Author: Mike Holman

Categories
Money

Cash For Clunkers – Tax Rules

The popular Cash for Clunker car trade-in program has just ended after handing out $3 billion dollars of cash for consumers to upgrade their older cars and get a brand spankin’ new ride which hopefully gets better gas mileage than the old one.

This program – officially knows as the Car Allowance Rebate System (CARS) was created earlier in the year as part of President Obama’s stimulus package for 2009.  This program was primarily designed to help stimulate the big car companies which have been enduring poor sales.  The other intention is to help the environment by burning less gasoline in more fuel-efficient cars.

[edit Sept 27 – Cash for Appliances – List of Eligible Appliances]

[edit Dec 9 – Cash for Caulkers

One very common question which has come up recently has been the taxation of any Cash for Clunker voucher money received by a person using the program. Some websites have been reporting that the entire amount of the credit is taxable income and will be added to your taxable income for the year.   This is not true – the government Cash for Clunker website specifically addresses this issue and says:

Is the credit subject to being taxed as income to the consumers that participate in the program?
NO. The CARS Act expressly provides that the credit is not income for the consumer.

Tax treatment of Cash for Clunker payments

If you are concerned about having any tax issues as a result of trading in your old clunker and getting a voucher or credit for a new car then put your mind at ease.  The discount you received off the new car purchase price is not considered taxable income so no taxes will have to be paid on it.

The taxation of this plan is the same as if you had just traded in your car or even if you had sold the old car separately.  The cash for clunker voucher amount or the sale proceeds from a used car sales are generally not taxable since they are probably less than the amount paid for the car originally.  You can’t claim the loss on your car since government law doesn’t allow capital gain losses to be claimed on depreciating assets.

The voucher or credit amount for your clunker is not “income” or any kind of bonus money.  It’s simply a payment for your old car which is not taxable.  In effect you are basically selling your old junker to the government for either $3500 or $4500.

How the Cash for Clunker program works

The main concept behind the Cash for Clunkers program is that you can trade in your old gas guzzler car for a new car which has better mileage.  The government will pay you either $3500 or $4500 for your trade in.  Obviously this is only worth doing if your current older car is worth less than the potential rebate amount.  If your car is worth more than the voucher amount then you are better off just doing a normal trade-in or selling it privately.

Rules of the 2009 Cash For Clunkers program

  • Car must be less than 25 years old (built in 1984 or later).  This applies to the date of trade-in relative to the manufactured date of the car.  See section below for more info.
  • Can only be used for trade-in on a new 2008,2009 or 2010 car.  Outright purchase or lease.  Used car purchases are not eligible.
  • Trade-in car must get 18 mpg or less (city/highway combined).  See this website to find out the mileage for your car or this site to find your car.
  • This program has ended so no more trade-ins.   Trade-in must occur on July 1, 2009 or later.
  • The new car must have a purchase price of $45,000 or less.
  • Credit will be either $3500 or $4500.  If the new car gas mileage is between 4 and 10 mpg more than the old car then the credit is $3500.  If the difference is at least 10 mpg then the credit is $4500.
  • Applies to new cars of any country – domestic and foreign cars are all eligible.
  • The new car must have a combined fuel economy of at least 22 mpg.  See this website to find out the mileage for your car or this site to find your car.
  • The credit will be applied to the purchase of the new car.
  • The car buyer doesn’t have to file anything – the car dealer will handle the documentation.
  • The credit will not be considered as income for the car purchaser.
  • All the normal credits and rebates for the new car will still apply in addition to the ‘cash for clunker’ credit.
  • The trade-in car must have been owned by you and insured for the past year (ie 365 days).  You must provide documentation for this.
  • Car must be driveable!!

More articles on this issue

[edit Aug 30 – Cash for Appliances program announced – Get rebates for new fridge or other appliances.

Cash for Clunkers – Tax Rules

Is there a Cash for Clunkers tax?

Cash for Clunkers taxable income?

Cash for Clunkers taxable?

