Wealth Pilgrim: Tips and advice to help you have more money, less debt and more life.

Innocent Spouse Married A Tax Cheat. Now What?

If you are an innocent spouse and marry a tax cheat, what can you do?

Let me share a real-life story:

Roberta and Tim have been married for over 25 years. Tim is self-employed and Roberta is a stay at home mom.

They travel all over the world, live in a multi-million dollar home…..and declare less than $50,000 in income on their tax return each year. While I’m no forensic accountant, it’s painfully clear that Tim isn’t declaring all of his income.

The IRS caught up with Tim recently. They audited his returns for the past 5 years and handed him a huge tax penalty.

Tim was lucky – he could have gone to jail.

What Roberta doesn’t know is that she’s lucky too. She was on the hook just as much as Tim since she signed the tax return.

Why is this important to you?

If you file a joint tax return, you do benefit by paying lower taxes, and that’s great. But sometimes one spouse goes too far in trying to reduce the tax liability. When they break the law, you’ve got a problem.

Why?

If you file a joint return and the information is false or wrong, the IRS can go after either of you because you both signed the return.

Big Brother can put you both (or individually) in legal hot water. And subsequent divorce won’t help you.

Even if your divorce decree says that one party has to pay the tax, the IRS doesn’t care. They can still come after you both.

So even if you are an innocent spouse, it’s really important for you to carefully review the tax return before you sign it. After all, you are liable for what you sign.

The typical situation:

Usually, one spouse knows more about the couple’s finances and files the tax return. Often, the other spouse simply signs the return without really understanding what’s in it.

So what can an innocent spouse do to protect themselves from becoming a target for the IRS?

1. Be aware.

Think about your lifestyle. What does it cost you to live? Where is the money coming from? Is it being reported? If you sign a fraudulent return, you are going to be held responsible. Roberta was living the life of Don Corleone. How can she claim to have the income of Homer Simpson? Don’t play that game….the IRS may not be so forgiving with you as they were with Tim and Roberta.

2. Ask questions.

If you see something on the return you don’t understand, ask. If something stinks, don’t let it pass. There is nothing so complicated that it can’t be made clear. Don’t stop asking questions until you understand what’s going on. If you have to, get your own CPA and get her opinion on the matters you question. Remember, this is your future we’re talking about.

3. Get to Kinko’s

Get copies of your last 3 years tax returns. Don’t count on your spouse to keep copies for you. Also, keep statements of investment and savings accounts for your own records.

4. Protect Yourself.

If you think your spouse is trying to pull a fast one, you’re going to have to protect yourself. Seek legal and tax advice from the pros. If your spouse is underreporting income or committing other tax fraud, start filing separate returns and set up separate banking and credit card accounts too.

Do you keep your own copies of your tax return? Do you understand everything in the return? Has this ever been a problem for you or someone you know? Would it freak your spouse out if you went through the return and asked questions?

Like this article? You will love getting my free brilliant financial updates! No spam, and I won't give your email address to any other person or company. That's a personal promise. Neal Frankle, Certified Financial Planner, Los Angeles, California.

Feb 08, 2010 | 0 comments | View Post

Young Couple Can’t Afford Credit Card Payment. Help Fix Their Money And Marriage

photo by Pastapopaulose, Flikr

I took a tough call yesterday from a young couple struggling with their money and marriage. John and his wife Margaret are in way over their heads and they’re considering throwing in the financial towel and declaring bankruptcy.

They owe $50,000 in credit card debt and they can barely make the minimum payments. They fear losing their home and their credit score.

How they got there:

Both John and Margaret are hard working people. They got caught when his employer (of 15 years) closed down after noticing he didn’t have enough cash for his small business. Ouchie….

They piled on credit card debt to tide them over until John found new work. Strike 1.

At just about the same time, the credit card companies started jacking up their rates. So just when the family could least afford it, their expenses went through the roof. Strike 2.

Finally, the city they live in came under financial hardship and doubled the residents’ property tax. Strike 3.

Those were the three straws that broke the camel’s back.

photo by Neil Carey, Flikr

The only assets John and Margaret have are their home and John’s IRA.

They have $200,000 in equity in the home and about $68,000 in the IRA account. That is their only savings.

Their income is barely enough to pay their basic living expenses. It is certainly not enough to cover their living expense and the credit card bills.

