Archives For Taxes

       If you spend much time reading personal finance advice for Christians (either on Provident Planning or somewhere else), you’ll probably start to realize that it’s not all that different from other personal finance advice. Most of the good advice for Christians applies equally to non-Christians as well. Stick to a budget, spend less than you earn, avoid excessive debt, keep an emergency fund, minimize your taxes, don’t buy insurance you don’t need, save for the future – none of those things are particularly Christian in nature.

       There may be some points in which Christian personal finance and secular personal finance will differ, but, generally speaking, good personal finance advice is the same regardless of your religion. The difference – and this is a major difference – is in the ultimate purpose, the final goal, of following that good advice.

       As far as the world is concerned, it makes sense to make smart personal finance decisions because that’s what is best for you. Good money management will help you meet your goals, maximize your wealth, and get the most out of the money you’ve earned. And according to the world, that’s what you should do with your money. Use it for the things you want. Use it to meet your goals and fulfill your dreams.

       But for Christians, making smart decisions in our finances is not important just so we can maximize our wealth and meet all our desires. Our purpose is not to find fulfillment in this world and the things it offers. Our purpose is to honor and glorify God – to serve Him with our entire being in everything we do. Our goal is to do His will. And part of God’s will for us is to share His love by caring for those in need through generous giving. We don’t try to maximize our wealth for our own use. We try to maximize our wealth for God’s use.

       I want you to remember this as you read the articles I write. Many times there won’t be a Bible verse in a post. Personal finance in the Bible is more about the principles that should govern our decisions – not specific applications (like how to get out of debt). But it’s very important that we remember the purpose of seeking and following good financial advice.

       When I talk about spending less, it’s so we’ll have more to give. When I talk about earning more money, it’s so we’ll have more to give. When I talk about making smart financial choices, it’s so we’ll have more to give. It all comes back to giving – giving motivated by love that flows out of our response to God’s Gift to us.

       Yes, making good financial decisions will have benefits for you personally. But our focus as Christians is on the benefits those decisions will have for the Kingdom. In our efforts to follow good financial advice, let’s keep our eyes focused on Christ and our minds focused on how we can serve Him fully.

       The advice we follow may not be all that different from non-Christians. But the motivation, goals, and results should be very, very different. And that difference will serve as a witness for the power of God’s love working in our lives.

       What do you think makes Christian personal finance different? Let me know in the comments!

       If your income falls in the low to middle range, you can get your tax returns prepared for free. How? By using AARP’s Tax-Aide Program.

What Is AARP Tax-Aide?

       AARP Tax-Aide is the nation’s largest, volunteer-run tax preparation and assistance program. It’s part of the IRS’s Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) Programs. It is available to taxpayers with low and moderate incomes and gives special attention to people age 60 and older.

How Low Does My Income Need to Be?

       The IRS refers to moderate income as $50,000 or lower, but as an AARP Tax-Aide volunteer I can tell you this guideline is loosely followed. If you make $60,000/year, you’ll probably still be able to get help.

Not for Complex Returns

       If you have rental properties, a Schedule C (not C-EZ), a complex Schedule D, a Schedule F, or an otherwise complicated tax return, then AARP Tax-Aide (or any VITA program) is not for you. You should hire an experienced tax preparer – preferably a CPA.

Where Can I Go for Help?

       If you’d like to find an AARP Tax-Aide location near you, you can find one on their website starting in late January. If you can’t find an AARP Tax-Aide location near you, you can try calling 1-800-829-1040 to locate a VITA location near you.

How Well-Trained Are the Volunteers?

       AARP does not let just anyone volunteer for the Tax-Aide program. All volunteers are required to undergo a thorough training course mandated and created by the IRS. They are well-trained in how to handle the 1040 Form and the standard schedules.

       You may also find that many of the volunteers have a background in tax preparation or finance. For example, I volunteer and I’ve had two years of professional tax preparation experience. The local coordinator for my volunteer site was a CPA before she retired, and we had at least one other CPA volunteer last year. So the help you get may be quite good.

