Are You An Impulsive or Compulsive Spender?

Jo Bittoff of www.actfinancially.com, who has nearly four decades in the credit, collections, consultant and banking industriessays, in truth, it's hard not to spend impulsively or compulsively. We live in a society that bombards us with ads, data and subliminal messaging that suggests we NEED to have more and more and more. Our appetite for possessions is never satisfied.  Believe me when I tell you that no matter how many material belongings you manage to accrue, odds are that for many, it will never be enough.

The messages we get (up to hundreds of times a day, by the way) play on our insecurities by suggesting that we NEED to be sexier, faster, have whiter teeth, wear a label on our butt, be stick thin, live in the right neighborhood, and drive the best car. It's never-ending. By listening to these messages we are indoctrinated into understanding that simply being who we are, living within our means and displaying an unlabeled butt flashes the world the message that we have failed to become a successful person.  Interesting spin.

The bottom line is that, while consumers are buying into the message and thus drowning in debt, the overwhelming level of consumption has fueled the marketplace with a vengeance. So who is the winner, and who is the loser?

Societal pressure and recent almost unlimited access to credit card limits set up an environment in which impulse spending became the norm for many. Not just the average gal on the street, mind you, but people in every income range. For many in the upper income brackets, overspending is just on a much larger scale.

While impulse spending is easier to gain control of, it's best to do so before it crosses over into compulsive spending. Here are some tips:

*    If you decide to make the purchase, make an unbreakable deal with yourself that you will discuss the purchase and the process with your spouse, mom or some other interested party.  

This elaborate process should help you slow down and analyze your thinking before spending on things that are not critical to your basic living needs. Of course, if you want it AND can easily afford it, go for the gusto. It's wonderful to have 'stuff', just not when it damages you, your budget and your relationships.   

If you are unable to follow the tips above, you may have already crossed the line into compulsive spending. There are a number of signs that point to the likelihood that one is a compulsive spender. Here are just a few:  

*    Shopping provides a 'high' or feeling of exhilaration and power. 

Take Action!  

Promise you will make NO purchases that do not easily fit into your written budget.    

There's still time for businesses and individuals to impact their 2011 tax returns.

Grant Thornton LLP is sharing what you can do to affect your 2011 return, how to avoid filing season hassles and how to plan for 2012.

There are important changes for both individuals and businesses in the 2011 and 2012 tax years, but that's not a reason to panic.  

"The filing season shouldn't just be about filing your tax return for last year," said Justin Ransome, tax partner in Grant Thornton's Washington National Tax Office. "Now is the perfect time to start thinking about your tax strategy for this year. The earlier you start, the more options you have."

There are a number of ways to help you manage your 2011 return and help you be better prepared for next year. 

What's new for 2011?

1.       The IRS has new information on your business - A new law took effect last year that gives the IRS more information on what business owners earned in 2011. For the first time, banks and credit card companies must tell the IRS how much your business received in total payment card receipts during the 2011 calendar year. So when you file your 2011 return, keep in mind that the IRS knows exactly how much your business earned through debit and credit card transactions, plus any payments received from online payment processors like PayPal.

2.       You can deduct interest on a mortgage of up to $1.1 million - For many years, courts and the IRS interpreted the tax code to limit your deduction to the interest on up to $1 million in debt used to buy, build or improve your home, while allowing you to deduct interest on an additional $100,000 in home equity debt only if it was not used to acquire the home.  The IRS recently changed its position and has now ruled that debt used to buy, construct or improve a home can be treated as both acquisition and equity indebtedness. This means you can now deduct $1.1 million in mortgage interest even if all of it was used to purchase or build the home.

3.       Payroll tax deduction - The employee portion of the Social Security tax was reduced in 2011 from 6.2 percent to 4.2 percent. This lower rate applied all the way up to the Social Security wage limit of $106,800, and employers reduced withholding accordingly. If you're self-employed, your self-employment taxes were also lowered from 15.3 percent to 13.3 percent on income subject to Social Security. But this reduction does not affect the deduction for self-employment taxes on your 2011 tax return.

What can I do right now to affect my 2011 return?

4.       Contribute to an IRA - You can still get an above-the-line deduction on your 2011 return by contributing to an individual retirement account (IRA) now. You can make contributions that are deductible on your 2011 return any time before the April 17, 2012, filing deadline - and even set up the account now if you don't have one. Contribution limits for 2011 are $5,000 plus a $1,000 catch-up for those 50 and older. If you were an active participant in your employer's retirement plan, contributions to an IRA offer deductions only at income levels below $110,000 for joint filers and $66,000 for singles.

5.       Reconsider a Roth IRA rollover - The $100,000 income limit on rollovers from an IRA or 401(k) to a Roth IRA disappeared in 2010. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). Many people made conversions last year while asset values were depressed. If you were one of them, re-examine the rollover. If the value decreased, you have until your extended filing deadline to reverse the conversion. That way you may be able to perform a conversion later and pay less tax.

How do I avoid filing season hassles?

6.       Get your charitable house in order - A charitable cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.

7.       Consider filing electronically - Filing electronically will speed up your refund and can save you from simple mistakes. Before the IRS accepts an electronic return, it checks for several critical errors. The IRS gives you the chance to correct the problems before it accepts and processes your electronic return.