The couple asked me about bankruptcy. I had to tell them up front that I wasn’t the best person to consult with – that’s why I’m asking you for your input.

Having said that, here’s the advice I did provide:

A.   Continue making property tax and mortgage payments. The home is the one asset they own that has some equity. They simply can not afford to lose it.
B.   Perform a postmortem on the credit card debt. How did they accumulate the debt? What could they have done differently to avoid falling into this trap?
C.   Implement a drastic plan to cut expenses and increase income. I suggested that they go through every single expense and try very hard to find a way to do without. Also, I suggested they rent a room out in their house and find second jobs. They simply must create an emergency fund so this problem does not repeat itself.
D.   Renegotiate the debt with the credit card companies. I told John and Margaret to call the companies and inform them that they simply can not make the payments. They should push the companies hard to make an arrangement. I believe that the couple should be able to get the companies to agree to an interest rate moratorium and even a principal reduction.

I did not suggest that the couple contact a debt consolidation or negotiation company because I have heard horror stories about these firms and I was wondering what your experience has been.

What advice would you give John and Margaret? Are there companies that really do help people facing these hardships?

After you’ve considered these questions, please consider checking out these posts and carnivals. They are my favorites for the week.

Cash Money Life – Carnival of Personal Finance

Peak Personal Finance – Personal Finance News Carnival

How to Buy Super Bowl Tickets - Save this one for next year! (Go Colts!!!!)

Be Vigilant of Car Recalls

Have a No-Spend Weekend

Five Reasons To Start A Side Business

Six Reasons Why Britain is Booming Again

Help with Debt

Passive Income Now – Money Hacks Carnival

Pragmatic Environmentalism

Feb 05, 2010 | 21 comments | View Post

How To Make A Small Successful Business Out of The Biggest Bailout in U.S. History – Book Review

You can make a part-time small successful business and a fortune out of the big government bailouts. At least, that’s what one author thinks.

Ron Insana wrote a book about that very subject and it’s called,”How to Make a Fortune From the Biggest Bailout in U.S. History”.

In case you’re not familiar with Insana, he was a senior analyst with CNBC and he’s been a regular on countless other main stream financial news programs.

What the book covers:

This book discusses in plain language how the financial crisis of 2008 was created and gives some very practical ideas on how to take advantage of the situation we’re in now. He doesn’t come out and say it but one message I got out of reading the book was that you could easily create a small successful business by implementing the ideas he talks about.

According to Ron, we are smack dab in the middle of once-in-a-lifetime fire sale. Everything from real estate to blue chip stocks is available at huge discounts and he offers a variety of ways we can cash in on the opportunities.

What I like about the book:

I like the fact that Ron really knows how to string a sentence together. It makes reading the book easy. He distills the subject so the reader understands what he’s talking about and can do something with what she’s learned. That’s rare today and I appreciate it.

I also liked the way he tries to help novice and advanced investors at the same time.

For the beginner, he explains why he feels we’ve hit bottom and gives actionable ideas on how to make money now. He discusses real estate, fixed income and stock market investments.

For the advanced investor, he provides more sophisticated tactics in each of these areas.

What I thought could have been handled better:

I’m not sure if I my expectations were inflated or if he failed to deliver on what the title promised. But I was expecting more details on how to take advantage of the real estate melt-down.

Before reading the book, I was convinced that you have to be a big player in order to really cash in on the distressed real estate market today. Ron’s book didn’t change my mind. Sure you can buy real estate….but how can you tap in to those mega programs the government put together?

Also, Ron talks about how now is a great time to buy real estate. I agree with him in some specific areas of the country and disagree with him on other areas. Also, I would like to know how individuals can buy distressed properties and mortgages like the big kids do.

The author does provide some general direction on these subjects but I would have liked to see more step-by-step help. I would have liked to see more caveats here too. Just because assets are being offered at steep discounts doesn’t mean risk has been eliminated.

While I got a sense of where to go, I didn’t put the book down feeling qualified to become a landlord. Maybe I expected too much. In order to answer my questions, it might have taken Ron a great deal more work.

When all is said and done, the book is a worthwhile read.

Are you interested in this subject? What resources have you used to get educated? How are you investing differently today when compared to 2 years ago? Are you taking more or less risk?