Cash for Clunkers Tax Rules

Who benefited from the Cash for Clunkers program?

Does Cash for Clunkers affect your taxes?

Cash for Clunkers tax rules

Cash for Clunkers tax rules – the Truth!

Tax rules and consequences of the Cash for Clunkers program

Cash for Clunkers Taxable Income Issue Resolved

Categories
Personal Finance

Back To School Cell Phone Deals

7-Eleven SpeakOut Wireless is one of the best pay as you go deals available in Canada. You pay $100 + tax and it is 20 cents a minute and 4 cents a text message incoming and outgoing. The airtime expires in 365 days. Here is the catch: they charge you 79 cent a month for 911 fees. The number of regular minutes that you have is slight lower than officially advertised. Here is how you would calculate the effective minutes: (125 – 12*.99)/.25 = 452 minutes a year. So it is slightly less than advertised 500 minutes a year. SpeakOut Wireless has one of the cheaper Canadian and US long distance rate of 16 cents a minute for this plan.

SpeakOut Wireless’ definition of long distance is different than other Canadian wireless carriers. If you are outside of your local calling area, all outgoing and incoming calls are considered long distance. However, SpeakOut Wireless’ local calling area is much larger than most Canadian wireless carriers. All numbers covered with the same area code is considered in the same local calling area. The entire southern Ontario with the area code of 519, 226, 416, 647, 905, and 289 is considered as one local calling area. SpeakOut Wireless’ local calling area and long distance policies are superior to its competitors in most cases. The local calling chart is available here.  Canadian area code map can be found here.

7-Eleven SpeakOut Wireless’ Back to School promotion is 50% off any SpeakOut Wireless phone. 7-Eleven SpeakOut Wireless recently released the Nokia 5130 XpressMusic for $139.99. With the 50% discount, Nokia 5130 XpressMusic would cost $70, a decent deal for a mp3 phone with a basic camera. Rogers sells the same phone for $99.99. The bad part is that 7-Eleven SpeakOut Wireless’ Nokia 5130 XpressMusic is locked, which means you cannot use this phone in US, Europe, or Asia with a local SIM card. It might be eventually possible to unlock this phone in the future. An unlocked Nokia 5130 XpressMusic in Hong Kong costs $164.99 CAD (1180 HKD). So the Nokia 5130 XpressMusic seems to be competitively priced from 7-Eleven SpeakOut Wireless.

The first year cost of this solution is ($100 + 70$) * 1.13 = $192.10 (5% GST, 8% PST)

Medium Usage without Contract

Virgin Mobile Canada has a monthly prepaid plan that is pretty good with no contract. You pay $20 a month for 200 minutes and 10% bonus credit with automatic topup by credit card.  So basically it is 10 cents a minute with an extra credit for add-ons.  Prepaid monthly plans come with call display, voicemail, minutes tracker, and no contracts.

Virgin Mobile’s Back to School promotion is a $50 dollar activation credit for Prepaid Phones. The activation credit can be used for the add-ons in combination with 10% bonus top up credit. There are some basic mp3 phones from Virgin Mobile like Samsung R610 for $79.99, Samsung Link for $99.99, and LG Rumour2 for $129.99.

In the first year, there should be a total of $74 of additional credit on the account from $50 activation credit and $2 a month top up bonus credit. Additional credit on Virgin Mobile prepaid account can be used for add-ons. Add-ons can be found here.

The biggest downside to Virgin Mobile prepaid is that 30 cents a minute is charged for Canadian and US long distance.

The first year cost of this solution with the purchase of Samsung R610 is ($79.99 +$20*12)*1.13 = $361.59. (5% GST, 8% PST).

Medium to Heavy Usage with Contract

If you need a regular monthly plan that is more comprehensive, you should get a 2 year or 3 contract with one of the big names. When searching for a plan and a phone, ask if any promotional or epp plan is available. It is usually around $45 a month after add-ons and taxes.  After a year or a year and half, you can call customer retention department and ask for a retention or loyalty plan, which offers two to three times the value of a regular plan at a slightly lower price for $30 to $35 including tax.

