Tax Proposals in Obama's 2010 Budget Outline
After reading the full text of President Obama's 2010 budget outline, I can see much more details than what I read in the news. I encourage everybody to read it as well. If you'd rather not read a 140-page document, here are what President Obama proposed in this budget outline with regard to taxes:
1. Make some tax cuts in the stimulus law permanent. These tax cuts are already in the stimulus law, but the stimulus law had them for only two years in 2009 and 2010. President Obama proposed to make them permanent.
- $400/$800 Making Work Pay Credit
- lower refundable threshold for Child Tax Credit
- American Opportunity Tax Credit for college education. Stimulus law increased the maximum benefit from $1,800 per year for two years to $2,500 per year for four years.
Obama's Budget Outline
I have a major problem with the mainstream news media. This morning they all reported that President Obama sent a budget outline to Congress. They selected some nuggets from the outline and told us President Obama wants to invest in health care and what not. See this report from the Associated Press or this article from New York Times for example. From these reports, we know there is a 140-page budget outline. However, none of the reports link to the original source: the budget outline itself. I want more information than what the reporters chose to tell me. Reporters, please do me a favor. Filtering the information is fine, but please always link to the source.
End of rant. If anybody sees a link to the real budget outline, please let me know. If I find it I will also update this post and put it here. I already tried whitehouse.gov and House Ways and Means Committee website.
[Update] Score! Found it from Office of Management and Budget (OMB) website.
Vanguard TIPS Fund Portfolio Changes
I return to one of my favorite topics: TIPS. For new readers, TIPS are Treasury Inflation Protected Securities. They are a type of bond which pays interest indexed to inflation. In a previous post, Individual TIPS Or TIPS Mutual Fund, I said it's a good idea to buy TIPS in a mutual fund and that buying individual TIPS is like becoming an amateur manager for your own bond fund. The real yields on TIPS bonds bounced around quite a bit in the fourth quarter of 2008: reaching a peak in October, falling back down at the end of the year.
The longer term TIPS became very attractive in October 2008, relative to the historical real returns on bonds. I was tempted to buy more TIPS and/or lock in the good yield for longer time by selling my shorter term TIPS bonds for longer term TIPS bonds. An amateur like me thinks that's the best thing to do. What about the professional bond fund managers? Did they also see the longer term bonds as a good buying opportunity?Vanguard has a TIPS fund: Vanguard Inflation Protected Securities Fund (VIPSX and VAIPX). They report their portfolio holdings four times a year, after the end of each quarter. The latest holdings are on their web site. I tracked down the quarterly holdings in 2008 from the reports they filed with the SEC. There were only fewer than 30 TIPS bonds ever issued. The Vanguard fund owned about 25. The small number of holdings make it easy to compare the portfolio changes from one quarter to the next. Because market prices fluctuate, I compared the changes in the face amount, which reflect the fund managers' buying and selling activities.
| Q1 2008 | Q2 2008 | Q3 2008 | Q4 2008 | |
| Number of bonds held | 24 | 23 | 24 | 23 |
| New position | 2 | 0 | 1 | 0 |
| Added to position | 18 | 11 | 11 | 9 |
| Reduced from position | 3 | 5 | 4 | 10 |
| Position eliminated | 1 | 1 | 0 | 1 |
| Position unchanged | 1 | 7 | 8 | 4 |
Retirement Plans Galore: 401(a), 401(k), 403(b), 457, SEP, SIMPLE
A reader sent me an e-mail some time ago about the interplay between a 401(a) plan and a Roth solo 401(k) plan. You probably heard of 401(k), 403(b), and 457 plans. The names of these plans come from the section numbers in the tax code which specify the rules for these plans.
401(k) plans are offered primarily by private sector employers. Employees in public schools and tax-exempt organizations have 403(b) plans. State and local governments and tax-exempt organizations have 457 plans. Some employers offer both a 403(b) plan and a 457 plan. What is a 401(a) plan then?
Strictly speaking a 401(a) plan is a bit of a misnomer because other kinds of plans including 401(k) plans must also qualify under tax code 401(a). In a loose context, a 401(a) plan is a retirement savings plan in which employees can't choose or change the amount contributed to the plan. It's also called a "money purchase plan."
