Q: My kids are fairly young –
how do I make sure that what I’m saving now can cover their college
costs in the future?
One of the best ways to do this is something called a 529 Plan; this is
an investment option –similar to a mutual fund– administered by the
state. Money put into a 529 Plan grows tax-free and can be spent
tax-free (on education costs). When you set up your 529 Plan, look for
something called an “age-based portfolio”; this kind of plan is
automatically adjusted over time to meet a specific goal by a specific
year. It also means you’ve got a fund manager tracking the investment
for you, which means less stress in your life.
Parents should set up the 529 account in their own name, listing the
child as the beneficiary of the plan – this ensures little or no effect
on eligibility for financial aid. (It also means that any unused money
can be transferred to another child or withdrawn.)
You can set up a 529 Plan either through a financial advisor or on your
own. More info can be found here.
Q: College expenses can be
incredibly confusing, with a ton of fine print and “extra fees”. How do
I know what the real cost is?
Assessing college costs is like buying a car: a page of numbers, none
of which seem to be the bottom line. It’s important to pay attention to
the language: when you see “tuition”, that’s the cost of the actual
education – what you’re getting in the classroom. When you see
something called a “fee”, or an “indirect cost”, that’s an extra
charge...but it’s still a mandatory expense.
The number you want to know is the “cost of attendance”. This is the
total, final, bottom-line amount it takes to get you out the door with
The good news: Federal law requires colleges to make the “cost of
attendance” readily available to students or prospective students. They
don’t go out of their way to tell you, though, so you need to ask...and
be sure to specifically request the “cost of attendance” figure.
Q: When it comes to financial
aid or grants, where’s the best place to begin?
Seven words: The Free Application for Federal Student Aid, or FAFSA.
The FAFSA is used by all kinds of groups and organizations as a basis
for awarding scholarships and loans; it’s also used to determine things
like Pell Grants and grants from many states. If you’ll need financial
aid, you need to fill out the FAFSA, period. You can do it yourself for
free, or you can hire a consultant to walk you through it, but it all
starts by going to: http://fafsa.ed.gov
Q: Many parents face the
difficult question of whether to co-sign a college loan. What do
parents need to consider when making this decision?
This is a tricky area. Parents want to help their kids in every way
they possibly can...but, at the same time, parents need to make sure
that they’re not endangering their own financial stability in the
process...beginning with retirement. Remember: there are college grants
and college loans....but there’s no such thing as a retirement grant.
When that money’s gone, it’s gone.
Parents need to take an honest look at their own finances, as well as
what their son or daughter can reasonably expect to receive in aid or
grants...and what the child can be asked to contribute on their own.
These are awkward conversations to have, but also remember this: the
parental instinct to help your children never goes away, and if you
jeopardize your own financial situation in the short term, you may not
be able to save your children down the line....perhaps from a true,
April 13th, 2012
Q: I’m getting a refund this
year – how long does it take to arrive?
A: If you filed
10-21 days. If you filed via regular mail, about
Filing your taxes electronically has become more than a matter of
convenience – it can actually cut your refund-wait time by 75%. And, if
you filed online, the IRS provides a website for tracking the status of
your refund, so you can get a better estimate of its arrival date. Go
to IRS.gov, and in the search box, type “where’s my refund?”, and
you’ll be taken to a page which will tell you exactly that.
Q: What’s the smartest way to
use the money from my refund?
A: Treat it as an extra
paycheck...not as a “bonus”.
Remember, that refund money originally came out of your paycheck – it’s
part of the total, round number that you think of as your yearly
income. Use this extra paycheck to increase (or jump start) your
financial stability. A good rule of thumb: immediately put 10% of that
refund in savings. If you’re drowning in credit-card debt, put the rest
of your refund –as much as possible– toward the card with the highest
interest rate. If you’ve been making financial progress this year, feel
free to put part of your refund toward a cash purchase – something
you’re saving up for.
Remember: with a refund, you’re not spending the government’s
money...you’re spending you’re money. Act accordingly.
Q: I’m pretty sure I’ll owe money
to the IRS. What do I do now?
A: File on time, no
matter what – and if you can’t pay it all,
pay what you can.
We cannot say this loud enough or long enough: it is crucial that you
file your taxes on time, even if you think you’ll end up owing. The
penalties for not filing are much, much higher than the penalties for
non-payment. In other words: it’s better to owe money than to make the
IRS come looking for you.
