Even though most everyone with an income pays taxes, not everyone has heard of tax brackets. And just because someone has heard of them, doesn’t mean that they understand them. Hopefully I’ll be able to clear up some of the confusion on the subject.

As explained by Wikipedia, Tax brackets are the divisions at which tax rates change in a progressive tax system. Different levels of income are taxed at different rates. This is why you may have heard people say that getting a raise has bumped them into a higher tax bracket. This, however, is the source of most confusion since people think they will be getting taxed more on their income, and this is only partially true.

The tax bracket you are in is the rate that you pay on the last dollar that you earn. It is not the rate at which all of your income is taxed. Therefore, you really shouldn’t ever be worried about moving into a higher tax bracket. In order to fully understand how it works though, it’s best to see an example. We’ll use the tax rates for the case of married filing jointly.

The first $15,650 is taxed at 10%. Any income over this amount up to $63,700 is taxed at 15%. Any income over this and up to $128,500 is taxed at 25%. It works the same as you move up through the tax brackets.

So, let’s say that you and your wife earn a combined income of $150,000. The tax that you are responsible for is $24,972.50 plus 28% of the amount over $128,500 which is $6,020 for a grand total of $30,992.50. This works out to a tax rate of approximately 20.7% which is significantly lower than the 28% tax bracket that you would be in.

As you can see, the actual tax rate that someone pays will be different than the tax bracket that they are in. Essentially everyone will pay their own effective tax rate based on their level of income. Just remember that this only applies to the Federal Income Tax rates. Their is also Social Security payments and state and local taxes which must also be factored in to determine your total tax bill.

It’s been awhile since I’ve talked about the Roth IRA and there are some important points to remember. If you’re a newer reader, you may want to go back and read Answering a Reader’s Question, Best of the Roth IRA, and Starting My Roth IRA. The options are plentiful when you’re looking into setting up a Roth IRA, but the benefits are pretty much the same no matter where you choose to set it up. I choose to have my Roth IRA with Scottrade because of all the options it offers me, but you may choose to go with another provider. Do whatever works for you.

For this year (tax year 2007) the maximum contribution limit is $4,000, and it will increase to $5,000 for 2008. After that, the limit will supposedly adjust in $500 increments in line with inflation. I say supposedly because as we know (or should know), the government can (and does) mess with it however they choose.

Not everyone is eligible however to contribute to the Roth IRA based on income. For single tax filers, the income limit is $99,000. Your allowable contribution amount will then phase out up to $114,000 where you no longer may contribute to a Roth. For joint filers, the limits are $156,000 to $166,000. If you happen to be above these income limits, I wouldn’t feel too sorry for yourself. There are plenty of other options available to you.

Another aspect of these types of accounts that many people are not aware of is that you can access a portion of the funds for qualified expenses. If you’re looking to save up for a down payment on a house, you’re allowed to withdraw up to $10,000 in earnings for such a purpose. Notice I said “earnings” here. At any time you’re allowed to withdraw an amount up to your actual paid in contributions because it was after tax money. For a new home purchase, you’re also allowed to access additional funds. Also, even though it’s called a “first time homeowner” distribution, you just can’t have owned a home in the prior 24 months.

Besides these and other nice aspects, it’s also nice throughout the year to be reminded to make those contributions. It doesn’t really do you any good to read all about the advantages of having one if you don’t set one up and contribute to it. We’re over half way through the year so you can gauge your contributions accordingly. Also, remember that you can still make contributions for 2007 up until the April tax deadline in 2008. Don’t use this as an excuse to put it off, but as a back up scenario. So, it’s time to evaluate your situation.

I was talking with someone today about a couple of real estate investments and he mentioned that he was going to go talk with a couple different accountants. This made me think about when I was looking for an accountant about a year ago. I also was looking for some advice about an investment, and for someone to handle everything come tax time. This is actually what I wanted to write about here.

There isn’t really a better time than now to look around for and interview accountants. The heavy tax season is over, and they have more time to spend with you answering questions and explaining things to you. A lot of people are also worried that they’re going to get charged for every minute that they spend talking with an accountant (I had this concern at least). Interestingly enough, it was actually quite different.

I had made an appointment to speak with someone on a recommendation (always a good start) and we scheduled about an hour. I went in with a list of questions, mostly about real estate investing and the tax implications (and benefits). He was very nice and was more than willing to answer all my questions and even point out things I didn’t know to ask about.

What did it cost me for such an informative meeting? Not a thing. You see, it was a win-win situation for the both of us. I was able to learn and have my questions answered, and he was able to make a good impression on a prospective (now current) client. And all I had to do was call and ask to speak with him.

What I’m getting at is that you can do the same thing. Take the opportunity to speak with a couple different CPAs and see what you can learn and how they can benefit you. Maybe you don’t need one (or think you don’t) yet. Whatever the case, this time of year is a great time for it. They’ll definitely have less time come the end of the year as we head into tax season.

I’m also sure that my accountant won’t mind the plug here on this blog. His name is Dave Peterson at Haynie and Company (this is not sponsored). They’re based in the Salt Lake City, Utah area, but they do work for clients all over the U.S.

Also, if for no other reason, it’s worth taking the time to talk with someone solely for the knowledge that you can gain. It’s yet another step towards mastering your finances and reaching your goals.

