Volunteer for AARP's Tax-Aide to help others and yourself

If you'd like to learn more about preparing your own taxes while also helping someone else, consider volunteering for AARP's Tax-Aide program, which begins training sessions soon. Tax-Aide employs volunteers to help prepare returns for low- and moderate-income individuals, with a focus on those 60 and older. You don't have to have a financial background, but you must attend a  3- to 5-day course, and to devote at least four hours a week between February 1 and April 15 to helping people face-to-face with their taxes. The jobs vary, from technology coordinators to "greeters" who direct taxpayers to the proper preparer, among other duties. AARP provides training in tax law procedures, preparing tax forms, and using tax preparation software. 

The application deadline for 2010 volunteers is December 11, 2009. Here are some details from AARP, including an application form. For more on doing your taxes yourself, consult Consumer Reports Money Adviser, and check back on this blog in early February, when tax season begins.–Tobie Stanger

Foreign-stock trading for the rest of us

Fidelity recently began offering some online customers–active traders, or those with at least $1 million at Fidelity–the opportunity to buy and sell stocks listed on foreign exchanges. They now join other online brokers who also provide this service, such as Interactive Brokers and E*Trade.

Don’t feel too left out if you don’t use Fidelity or similar brokers, or don’t make many trades. There are plenty of other ways for your investments to gain international exposure right here on our major exchanges. American Depositary Receipts (ADRs) have been around for some time, and are available for most of the largest foreign corporations.  And now exchange traded funds are numerous (probably too numerous, but that’s a topic for another day). You now have a choice of over 100 ETFs with which to invest in foreign markets.

Also, buying stocks like a local may not necessarily be more efficient, or profitable.  Recently, a study by a leading Indian business newspaper determined that the returns of Indian companies were actually superior if you bought their ADR instead of buying the stocks directly from the Bombay Stock Exchange.      

There’s also the tax men to consider, both ours and theirs. Many countries require a tax withholding on any dividends paid out, and it’s often at a rate that is higher than the maximum, 15-percent rate on qualified dividends currently in place for Americans. To avoid double taxation, you can retrieve the difference back from Uncle Sam via tax credits, but in the meantime you’re out of pocket. This credit, by the way, is also available to owners of mutual funds with holdings abroad. You should receive a 1099-DIV form from the fund by the end of January, indicating the share of foreign tax you’ve paid.–Chris Horymski

Variable annuities may be getting even worse

Regular readers of Consumer Reports will know that we’ve never been big fans (or even small fans) of variable annuities, insurance contracts that promise you payments based, in part, on the performance of whatever mutual funds you pick when you sign up. 

So we were interested to see this Wall Street Journal article on variable annuities the other day, indicating that many insurers may be reducing the guarantees on their products, making them an even worse deal for consumers.

While annuities have a tax advantage over conventional mutual funds, in that your earnings are tax-deferred until you take money out, they also have some serious drawbacks. Those typically include high sales charges and considerably higher annual fees than regular mutual funds, plus punishing surrender charges if you need to get your money out early.  And don’t even get us started on the aggressive sales tactics often used to push them.

The only reasonable case we can see for buying an annuity is if you don’t have access to other tax-deferred accounts, such as a 401(k) plan or an IRA, or if you have already maxed-out on them. If you must buy one, be sure it’s from a really solid insurer. 

Subscribers to our Consumer Reports Money Adviser newsletter will find a more comprehensive analysis of variable annuities in their December issue.  

Would you support a tax break for pet care?

In the midst of all the heated conversation about health-care reform, a Michigan Congressman is sponsoring a bill to give pet owners a tax break for pet care.  

Rep. Thaddeus McCotter (R-Mi) has introduced H.R. 3501 to create a deduction of up to $3,500 on federal tax returns for the care of "qualified" pets, defined as "legally owned, domesticated, and live animals." Animals used for business purposes–say, a dog that helps round up sheep or a cat filmed in TV commercials–aren't covered. The bill says qualified care includes veterinary care, though it doesn't mention what else (pet sitting? chew toys?) would be included. There's no apparent provision for people who don't itemize and utilize the standard deduction instead. And there's no word on whether the pet needs a valid Social Security number. (Just kidding.)

