What 'refundable tax credit' means

One provision in today's stimulus bill that's attracting lots of attention is the $8,000 refundable tax credit for first-time homebuyers who purchase in 2009. But what does "refundable" actually mean? The confusion runs deep. Since most of us are doing our taxes right about now, it seems like a good time for a rundown on the often-slippery distinction between credits and deductions.

Here, in ascending order of usefulness, are the various ways the IRS lets you adjust your tax bill:

Tax deduction: Most items you "write off" on your taxes are deductions, which reduce the amount of your income that the IRS considers taxable. The actual cash you save depends on what tax bracket you fall into. A single person with $40,000 in income would, for 2008, fall into the 25% tax bracket and owe $4,981 in federal taxes for the year (saith Bankrate's tax calculator). But add a $1,000 deduction, and the tax drops to $4,731 -- $250, or 25% of the $1,000 that's been deducted.

Most deductions require you to itemize your return -- and about two-thirds of American tax filers don't itemize. Itemizing is only worth it if your deductions will exceed the standard deduction. Unless you have a mortgage, extremely high medical bills, or other major expenses, the standard deduction is a better deal.

I didn't expect to itemize my return until we eventually had a mortgage, but I was surprised two years ago when my tax software spat out an itemized return. One of the things you can deduct is state and local taxes, and in NYC, those get whomping -- they finally overwhelmed the standard deduction David and I would otherwise take. If you do venture into Itemizationland, it pays off to start tracking deductible things like charitable contributions and unreimbursed business expenses.

Adjustments to income: A handful of deductions are available even to those who don't itemize their returns -- which is a great deal, especially for students, at whom many of these deductions are aimed. Two common ones: You can deduct tuition expenses and student loan interest (subject to income caps).

Often called "above the line" deductions, these adjustments work out mathematically just like itemized deductions. For a single filer with income of $40,000, a $1,000 income adjustment will lead to a $250 savings.

Nonrefundable tax credits: A tax credit is better than a deduction. Instead of adjusting your income, a credit adjusts your actual tax bill, dollar-for-dollar. Mostly aimed at students and low-income filers, credits are powerful weapons that can take your tax liability all the way down to $0.

One popular tax credit is the Lifetime Learning Credit, which lets you deduct 20% of your educational expenses. If you had income of $40,000, a $4,981 tax bill, and a $1,000 Lifetime Learning Credit (for $5,000 in eligible expenses), you'd get to shave $1,000 straight off your tax bill, cutting it to $3,981.

Nonrefundable credits are only useful to those who make enough to owe tax. If you had income of just $4,000 instead of $40,000, you'd have earned less than the standard deduction and you'd owe no tax. If you also had tuition expenses, you wouldn't get any extra tax benefit -- you already owe nothing, so there's no tax bill for you to deduct them from.


Refundable tax credits: If credits are "powerful" weapons, refundable credits are nukes. These rare beasties can take your tax bill below $0 -- instead of you owing the IRS, Uncle Sam owes you.

One of the most common refundable tax credits is the Earned Income Credit, which works to boost income for low-wage workers by offering tax breaks. The credit will reduce your tax bill, but if it reduces it past $0, you still get the cash.

That's why the $8,000 homebuyer credit in the economic recovery act will have such a profound effect on the tax bills of those who qualify. That single person with $40,000 in income and a $4,981 tax bill -- add in an $8,000 homebuyer credit and their tax bill drops to -$3,019, meaning there's a nice check on the way. If, like most of us, you've already made tax payments through payroll withholding or other methods, you'll get what you're owed on the credit plus a full refund of what you've already paid.

The Finance Buff has a good explanation of how refundable-versus-nonrefundable credits work, and a list of various credits and which category they fall into.

Now, having written all that up, I'll go stare forlornly at my 2009 tax filing, which has none of those nice credits and deductions I got to play with in past years. Still, since it netted me a nice refund check that arrived a few days ago, I can't whinge too much.