Conventional wisdom tells us to save for a down payment when purchasing a home. Twenty percent happens to be the magic number. In today’s world, however, this just isn’t the norm. Between the over-inflated housing prices and America’s scanty savings rates, many are finding that they have to explore other options.

If you’re going to buy a house without putting any money down (or less than 20%), there are two main options. You can get a single loan of up to 100% percent of the purchase price of the home, in which case you’ll be forced to pay Private Mortgage Insurance, or PMI. You could also get a loan for 80% of the purchase price and another piggy back loan for the other 20%.

So which choice is the better choice? Or is one better than the other?

With the first option, you’ve got one loan that’s typically at a competitive interest rate that keeps the payment low. The downside to this option is that the lender will make you pay an insurance premium called Private Mortgage Insurance. The policy insures the lender against a default because they’re lending more than 80% of the value of the home. It has no benefit to you, and is the reason your payment will be higher.

If you choose the second option, you won’t have to pay for PMI. What you’re essentially doing is getting a loan for your 20% down payment and financing the other 80% separately. This would seem like the better option except that the smaller loan, or piggy back loan, is financed at a higher interest rate. This will also serve to raise the payment amount.

As far as your monthly payment is concerned there is no clear winner between these two options. It’s usually a good idea to get a quote for both of these options.

It used to be that only the mortgage interest was tax deductible and you couldn’t deduct your PMI payment. This has changed, however, as of 2007. Now you can also deduct your Private Mortgage Insurance payments. So, it would seem that both are viable options.

I, however, still prefer to go with the 80/20 loan split as long as the monthly payments are comparable. With this option you’re able to lower your monthly payment once you pay off the smaller of the two loans.

If you’ve got a loan with PMI, it’s a more involved process in order to remove it and lower your payment. You’re able to remove your PMI payments once you’ve payed the loan down to 80%, but it doesn’t just automatically get removed usually until the loan is down to 78%. If you believe that you’ve already got 20% equity in your home at some point then you’ll have to go through the process of ordering an appraisal and proving to the lender that you indeed have 20% equity.

While these two options are different in how they work, they provide very similar outcomes. The choice between them is then left up to your personal choice and what will work best for your particular situation. As I stated before, it’s best to get a quote for both scenarios. You can then compare the two options and make an informed decision.

What are your thoughts?

Money can be used to buy a lot of things, but we typically don’t think of money as being a product just like any other. It doesn’t really make any sense to purchase money, but being able to purchase the “use of money” makes a lot of sense.

Every time someone takes out a mortgage, gets a car loan, or uses a credit card, they’re exercising their ability to purchase the use of money. Just as with any other product, though, it can be bought for a variety of different prices. It can be expensive or even relatively cheap.

A lot of consumer goods and products can also be considered expensive or cheap, but it’s sometimes difficult to determine their value. It’s common to hear the phrase, “you get what you pay for”.

When borrowing money, you don’t really have to worry about this consideration. It’s actually made quite simple for us. All we have to do is look at the interest rate associated with the loan and we’re able to determine how cheap or expensive it is.

Even though there are a lot of people who will advise you not to get into debt, there are situations where it’s not only alright, it’s a very good thing to do. We just have to remember that debt is a product that can be used wisely or foolishly.

Knowing whether a loan that you have is relatively cheap or expensive is very important information when you’re deciding whether to pay off the loan or continue to use the money for something else.

You can answer questions such as whether to pay off your student loans, your home mortgage, or invest the money. Sometimes it doesn’t make sense to pay off low interest loans when you could earn a greater return on your money in some sort of investment.

Money in a money market account at 5%, for example, is better than paying off a student loan at less than 3%, especially when the interest is tax deductible.

Realize that there is a cost associated with borrowed money, but it may be a cost that’s well worth it.

By now everyone should have their taxes filed or at least be just about ready to send them off. Unfortunately, most people have not only already filed them, but they’ve gotten the refund and already spent it. Usually it’s a weight off the shoulders knowing that you’re finally finished and don’t have to think about it for another year.

The key phrase here is “don’t have to”. While it’s true that you don’t have to think about taxes until next year, it might not be the wisest move. Now is the perfect time to do some tax planning for next year.

Getting that big refund is nice, and maybe you even exercised some financial savvy by stashing it in a retirement fund or investing it in some way. Wouldn’t it have been better if it had been working for you all along? These are some of the things you should be thinking about.

I’m not going to say that there’s a one size fits all formula. Some people prefer to get the refund and stash it away because they know they don’t have the discipline to save the same amount little by little during the year. This is further complicated because you don’t know how much it’s going to be until the end of the year. How would you know how much to put away monthly or biweekly? Ultimately, you’ve got to do what works for you.

You may want to evaluate, however, how much you’re putting away into tax advantaged investment vehicles such as a 401k or an IRA. Were you surprised by how much you had to pay in taxes? Take some time to figure out ways to reduce this tax bill in the future.

If investing in real estate peaks your interest, schedule an appointment with a CPA to discuss the tax advantages that are available to you as an investor. The advantages don’t just stop with the mortgage insurance deduction.

You may want to talk with a good CPA anyway, if you’re going to have some free cash flow for investing. He/She will be able to advise you as to what type of investment vehicle would be right for you and your particular tax situation.

I would suggest that you don’t just wait for the tax man to come again next year. Be proactive and take the necessary steps now to reduce your tax liability in the future. You’ll only thank yourself later.