Can I File Electronically (E-file)?

       Electronic filing with direct deposit is the fastest way to get your tax refund from the IRS. Most AARP Tax-Aide sites offer electronic filing with no charge to the taxpayer. Many more sites are gaining the capabilities to e-file every year.

What If I Just Have a Tax Question?

       AARP offers free, year-round tax assistance via the Web for 24/7 help. You can find more information at the AARP Tax-Aide website.

I’d Like to Help! How Can I Volunteer?

       If you’d like to volunteer with AARP’s Tax-Aide program to help with the 2009 tax season, there’s still plenty of time. Go to their website to read more about becoming a volunteer and to fill out a volunteer form.

       Benjamin Franklin is quoted as saying “a penny saved is a penny earned”. And others have discovered that a penny saved is more than a penny earned. But did you know a penny saved can be worth nearly two pennies earned? Before you dismiss money-saving activities as “not worth your time”, you need to consider just how much of your earnings goes to taxes.

If You’re Not Self-Employed…

       If you’re not self-employed, you’ll pay your marginal federal income tax rate, 7.65% for FICA, plus any applicable state or local income taxes on any money you earn. Add all of these up and you’ll get a total tax rate anywhere from 17.65% up to 51.65%. You may also have to pay sales tax on the things you buy (as opposed to making or doing them yourself).

       The chart below shows just how much a dollar you earn is worth after taxes depending on your marginal federal tax rate, FICA, and state and local income and sales taxes. I only went up to the 25% tax bracket on the federal side, and I used the national average rates for the state and local income and sales taxes.


Not Self-Employed Tax Rates


       Most people will probably fall in the 15% federal tax bracket. If you’ve got state & local income taxes and sales taxes and you’re in the 15% federal bracket, then every dollar you can save is equal to $1.49 if you had earned it. You lose $0.29 to taxes from every dollar you earn, and then you’ll pay another 6% sales tax (on average) when you spend the money. In this case, a penny saved is worth 1.5 pennies earned.

If You’re Self-Employed…

       Entrepreneurs have the extra burden of the self-employment tax to pay on their earned dollars. However they do get to take a tax deduction for one-half of the self-employment (SE) taxes, so their SE tax rate works out to 14.13%. So a self-employed person could automatically lose anywhere from 24.13% to 58.13% in federal, SE, state, and local income taxes for every dollar they earn. And they’ll still have to pay any applicable sales tax on top of that. The high-earning self-employed people can easily say “a penny saved is two pennies earned”.

       I put together a chart for self-employed people similar to the one above. The only difference is the substitution of the SE tax for the FICA tax.


Self Employed Tax Rates


       As you can see, a dollar saved is almost worth two dollars earned for someone in the 25% federal bracket who has to pay state and local income and sales taxes. They’ll lose $0.45 to taxes on every dollar they earn, and then they’ll pay another 6% sales tax when they spend the money that’s left over.

Why This Matters

       Realizing how much you pay in taxes is key in figuring out if it’s worth it to do something yourself or pay someone else to do it for you. You’ve got to know your after-tax hourly rate to be able to compare it to how much you’d save by doing it yourself.

       For instance, let’s go back to the first chart for people who aren’t self-employed. If your federal tax rate is 15% and you have state and local income taxes of 6%, you’re going to lose almost $0.30 to taxes (including FICA) for every dollar you earn. That means if you’re getting paid $20/hour you’re only taking home $14/hour after taxes for each extra hour you work.

       Now let’s say you can pay $25 to have your oil changed, or you can do it yourself for $13 (a savings of $12) plus your time. If it takes you 15 minutes, your hourly rate for doing it yourself is $48/hour. If it takes you 30 minutes, you’re saving $24/hour. And even if it takes you 45 minutes, you’ll still save the equivalent of $16/hour. Now compare that to your after-tax hourly rate from your job ($14/hour), and you can easily see that it makes sense (by the numbers) to change your oil yourself.

