Wednesday, April 24, 2013

Is There a Taxing Reason for the Marriage Season?

I divorced in 2012 and for the 2012 tax year, I was surprised by a federal tax refund and a state tax bill of similar amounts.  I thought I would owe more to both.  This led me to think about the vagaries of our tax system and, in particular, one that is spoken of often, the marriage tax penalty.  Does it really exist?


First, we’ll use 2013 tax law, where it is true that the standard deduction for married couples ($12,200) is twice the standard deduction for single taxpayers and married couples filing separately ($6,100).  Also, the 10% and 15% marginal tax brackets for married couples are twice the size of those for single taxpayers.  Taken together, there would appear to be a desire to have no marriage tax penalty in the tax code.  That is, however, where the story begins, rather than ends.


Let’s dig a little deeper, while using the table below created from the 2013 Tax Rate Schedule (the tax tables used are in Forbes ).  We hold taxable incomes constant, below, in order to compare the differences in taxes.  (We have purposely ignored all phase outs.)

Taxable Income


Married Filing Jointly

Single Tax/Married Tax






















The ratio of single tax/married tax in the fourth column indicates that the single tax is greater for single people and that the difference is not constant.  This comes from a multitude of factors, including a different number of exemptions, changes in tax brackets, and cultural biases.  For example, if you are single and have $450,000 in taxable income, you could marry someone with no income and no deductions, reducing your taxable income by the amount of the exemption ($3,900) to $446,100.  This results in a tax owed of $124,481 for a tax savings of $11,483 ($135,964-$124,481).  This is clearly a penalty for being single.


On the other hand, what if your spouse works?  Let’s compare two, two-person households, with each person earning $100,000 in taxable income.  If the household is made up of two single persons, they each pay $21,293 or their combined household taxes would be $42,586.  If they were married with joint taxable incomes of $200,000, they would pay $43,465 in taxes, or $879 more than the two single persons household.  Thus, a marriage tax penalty exists and it results from the fact that single taxpayers are in the 25% marginal tax bracket until taxable income reaches $87,850, while married couples leave the 25% marginal tax bracket and enter the 28% marginal tax bracket at a taxable income of $146,400 – which is less than twice $87,850 ($175,700).  The married couple pays relatively more tax, given that more of their income is subject to the 28% marginal tax bracket.


How can both a single and a married tax penalty exist?  The answer is relatively simple.  The tax system began during a time when families typically had one earner.  When two earners marry each other, they are pushed into higher tax brackets, as they both have income.  This is not true when one earner makes substantially less than the other. 


Take, for example, a couple with $200,000 in taxable income.  Let’s let one member make $176,000, while the other spouse earns $24,000.  If they were single, spouse one would pay $42,573 in federal taxes on the $176,000 in taxable income, while spouse two would pay $3,156 on the $24,000 in taxable income.  Combined, their tax bill would be $45,729 or $3,143 more than if they were single with equal taxable incomes of $100,000 and $2,264 more than if they were married with total taxable income of $200,000.  This highlights the fact that the tax benefit of being married is greater, the greater the disparity in the income of the two spouses.  This difference rewards the traditional, outdated view of the household as consisting of a primary earner with, perhaps, a secondary lower-paid earner.

What is the bottom line?  There really isn’t one.  There exist both single and married penalties in the tax code.  In fact, the tax code is full of implicit and explicit taxes and subsidies which have an effect on consumer behavior. Politicians made it that way to steer money toward beneficial (i.e., favorite) activities and away from those they perceive to not be beneficial.  These create a complex tax code which confuses taxpayers and is part of the reason why there is such criticism of the tax system.


With respect to marriage, one does not base their decision to marry on the tax code.  At least they shouldn’t.  If one spouse earns substantially more than the other, it might pay a little to move the wedding forward to December, from February.  On the other hand, if the couple earns substantially equal incomes, they might want to delay the wedding from December to January.  The odds are pretty good that the choice of whether they can get the room in which to hold the wedding reception will weigh more heavily on the date decision, than their potential tax bill.