If you owe the IRS more than you have (or think this will be the case),
contact the IRS to set up an installment plan. The goal in such a
situation is to pay what you can right away – this shows good faith,
and can help cover penalties and interest.
Q: Should I just pay my whole tax
bill on a credit card?
A: Probably not;
paying the IRS directly is much usually much
cheaper (this year, at least.)
In past years, taxpayers were often advised to pay off their taxes with
a credit card to avoid heavy fines and penalties. At the moment,
however, IRS installment plans cost relatively little...about six
percent per year. A typical credit card, though, is around 15%, and has
added charges and fees on top of that.
As always, check the specifics of your situation at IRS.gov, and no
matter what your plan for payment, pay it off as soon as you can, and
get back in the black.
Q: Taxes fill me with dread –
it’s the single most nerve-wracking time of year for me, hands down.
What’s the most important thing I can do to minimize the headache?
A: Instead of putting
your taxes off for another day (or week), tackle
them head on...now.
In Zombie Economics, we talk
about stopping the danger before
it gets close to your house. If you wait until the zombies are on your
front porch, you’re panicked and rushed, and you’re likely to
miss whatever you aim at.
As with most financial matters, the key is actually starting. Make the decision to sit
down and begin the process. Gather the appropriate documents, sit down,
and start putting things together.
When you delay, it creates additional stress, which, in turn, means you
might miss important details...or make mistakes. Once you’ve begun, the
anticipatory dread vanishes, and you realize you’re on your way to
having it done. It also means you won’t be one of those desperate souls
trying to get into an overcrowded post office with five minutes to
Q: I’ve heard people say that
getting a tax refund might be a bad sign. Why?
A: A refund means you
overpaid your taxes to begin with, and gave the
government a no-interest loan.
Zombie Economics is about making every dollar count – your money is
your arsenal. As part of that, it’s time to recalibrate our thinking
about tax refunds. We’ve been trained to view these as a positive, but
when you get a tax refund, you’ve actually lost money in the process.
When you withhold too much, you are, in essence, overpaying your taxes,
and giving the government a free loan – money that you get back later,
but without any interest or any kind of bonus.
The key is to withhold just the right amount. Get a copy of your W-4
from your HR department and look at the number of allowances you’re
claiming. Then tally up the number of dependents. If the number of
dependents is larger than the number of allowances, you might be
withholding too much.
Another way to figure this out? Go to IRS.gov, and in the search
window, type in “withholding calculator”. This will take you to the
IRS’s web-based withholding calculator – it will let you determine what
you should be withholding on your W-4.
And remember: you can change your withholding at any time.
When in doubt,
hire a professional. Especially if significant money is on the line. If
you don’t understand the ins and outs of tax law (and it’s
mind-bendingly complicated), don’t try to handle this yourself.
Q: I’m terrified of being
audited. How can I lower the chances of that happening (and what should
I do if it does happen?)
A: Common mistakes and
large deductions can be red flags, so double-check
your work and be prepared to show proof.
While the IRS can sometimes appear to be picking its auditing targets
at random, there are common triggers – things which can catch the
attention of an inspector:
Red Flag: Simple
mistakes when entering or submitting your information.
If you accidentally add or drop a zero, or put a decimal point in the
wrong place, that can be enough to raise a red flag.
The Good News: These can
typically be dealt with fairly easily. An
honest mistake is usually shown to be that pretty quickly and the
matter gets resolved.
Red Flag: If you claim a
large amount of business-related
expenses...especially if the income from that business seems low in
relation to the deduction amount. Claiming a significant amount of
charitable deductions can also draw attention.
The Good News: Questions
about business or charitable deductions can
also be dealt with fairly easily...if you’ve got proper documentation.
It is very important that you be able to re-create these expenses,
which means showing proof that the donation happened, or that the
business trip really did cost that much. If you can’t prove it –and
remember, we’re talking about things which happened a year earlier– it
probably won’t be allowed.
A final note: When in
doubt, hire a professional. Especially if
significant money is on the line. If you don’t understand the ins and
outs of tax law (and it’s mind-bendingly complicated), don’t try to
handle this yourself.
Send your questions, queries,
strategies, and suggestions to: ask [at] zombieeconomics.com