Open Season to Get Some Tax Savings

The annual open enrollment period is upon us once again.  Over the past and in the coming weeks, you should receive information packages from your employer on your benefit enrollment options and instructions for this year.  Now is the time to evaluate the benefits you have and decide which to keep, change, or remove.  The following are the basic benefits:

• Medical/Dental/Vision Plans
• Prescription Drug Coverage
• Health Care Flexible Savings Account (for more, click here and here)
• Commuter Benefits (for more, click here)
• 401k Retirement
• Basic Life Insurance (provided by employer free of charge)

All of your contributions to the above benefits, except for basic life insurance, are deducted before taxes.  This lowers your taxable income and the amount of taxes you pay.

First, you should review any materials you have received and try to attend an information session (most employers provide one to explain any new changes and provide tips on how to select benefits).  This is also an opportunity for you to ask any questions specific to your employer’s benefits options.  Next, you should take some time to go over any expenses you have incurred in these areas and any expenses you plan to incur over next year.  Perhaps you would like to get new contact lenses next year or remove your wisdom teeth; now is the time to adjust your benefits to maximize your savings.  Last, in regards to your choice of medical/dental/vision plans, make sure that they cover any doctors or specialists you want to see.  If you don’t know any, now is also a great time to ask your co-workers for recommendations, since this will be at the forefront of everyone’s minds.

This is your only opportunity to alter your benefits enrollment with your employer until next year, so make your decisions with prudence.  Unless there are any life changing events, such as marriage and birth, you will be committed to your selections until fall 2010.

The Score That Really Matters

While your SAT, GRE, GMAT, MCAT, or LSAT scores will cease to matter once you have graduated from college or graduate school, there is one score out there that will follow you the rest of your life: your FICO credit score.  This number is used by various parties,  from prospective landlords and employers to institutional lenders to insurance agencies, to determine your credit riskiness.  A higher score (850 is the maximum) shows that you are fiscally responsible, making you less likely to default on monthly payments.  This translates into lower interest rates and a higher credit line, and may mean you don’t have to give as much in security deposit or down payment.  Most people don’t go past 800, so any score above 750 is generally considered to be pretty good.

Your FICO credit score is calculated by weighing different types of credit data, such as payment history, amounts owed, length of credit history, number of recently opened accounts, and types of credit used.  Therefore, some of the easiest ways to improve your credit score is to pay your bills on time (even if just the minimum), lower the ratio of your outstanding debit to your credit limits, try to keep an older credit card active by using it to make a purchase every so often (even if the credit card doesn’t provide much rewards), and not open new credit cards that you don’t need.

Unfortunately, your credit report does not come with the score for free.  The best way to get your credit score is through www.myfico.com.  For $16, it will give you your credit score, tell you whether it is good or bad, and simulate how it may change.  And you should try to purchase your score from all three credit bureaus (Experian, Equifax, and TransUnion) at least once, since each bureau calculates the score slightly different.

The Quick & Dirty Guide to Paying Taxes on Foreign Income

If you are a U.S. citizen and have landed a job overseas, you still have to pay U.S. income taxes but you will be eligible for the Foreign Earned Income Exclusion.  In order to claim this tax benefit, (1) your main place of business or employment must be in a foreign country, (2) you must have earned foreign income, and (3) you must have established a bona fide residence in a foreign country for an entire tax year or have been physically present at the foreign country for more than 330 days.  For 2009, the foreign earned-income exclusion is $91,400, an amount adjusted each year to reflect inflation.  This means you can exclude up to $91,400 in foreign earned income from your total income.  If you have earned more than this amount, you will have to pay U.S. taxes on the difference.   However, you can also deduct any foreign tax you have already paid on your income.