Bell, Rogers, and Telus have released their back to school student plans. Even though, these plans are better than retail plans, they are not as good as the retention plans or some epp plans.

$25 Plan Comparison

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$35 Plan Comparison

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$50 Smartphone Comparison

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These student plans are very expensive and are not ideal unless the cost of a part of the plan can be waived. One way of saving money on retail plan is to only get the Call Display without Voicemail. Fido, Koodo, Virgin Mobile and Solo Mobile are slightly more competitively priced if some of the features listed above are not needed.

Some basic examples:

The annual cost of a $30 retention plan is $30*12*1.13 = $406.80.

The annual cost of a $55 smartphone retention plan is $55*12*1.13 = $745.80.

The annual cost of a $40 retail plan is $40*12*1.13 = $542.40.

The annual cost of a $75 smartphone retail plan is $75*12*1.13 = $1017.

These costs are estimations and do not include the subsidized cost of a phone or contract break up fees. In conclusion, cell phone contracts can be very expensive, but if landline fees (approximately $25 a month) can be saved, the real cost of cell phone portability is not as high as it seems. Cell phones plan need to be customized to the individual’s needs and circumstances. Last, but not not least, you should always ask if there are any promotions since the salespeople are instructed not to tell their customers about some of the special promotions unless asked.

Going Over the Border to the US

US roaming minutes from Canadian providers can be really expensive. Customer retention departments at Bell and Telus have been known to give out some decent US roaming solutions. Rogers and Fido do have some US roaming plans and there is a possibility that customer service or retentions can give a discount off the retail price.

Tmobile pay as you go is the best in the US if more minutes are needed. Tmobile uses GSM so it is compatible with unlocked GSM phones by using a Tmobile SIM card. Unfortunately, Rogers and Fido lock most of their phones. For Tmobile pay as you go, the airtime is $100 US + tax upfront and there are 1000 minutes a year. This is equivalent to $8.34 US + tax a month for 83 minutes a month. Your usage is very flexible and instead of minutes, you can use it on text messages. In the US, pay as you go does not charge long distance on top of regular minutes. So feel free to call from one state to another. The only limitation with Tmobile pay as you go is the  $0.60 a minute to call from US to Canada.

Phone Cards

The most popular and reliable phone card in Canada is CiCi. There are no connecting fees and customer service can be reached if needed. It comes in denominations as low as $5. It expires in 6 months.

The phone card I use is called Link Calling Card. It comes in $5 and $10 denominations. The exact cost per minute is not specified and customer service cannot be reached from personal experience. However, I find that Link Calling Card provides at least twice as many minutes as a CiCi card if not more in some cases. Link Calling Card expires in 8 weeks. For people who use their phone cards often, I recommend trying $5 Link Calling Card if possible. Link Calling Card is available at many convenience stores.

Conclusion

The Canadian cell phone costs are higher than most developed countries. 7 Eleven SpeakOut Wireless is a decent solution for people with light usage and Virgin Mobile Monthly Prepaid is a decent solution for people with medium usage. Retention plans are the ultimate goal for people with high usage or data needs. Find the plan that fits your needs and read the contract carefully before signing anything.

Categories
Personal Finance

When Do You Buy New Items Or Just Replace Parts?

roller-bladesI’m a big fan of inline skating – or “roller blading” as I like to call it.  I got my first pair of skates which were the original Rollerblades back in the mid-80s.  Rollerblade was the original inline skate company and I had to order them from somewhere in Quebec.  It wasn’t until probably the 90’s when they became more mainstream and other sporting good companies got in on the act.

I tend to run my sporting equipment into the ground before replacing it.  This has nothing to do with being frugal or environmentally conscious but rather it’s just easier to keep using what you have as long as it still works.  Laziness is also a factor as well.

My first pair of roller blades I used until the wheels literally stopped turning.  Then about 10 years ago I bought a new pair which are still in good shape but unfortunately I never rotated the wheels and the front left wheels got worn down to the point of falling apart.  I was still able to use the blades without that front wheel but I figured I should get new wheels or blades.