Regardless, marriage is not about money but, for financial success, it does take some money.  If you want to marry, marry.  Do not marry for, or not for, the tax benefits.  And, don’t forget what Frank Burns, the M*A*S*H character said in 1975,”Marriage isn’t all that it’s cracked up to be.  Let me tell you, honestly.  Marriage is probably the chief cause of divorce.”  Simply put, if you don’t want to get divorced, don’t get married.  That’s like a failure once said, “I didn’t want to fail, so I didn’t try to succeed.” 


Friday, April 19, 2013

Choosing a credit card: Read the fine print

Graham McCaulley, Extension Associate, MU Personal Financial Planning Extension


A credit card lets you buy things and pay for them over time. Using a credit card is like any borrowing — you have to pay the money back. 


Credit card features vary from card to card and there are several types of cards to choose from. To get the best deal, compare fees, charges, interest rates and benefits. Some credit cards that look like a great deal at first may really be a bad deal when you read the terms and conditions of use and see how the fees could affect your available credit.


Credit card terms


Important terms of use must be disclosed in any credit card application or for cards that don't require an application. Here are the terms to ask about when you consider credit offers.  


Many credit cards charge membership or participation fees. These fees have a variety of names, like "annual," "activation," "acceptance," "participation" and "monthly maintenance" fees. Fees may appear monthly, periodically or as one-time charges. They can have an immediate effect on your available credit.


In 2010, rules from the Credit Card Accountability Responsibility and Disclosure Act (Credit Card Act), as well as additional Federal Reserve regulations, went into effect to create new credit card consumer protections and disclosure requirements. These rules were further strengthened by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act). For example, these rules specify that fees, such as an annual fee or application fee, cannot total more than 25 percent of the initial credit limit. 


Some credit cards add transaction fees and other charges if you use them to get a cash advance, if you make a late payment or if you go over your credit limit. The rule mentioned above regarding fees being less than 25 percent of the credit limit does not apply to these type of penalty fees. 


Annual percentage rate (APR) is a measure of the cost of credit, expressed as a yearly rate. It must be disclosed before your account can be activated, and it must appear on your account statements. 


The card issuer also must disclose the periodic rate. That's the rate the issuer applies to your balance to determine the finance charge for each billing period. 


Some credit card plans let the issuer change the APR when interest rates or other economic indicators — called indexes — change. The rate change is linked to the index's performance and often varies. Rate changes can raise or lower the finance charge on your account. Before your account is activated, you must also be given information about any limits on how much and how often your rate may change.


If your card does not have a variable interest rate tied to an index, the credit card companies generally cannot raise your APR for the first 12 months after you open your account, and if the rate is going to be raised after that point, you should be given 45 days notice and the opportunity to cancel the card before the new rate takes effect.


A grace period, also called a "free period," lets you avoid finance charges if you pay your balance in full before the date it is due. Knowing whether a card gives you a grace period is important if you plan to pay your account in full each month. 


Balance computation method is how the card issuers calculate your finance charge. If you don't have a grace period, it's important to know this. Which balance computation method is used can make a big difference in how much of a finance charge you pay — even if the APR and your buying patterns stay the same.  


Many credit card companies offer incentives for balance transfer offers — moving your debt from one credit card to another. All offers are not the same and the terms may be complicated.  


Many credit card issuers offer transfers with low introductory rates. Some issuers also charge balance transfer fees. In addition, if you pay late or fail to pay off your transferred balance before the introductory period ends, the issuer may raise the introductory rate and/or charge you interest retroactively. When you make payments, they are to be directed to highest interest balances first.


Balance computation methods


The average daily balance method credits your account from the day the issuer receives your payment. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made that day. Although new purchases may or may not be added to the balance, cash advances typically are included. The resulting daily balances are added for the billing cycle. The total is divided by the number of days in the billing cycle to get the average daily balance.  


Adjusted balance is usually the most advantageous method for cardholders. The issuer determines your balance by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren't included. 


The previous balance is the amount owed at the end of the previous billing period. Payments, credits and purchases made during the current billing period are not included. Some creditors exclude unpaid finance charges.  


Credit card companies can only impose interest charges on balances in the current billing cycle (i.e., no two-cycle billing). If you don't understand how your balance is calculated, ask your card issuer. An explanation also must appear on your billing statements.