In addition, you may also be eligible to claim the Foreign Housing Exclusion and/or the Foreign Housing Deduction.  This part gets a little tricky.  First, you have to determine your “housing amount” by subtracting the base housing amount ($91,400 x 16% /365 days x number of qualifying days) from your total housing expenses.  Then you have the following three options:

• This is the entire amount you can exclude if all of your housing expenses were paid by employer-provided income (i.e., your company pays your salary and you use part of your salary to pay your housing expenses).
• This is the entire amount you can deduct if all of your housing expenses were paid by self-employment income.
• BUT if your foreign earned income includes both employer-provided income and self-employment income, you will have to figure out what percentage of your total foreign earned income originated from each source and use that to determine how much housing amount to exclude and deduct. For example, if 70% of your total foreign earned income is from an employer and 30% is from self-employment, then 70% of your housing amount is eligible for the Foreign Housing Exclusion and 30% for the Foreign Housing Deduction.

The total amounts of your Foreign Earned Income Exclusion, Foreign Housing Exclusion, and Foreign Housing Deduction, however, cannot exceed your total foreign earned income.  When filing your tax return, you will fill out the Form 2555-EZ or the Form 2555 and attach it to your Form 1040.  See Publication 54 for more information and if you have any questions, please leave a comment.

An Added Benefit for Biking to Work

If you ride your bike to work or are thinking of doing so – be it for your health, to save money, as a hobby, or any other reason – you may be able pick up a tax break along the way.  As of January 1 of this year, qualified bicycle commuting reimbursements of up to $20 per month (a total of $240 a year) are eligible for income exclusion, alongside qualified parking and highway vehicle transportation and transit passes.  That is, your employer can reimburse you for “reasonable expenses,” including bicycle purchase, improvement, repair, and storage, and the value will not be reported in your income, up to $20 times the number of months for which you are eligible for this benefit.

To receive this benefit you cannot receive any other qualified transportation fringe benefit on the same month.  It is ok, however, to receive different transportation fringe benefits throughout the year, such as a bicycle commuting reimbursement during the summer and a parking reimbursement in colder months.  To qualify for the bicycle commuting reimbursement exclusion on a given month, you must “use the bicycle regularly for a substantial portion of the travel between your residence and place of employment”.  The terms “regularly” and “substantial portion” are not explicitly defined anywhere in the Emergency Economic Stabilization Act of 2008 through which it was passed or in IRS documents, however.

But here’s the catch: unlike the other two qualified transportation fringe benefits, employees cannot choose to receive the benefit through pre-tax contributions [though a bill (H.R. 863) was proposed in February to change that].  Either your employer reimburses you or it does not. It may be in its interest to reimburse you, though, as a lower income reported for you means lower taxes for it, too.

Let your employer know if you want this benefit.  To learn more  and get information for your employer on how to set up a commuter solution for bike riders, visit The League of American Bicyclists’ webpage on the initiative.

Benefits of Pre-tax

For those who are starting their first job and trying to wade through the mountain of papers from HR on benefits, may I point your attention to two really great pre-tax benefits.

• Transportation Reimbursement Incentive Program - You can elect to contribute pre-tax dollars from your paycheck for any commuter expenses.  As of March 2009, the maximum contributions per month for public transportation and parking expenses are $230 each (the minimum monthly contribution is $20).  You only have until March of the following year, however, to use up your contributions; otherwise, they expire.  The main benefit of this program is that it uses pre-tax dollars, lowering the taxable income reported on your W-2 and decreasing your income tax.
• Health Care Flexible Savings Account – In a similar vein, you can also contribute pre-tax dollars to go towards any health care costs not covered by your medical insurance, such as prescription co-pays, eyeglasses, contact lenses, and birth control pills.  You can contribute between $200-3,600 per calendar year and have until March of the following year to use up the funds.

Read up on the details in your HR literature to see what qualifies for transportation/ health care expenses under these accounts.  And if your company doesn’t participate in these programs, you should definitely make the suggestion to HR.

Burn the Fat, Not the Cash

The recessionary lifestyle has led many folks to trim the gym membership from their budgets.  But it is precisely now that everyone should focus on preventative care and stay as healthy as possible, because it doesn’t take much more than a trip to the emergency room to drain your rainy day fund.  And while most health insurance coverage leave a lot to be desired, several offer a benefit that very few people take advantage of – discounts and savings for health club memberships.  The Blue Cross Blue Shield PPO Plan, for example, reimburses up to $150 in membership fees  for each calendar year.  CIGNA also offers numerous discounts to various health clubs, such as the Sports Club and Bally Total Fitness.  A one year membership at Bally with nationwide access will cost around $590, while the same membership will cost around $395 with CIGNA’s discount.  This is a huge $200 in savings.  So check out what kind of healthy club membership discounts and savings your health insurance has to offer before you decide to quit or join a gym.

