By John W. Schoen
updated 5/13/2004 3:52:01 PM ET 2004-05-13T19:52:01

April 30, 2004

This week, Aviance in Atlanta has figured out a way to give herself a raise -- which is a great idea as long as she doesn't go overboard. Rich in Colorado Springs want to know where to go shopping on the Internet for a low interest rate on a a loan. And Jay is worried about the bite that higher gasoline prices are taking out of his monthly budget. (Turns out he's a little too worried.)

Give yourself a raise
While searching for a way to bring more money home each paycheck, I heard from a tax accountant that there is a way to figure out how many withholdings one can claim without having to owe the IRS at tax time. For example, I will have 9 months of interest paid on a new home I purchased by the end of this year and I pay about $450 a month in student loan interest, in addition to charitable contributions. How can I find out how much to increase my withholdings to bring more home in order to "even out" what I will pay in taxes and itemized deductions?
          Aviance J. -- Atlanta

Most taxpayers getting a refund this year are thrilled when that check shows up in the mailbox. After all, who wouldn't be happy to have Uncle Sam giving paying them money instead of the other way around?

The problem is that's not Uncle Sam's money -- it's yours. If you get a refund every year, you're letting the government use your money for months -- interest free -- before giving it back. So getting a refund just means you've been overtaxed, usually because your employer is withholding too much from each paycheck.

So if you got a refund this year, get a copy of IRS Form W-4 and fill out the worksheet on page 2. You’ll see at the top of the page it asks for your itemized deductions, which is where you’ll fill in the amounts for qualified interest payments.

Unfortunately, like everything else about IRS math, there’s a fair amount of “voodoo economics” in the formulas used to calculate these withholdings. Even after filling out the worksheet, your final tax bill may end up over- or undershooting what you’ve had withheld. And even if you fill out the form truthfully, you’re still responsible for withholding or paying estimated tax for at least 90 percent of the tax you owe – otherwise you may owe a penalty. (Exception: If you get a raise this year, and the tax withheld is 100 percent of what you owed last year, you’re off the hook. And there are special rules for farmers and fisherman, but we’ll leave that for another answer.)

So be a little conservative the first year – don’t overshoot and cut your withholding too far. With fixed interest expenses like a student loan or mortgage, you should be able to adjust more precisely for these deductions next year after you’ve seen what happens with the changes for this year’s withholdings.  

Rate Shopping
I'm looking for a good Web site that would enable me to watch the daily mortgage rates.  Does such a site exist?  I understand that rates will vary. However I have to believe there must be someone tracking averages somewhere on the Internet. 
          Rich S. -- Colorado Springs

One of our favorites is, which keeps track of rates for all forms of consumer credit, from refinancings to credit cards.

It pays to check: not only do rates vary from one week to the next, but there's usually a wide spread from one lender to another. It really pays to shop around.

Major Market Indices

Gas price bite
Most Americans give up 75 percent of their incomes for taxes, health care, insurance and interest to banks and if they give 10 percent to their church that leaves only about 15 percent of their total income for other purchases like gasoline. The above loss of income is much much higher than it was in earlier decades. I think you need a new formula that reflects percent of disposable income related to gas price.
          Jay A.

You raise a good point, but your data isn't supported by the government's survey on consumer spending. While these government surveys are far from perfect, they represent the widest collections of data available and are useful in estimating roughly what Americans earn, save and spend.

According to the data, the average American household in 2002 (the latest year available with annual numbers rolled up) had income from all sources of $49,430. Of that, about 5.1 percent went to taxes. (If that seems low, remember that many of these expenses -- like mortgage interest -- are tax deductible.)

Of the money left after taxes, housing represents the biggest expense (31.7 percent), followed by transportation (18.8 percent); food (13.2 percent); personal insurance, which includes Social Security payments (10.8 percent); "other" (10.3 percent); healthcare (5.7 percent); entertainment (5.1 percent) and clothing (4.4 percent). (Interest payments other than home mortgages are not broken out.)

While transportation costs are high, only 2.9 percent -- or about $1,235 -- went to pay for gasoline and motor oil. If gasoline prices are up 30 percent since 2002, that represents an added $327.50 burden to the average household budget -- or about seven-tenths of one percent. (And that assumes incomes remained flat, which they haven't.)

Yes, these are averages, but the percent of household budget used to pay for gasoline is pretty much the same across income groups.

That's not to say that $327.50 is an insignificant burden on low-income households. And there are certainly families out there that spend more than 3 percent of their household budget on gasoline.