A main finding to support the proposed deduction is that the human-animal bond "has been shown to have positive effects upon people's emotions and physical well-being," in the bill's words. The title of the bill is the Humanity and Pets Partnered Through the Years (HAPPY) Act. 

The bill doesn't mention the growing expense of medical care for pets, though ostensibly that's a major impetus for it. Consumer Reports Money Adviser recently discussed ways to save on pet expenses, regardless of whether this bill becomes law.

What do you think about such a tax break? Is it needed? Feel free to comment below.–Tobie Stanger

October 15 deadline to change Roth IRAs for tax savings

Last year's stock-market meltdown was hard enough to stomach without having to lose a chunk of losses to taxes. If you converted from a traditional IRA to a Roth IRA last year and paid taxes on an account that's been decimated, you have until October 15 to reverse it. 

Say your IRA was worth $100,000 last year when you converted it to a Roth, and your account is only worth $60,000 now. You essentially paid taxes to convert the IRA on an additional $40,000 you no longer have. The tax code allows you to reconvert, or recharacterize, the Roth back to a traditional IRA and get a refund on the taxes you paid. And if you want, you can then convert it back to a Roth, but pay taxes only on the new account value. If you undo a Roth conversion that you made in 2008, you only have to wait 31 days to reconvert it into a Roth. However, if you converted in 2009, you'll have to wait until Jan. 2, 2010 to reconvert.

To do the deal, talk with the custodians of your Roth IRA; they’re the ones who need to set up a new IRA in which to transfer your Roth money, says Jim Wagner, CEO of Trust Administration Services, a Carlsbad, Ca.-based company that provides services for self-directed retirement plans. Depending on your administrator, there may be fees involved. You’ll need to fill out IRS Form 8606, Nondeductible IRAs. Your accountant can tell you whether you’ll need to amend any tax returns as a result of the change.

For a more in-depth discussion see this article in Financial Planning magazine by IRA guru Ed Slott  and this article from Bankrate.com. For more information on tax-law changes that will give many more people the chance to convert to Roth IRAs next year, read "New Twists on Roth IRAs" from Consumer Reports Money Adviser.–Chris Fichera 

No tax bite on cash-for-clunkers vouchers

In case you were wondering, those vouchers of up to $4,000 to purchase a new car through the government's "cash for clunkers" program aren't considered taxable income to buyers. So it won't cost you anything on the 2009 federal income tax return you file next year.

For tax geeks, here's the language from the Consumer Assistance to Recycle and Save Act of 2009 (CARS): 

Sec. 1302 (h)(2)

FOR PURPOSES OF TAXATION- A voucher issued under the program or any payment made for such a voucher pursuant to subsection (a)(3) shall not be considered as gross income of the purchaser of a vehicle for purposes of the Internal Revenue Code of 1986.

For a change, good news from the IRS!–Tobie Stanger

Ways to improve college 529 plans

The Treasury Department's analysis of Section 529 plans, published this week, offers some useful recommendations for improving these state-based college savings plans, which have become increasingly popular financing vehicles for the middle class.

The report offers several ways states can improve their plans. Here are two we like a lot:

•Offer more age-based index funds. Funds that provide stock and bond allocations tied to a child's age are popular and well-suited for many middle-class families. That's because the proportion of stock gradually decreases over time, reducing risk of serious financial loss as the child approaches college age. But 5 of 48 state-based programs don't offer such funds. And while index funds have proved to be a cost-effective way to achieve good returns over the long run, only 23 of the 43 states with age-based funds offer them in index versions.

•Dump the home-state bias. Only Arizona, Kansas, Maine, Missouri, and Pennsylvania give a state income tax break to residents who put their money in the 529 plans of other states. If all states would do this, more parents could shop around for the least-costly plan that suited their needs.

Click here to read more of the Treasury's recommendations. Recently, Consumer Reports Money Adviser's Money Lab analyzed 529 plans, and found 5 that earned A's.  Click here for the report.