       You can apply this logic to any number of money-saving activities to see if it makes sense to do it yourself. In the case above, anything that saves you at least $0.23/minute you spend doing it is worth your time. So taking 10 minutes to make an extra stop at a different grocery store can be a smart financial choice if you’re going to save at least $2.30.

       Understanding that saving money can be more effective than earning it will also help you realize the importance of being frugal. I’m not saying that being frugal is better than earning more money, but it’s a powerful tool and you’d be foolish to refuse using it. Combining frugality with earning more will help you get out of debt, save more, or give more.

How Much Is a Dollar Saved Worth to You?

       Because this greatly depends on your tax rates, I’ve created a little calculator below that you can use to figure out how much a dollar saved is worth to you. Try it out and let me know your results in the comments!

*Note: Click the ‘Click to Edit’ button to use the calculator with your own numbers.


Show Me in the Scriptures…

Corey —  October 27, 2009 — Leave a comment

       A reader recently left a comment on my post discussing how much you should have in your emergency fund. Frank said:

Could you please show me in Scripture where it says believers are to have an emergency fund?

Thank you.



       I responded to Frank’s question in the comments, but I think this is an important enough issue to address in its own post.

       Not all personal finance advice can be backed up with a specific quote from Scripture. Does that mean it is bad or unchristian? Not in the least. If the advice follows the pattern of teaching and wisdom in the Bible, it can still be considered good advice for Christians despite the lack of a specific Biblical reference.

       For example, is there a specific Bible verse telling you that you should create a will? No. But it’s still a wise thing to do. Is there a specific Bible verse that tells us to update our résumés? Again, the answer is no, but that doesn’t change the validity of the advice.

       This concept doesn’t apply just to personal finance. Is there a Bible verse telling us to buckle our seat belts? Nope. But does that mean you’re trusting your seat belt more than God if you buckle it? What about looking both ways before you cross the street? Do you lack faith because you do this?

       The problem with applying the “show me in the Scriptures” test is that there is not specific advice for every single situation we will encounter in life. There are guiding principles and values that, along with God’s Holy Spirit, will help us discern the wise choices. But you’re not going to find Bible verses telling you to brush your teeth, stop eating at McDonald’s, or to take advantage of an HSA if you’re eligible.

       Scripture does contain many verses teaching us the importance of wisdom in handling our affairs. Here are a couple examples:

       The simple believes everything, but the prudent gives thought to his steps.

Proverbs 14:15 (WEB)

       The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.

Proverbs 21:5 (WEB)

       Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.

Proverbs 21:20 (WEB)

       The prudent sees danger and hides himself, but the simple go on and suffer for it.

Proverbs 22:3 (WEB)



       In fact, the entire book of Proverbs points to the importance of wisdom and its place in the life of those who follow God. But what about all the times Jesus told us not to store up treasures on earth? Or when He taught us not to worry about what we’ll eat and drink and wear?

       Tell me, what did Christ mean when He said do not worry or be anxious? What does it mean to worry or be anxious? Those words mean to be distressed, uneasy, and tormented with care about something (material things in this case). Christ’s solution was for us to “seek first the Kingdom of God”. Instead of being worried about how we’ll meet our material needs, we should be worried about how we’ll meet our spiritual needs – how will we serve God and draw closer to Him.

       You can be worried and anxious about material things whether or not you wisely plan ahead. I can have an emergency fund and still be worried about material things. I can not have one and still be worried about material things. Even if I have an emergency fund, I can stop worrying either because I have that money saved or because I trust in God’s provision. That brings us to the other main teaching of Christ about money.

       When Jesus taught about storing up treasures and serving Money what did He mean? What does it mean to be wealthy or rich or to have treasure? All those words denote an abundance, which means having much more than what is sufficient or needed. Jesus’ warnings about wealth were not to tell us that we should never use money appropriately to meet our needs. Jesus warned us instead of the danger in accumulating more than what we really need. He told us not to become consumed with money and wealth.