But if you look at the overall burden of higher gasoline prices as a portion of household income, the recent run-up in prices represents less than a penny out of every household dollar.

April 23, 2004

This week's report that inflation is running hotter than expected has Premal in New Jersey wondering what higher inflation will do to interest rates and his investments -- and vice versa. It's question a lot of investors are asking these days. And in California, Sabina wants to know why she has to pay property tax when she doesn't own the property under her house.

Inflation interest
Due to recent worries of the rise in interest rates, I was wondering how inflation affects interest rates and vice-versa? What does this mean for the stock market, the bond market, and Treasuries?
          Premal D. -- Newark, NJ

Some inflation isn’t necessarily a bad thing: in fact, it’s usually a sign that the economy is growing. There are lots of causes, but the underlying problem is shortages of labor or commodities. If the economy is growing faster than worker output, employers have to pay more, which causes wage inflation.  (That’s not a problem now because the workforce keeps getting more productive.) Commodity inflation happens with companies are making widgets so fast they can’t get enough steel or oil to keep factories working hard enough to meet demand. (That is a problem now – especially as China’s economy continues to grow at a rapid clip.)

The problem is that inflation often disguises the true financial health of either the company whose stock you own, or your household budget, or your country’s economy. No matter how much inflation is out there, the number you’re interested in the real rate of return (on an investment) or the real rate of growth (of company’s profits or a country’s economy or your paycheck.)

It’s fairly simple to figure: Just take the nominal rate of growth (how many dollars you have this year compared to how many you had last year) and subtract the inflation rate. If you own stock in a company that reported an 8 percent gain in profits, and inflation is running at 5 percent, your company’s profits really only grew by 3 percent. On the other hand, if your boss gives you a raise of “only” 6 percent, but inflation is running at just 2 percent, your real raise is 4 percent. That’s how much you spending power will increase compared to last year.

The same goes for investments. If  the company whose stock you own is generating solid profit growth (in real terms), it should continue to rise in the long run  (even though investors scared of higher rates may push it lower in the short run.

Inflation is less forgiving on fixed-income investments like bonds. If you own a Treasury bond that’s paying 5 percent, but inflation is eating up 3 percent of that return, you’re really only getting a 2 percent real return. (We’ll leave taxes out of the discussion just to keep things simple.) That’s why this week’s news — that last month inflation was running at about 5 percent on an annual basis — is bad news. With 10-year Treasuries yielding less than 4 percent, you’re actually losing money if that latest monthly number continues for the rest of the year. (Monthly numbers are notoriously volatile.).

Inflation and interest rates are linked, and tend to move in the same direction. Here’s why: If you lend (or borrow) money, inflation reduces the value of the money used to pay back the loan. So as inflation rises, lenders demand more interest to make up for the loss of buying power. That’s why market-driven interest rates go up. And now one is going to continue to invest in those long-term Treasuries if they keep losing money, so the investors who put new money in the bond market will demand higher yields.

Rates are also set by the Federal Reserve, which uses interest rates to try to keep the economy growing too fast (when inflation rises) or too slowly (when people lose their jobs.) Right now, the fear is that demand for key commodities like oil is growing too quickly, which is why energy prices are so high. Unless the Fed steps on the brakes (raises rates), inflation could take hold. And once inflation gets started, it’s very hard to stop: Things cost more, people demand more wages, their companies have to raise prices, so things cost more, and around and around you go.

That’s what happened in the 1970s which was, maybe not coincidentally, the last time the U.S. spent heavily on a war (Vietnam then, Iraq now) and oil prices took a sudden leap higher. We’ll just have to wait and see how much history repeats itself this time around.

Improper property tax?
Where I live in southern California, almost every home is under a Homeowner’s Association (i.e. you own the house, but not the land under it).  So why do we still have to pay property taxes? It’s not like I have the right to tear it down or anything like that.
Sabina H. --  Irvine, Calif.

Though most people think “land” when they hear the word “property,” the tax man takes a much more liberal view of the word’s meaning. Property taxes can be levied on just about anything you own: Your house, your car, a boat – you name it. The list is limited only by the creativity of the elected representatives looking for ways to balance their state or local government — and the logistics of collecting it.  Taxing a house is pretty easy: It’s fairly simple to assess, and you’ll have a hard time hiding it from the government.

