paid for by your employer is known as a:
a. Defined benefit plan
b. A miracle
c. Both

4. What kind of income is the hardest to protect from financial predators such as taxes?
a. The dividends that just got cut from the financial stocks you bought
b. The $50 and rocking CD collection you inherited from your uncle Craig
c. The forty hours worth of cash your company pays you for sixty hours of work

5. What is the best way to create a budget surplus?
a. Cut down on expenses by buying a fuel efficient car
b. Get a higher paying job to make more money
c. Saving and investing before paying your bills

6. An example of leveraging your money is:
a. Putting money in an interest bearing savings account
b. Buying investment real estate with a bank loan
c. Going to a local casino.

7. The best way to invest is in a diverse portfolio of stocks, bonds, and mutual funds. True or False?

8. The key to becoming wealthy is:
a. Only having two scotches per night
b. Buying high and selling low
c. Selling the CD collection you inherited from Uncle Craig
d. Increasing your financial intelligence

~~~ 

 

Answers: 1. (B) 2. (C) 3. (C) 4. (C) 5. (C) 6. (B) 7. (False) 8. (D)

 

If you ever read the rich dad, poor dad series especially cash flow quadrant then this game would be familiar for you.

The origin of this game is in a form of a board game (like a monopoly). But if you have ever played it, there are significant differences.

The objective of this game is to teach the financial literacy and to understand more about financial statements in a simple manner. The best part of this game is that how you play the game reflects your perception about money.

At start, you will have to choose what dream that you want to be realized. Isn’t it interesting? In our daily life it is very important to set short term and long term goal.

After you choose your dream, the game will randomize the profession for you. The professions range from low to high salary. But, it is not very important that you get the low or high paid work. The most important is how you stick to your plan and manage your financial life to reach your dream.

 

Now, things are getting quite complicated for the beginners. You will counter the balance sheet and income statement. It is the chance to learn about financial vocabularies and their meaning in the simulation provided by the game. You will learn about stock, stock options, property and compound interest.

The game play itself is quite simple. The rat (representing our daily life) will face many circumstances that needed your attentions. Each of your decision will bring long term consequence to your financial position. Just keep in mind that the goal is to have enough passive income to cover all your living expenses.

 

A nice book to read, a nice game to try.