Ask Zombie Economics

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Ask Zombie Economics

Latest update: May 9th, 2012

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 (It also means that any unused money can be transferred to another child or withdrawn.)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 your diploma.

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, life-and-death situation.

April 13th, 2012

Q: I’m getting a refund this year – how long does it take to arrive?

A: If you filed online, 10-21 days. If you filed via regular mail, about six weeks.

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 spare.

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

Lisa Desjardins is a correspondent for CNN Radio who also reports for CNN.com and CNN television. She works -and spends a good deal of time employing survival strategies in- the US Capitol, where she has covered extensive financial issues, including the collapse of 2008 and the Wall Street reform bill passed in 2010. Lisa has also worked for the Associated Press in Washington, and WIS-TV and WBTW-TV in South Carolina.

Email: lisa [at] zombieeconomics.com

Media requests / interview inquiries: info [at] zombieeconomics.com

Rick Emerson is a radio and television broadcaster based in Portland, Oregon. He is the host of The Rick Emerson Show, which has enraptured/annoyed listeners since 1998, and of KRCW-TV’s Outlook Portland. He is also the author and star of the one-man show Bigger than Jesus: The Diary of a Rock and Roll Fan, as well as the feature-film of the same name, and has displayed his limited acting ability on such television programs as Leverage.

Email: rick [at] zombieeconomics.com

Media requests / interview inquiries: info [at] zombieeconomics.com

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