Phantom vesting strikes again

I left my old job in December 2007. The employer had a five-year vesting schedule for its 401(k) match, and since I'd worked at the job for just under two years, I assumed I'd be walking away from the unvested 80% of my match. Annoying, but them be the rules, and it was hardly incentive enough to turn down a new job I really wanted.

I didn't get around to organizing a rollover right away, though, and when I checked my 401(k) a few months later, I found that it was 40% vested. Even though I'd left the company, the extra 20% that would have vested on my two-year anniversary in February vested right on schedule.

One of my friends had previously mentioned that when she left IBM, her 401(k) kept vesting years later. Which made me wonder if the same thing was going to happen here. I mean, clearly, it shouldn't -- I'd even confirmed with HR before I left: I go, my vesting stops, right? Of course, said the HR rep.

And yet. This month would have marked my third full year with the company, if I'd stayed. And lo, when I logged on to check my 401(k) this morning, it's now 60% vested.

If this was just me, I'd assume something had gone seriously screwy. But since this is now the second time I've heard of this happening, I'm wondering how widespread it is. Are companies just routinely forgetting to tell their 401(k) vendors about employee terminations?

On a more practical note: I left the 401(k) alone this year as an experiment, to see if this would happen. If I wanted to absolutely maximize my returns, I guess I should leave it alone another two years and see if I can get the other 40% to vest. But since what remains unvested is now less than $1k, and there's still the chance my improperly-vested portion gets yanked back when I eventually do the rollover (I assume those forms will ask me what date I left), I'd rather go ahead and consolidate my accounts now.

Next step: Figure out if I should simply roll this over to my current 401(k) or if there's advantages to doing an IRA.

The case of the disappearing In NYC points

When Amex discontinued my beloved In NYC card (*insert sniffling noises here*), all the mail they sent about the switchover to their Blue card emphasized that there would be minimal disruption. Similar terms, same card number, and the seamless transfer of my balance and my accumulated rewards points.

Oops. In practise, not so much.

I procrastinated as long as I could, but at the start of January I finally activated my Blue card and retired my old card. When I got the first statement, though, I noticed something a bit odd. My rewards points balance was 0. It should have been somewhere north of 30,000, since I'd had a whole bunch of unused points lingering.

At first, I figured it was probably a transfer glitch that would work itself out. But when weeks passed with no sign of my points reappearing, I finally bit the bullet and called American Express. The customer service rep had no idea what was up, but opened a dispute.

That was on Jan. 19. On Jan. 31, I got an email from Amex saying the dispute was being investigated: "You should expect to hear from us further once this investigation has been resolved. We try to resolve investigations in less than one month, but complex cases may require additional time."

The email also came with a link to Amex's inquiry center, where I can "check the status of your inquiry and learn more about our billing disputes process at any time." Oddly, when I log on, it shows no active inquiries on my account, and no closed ones within the past 12 months.

I casually mentioned my disappearing points to another friend who had an In NYC card -- and she said hers had gone poof, too. Has this happened to anyone else? I assumed this was a glitch unique to me, but if all the In NYC points have vanished, that's worth a phone call to Amex's PR department for comment on when they'll be resolving this ...

Introducing Shopping Pr0n

One day last spring, work asked if I'd be willing to do a TV interview to promote a big project publishing that week. "Sure," I said. I was (briefly) a theatre major in college, and I'd done TV stuff before on occasion; public speaking holds no fear for me.

What did strike fear into my heart? Clothes. Specifically: Television clothes. My office is relatively relaxed, and I'd long gotten along with nothing more formal than business casual, even for job interviews. I didn't own a suit. Even if I had owned a suit, TV clothes are a whole other ballgame -- certain colors don't work, patterns are problematic ...

With about 48 hours to pull something together, there was only one obvious course of action: Ping Fashionista Friend to say HELP. Fashionista Friend has, aside from her generous nature with advice, two rare and incredibly useful skills: she's good at explaining, in basic terms, what works and why - and she's been through a range of about 10 dress sizes in her life. Unlike most fashion mavens, Fashionista Friend can make suitable recommendations for anyone size 2 to 20. (Her range probably extends beyond even that, but allow me my alliteration.) Also, when you ask for fashion advice, her first question is "give me your measurements," and her second is "what's your budget?" Because unlike most glossy fashion mags, she can adapt to the idea of dropping less than $1k per outfit.