Other costs and features


Credit terms vary among issuers. When considering a credit card, think about how you plan to use it:  

        If you expect to pay your bills in full each month, the annual fee and other charges may be more important than the periodic rate and the APR.

        If you use the cash advance feature, pay attention to the APR and balance computation method.

        If you plan to pay for purchases over time, the APR and the balance computation method are major considerations.


You'll also want to consider if the credit limit is enough, how widely the card is accepted and the plan's services and features.


Your credit card agreement explains what may happen if you default on your account. For example, if you are one day late with your payment, your issuer may be able to take certain actions, including raising the interest rate on your card. Some issuers' agreements even state that if you are in default on any financial account, those issuers' will consider you in default for them as well. This is known as universal default. 


Some cards with low rates for on-time payments apply a very high APR if you are late a certain number of times in any specified time period. This is a type of special delinquency rate.


Help and information


Questions about a particular issuer should be sent to the agency with jurisdiction.


Office of the Comptroller of the Currency regulates banks with "national" in the name or "N.A." after the name:Office of the OmbudsmanCustomer Assistance Group1301 McKinney Street,Suite 3450Houston, TX 77010toll-free 800-613-6743


Board of Governors of the Federal Reserve System regulates state-chartered banks that are members of the Federal Reserve System, bank holding companies, and branches of foreign banks:Federal Reserve Consumer HelpP.O. Box 1200Minneapolis, MN 55480toll-free 888-851-1920 (TTY: 877-766-8533)


Federal Deposit Insurance Corporation regulates state-chartered banks that are not members of the Federal Reserve System:Division of Supervision and Consumer Protection550 17th Street, NWWashington, DC 20429toll-free 877-ASK-FDIC (275-3342)


National Credit Union Administration regulates federally chartered credit unions:Office of Public and Congressional Affairs1775 Duke StreetAlexandria, VA


Office of Thrift Supervision regulates federal savings and loan associations and federal savings banks:Consumer Programs1700 G Street, NWWashington, DC 20552toll-free


Federal Trade Commission regulates non-bank lenders:Consumer Response Center600 Pennsylvania Avenue, NWWashington, DC 20580toll-free 877-FTC-HELP (382-4357)


The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters consumer complaints into a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.


Source: Procter, B., & McCaulley, G. (2010). Choosing a credit card: Read the fine print (Research Brief). Columbia: University of Missouri, Human Environmental Sciences Extension. 


Wednesday, April 10, 2013

The Battle of the IRAs: Roth versus Traditional

I am surprised that the question I am asked most often is, “Should I get a Roth IRA or a Traditional IRA?”[i]   Most people know that a conventional IRA allows you to put money in savings without paying taxes on the money before you make the deposit.  When you withdraw the money, in retirement, ordinary income taxes are levied on the entire withdrawal.   On the other hand, with a Roth IRA, deposits are made after you pay taxes.  Then, upon retirement withdrawal, no taxes are due.  Like most financial matters, consumers try to make this decision much harder than it actually is.  First, I’ll give my answer and, for most people, the Roth is preferred.  I will explain why, later.  Let us begin by comparing the options with math, so we understand the basics.  As with most math problems, we have to set forth some assumptions. 

·         We will assume a person in the 25% marginal tax bracket.

·         We assume the choice is between a deposit of $5,500 in before-tax dollars (the 2013 limit for IRA deposits) into a conventional IRA or $4,125 in after-tax dollars into a Roth IRA[ii].  The reason for the difference is that we are holding current earned income constant, as the $5,500 in earnings becomes $4,125 after paying 25% in taxes.

·         The account is invested for 40 years at 8%.

Under these assumptions, the conventional IRA will grow to $119,485 which, upon paying taxes at 25% on withdrawal, becomes $89,614.  The $4,125 Roth deposit will grow to $89,614, as all taxes have been paid before the original deposit.  Conclusion, if we hold the earnings required to make the initial deposit and the tax rate constant, there is no difference in what the retiree has to spend in retirement.  If, however, their tax rate is greater in retirement than while working, the Roth IRA would best her traditional cousin, and if the household’s tax rate is lower in retirement, the traditional IRA would best his Roth cousin.   