Feb 03, 2010 | 7 comments | View Post

Planning Your Retirement Without Worrying About High Interest Rates, Inflation or Income Taxes

If you are planning your retirement or trying to make your small business successful, you don’t have to worry about sky-high inflation, interest rates going through the roof or astronomical income taxes plaguing you for the rest of your life.

I spoke to Don on Friday and he was worried about all three.

He made the following arguments:

1. The government is piling up record levels of debt.

This, unfortunately is true.

2. In order to make up for the short-fall, the block heads in Washington will print money like Wiley Wonka produced chocolate. Our “leaders” may not have any Umpa Lumpas available to man the presses but they do have the ability to print up as much green stuff as they want.

Yes again. This is a likely scenario and indeed, it’s highly inflationary.

3. In order to punish all the very bad people who actually make money (and also in order to help make up for the spending deficit) the government will likely increase income tax rates.

Trifecta! Yes….this is also a likely result of the kind of “thinking’ that’s been going on in Washington for the past several years.

So why did I tell my client not to worry about these problems?

Because, if you examine the facts, you’ll see that these kinds of problems are transitory.

Yes….it is highly likely that we will experience periods of higher inflation, income taxes and interest rates.

But it’s highly unlikely that we’ll be saddled with those problems forever.

I think Don was right to be concerned about these realities in the short-term but I believe he made a mistake when he concluded that these problems would plague us for the next 10,20 or 30 years.

The graphs below tell the story:

Wikipedia

TruthandPolitics.org

You can see that interest rates, inflation and tax rates gyrate and change. They don’t stay in one place too long.

Why not?

Because people who live in democracies get to throw policy makers out once we get good and sick of their idiocracy (a new word I think I just made up –but useful). There is also this little thing called the “business cycle” which even the clowns in D.C. have been unable to completely destroy – at least so far.

Bottom line, it makes a lot of sense to be concerned about higher inflation, interest rates and tax brackets on the immediate horizon. But if you convince yourself that these problems are here to stay, you are ignoring the facts.

So when you think about planning for your retirement, please keep in mind that you’ll likely experience many cycles of high and low interest rates, tax brackets and inflation. You can’t predict when these periods will be or how long they’ll be. But you can plan on them coming and going.

Do you buy my argument or do you think inflation is just around the corner and when it gets here, it’s here to stay?

Feb 01, 2010 | 0 comments | View Post

Free Weight Loss Program Still Working and Paying Unexpected Dividends

My free weight loss program is still working and I’m gaining a lot more than losing weight.

Click Here to Continue Reading

Jan 29, 2010 | 9 comments | View Post

Free Budgeting and Forecasting Software Review – Budget Pulse

I had the pleasure of interviewing Craig Kessler of BudgetPulse.com last month and he really got my attention when he explained his firm’s free budgeting and forecasting software. You can hear the entire interview with Craig.

For of those of you unfamiliar with BudgetPulse.com, it’s a newish software program created for you and me to help us manage our personal finances. You may think I’m weird, but I get all perky when it comes to this kind of thing. Whoa…..

Back to Craig…

During our interview, I learned a lot about Craig’s product and (more importantly) how different our needs are as consumers.

Click Here to Continue Reading

Jan 27, 2010 | 10 comments | View Post

Roth IRA Conversions Can Wreck Your Tax Credit for Homebuyers

If you don’t time your Roth IRA conversions correctly, it can cost you your tax credit for homebuyers.

First, the good news….

Because of recent changes in the law, you may find it easy to qualify for homebuyers tax credit.

You qualify for the credit if:

1. You haven’t owned a principal residence for the three years prior to the new purchase or…
2. You previously owned and resided in the same home for at least five consecutive years out of the previous eight.

(Here’s a great post on Roth IRA conversion rules by my buddy Matt Jabs.)

Of course there are some limits. One such limit is income – and that’s where the IRA Roth conversions come into the picture.

You see, the credit phases out (between $125,000 and $145,000 of AGI for single taxpayers and

between $225,000 and $245,000 of AGI for couples filing jointly).

What does this have to do with your Roth IRA conversions?

Simply put, Roth IRA conversions increase your AGI. And that means the Roth IRA conversions may put the tax credit beyond your reach.

Luckily, there are a few tactics you can use to convert your Roth and still qualify for the credit.