       There is a vast difference between being consumed with accumulating an abundance of wealth and planning wisely to have enough to meet our needs. In the same way, there is a huge difference between being occupied with worry and prudently foreseeing needs and dangers and preparing to face those situations. These two teachings that Jesus gave us are so often stretched to mean that we should never save anything at all for the future because that demonstrates a lack of faith. The truth is that Jesus taught us to:

  1. Give God and His Ways priority in our thoughts and lives.
  2.        

  3. Avoid storing up more money than we will need. (That is, not to let becoming rich be our priority in life.)



       Proverbs commends wisdom and many New Testament verses speak to the importance of providing for your own family. We are not taught to make ourselves a burden to others when it is within our power to care for ourselves. Instead, we are taught that if there are any among us who cannot provide for themselves it is our responsibility as fellow Christians to care and provide for those people. Jesus’ teachings combined with the rest of Scripture in no way preclude us from saving for the future, using insurance, or utilizing money in any other wise manner. What is forbidden is making Money our god – giving priority to accumulating more money than we really need instead of serving God.

       The real issue then becomes finding contentment in Christ and determining our true needs. The danger we face is allowing the world to dictate our needs and success (a bigger house, a fancy car, expensive clothes, etc.) instead of learning to live on enough (our daily bread). That is the bigger issue here and the battle all of us Christians face. Once we have submitted to God in our discontentment and covetousness, we will be able to make Money serve us and God’s Kingdom instead of allowing it to be our master. But these are all topics worthy of their own discussion (contentment, defining needs, and avoiding covetousness).

       Please share your thoughts on this topic in the comments. I’m looking forward to hearing from all of you!

Uncle Sam says,        If you qualify, making a contribution to a Traditional IRA can help you lower your taxes. You could save anywhere from $500 to $3,000 on your federal income taxes! You could also save on your state or local income taxes depending on how they’re calculated. Here’s what you need to know:

What is a Traditional IRA?

       A Traditional IRA is a tax-deferred account designed to help you save for retirement while providing tax benefits. If you qualify, contributions to a Traditional IRA are tax-deductible up to certain limits. Interest, dividends, and capital gains are not taxable inside a Traditional IRA. You’ll have to pay ordinary income taxes on withdrawals from a Traditional IRA.

Do You Qualify?

       To be eligible to take a tax deduction for your Traditional IRA contributions, you must meet these requirements:

  1. You must have earned income equal to or exceeding your Traditional IRA contributions.
  2.        

  3. You must be under age 70 1/2.
  4.        

  5. If you (or your spouse) are covered by an employer-sponsored retirement plan, your income must be under a certain limit depending on your situation (single or married).



       Earned income includes anything you receive a W-2 for or any profits from self-employment. Things like interest and dividends are considered unearned income because you didn’t actually do any work to receive them. For IRA purposes, earned income can also include alimony or separate maintenance payments.

How Much Can You Contribute?

       How much you can contribute depends on your adjusted gross income (AGI) and whether you or your spouse are covered by an employer-sponsored retirement plan. You can find out for sure by looking on your W-2. If there’s an “X” in box 13, then you’re covered. Your AGI is all of your income minus any deductions you can take on the first page of Form 1040 down to the IRA deduction. Those deductions are quite limited, so it will probably just be your total income (including interest, dividends, capital gains, etc.).

       If you’re single and you’re not covered by an employer-sponsored retirement plan, the maximum you can contribute (and deduct) to a Traditional IRA for 2009 is $5,000 ($6,000 if you’re 50 or older). If you’re married and neither you nor your spouse are covered by an employer-sponsored retirement plan, you can each contribute (and deduct) $5,000 (make it $6,000 if you are 50 or older). If only one of you is 50 or older, then that person can contribute $6,000 but the other can only contribute $5,000. There are no income limitations when neither you nor your spouse are covered by an employer-sponsored retirement plan.

       If you’re single and you are covered by an employer-sponsored retirement plan, your 2009 AGI must be below $55,000 to be able to contribute the maximum of $5,000 (or $6,000 if you’re 50 or older). The amount you can contribute gets phased out proportionally if your AGI is between $55,000 and $65,000. For example, if your AGI is $60,000, you can only contribute $2,500 (or $3,000 if you’re 50 or older) to a traditional IRA. You can’t contribute (and deduct) anything if your AGI is above $65,000.