Take Advantage of Your Corporate Credit Card

When I first started working, my firm gave me a corporate credit card from Diners Club, to which I can charge business expenses, such as plane tickets, overtime meals, and taxi cabs.  Over the past the three years, however, my corporate credit card has been my primary credit card.  Here are the reasons why:

• Two month grace period – For each billing cycle, I get a two month grace period to pay off the complete balance before the credit card starts charging me interest.  More times than not, expenses, especially those involving international travel, take more than a month to get reported to and approved by accounting, after which a check is cut to reimburse me.  The two-month grace period feature has helped me out on more than one occasion for such these reasons, but it also served as a safety net in case I ever find myself too cash-strapped to pay the full balance right away.
• Rewards program – I have to pay a $75 annual fee to gain access to the rewards catalog, but it has been completely worth it.  After three years ($225 in annual fees), I was able to exchange my points for $425 in Amazon credits, $100 in statement credits, and a $20 gift card to California Pizza Kitchen.  This is more than a 200% return.
• Customer service – The Diners Club has great customer service, in that I have never once spoken to a machine.  Further, when a hotel in Spain charged me for a night’s stay after claiming that I did not email to cancel my reservation, I was able to dispute the charge with Diners Club and they credited me the amount I was charged.  Considering that it was an international purchase, where euros had to be converted to dollars on my statement and there was a foreign exchange fee, I was grateful that Diners Club made the process so painless.
• Credit report – Lastly, the Diners Club does not show up on my credit report.  So while I don’t get rewarded for paying my balance on time and in full, should I ever lose the credit card, I never have to worry about someone charging it and ruining my credit score.

If you are lucky enough to get a corporate credit card, whether Diners Club or the American Express Corporate Card, do a little investigating.  The best source of information will probably be your colleagues, so ask them about their experiences and see if using the corporate credit card as your primary credit card will be worth it for you as well.

You Can’t Afford Not to Match

By “match,” I am not talking about your work outfit (although that goes without saying). I am talking about your employer’s matching contributions to your 401K.  401K  (so-called because of the section of the Internal Revenue Code that governs such plans) is a type of retirement plan that allows individuals to contribute pre-tax dollars to a fund and have the savings grow tax-deferred until withdrawn at retirement.  Most recent graduates do not get paid enough as it is, so I am always quite surprised to hear about people who did not even bother to find out if their employers offer matching contributions. Hello? It is free money!

Leaving aside the arguments that recent graduates are too young or too poor to save for retirement, let’s talk numbers. For example, let’s say you make $35,000 a year and your employer offers a matching contribution to your 401K at a rate of 50 cents for every dollar you contribute, up to 6% of your salary. This means if you put in $1,000 for your 401K ( less than $20 each week), your employer will just give you another $500. If you make the maximum contribution of $2,100, your employer will give you more than $1,000 in free money. Some companies match at a higher rate and/or set even higher matching ceilings. So while it may be hard, you should really figure out a way to put aside enough money to maximize your matched contribution. In the end, you will be receiving free money from your employer and it will all be growing exponentially in an account somewhere.

Unfortunately, in this economy, many employers are scaling back their costs by cutting out the matching contribution benefit, in which case you should no longer contribute to your firm’s 401K but set up a Roth IRA (more in the next post).

The other major component of matching contributions is how long it will take for them to be 100% vested – meaning they belong to you completely even when you quit. Some firms, such as mine, are 100% vested when they are matched; others require that you work for a few years with them. If you are not sure how long you will stay at your current company, then you should also consider opening your retirement account elsewhere.

Bottom line – this is a HUGE benefit that your employer is providing and you would be crazy not to cash in on it.