First, keep in mind that you must buy the new principal residence by April 30 (the escrow can be completed by June 30.) But you can claim the tax credit in either 2009 or 2010. That being the case, choose the year with the lowest AGI.

Also, keep in mind that if you do convert your IRA, you can report the income in 2010 or split it evenly between 2011 and 2012. If you report the Roth IRA conversions income in 2011 and 2012, you can still take the tax credit this year without worrying about IRA Roth conversions money pushing you over the limits.

Another tactic is to take the tax credit on your 2009 tax return and (if you are concerned about higher tax rates in 2011 and beyond) and pay the tax on your Roth IRA conversions in 2010.

Bottom line, there is a lot of flexibility and you can use that to your advantage.

Now that you know how to use the Roth conversion rules to your advantage, a bigger question comes up which is this; should you convert your IRA to a Roth or not?

Don’t blindly assume that the IRA Roth conversions are for you. My buddy Sam wrote a nice piece on why you should not convert to a Roth.

Generally speaking, the Roth is not a good choice for you if you will pay the tax with IRA money or you plan on using the converted account within 10 years.

Are you planning to convert your IRA to a Roth? Had you considered how that might impact your homebuyer’s tax credit? What is your strategy for your Roth IRA conversions and/or the homebuyer’s tax credit?

Jan 25, 2010 | 6 comments | View Post

How To Fix a Marriage After Financial Infidelity

photo by LeibiDich, Flikr

Is it possible to fix a marriage after financial infidelity?

I came across an interesting story about a newlywed couple who illustrates how difficult it may be.

A few weeks after the marriage, Karin,bought a laptop without first consulting her husband Jim.

It made the groom so angry he started reconsidering his decision to get married in the first place. Now he’s seeing red and the bride is scared to death.

It’s true that Karin bought the very expensive laptop without first talking to Jim. But she bought it with her own money.

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Jan 22, 2010 | 22 comments | View Post

If You Were The Owner Would You Be Selling This Home And Planning Your Retirement?

If you were the owner of this home, would you be selling and planning your retirement?

What if you could sell this home for $3 million?

Would your answer be the same if your backyard looked like this?

These are pictures I took and questions I asked myself last week.

Lady Pilgrim and I took a few days of R&R in Maui last week. (We were there 15 years ago thought it was about time to go back.)

While we were there, we took many walks along the beautiful coastline. One of the most spectacular sites was an endless parade of whales that breached the water as we explored the beach. It felt like they were welcoming us to their home. Coolio.

When you see those big guys frolicking around in the water, it really makes you reconsider and rethink who and what you are.

Another site that made me really stop and think was the picture of the shack above. This home is located on one of the most spectacular pieces of real estate in the world. It’s worth many millions of dollars. But look at it. Would you live there?

As I strolled down the beach, I asked myself what I’d do if I owned that lean-to. On the one hand, I’d have a view that most people just dream of seeing let alone have as a backyard. On the other hand, the conditions that I’d have to deal with in that hovel made me shiver. I just don’t know if I’m Pilgrim enough to take that.

So that’s my question to you. If you lived in this shed and owned that land, would you stay and just live and love your life? Or would you sell and be set for life – while having to leave your Garden of Eden?

I know it’s an extreme situation but when it comes to planning your retirement, we all have to ask ourselves similar questions. Are we willing to leave our own paradise, downsize and take it easy? In fact, this is a question that we have to ask ourselves even before we start planning retirement. What if you could sell everything right now and work part-time? Would you do it?

Jan 20, 2010 | 11 comments | View Post

Watch Movies and TV Online For (almost) Free Using Your Computer

photo by EMagic, Flikr

The following is a guest post from Johnathan, a Wealth Pilgrim reader who wants you to watch movies and TV online (almost) for free. I got rid of cable completely and I’m not looking to replace it – even if it is for free. Still, I love the idea of saving money and I’m sure you do too.

You already know that I’m not a tech genius and I’ll admit that some of this is beyond me. But I do know that even if we only get a few ideas, it could be well worth it. Check out Johnathan’s ideas and let me know what you think:

We never had Satellite or Cable service until after our first child was born. During those wee hours of the morning, feedings, diaper changes, comforting, etc., there was next to nothing on broadcast TV. One night, we saw an ad for free Satellite installation with Tivo (DVR), for under $40/month. What the heck, we gave it a try!