The reasons why the Roth is preferred for most people follow.


1.       If your company offers a Roth 401k, you may make larger contributions.  For 2013, the maximum is $17,000, unless you are a geezer like me and over 50.  If you are of such vintage, the maximum is $23,000.

2.       If you need money from your Roth IRA, you can withdraw you contributions (not interest, dividends, or capital gains) for any use without penalty, as you’ve already paid the taxes.  Thus your Roth can double as a savings account.  (It is for your retirement so leave it alone!)

3.       When you die, the money that remains in your Roth IRA is not taxable income.  Money that is in a traditional IRA has income taxes that must be paid by your heirs.

4.       Since taxes have been paid on the corpus of the Roth IRA, your investment decisions will not be affected by tax considerations.   Conventional IRAs are often held out as a better place to invest in securities that pay interest and dividends, as these will not be taxed until withdrawal.  This is, however, also true with capital gains.  The bad news is that those capital gains will be taxed at greater ordinary income rates, as opposed to capital gain tax rates, if held outside of the conventional IRA.

5.       With a traditional IRA you must begin to take withdrawals (i.e., pay taxes) on the money at the age of 70½.  (The government wants to get the money you “owe” them.)  Since you’ve paid taxes on the Roth, there are no requirements for withdrawals and, thus, increases the use of the Roth IRA as tool for bequests.  You can also continue to make contributions to a Roth IRA, after the age of 70½.  You cannot contribute to a traditional IRA after the age of 70½.

6.       Roth IRA income is not subject to taxes and, thus, may prevent your retirement income from being large enough to cause your Social Security to become taxable.  Moreover, with a lower taxable income, you are less likely to be charged greater premiums for Medicare.

7.       Lastly, both Roth and conventional IRAs allow you to withdraw $10,000, once in your lifetime, if you are a first-time homebuyer, or a buyer who has not owned a home for two years.   This can be a wonderful opportunity for a young person to use their retirement plan, of either flavor, to purchase a home.  The only provision is that the money has to have been in the plan for at least five years.

I hope this helps answer your questions or, if you are young, gets you started on saving some of your earned income in a retirement plan.  While the laws governing these options may change one thing will never change, financial success begins with your disciplined saving plan.


[i] We will use the term IRA with the understanding that the information is able to be generalized to 401k, 403b, and other retirement plans that have both conventional and Roth options.

[ii] If you are eligible in 2013, you can contribute up to the $5,500 maximum into the Roth IRA but, in order to do so, you’d have to use earnings of $7,333, in order to have $5,500 after you pay taxes of 25%.  We are holding earnings constant at $5,500, in order to have a fair comparison.

Friday, April 5, 2013

Investing in Yourself: An Economic Approach to Education Decisions

Each month the Federal Reserve Bank of St. Louis publishes a newsletter titled Page One Economics, which is a selection of useful economic information, articles, data, and websites compiled by the librarians of the Federal Reserve Bank of St. Louis Research Library. Recently there was an article titled “Investing in Yourself: An Economic Approach to Education Decisions” that caught my eye and I felt it would be a great fit for the Financial Tip. It is re-printed here with permission from The Research Library. We encourage your comments and thoughts at


There is a classroom version of Page One Economics available for teachers for free at:


To subscribe to their newsletter or for more information and resources, visit their website and archives at


The views expressed are those of the author and do not necessarily reflect the official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, the Board of Governors, the University of Missouri, the Personal Financial Planning Department or The Office for Financial Success.


When I travel around the country, meeting with students, business people, and others interested in the economy, I am occasionally asked for investment advice…I know the answer to the question and I will share it with you today: Education is the best investment.”—Federal Reserve Chairman Ben S. Bernanke, September 24, 2007(1)


One of the most important investment decisions you will ever make is the decision to invest in yourself. You might think that investment is only about buying stocks and bonds, but let’s take a step back and consider investment a little differently. Economists use the word investment to refer to spending on capital, which can be either physical capital (tools and equipment) or human capital (education and training). Let’s briefly look at each type.