President Obama puts focus on retirement saving

In his weekly radio address yesterday, President Obama laid out what he called "several common-sense changes" aimed at bolstering Americans’ savings, especially for retirement.

The major one will encourage employers to enroll more workers automatically in a 401(k) or IRA plan.

Automatic 401(k) enrollment has been around for some time. The automatic IRA, which we covered here earlier this summer, would provide a way for employers without 401(k) plans to offer their workers something similar.

Enrolling employees automatically in a retirement plan, rather than having them elect to sign up for it, is intended to get people to save for retirement who might not otherwise be inclined to.

Of course, people fail to save for many different reasons. In some cases it may be procrastination or a lack of understanding of their options, which automatic enrollment should help address. Others, though, may not save for the future simply because they can barely ends meet in the here and now. So this initiative, well intentioned as it may be, isn’t going to do much for them all by itself. However, another Administration proposal, currently before Congress, would expand the saver’s credit, which could make it more practical for people in that situation to put some money aside.

Other initiatives mentioned in the radio address include:

• A check box on tax returns allowing people to receive their tax refunds in the form of U.S. Savings Bonds. Savings Bonds generally have to held for 12 months before they can be redeemed and for five years to be redeemed without penalty, so this could encourage at least short-term saving (assuming anybody actually checks that box).
• Making it possible for employees to direct payments from unused vacation and sick days into their retirement accounts, rather than taking them in cash. This could benefit workers with the financial resources, as well as the will power, to take advantage of it.

--Greg Daugherty

Greg writes the “Retirement Guy” column each month in the Consumer Reports Money Adviser newsletter.

Home buyers: For $8,000 tax credit, aim to close soon

Some sage advice from HSH Associates, a provider of loan and mortgage data: If you want to take advantage of the economic stimulus package's $8,000 tax credit for first-time homebuyers, get going now. You need to close by December 1. There’s always the possibility that Congress may extend the deadline, but that’s probably not something you’ll want to count on in the middle of a contract.

Even in a normal environment, it usually takes four to six weeks to get from the contract to the closing table.  But these aren’t normal times. Loan processors still can’t keep up with the surge in applications that began in January, and you can expect much more rigorous scrutiny by underwriters.

For more details on the credit, check out the IRS Web site.–Chris Horymski 

College students and personal finance, Part 4: Financial independence

Editor's note: As the new college year revs up, Consumer Reports Money Blog devotes several days to the personal finance issues of college students. Here, Nicole Willis, one of our college-age summer interns, muses on what she's learned–and has yet to learn–about financial independence:

My four-and-a-half year ride through college, financially, consisted of both my dad’s hand gripping the back of my bicycle seat and my mom holding onto one of my handlebars. While I moved out of my family’s suburban Orlando house and onto my large university’s campus, I was only seven miles away and visited home at least weekly for my dad’s asparagus and pine nut pasta. While I did my own laundry, I did it at home in a twenty-first century front-loading machine without quarters. And when it came to my finances, I was very laissez-faire: my parents not only funded everything (except my car’s gas and the occasional night out, for your information) but they kept track of everything that needed to be paid for: my tuition, my sorority bills, car insurance, cell phone bill, etc. My tuition and textbooks were taken care of, however, by the Florida Prepaid College Program and by a scholarship I received in high school.

The only time I interacted with money-related acronyms in high school and college was when I was recently hired for a new job, which occurred about once a year since I was 16. When eagerly filling out the preliminary paperwork, any and all forms with a bold W or I on the top instantly turned my eagerness into a bowl of mashed potatoes. But I luckily recalled my dad telling me upon getting my first job to put a “1” at the bottom, and I was OK.

Needless to say, I still have much to learn about being financially independent. I need to be tutored in all that’s involved in paying for grad school, finding my own health insurance, saving for my retirement…the mashed potatoes feeling is coming on again. I currently have a part-time job to return to in Orlando in the fall, and am actively seeking that first full-time job for when I’ll be an alumna in January. I just have to remember “1” for when that next first day comes.

Nicole Willis is a fifth-year, "super senior" at the University of Central Florida, majoring in journalism and psychology.