       If you’re married, it gets a little more complicated. If both you and your spouse are covered by an employer-sponsored retirement plan, your 2009 AGI must be below $89,000 to get the maximum contribution for both of you. The phaseout begins at $89,000 and goes up to $109,000. Neither you nor your spouse can contribute (and deduct) anything if your AGI is above $109,000. If one of you is covered by an employer-sponsored retirement plan and the other is not, there are two separate limits. To be able to deduct a Traditional IRA contribution for the spouse who is covered, your AGI must be below $89,000 (just as above) with a phaseout going up to $109,000. But to deduct a Traditional IRA contribution for the spouse who is not covered, your AGI only needs to be under $166,000 with a phaseout going up to $176,000. It’s possible that you can only make a deductible Traditional IRA contribution for one of you and not the other (if your AGI is between $109,000 and $176,000).

When to Contribute

       You can make contributions to your Traditional IRA until April 15 of the following tax year (just like Roth IRAs and HSAs). So if you want to make a contribution for 2009, you have until April 15, 2010 to do so.

Don’t Forget to Claim the Deduction!

       You’ll need to make sure you claim your deduction for Traditional IRA contributions on your federal income tax return. You’ll take the deduction on line 32 of Form 1040. (Or you can just tell your tax preparer.) If you don’t claim the deduction, you won’t get any benefit at all!

More Free Tax Saving Tips!

       If you want to learn more ways to (legally) reduce your taxes, sign up for free updates to Provident Planning. It’ll only cost you a minute of your time, but you might just learn how to save yourself hundreds or thousands of dollars!

Uncle Sam says,        If you qualify, making a contribution to a Health Savings Account (HSA) can help you lower your taxes. You could save anywhere from $300 to $2,000 on your federal income taxes! You could save even more if your employer allows you to make pre-tax contributions because you won’t pay FICA taxes (Social Security and Medicare). Here’s what you need to know:

What is an HSA?

       An HSA is a tax-exempt account designed to pay or reimburse you for certain medical expenses. If you qualify, contributions are deductible up to a specific limit. Also, you do not pay taxes on the earnings in your HSA. Distributions for medical expenses are also tax-free.

Do You Qualify?

       To be eligible for an HSA, you must meet these requirements:

  1. You must be covered under a high deductible health plan (HDHP) by the first day of the last month of your tax year (usually December 1).
  2.        

  3. You must have no other health care coverage. (Excluding worker’s compensation, coverage for a specific disease or illness, coverage for a fixed amount per day of hospitalization, accidents, disability, dental, vision, or long-term care)
  4.        

  5. You must not be enrolled in Medicare.
  6.        

  7. You cannot be claimed as a dependent on someone else’s tax return. (This applies even if the other person chooses not to claim you.)



       The definition of a high deductible health plan (HDHP) depends on whether the coverage is just for you (self-only) or for your family. The definition also changes every year because the limits are increased for inflation. For self-only (single) coverage in 2009, an HDHP must have a minimum deductible of $1,150 and maximum out-of-pocket expenses of $5,800. Those amounts go up to $1,200 and $5,950 in 2010. For family coverage in 2009, an HDHP must have a minimum deductible of $2,300 and maximum out-of-pocket expenses of $11,600. Those amounts increase to $2,400 and $11,900 in 2010.

       Your employer or insurance company should be able to tell you if your health insurance qualifies as an HDHP. Check with them if you’re confused.

How Much Can You Contribute?

       The next thing you need to figure out is how much you can contribute without incurring any penalties. If you’re single, the contribution limit is $3,000 ($3,050 in 2010). If you have family coverage, the contribution limit is $5,950 ($6,150 in 2010). If you are over age 55, you can contribute an additional $1,000 (does not increase in 2010). If you’re married, you’re both over age 55, and your spouse has his/her own HSA, then you can each contribute an additional $1,000 (to your separate HSAs). (If only one of you has an HSA, you can’t contribute an extra $2,000 even if both of you are over 55. You can only contribute an extra $1,000.) So you’ll be able to contribute anywhere from $3,000 to $7,950 in 2009.