It wasn’t always so.  For much of U.S. history, government relied on other taxes, including a “poll” tax on those who could vote, tariffs on imported and exported goods, and excise (or sales) taxes.  From 1868 to 1913, when the modern income tax was introduced, for example, some 90 percent of federal government revenues came from taxes on liquor, beer, wine and tobacco.  Many states have returned to — or expanded — these so-called “sin taxes” to fill holes in their budgets.

Most property taxes go to pay for local government. And if the federal government continues to cut taxes and state governments continue to battle budget deficits, local governments will likely find themselves relying more heavily on property taxes.

Property taxes used to make up an much bigger share of local budgets. At the start of World War II, some 80 percent of local revenues came from local property taxes.  By 1999, that had fallen to 45 percent. Most of the rest now comes from state and federal government aid. 

April 16, 2004

OK, it’s the day after April 15, you still haven’t filed your tax return, and you’re wondering what kind of penalty the folks at the Internal Revenue Service are cooking up for you. Take heart, you’re still in better shape than Mike in Florida. He still hasn’t filed his 2002 return and wants to know what it’s going to cost him.  (We hope he’s sitting down when he reads the answer.)

Unhappy returns
What are the penalties for filing your tax return a year late? Like 2002 in 2004.
          Mike -- Ft. Myers, Fla.

In the minds of the IRS, you’ve committed two separate, but equally important, no-nos here. The first is not filing a return. The second is not paying your taxes.

As much as they don’t like late filers, the IRS really doesn’t like people who don’t pay up on time. If you don’t owe anything for 2002, you’re in luck. The penalty for filing more than 60 days late is $100 or the balance due, whichever is less. So if you don’t owe back taxes, just file the return and start enjoying a good night’s sleep again.

If you do owe back taxes, Uncle Sam becomes a lot less friendly. First, you’ll have to pay interest on the amount you owe, currently at 5 percent, compounded daily.  (The rate is set every three months.)

On top of that, you’ll owe a penalty of half a percent per month, up to 25 percent of what you owe. That penalty bumps up to 1 percent if you don’t pay within 10 days of getting a notice from the IRS. (The folks at the IRS get really annoyed when you don’t answer their letters.)

And you’ll owe that late filing penalty, good for another 5 percent of what you owe in back taxes, up to 25 percent (but capped at $100.) The combined late filing and late payment penalties are also capped at 5 percent per month. So, worst case, you’re looking at 125 percent of what you owe, plus interest on the tax, plus that $100.

If you have a good excuse — “reasonable cause” in tax-speak — the IRS might cut you some slack. But it’s got to be a really good excuse — like death or serious illness (yours or an immediate family member) or, say, your house burned down. Telling them “I forgot” won’t cut it. And while you may be able to wiggle out of the penalty, you’ll still owe interest on any tax you owe — forever. There’s no cap, and no statute of limitations on interest.

In the unlikely event that you didn’t file a return and were owed a refund, there’s no late filing penalty. But if you don’t file a return to claim your refund within three years, you usually lose the right to collect it.

So, Answer Desk readers, if you still haven’t filed your 2003 return, the simplest thing to do to avoid all this heartache is to file for an extension, using Form 4868. You can get more time to file, but not to pay. So you’ll still have to send along a check for the amount you think you owe. And if it's less than 90 percent of the full amount, you'll be hit with a penalty (see above).

If your problem is that you can’t afford to pay this year’s taxes, try filing Form 9465 and ask to pay what you owe in installments. Generally, you’ll get three years to pay off your tax bill for amounts less than $25,000 — but only once every five years and only if you can prove you can’t pay it all at once.

For more on filing for an extension, check out the IRS Web site.

April 9, 2004

With gas prices rising, Answer Desk readers are fed up. Michelle was one of many California readers who wrote this week to say they’re steamed about reading that gasoline prices are about to hit $1.80 a gallon, when they’re already paying well over $2 a gallon. Take a deep breath, Michelle, and you’ll discover a big part of the answer. Meanwhile, Dan in Dallas noticed he made a mistake in the tax return he just filed. He’s wondering whether to fix the problem – or keep quiet and hope the IRS doesn’t find out.

California Screamin'
I live in California and these "so called" gas prices do not even begin to reflect what we have been paying at the pumps.  I would love to gripe about $1.80 again.  For most of 2004, we Californians have been paying over $2.00 a gallon.  Why is it that the rest of the nation get a $.20 increase but we here in California get a $.50-$.70 increase?  
          Michele C. -- Apple Valley, CA 

The biggest reason you pay more in California is that your elected representatives have placed restrictions on gasoline sold in the state -- requiring a special "blend" that can't be sold anywhere else in the country. It's more expensive to produce, and -- if there aren't enough refineries set up to make it -- California doesn't have adequate supplies to keep all the cars in the state topped off. So the price goes up.