8.       Check your numbers twice - Avoid math errors and make sure to get your Social Security numbers right. IRS computers automatically match all Social Security numbers and check for simple math mistakes. If you wrote down the wrong Social Security number for one of your dependents, the IRS will disallow a deduction for the dependent, recalculate the return and usually send you a brand new tax bill. Millions of returns also generate math error notices that often come as unwelcome surprises to unsuspecting taxpayers. These problems can be a hassle to unwind.

9.       Don't miss the deadline for filing an extension - The filing deadline is April 17, 2012. Don't bury your head in the sand if you're going to miss it. Filing for an automatic extension with Form 4868 is painless and will spare you penalties for missing the deadline. But remember, extending the filing deadline does not extend the time for making a contribution to an IRA, and it does not extend the time for payment. By the filing deadline, you must have paid at least 90 percent of your 2010 tax liability through withholding, estimated payments and any payment made with your extension.

What should I start thinking about for 2012?

10.    Increase retirement contributions - The IRS has increased the amount of money you can set aside for certain retirement accounts in 2012. Contributing the maximum amount to traditional retirement accounts like 401(k)s and IRAs is still one of the simplest and best tax planning options. The 2012 contribution limit for a 401(k) has increased from $16,500 to $17,000. Those 50 and older can make an additional catch-up contribution of up to $5,500 to their 401(k). The limit on an IRA contribution remains $5,000 for 2012, but the income limits for the phase-out of contribution deductions for participants in employer-sponsored retirement plans has increased. Taxpayers 50 and older also can make catch-up contributions of up to $1,000 to their IRAs.

13.    Understand new reporting requirements in 2012 - Business owners with employees face new reporting requirements this year. For the first time, employers will be required to provide the IRS and employees with the total cost of 2012 group health coverage. This information must be reported on the Form W-2, which is used to report employee wages and withholding. The Form W-2 for 2012 is not due until Jan. 31 2013, but you should start collecting the information on the cost of health coverage now to meet the reporting deadline next year.

14.    Prepare for possible income tax increases in 2013 - The 2001 and 2003 tax cuts are scheduled to expire at the end of 2012 - threatening to raise tax rates on many types of income. This may be the year to reverse your normal tax strategy and accelerate taxes into 2012 to avoid the rate increases. There are many strategies for deferring deductions and recognizing income, but the key is to be flexible.

CACC does not prepare taxes and recommends you seek tax advice from licensed tax professionals in your state who are familiar with your personal financial situation.

Jane was not looking forward to going through her parents' belongings to get their house ready to sell. Their health had been failing for some time and they finally agreed to move to a retirement community. Now that they were both comfortably moved into their new apartment, it was up to Jane to get rid of the things they no longer needed.

Her parents had lived in the same house for more than 50 years, so Jane expected to find things that should have been tossed out years ago.  But she was amazed to discover 50 years of tax returns and bank statements carefully stored in boxes in the attic. Her parents had saved all their financial records!

Many people are confused about what records they need to keep and for how long. They hold onto tax returns, bank records, brokerage statements and other financial information simply because they don't know if they'll need it again. Like Jane's parents, the documents get packed in boxes that eventually take over valuable living or storage space.

Financial planner Rick Rodgers, author of The New Three-Legged Stool: A Tax Efficient Approach To Retirement Planning (www.TheNewThreeLeggedStool.com), says tax time is a great time to get organized.

"Most people are going through their records to get ready to file their return," he says. "This is the time to get smart about what you need to keep and then set up a system to store it efficiently going forward."

Rodgers suggests these five steps to help you effectively organize your finances for 2012 and beyond:

1. Out with the old - Discard the records you no longer need: Tax returns older than seven years; bank records and credit card statements that are not related to the tax returns you're keeping; brokerage statements that aren't related to purchases of current holdings. Be sure to shred all your old documents before throwing them out.

2. Go digital - Convert the documents you plan to save into digital images that are stored on your hard drive. Invest in a good scanner and scan as you go through your paperwork, shredding and tossing the hard copies as you go. On your computer, file by tax year, so your 2011 folder will contain your tax return for 2011 and all pertinent bank records and receipts. Organize the previous six years the same way. Next year you can delete the oldest folder when you add the 2012 folder.

3. Save a forest - All of the financial institutions you deal with would prefer to send your statements electronically. Stop receiving paper statements. Instead, download your statements electronically and store them in your new filing system.  Most banks and credit card companies keep at least a year's worth of statements available.  You need to download these files only once a year to complete the year's file.

4. Save backups in case of emergency - Make backup copies of your files on a CD. Choose a CD-R (recordable) as opposed to a CD-RW (rewriteable), because CD-R cannot accidentally be overwritten. Depending on your computer operating system, you may be able to continue adding data to a CD-R each year, until the CD is full. However, some operating systems won't allow that, so you'll need a new CD for each year.

5. Go paperless - Your new electronic filing system can be expanded to include all your financial records, from car maintenance receipts to pay stubs.  Wills and insurance policies can also be scanned and stored but, of course, keep the originals of those in a safe deposit box or fireproof safe.

Gone are the days of saving your financial documents in box and shoving it into the attic.  Technology advances have made organizing your personal finances easier with minimal cost.  Make 2012 the year you get organized by moving your finances into a 21st century filing system.

Thank you for choosing Consumer Advocates Credit Counselors. We welcome your comments and suggestions for future issues. Please email education@caccdebt.org with your ideas.

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