I ended up going to Sporting Life and buying a new set of wheels for $100 which compared to $260 for the blades I considered buying.  One of the main reasons for this decision was that I liked the bindings on my old blades better than the “new” style of bindings which you see in the photo.  My skates are more like downhill ski boots.  Plus of course, it was a lot cheaper.

I’ve had situations in the past where I just replaced a part and the final results didn’t work out very well.  Hockey skate blade replacement, buying used tires for my car (really dumb) are some things that I would recommend avoiding.

Do you have any examples of where you where able to just replace a part and it was successful or not?  Are there some things you would just automatically buy a new item?

Photo credit: Oh Barcelona

Categories
Announcements

Linkstuff For Aug 19

The Toronto Star had a great post on the US financial institutions that benefited greatly from bailouts but for some reason aren’t returning the favor.

Nancy Zimmerman (Money Coach) is thinking of buying a house on impulse – go and give her some advice!

Remodeling This Life wonders where time went now that her kids are about to start school. Very nice post.

One of the more amusing and clever posts I’ve read in a while was from WiseBread – Remember where you parked your car and 35 more practical uses of a digital camera.

The Financial Highway had some tips to keep emotions out of investing.

The Bag Lady had an interesting take on the Cash for Clunkers program – she says let’s burn down houses.

Million Dollar Journey had a great post by staff writer Kathryn about whether to buy or rent a house when she moves to Toronto. Tons of great comments.

Canadian Capitalist is finally getting around to starting a TFSA.

ABCs of Investing wrote about investment real return.

Carnivals

Carnival of Everything About Personal Finance

1031 Exchange August Edition

Categories
Personal Finance

Calculating The True Cost Of Your Vacations

Everyone loves a nice vacation – whether it involves driving a short distance to visit family for a couple of days or flying to the other side of the globe to go snowboarding.  The big problem with vacations however is the cost – most of us have budgets that are limited in some way and we want to get the best value for our vacation dollar.   Nobody wants to go into debt for a vacation.

Is it better to do a 3 week trip to Europe once every 2 years or go on 1 or 2 more modest vacations per year?

One trick which I have done in the past when trying to determine the costs of a trip is to figure out the “net” cost of the vacation.  Everyone knows that when you go on a trip that there will be quite a few costs such as airfare, gasoline, rentals (cars, accomodation), food, tourist attractions etc.  What some people don’t realize is that when they leave their normal life for a while that they are also saving some money which should be subtracted from the cost of your vacation.

Go on vacation and save money?  I don’t think so!

It’s true – and I’ll give you an example.  If your family normally spends $200 per week on groceries and household items then if you go on vacation for 1 week you will save $200 on groceries and household items.  When you calculate how much a trip is going to cost (or has already cost) you should factor in these “savings” to get the net amount of the trip.

For example if a family goes on a vacation and spends $2000, most people would to say the trip cost $2,000.  But if they factor in money that they didn’t spend when at home (let’s say $400) then the trip only cost a net amount of $1,600 which is significantly less.

Obviously you would need to have a very frugal trip to have an overall net saving by going on vacation but if the trip is reasonably modest then netting out your “normal” expenses could make the trip quite cheap.

Why do this?

One reason is that you like to know exactly how much things cost – I have always calculated the net costs for big trips and it makes me feel better to know that a trip was a bit cheaper than the gross costs.

Another good reason is that if you are trying to make decisions about future vacations, it’s good to have the proper cost information to make an informed decision.

Lastly – it might allow you do longer or more expensive vacations.  If you budget $2,500 for a trip and don’t subtract the $500 you would normally spend during that time then you will actually end up spending $2,000.  This isn’t a bad thing but it’s better to make that choice ahead of time.

How to do it?

Add up your expenses that result from you being at home.  Food, some utilities, gasoline, commuting expenses are good examples.
Don’t include any fixed costs – things like car insurance are going to happen even if you don’t use your car.  You don’t have to be exact with your figures – estimates are fine.