Five years later, the bill climbed to $70+/month — for a service-level only one up from basic – no movies, no sports, nada! That’s a bit much, and we weren’t getting anywhere near that kind of value out of it, IMHO.

We canceled the satellite, got a new TV and hooked it up to a spare computer. Using www.ZeeVee.com/ZINC as a “Guide Channel”, we get more shows than before – can access NetFlix – plus, we don’t have to wait on network schedules: It’s online, waiting for us – the web is our DVR. Plus, we completely eliminated a monthly bill!

This bigger boatload of TV has both new (Sons of Anarchy, Burn Notice, Eureka) and old (Have Gun — Will Travel, Bat Masterson, Lost in Space, FarScape). There are other shows I’ve never seen, much less heard of! We get nearly everything we were used to, except for BBC stuff like Dr. Who – which will come out on DVD.

HOW WE GOT THERE

Two years ago, I got a new computer and noticed the improvement in video quality. The screen was 24″ and HD, using DVI. I tried a DVD movie, and it was more clear and crisp than our 36″ tube TV! At the store, I began to look closely at the new flatscreen TVs and saw that a few had PC/VGA video plugs. Hmmm…interesting.

Over time, I would scan the web for video, and found an interesting assortment, like the old Star Trek series, at http://www.cbs.com/classics/star_trek, “The Ascent of Money” at http://www.pbs.org/wnet/ascentofmoney and a slew a stuff at http://www.snagfilms.com/. Took Hulu, Veoh and Joost out for a test drive. Signed on for a NetFlix trial (1 DVD/month), to try their “Instant Play”. It was a lot to take in, much less manage and organize, somehow.

Then, I found the ultimate “glue” to use as a “Channel Guide”, bringing Hulu, network websites and NetFlix together: www.ZeeVee.com/ZINC.

Hmmm…more interesting.

THE TUNER

Time to try a broadcast TV digital tuner for the PC. When the switchover to all-digital broadcast started, I noticed that we got not only clearer pictures, but more channels for each station. As the kids are younger, they’re pretty happy with PBS, and we get two PBS stations, one with four channels, the other with three. Hey, how much BARNEY or CAILLOU can they watch?

The way to go seemed to be the HD HomeRun, made by SilconDust, which puts two tuner signals into the home network, complete with software for all our computers. A little pricey, but it works well, turning any PC into a TV receiver and DVR. It plugs into any router/switch on the network, and for reception, we already had a coax cable running to the outdoor antenna.

Now, we record “Cook’s Country”, “Defying Gravity”, “Red/Green Show”, “Survivor” and “Woodwright’s Shop”. Fast-forwarding through commercials works better than the old TIVO did. Not that we have time to watch every episode…

THE FLATSCREEN
Now, if only I could put this whole mishmash in the den with a big screen, we’d be “cooking with gas” for sure! The choices were Plasma and LCD. Plasma has problems when physically tilted, like when you move it (ask any “Wal-Mart” employee in that department). The wife approved the LCD picture quality – decision done!

In LCD’s, the 55″ VIZIO was the biggest, and had a slew of connections — including VGA for PC’s, which many of the others did NOT have (at the time). The picture looked good, and according to the store’s employees, there were few returns. We got one, paying by American Express, as that extends a manufacturer’s warranty by a year.

I hooked up my usually unemployed backup computer (bought to closely match the desktop in speed and graphics), a dual-core laptop with an NVidia graphics card. After installing ZINC and configuring NETFLIX, we were up & running.

SOUND

Audio—Some laptops have a problem with sound; mine was one of them. Fixed this with a USB gadget, the “Audio Advantage“ for $30.

VIZIO speaker sound is not great, but it’s OK. Depending on what’s playing — DVD, NetFlix or ZINC — and sometimes, whether it’s newer or older material, the sound may have to be adjusted. We often use the ROCK or JAZZ setting; it seems to make voices clearer. Sound volume varies a lot, too, depending on the signal source — these online services really need to set a standard; so do some of the DVD producers.

We’re going to try hooking up the old BOSE surround system, with digital output. There is also a “Speaker Bar” available for the Vizio, which is supposed to be close to surround-sound quality. Since the new TV centralizes sound, we can just leave whichever one on all the time, and won’t need yet-another-remote.