As we've pointed out before, gasoline in the U.S. is actually pretty cheap. If the price of gasoline in 1919 were adjusted for inflation, it would cost $2.75 in 2004 dollars. No one complains when gasoline prices go down -- in fact, you don't even read about it in the paper.

The reason everyone is so concerned now is that prices have risen more sharply -- much more sharply -- than in the past. And it busts everyone's budget -- because they grew accustomed to cheap gasoline. Some people simply can't afford the increase.

But many more have chosen to drive a light truck or SUV that gets half the mileage it could be getting. If you doubled your mileage, you'd pay half the price to go the same number of miles. So instead of complaining, why don't Americans trade in their cars for higher mileage vehicles -- which would burn the equivalent of 90-cent a gallon gasoline?

Gasoline is a scarce resource that is getting scarcer every year. What puzzles us here at the Answer Desk is why everyone is so surprised that gasoline prices are rising. They may fall again this winter (when there’s less vacation less driving than in the summer), but they're going to go up again and keep going up. Americans are just going to have to get used to it. Ask Europeans about what they pay -- they'd love to buy "cheap" $2.25-a-gallon gasoline.

Return that return
I noticed an error on my 2003 tax return AFTER I submitted it in March. How should I address the problem? Is it better to be proactive and send in an amended return later, or wait and see if the IRS catches it and notifies me?
          Daniel J. -- Dallas, Tex.

It's always better to fix the problem. If you're hoping the IRS won't catch your error, why not just file a return every year with an "error" in you favor and hope they don't discover it?

One reason is that this is called tax fraud. The other reason is that, if they do catch the mistake, you'll owe a penalty and, if some time has passed, a big interest payment from the date the tax was due (six percent, compounded daily.)

And they've got three years to catch the mistake before the statute of limitations runs out.

April 2, 2004

Retirement Catch-up
I'm a 47 year old woman with no retirement. Quite simply, I just didn't even think about it until the past couple of years... now I think about it constantly. I'm very worried about it as a matter of fact. My question is how can a person at my age, who works full-time and makes enough to pay the bills and have a "little" left over each month... but not enough to save to retire on... how can I ever retire? What are my options? Is investing the answer, and if so... in what? Please help...
          Joy C. --  Norman, Okla.

Well, just thinking about retirement is a great first step. And while you may feel you have fewer options than if you’d started 20 years ago (how many people really think about retirement when they’re 27?), you do have options. If you plan on retiring at 67, you've got 20 years to save. That's not bad.

The first thing is to figure out how to generate more than that “little” from your income. That means a) cutting spending or b) increasing income – or both. Many people who are new to the idea of retirement planning are also new to personal financial planning altogether. So if you haven’t done so, sit down and make a budget. Keep a notebook for a month and log every cash expense. Then round up your checking and credit card statements and track where every penny (OK, every dollar) goes. This exercise usually reveals spending choices that, upon reflection, we might not have made with the discipline of a budget.

Next, set aside a reasonable savings target, but make it a “stretch” target. Then, “pay yourself first.” To do this, arrange for your bank to take that target amount from every paycheck and have them drop it in a savings account. (If you bank says they can't do this, find another bank.)

You’re going to feel that bite out of your paycheck elsewhere: Think if it as the “fat burn” you get on a treadmill when you go on a diet. But setting aside your savings before you pay the bills will force you to look for ways to cut back.

Over time, as you start accumulating savings, this should get easier. If you get a raise at work, increase your “personal savings plan.” The art of saving is not easy: It’s as bad as quitting smoking – worse for some. But despite what you read in the spam in your e-mail inbox, there are no quick ways to generate piles of cash — legally.

Once you start accumulating your savings, you’ll want to figure out where to put it. If your company has a 401(k) plan, the decision is simple. These retirement plans pay you to participate. It’s free money. For every dollar you put in, many employers contributes 50 cents, up to a certain percentage of your income. Most plans let you invest in mutual funds – investments that can give you higher returns than a savings account, but are professionally managed. (If you don't have access to a 401(k), consider setting up an Individual Retirement Account -- that way you don't have to pay taxes until you retire and your money grows faster.)