Some factors to think about

The two biggest factors which will influence the effectiveness of this “accounting” are:
1)  Daily cost of trip – The more expensive the trip then the less the “netting” will have an effect.  If you are spending $5,000/week in Hawaii then the fact that you are saving $350éweek by not being at home isn’t going to be all that significant.
2)  Daily costs of “nettable” home expenses – If your regular daily expenses are very low then removing them from the vacation cost won’t be as significant as it will for someone who eats out a lot and burns a lot of cash on a regular basis.

In the example noted in the first paragraph it’s likely that the cost of a 3 week trip to Europe won’t be reduced by a whole lot by netting the home expenses so it will still be an expensive trip.  However, if the alternative trips are cheap enough (the 2 weeks per year trips) then it’s possible that the cheaper trips might be very cheap in comparison to the Europe trip after netting.

This is significant because it the decision between doing shorter more expensive trips or longer cheaper trips (or more cheaper trips) might point more towards doing the cheaper trips since you will get a lot more bang for your buck especially after netting the costs.  Most people who are working don’t have a lot of vacation so for them – netting out the expenses will just let them budget more accurately for their trips.  People who have more time for vacations ie teachers, retirees can use this method to decide between the higher budget short trip or lower budget longer trip.

Summary

When going on vacation, subtract any expenses which you would normally incur while living at home but that won’t occur if  you are away.  This could alter your thinking on the type and length of trips you take.

Categories
Personal Finance

Heading Home To Questrade Discount Brokerage

As I mentioned recently, I got my 1% rebate from RBC and want to come crawling back transfer my money back to my favorite broker – Questrade.  There is one huge reason why I’m such a fan of Questrade and that is money – their $5 trades are the cheapest in the business and that is all I care about.  I also like their customer service – I’ve rarely had to wait when I phone.

Can’t I just go to any new brokerage and get my fees covered?

Yes, but you have to negotiate the transfer fees and will probably have to pay $20-$30 every time you make a trade.  As a huge fan of low-cost investing – I go for the cheapest fees.

I’d like to try out Questrade but I’m not a returning client

Good idea – in that case you can sign up here or click on the banner after the text.

Is it hard to transfer to a different brokerage?

It’s not hard but it does take some time and is a pain in the butt.  However, I calculated that I will save about $150/year in trading fees by moving from RBC ($10 trades) to Questrade ($5) fees.  $150 a year indefinitely is well worth a bit of time to make it happen.  Also – I’m not a very active trader so your savings could be larger if you trade more.

Questrade review

Questrade Discount Brokerage review

Categories
Personal Finance

Manulife Dividend Cut and Links

Manulife Financial cut its dividend by a whopping 50%.  They still made $1.8 billion in Q2 so if anything it’s probably a good buy since the stock dipped 15% today.   The company hasn’t done a good job managing the risk of its variable-annuity products over the last few years so this move was made to improve the balance sheet and lower risk.

This just goes to show that diversification is a key strategy in investing.  It also shows that stock picking is hard – it doesn’t matter how well a company is doing or how long it has been doing it – you just don’t know what is really going on inside.  Some good financial statement analysis can go a long way.

Some links

Million Dollar Journey talks about the purpose behind your financial goals.

Canadian Capitalist had a neat post on the merits of investing in collectibles such as rare stamps and coins.

Where Does All My Money Go found the impossible – free investment management.

Bible Money Matters goes through his experience with signing up for Lending Club peer to peer lending.

Cash Money Life has some unexpected ways a baby can change your budget.  Patrick should know since he just had a baby.

Moolanomy explains how to find the best online high yield bank accounts.  (American)

Military Finance Network goes over Dave Ramsey’s Baby Steps.