KEYBOARD

I could NOT find a remote with trackball AND scroll wheel. The closest was an RF (not infrared) keyboard from DSI Model RK-768 http://www.dsi-keyboards.com/keyboard/item.php?id=49 (refurbished from Amazon. It has general volume control, media controls (for Media Center), a thumb-trackball, clickable scroll wheel and mouse buttons. A bit bulky, but works great. Now, I read the RSS news page from my lounge chair — though I did have to adjust the general Windows screen fonts much larger. Sometimes, I need to adjust browser fonts with CTRL + and CTRL -.

BLU-RAY, DVD “UP-CONVERT” & MUSIC

To go with the new TV, we browsed the store for an inexpensive DVD UpConvert unit. I saw a Samsung BluRay player that had NetFlix, Pandora (web radio), and UpConvert. A no-brainer!

I also ended up buying a $25 network “switch”, since the laptop, tuner and BluRay all use the net. Had to run a cable under the floor, to the router.

The Pandora works so well that we “retired” the music CD jukebox, transferring all the music to MP3 on the computer. By sharing the directory, all the PC’s in the house can use it, and the wife can finally use the little MP3 player she got as a gift. From me. Last year. It’s possible I procrastinated a little on the whole digitizing thing.

ROKU
The bedroom has a 32” tube set, so we added this to get NetFlix. This neat little gizmo has both Wired and WiFi networking, plus every possible TV connection, from COAX to HDMI, so it works on a new or old TV. Resolution is 720, not 1080. http://www.amazon.com/gp/product/B001PIBE8I/

The ROKU lineup recently expanded – exploded, actually! Originally, there were all of three items: NetFlix, Amazon VOD and MLB. All of a sudden, there are dozens of “channels”, mainly web-based “shows” with some news and weather. A nice plus!

The old set, a 10-year-old 36″ tube, is now in the basement. The kids like to go down and watch it. No idea why. More of that (expletive-deleted) BARNEY and CAILLOU. Hmmm…Maybe, if I cut the head off a stuffed Barney, mount it and tell’em he’s dead, they’ll watch something else! Probably shouldn’t try that with CAILLOU, though – might scar them, psychologically. Well, maybe not the youngest, (a potential lion-tamer), but I really shouldn’t take chances with the older one, being the first-born and all.

CAVEAT
Media Center for both Windows XP and VISTA does NOT work well for broadcast only — the Guide Listing does NOT get sub-channels! The official word is, via folks at www.TheGreenButton.com that Microsoft will not fix this in XP or VISTA. It’s supposed to be fixed in Windows 7, but the SiliconDust unit comes with TotalMedia, so it doesn’t really matter.

SIDE EFFECTS: Fewer Remotes and a Videophone
As a result of all this, we now have only three remotes, down from six. If we get a new PC with a BluRay drive and Windows 7, the Samsung can go downstairs. That would leave two remotes – but, as the TV acts like a monitor, turning itself off or on when the PC says so, which brings us down to just one, the keyboard. Well, there’s the old VCR remote, but that won’t get much use.

Only ONE remote? Now THAT is progress! (Though it IS keyboard-sized…)

Moved the webcam to the Den, so the kids can now see & talk to both sets of Grandparents (who remember “Buck Rogers” from the movie theater serials http://www.amazon.com/Buck-Rogers-Buster-Crabbe/dp/6305989397/), using Skype as a Videophone. Very cool! I had to set things up for them, but one physical trip and the rest via www.LogMeIn.com isn’t too bad. Microsoft webcams work best, IMHO.

On commercials – There are NONE with NetFlix. Recorded broadcasts are easily fast-forwarded. In ZINC/HULU/web shows, they can’t be avoided, but they ARE brief, 15-30 seconds. In all cases, you can hit PAUSE, to answer the phone or go get a snack.

FIGURING THE FINAL TALLY
$1400 TV
$180 BluRay/DVD UpConvert/NetFlix/Pandora
$150 Tuner
$100 Roku
$100 Misc (cable, keyboard, switch)
———
$1930 TOTAL

Assuming we get ten years out of the equipment, the cost oughta be about $193/year. Add $108/year for NetFlix, and that’s $300/year, vs. $800/year for satellite service.

Easy math!