Despite all recent the bad news about mutual funds cheating their customers, finding a good fund is still a great way to get started. If you start trying to pick stocks, you’re putting all your hard work at risk. Pick a fund that’s looking for slow and steady growth.

If you’re still worried about retirement, sit down and make a retirement budget.  You can project how much your new savings fund will pay you after 20 years of saving. Or maybe 25 years – you may decide to “retire” later.  Try our savings calculator.

Or maybe, like may people approaching retirement these days, you’ll decide to continue working forever – but only at a pace you like and in jobs that you enjoy. To finish your retirement plan, figure out what you might expect to spend (another budget), where you might want to live (maybe a cheaper part of the country.)  By playing it out on paper, you can see where you need to go. And once you get going, the worries about “doing nothing” begin to ease.

One last step: get a copy of your current statement from the Social Security Administration and see how much you’ll be entitled to at retirement. Though you may have saved little on your own, you’ve been paying Social Security taxes as part of your full-time job. Despite the dire predictions about the collapse of the system (see next question), the latest trustees report released last week projects that the system will be solvent until 2041.  But don’t let that stop you from building your own retirement nest egg.

For more information, check out MSN’s retirement section. (MSNBC is a Microsoft-NBC joint venture.)

Social Insecurity
If in the future there are 60 million retired and each needs an average of $24,000 a year to live on, that is $1.44 trillion. If the GDP has grown to $12 trillion, that is 12% of the GDP which has to be transferred from those who are working to those who are retired.  That transfer of wealth remains the same size no matter how the transfer is funded.  It can be funded by taxes, dividends from private savings, or a 401K converted to an annuity.  But regardless of how it is funded, it is still consuming 12% of the GDP, so I don't see how the manner of funding changes the burden on the workforce...

I'm leery of substituting private savings for Social Security because it was started in the first place because too many people couldn't or wouldn't save for their retirement unless forced to do it by the government through taxation.

Where or how am I wrong in this scenario?
Robert M. -- Simi Valley, Calif.

There are certainly those who agree with you that privatization is risky, including the Economic Policy Institute in Washington, D.C. 

As for your analysis of the numbers, you've overlooked the Trust Fund — the big pile of money the government has been accumulating to pay for the Baby Boom retirement — which is still rising. (Actually, it's a big pile of Treasury debt, which means the government owes itself money, but you have to invest the cash somewhere.)

And as for the financial health of the Social Security system, check out the 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, which was just issued last week. The report projects the cost of the program will rise from 4.3 percent of GDP today, to 6.3 percent in 2030, and to 6.6 percent in 2078.

But you may be surprised to learn that the trustees estimate the funds remains solvent until 2042 — beyond the life expectancy of the healthiest Baby Boomer. To keep the fund solvent through 75 years, the report says, payroll taxes would have to rise 1.89 percent, benefits cut 12.6 percent, or $3.7 trillion in general revenues (income taxes) would have to be transferred — or some combination of smaller amounts for each category.

Keep in mind these are 75-year projections which, though required by statue, are about as reliable as a 10-year weather forecast. (How can anyone possible estimate the size of the U.S. GDP 75 years from now?) What you can say is that, ultimately, the health of the public retirement system will depend heavily on the long-term strength of the U.S. economy.

So why do we all keep reading about Social Security “going broke”? One theory is that the scare headlines are just propaganda floated by politicians and policy wonks who want to see Social Security privatized. (Check our Washington Post partner Jane Bryant Quinn’s excellent piece on the subject.)

The idea is that if you scare enough people into thinking Social Security will be broke by the time they retire, they’re more likely to vote for scrapping the system and replacing it with a private plan, like Individual Retirement Accounts. But the trustees report seems to throw cold water on that idea.


Ever wonder what a P/E ratio is and why it's so important? Are you confused about the official definition of a recession? And just what the heck is a derivative? We're here to give you the answers.'s weekly feature "The Answer Desk" helps you make sense of business, the economy and investing. So send along your questions to and we'll try to get you the answer. (Please include your home town with your question; we'll only include your first name if we use your question.)

Any question is fair game, with one exception: no questions about specific investment recommendations, please -- we'll leave the stock picking to the "pros."

Each week, we'll take some of the most-frequently-asked questions and answer them here. We may not be able to answer every question, but over the weeks and months we will provide a comprehensive resource for you, explaining some more puzzling aspects of business and finance.

You can mail in questions at any time and then check this column every Friday for the answers.

(All information will remain confidential in accordance with MSN's privacy policy.)

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