TurboTax, TaxCut, and TaxACT Compared Side By Side
Over the President's Day long weekend, besides reading the book A Fool and His Money, I also did my taxes.
In a previous post Free E-File Is NOT Free, I said I'm going to try TaxACT this year because it's substantially cheaper than TurboTax and TaxCut. A couple weeks ago, I got TaxCut Standard for $1 at Dollar Tree. TurboTax also sent me a trial CD some time last year. With all three major tax prep software on hand, I was able to do a side-by-side comparison.
The tested versions are (all on Windows): » Read more …
Tax Deductions: Above-the-Line, Standard, Itemized, and Miscellaneous
I wrote about tax credits last week. This time let's look at tax deductions. First a recap of the difference between a tax credit and a tax deduction:
A tax credit directly reduces your tax dollar for dollar. If you are supposed to pay $5,000 in tax, a $500 tax credit reduces your tax to $4,500.
A tax deduction reduces your taxable income, which indirectly reduces your tax. If you are supposed to pay $5,000 in tax, a $500 tax deduction reduces your taxable income by $500 which then reduces your tax by only $500 * 15% = $75 if you are in the 15% marginal tax bracket.
Book Review: A Fool and His Money by John Rothchild
After reading a few less than satisfying books, I turned to a list of classics. Classics are classics for a reason: because they are good! I read over the long weekend A Fool and His Money by John Rothchild.
This book was published 20 years ago in 1988. If there were blogs back then, it would've been on a blog. The author John Rothchild was a journalist. In 1986, during a big bull market, he decided to take a year off, see for himself how he could make money with money, and then write a book about it. The subtitle of this book is The Odyssey of an Average Investor. With $16,500 from his book advance and the sale of a used car (equivalent to about $30k today), he went to banks, financial planners, and brokers. He attended investor conferences and met money celebrities. He visited the stock exchange in New York and spoke to traders, sell-side and buy-side analysts, and portfolio managers. He consulted an astrologer who gave him a profitable trade on S&P 100 options. He attended training classes for new stockbrokers. He played with stocks, futures, and options. Along the way, he chronicled his encounters and learned lessons in good humor (remember, he was a journalist). Let me just give you one excerpt. After learning there are Chartists who use stock chart patterns and Fundamentalists who screen financial ratios, he concluded:
Tax Cuts in Stimulus Bill Updated
American Recovery and Reinvestment Act of 2009 was signed into law on Feb. 17, 2009. CCH once again published a great summary for the tax provisions in the law.
CCH Tax Briefing: American Recovery And Reinvestment Act Of 2009
Book Review: The Little Book of Value Investing
This is another book in The Little Book series published by John Wiley & Sons. The title is The Little Book of Value Investing by Christopher Browne. I also reviewed these other books in The Little Book series:
- The Little Book That Beats the Market by Joel Greenblatt
- The Little Book of Bull Moves in Bear Markets by Peter Schiff
The author Christopher Browne is a Managing Director of Tweedy, Browne, which is a money management company with $7.6 billion under management as of the end of 2008. Tweedy, Browne boasts its 80-year history and its role as the broker for Benjamin Graham, the father of value investing. It is one of the most well known firms for following the value investing strategy.
Refundable Tax Credit and Non-Refundable Tax Credit
If you read and paid attention to the previous post Tax Breaks In Stimulus Bill for Buying a Home Or a New Car, you would see that the proposed tax break for buying a home is a tax credit while the tax break for buying a new car is a tax deduction. If you are not sure about the difference, it's a good time to clear up some tax terms. For the sake of length, this post will only cover tax credit. Let's look at tax deduction at another time.
A tax credit directly reduces your tax, dollar for dollar. If you are supposed to pay $5,000 in tax, a $500 tax credit reduces your tax to $4,500. On the other hand, a tax deduction reduces your taxable income, which indirectly reduces your tax. If you are supposed to pay $5,000 in tax, a $500 tax deduction reduces your taxable income by $500. If you are in the 15% marginal tax bracket, it reduces your tax by only $500 * 15% = $75. Therefore a $100 tax credit is worth a lot more than a $100 tax deduction.
Within tax credits, some are refundable tax credits and some are non-refundable tax credits. Here the word refundable often causes confusion because most people refer to the difference between their tax withholding and their total tax as the tax refund. » Read more …
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