Consulted by IM, Fashionista Friend was full of invaluable recommendations - pants suit, hitting "at or just below the hip," splash of colour underneath, "conservative, but not black," and absolutely no matter what, three buttons not two. Her tips were so specific that I managed to find a workable outfit in less than an hour of shopping. (You can judge the results for yourself ...)

So I was thrilled a few weeks back to hear that Fashionista Friend was launching a blog. Shopping Pr0n covers all sorts of topics, from plus-size fashion to bargain buys to straight-up luxury splurges.

Right now, I imagine most of us are cutting our clothing budgets to the bone. My personal weakness is handbags, and I'm on a purchasing moratorium. But in this kind of climate, I find reading sites like Shopping Pr0n even more valuable, because it helps me make smarter choices with the money I do spend. Now that we're heading into the crunch days of one paycheck - David's job ends at the end of February - I'm trying to make sure that we only spend on things that are exactly what we need. Shopping Pr0n is fun for window shopping, but I'm also relying on it to help me get my work wardrobe into shape.

In which I help bridge New York's budget shortfall

This is one of the simplest tax years I've had in ages: one W-2 for me, one W-2 for David, some charity deductions (we don't have a mortgage, but we pay so much in state & local taxes that we do an itemized return anyway), and that's it. I had a 1098-E form for my student loan interest, but didn't get to deduct it this time around -- I seem to have capped out on that.

The 1098-E was a bit eye-opening. It reported that I've paid $1,407 in interest on my student loans this year. Considering that I paid about $2,600 total toward my loans this year, that sounded like a hell of a lot of interest. And my loans are at reasonable rates! I have two, one consolidated at 4.7% and one fixed about a point higher. So how on earth did I end up spending more than half my payments on interest when my rates are single digits?

... and then, with the help of my trusty 12C, I finally got it. What is, or should be, blazingly apparent to anyone who pays a mortgage. A single-digit percentage of a Giant!Sum is still a Large!Sum, and interest isn't a proportion of your payments. Whoever is loaning you the cash is making sure to get their interest payments first, in full and up front, each year on the total debt. The only way to make progress paying down the principal is to a) pay extra specifically toward it each month, or b) get the total due down to a small enough figure that your monthly payments equate to a significant chunk of it.

When I finally did that depressing math, I realized it'll be years before I make any significant headway paying down my student loan debts, unless I allocate extra cash to paying them down each month. (I've always rounded up just to make the budgeting simple and paid $20 or so extra each month, specifically marked on the online payment form as "allocate toward principal, not toward next month's payment," but clearly, that $20 isn't going very far.) Kids: When your parents gripe about ever-rising tuition costs, listen to them. I did my final year of undergraduate college credits 10 years after I did the first three -- and I had to borrow twice as much to cover that final year as I had left on my loans for all of the first three. Ow.

Still, since my loan rates are reasonable, I think saving for an apartment downpayment trumps paying down extra loan debt. So, it lives on with me, for about 8.5 more years.

Also new this year: We owed New York money. Back in college (the first time, lo that decade-plus ago), I remember ending up owing New York money every year. It wasn't much, usually $50 or so, but it was still irritating. I always took 0 allowances; how did I end up owing? New York just seems rigged like that. Thinking back on recent years, I have a vague recollection that my tuition and loan debts were all that got us from the owing-money territory and into refundland.

Fortunately, the Feds owe us way more than we owe New York (that whole 0-allowances thing), so doing taxes was still a happy experience overall. Still, I grumped a bit* when I read the quote this morning in Reuters from New York budget spokesman Jeffrey Gordon that, unlike California, New York "is not 'running on fumes' and revenues are coming in every day."

As I IM'd a friend: "Yes, revenues are coming in every day, and today, $151 of them came from me!"

*(I am generally ok with paying taxes in exchange for the happy civic things my tax cash buys. David is even more so. None of his tax-and-spend liberal sentiments were harmed in the making of this post.)