Carnivals

Economy and Your Finances Carnival

48th Bankruptcy and Debt Carnival

Carnival of 20 Something Finances

Carnival of Financial Planning

Money Hacks Carnival

Festival of Frugality

Categories
Real Estate

How To Value Real Estate

Valuation of real estate properties is quite difficult – in fact it can really only be done within a fairly broad range since in my opinion it is just too hard to try to accurately predict the sale price of a house.  The title of this post should have been “How to guess at real estate prices”.  🙂

A few years ago I spent a lot of time looking at various houses, taking notes and finding out the eventual sale price.  The reason I did this exercise was partly because I enjoyed going to open houses but also because I knew I was going to be in the market for a new house and I wanted to learn the market better.  My theory regarding house valuation was that if I looked at enough houses and analyzed the different properties and the sale prices – I should be able to gain some sort of expertise and should be able to accurately predict the value of various houses.  My theory was a failure as I couldn’t seem to gain much accuracy for various houses that I tried to predict the sale price.

I was able to learn the local housing market to some degree but if I could guess within 10% of the final price then that seemed to be as good as I could do.  A plus or minus 10% error on a $500k house is not all that useful although I was able to know when sellers set the price below market for a bidding war.  Of course I couldn’t tell what the final price would be.

Look at lots of houses

The best advice that I have for a house hunter is to look at as many houses as they can, take notes (or keep the mls listings) and find out and write down the final sale price.  The purpose of doing this is to learn the local housing market and get a feel for what kind of house will go for various prices.  You might be asking why this is necessary if you have an agent….well…..this post might give you a clue!  I think a good agent who knows the area could be a great resource as far as knowing house valuations but unfortunately not all of them will be forthcoming if they aren’t familiar with your area.  If you have the time, then the best strategy is to learn the local housing market yourself.

This also applies if you are selling your house.  In fact it’s easier to do if you are only looking at houses similar to your own since there probably won’t be that many of them.  This is useful to try to set an asking price and also to counter your agent who will generally have different ideas than you about selling prices.

Land can be a huge factor.

One of the “truisms” of real estate that everyone always says (to me at least) is that detached houses command a premium over semi-detached.  While I can certainly accept this as being true, I’ve always been skeptical that there is much of a premium involved.  After all, other than the fact that a wall is shared, the house can be very similar to a detached.

As a bit of background – in my area there are probably 65% semi-detached houses and 35% detached houses so unlike some areas, there is nothing “unusual” about a semi.   It’s also a very urban setting so land values are quite high.

More background – for any American readers –  what I call “detached” (standalone house having no contact with any other structure) you might call “a house”.   What I call “semi-detached” you probably call “duplex” or “semi-attached”.

Detached/semi-detached was one of the “factors” that I tried to analyze in my great house valuation project.   After looking at quite a few houses, I really couldn’t see any premium for detached.  Part of the problem of course was a difficulty in finding houses that were similar in many respects except for the detached component.  I concluded after a while that the detached premium was probably low enough (<5%) that I couldn’t measure it properly.

It wasn’t until much later that I realized how high the land value was in the areas I was looking at.  Since most of the houses were in reasonably good condition (for old houses) I had assumed that buyers were paying quite a bit for the house along with the land.  As it turns out the buyers were generally paying a huge percentage for the land and a surprisingly small amount for the house.  I figured this out by eventually looking at some houses that were teardowns or complete guts.  Since the house was worth very little in those cases, clearly the buyer was just paying for the land.  In one particular area I looked at – most houses were selling for around $450k.  Much to my surprise, there were a few houses purchased for around $350k, $360k that were torn down which leads me to believe that $450k houses were in fact only $100k houses sitting on $350k pieces of land.

What does this have to do with detached/semi-detached?  Well, given that the land value was such a dominant factor in my local house prices, that meant that any premiums/discounts on the houses themselves are minimized.  Ie if the detached premium is 20% but the house is only worth $100k and the land is worth $350k then a semi-detached equivalent would be worth only $20k less which I wouldn’t be able to measure.

Of course semis are different in that it’s a lot harder to tear down a semi unless you buy both halves so it’s not accurate to say that the land under a semi has the same worth as a similar sized plot under a detached house but I’m assuming it’s close enough.

I have some other main “factors” which I think contribute to house prices which I’ll hopefully share in a future post.