When to Contribute

       You can make contributions to your HSA until April 15 of the following tax year (just like Traditional and Roth IRAs). So if you want to make a contribution for 2009, you have until April 15, 2010 to do so.

What Can You Use Your HSA For?

       Technically, you can withdraw money from your HSA for anything. But you’ll have to pay taxes plus a 10% penalty on withdrawals for anything other than qualified medical expenses. You don’t pay taxes on qualified medical expenses. To determine what is and is not a qualified medical expense, you’ll want to check out IRS Publication 502. In addition to the medical expenses outlined in Pub 502, you can also include non-prescription medicines, premiums for long-term care insurance, premiums for health insurance under COBRA or while you receive unemployment compensation, and premiums for Medicare if you’re over 65 (excluding supplemental and Medigap policies).

       Even if you won’t have any qualified medical expenses this year, an HSA could be a valuable tool during retirement. Think of it as an IRA for medical expenses. If you’re young, setting aside $1,000/year or so in an HSA for your medical expenses in retirement could be a great way to reduce your taxes now and get tax-free withdrawals in retirement. If you’re nearing retirement, maxing out your HSA would be a great way to accomplish the same thing.

Don’t Forget to Claim the Deduction!

       You’ll need to make sure you claim your deduction for HSA contributions on your federal income tax return. You’ll take the deduction on line 25 on Form 1040, and you’ll need to attach Form 8889 as well. (Or you can just tell your tax preparer.) But unless you’re able to contribute to an HSA using pre-tax contributions through your employer, you won’t get any benefit at all if you don’t claim the deduction!

More Free Tax Saving Tips!

       If you want to learn more ways to (legally) reduce your taxes, sign up for free updates to Provident Planning. It’ll only cost you a minute of your time, but you might just learn how to save yourself hundreds or thousands of dollars!

       The fact that mortgage interest is tax deductible has long been touted as one of the great benefits of home ownership. But it’s important to look at the mortgage interest deduction for it’s true benefit instead of simply assuming you’re getting a real tax benefit on all the interest you’re paying.

The Standard Deduction vs. Itemized Deductions

       Home mortgage interest only gives you a tax benefit if you can itemize deductions. You’ll only want to itemize deductions if your total deductions are greater than the standard deduction. The standard deduction for 2010 is $5,700 if you’re single and $11,400 if you’re married. If your itemized deductions are less than those amounts, you’ll just take the standard deduction on your tax return.

       Why does this matter? You’ll always have the option of taking the standard deduction – even if you never pay a thing that could be itemized (mortgage interest, property taxes, excessive medical expenses, etc.). Since you’ll always get the tax benefit of the standard deduction, itemized deductions only provide tax savings to the extent they exceed the standard deduction.

       Here’s an example. Let’s assume you’re married and your marginal tax bracket is 15% (adjusted gross income between $16,700 and $67,900). If your total itemized deductions are $14,000, you’re not getting a true tax benefit of $2,100 (15% of $14,000). Even if you didn’t itemize deductions, you would have been able to use the standard deduction of $11,400. To calculate how much your itemized deductions are really saving you in taxes, you must first subtract the standard deduction – leaving you with $2,600 ($14,000 – $11,400) in this case. That means your itemized deductions are only giving you an additional tax savings of $390 (15% of $2,600).

       When you’re talking about the potential tax savings of mortgage interest, you need to consider your standard deduction. If your mortgage interest combined with other itemized deductions isn’t going to push you over your standard deduction, then you’re not getting any tax savings at all. But even if it does, your tax savings should only be calculated based on how much your itemized deductions exceed your standard deduction. Before you let a Realtor or banker convince you of the great benefits of being able to deduct mortgage interest, make sure you take a close look at how much you’ll actually save.

       Looking at your itemized deductions this way, how much are you actually saving on your mortgage interest? Let me know in the comments!