Investing in Physical Capital


A firm invests in itself by buying capital that it uses to improve what it does. In other words, it invests in physical capital to earn higher profits in the future. For example, a firm might invest in new technology to increase the productivity of its employees. The increased productivity raises future revenue (income earned by the firm) and profits (revenue minus costs of production). Seems like an easy decision, right? Well, before a firm invests in physical capital, it must consider three very important points.


First, a firm invests in technology now with the expectation that it will lead to higher revenue and expected profits in the future. But this expectation might not be realized. For example, the technology might not increase productivity as much as the firm expected. Or the demand for the good the firm produces might decrease, resulting in less revenue than expected.


Second, a firm considers other investment alternatives. A firm can invest in many ways to raise future profits. For example, maybe investment in technology A results in profits, but investment in technology B, which is more expensive, leads to much larger profits.


Third, a firm also considers the potential return on investment (ROI). The ROI is a performance measure of the effectiveness of an investment. It is calculated as the net gain (gain from investment minus cost of investment) divided by the cost of investment. A firm compares the expected gain with the investment cost to make a sound decision. Of course, the result of any investment lies in the future and must be projected. Predicting the future is always tricky; therefore, any uncertainty about the result must also be considered.


Investing in Human Capital

Investment in human capital is the effort that people expend to acquire education, training, and experience. People invest in their human capital for the same reason a firm invests in physical capital: to increase productivity and earn higher income. An added benefit is the increase in job opportunities for those with more education: The unemployment rate for those with a bachelor’s degree is 4.1 percentage points lower than for those with only a high school diploma. Of course, higher education is expensive. To increase the likelihood that the investment will pay off, let’s consider three points.


First, an investment in human capital might not pay off. Just as a firm’s investment in physical capital involves risk, there is also a risk that the expected outcome from investing in human capital will not be realized. Research consistently shows a correlation between more education and higher income (see the second graph), but there is no guarantee. One way to think about the ROI in human capital is the college wage premium, which is the percent increase in earnings of those with a bachelor’s degree compared with those with only a high school diploma. Recent research suggests that the college wage premium has been growing—from 40 percent in the late 1970s to 84 percent in 2012.2


Second, people should consider what kind of an investment to make. Getting an education will most likely lead to higher income, but there are vast differences in the projected income and job opportunities of the various courses of study available. For example, according to the Bureau of Labor Statistics (BLS), an elementary schoolteacher with a four-year degree earned $51,380 (median) in 2010,3 while a computer programmer with a four-year degree earned $71,380 (median) in 2010.4 Both earned a higher income than they would have if they had not acquired a college degree, but the difference between the median earnings is significant.

The job opportunities available in different professions also vary. The BLS forecasts job outlooks for various occupations. For mechanical engineers (2010-20), the BLS forecasts job growth of 9 percent,5 while for registered nurses job growth of 26 percent is expected.6 Again, there is a significant difference. Given these facts, does that mean that you should not become an elementary schoolteacher? Does it mean that you should consider only computer programming or nursing? No, but the median income and the expected job growth rate are two factors to consider when making decisions about future education and training. In fact, there are many opportunities to gain training and valuable job skills besides the usual college route. Vocational, technical, and trade schools teach specific, practical jobs skills that can lead to a good job within 2 to 4 years. For example, many such schools offer programs in computer-aided design and drafting (CADD); law enforcement; heating, ventilation, and air conditioning (HVAC); and information technology (IT).


Third, people should consider the cost of various kinds of educational institutions when they think about investment in education. For example, the average cost of attending a four-year public university (tuition, room, and board) from 2007 to 2011 was $58,623, while the average cost at a four-year private university for that same period was $125,604.7 Does that mean you should consider only public universities? No, but cost should be considered in making your decision. The ROI for a would-be elementary schoolteacher would be higher if he or she chose to attend a four-year public university.




A firm invests in physical capital in an attempt to increase its revenue (income) and potential profit, but only after considering the return on investment. People might consider using a similar strategy when deciding whether and how to invest in their own human capital.



1 Bernanke, Ben S. “Education and Economic Competitiveness.” Speech presented at the U.S. Chamber Education and Workforce Summit, Washington, D.C., September 24; 2007;

2 Jonathan, James. “The College Wage Premium.” Federal Reserve Bank of Cleveland Economic Commentary, 2012, No. 2012-10, August 8, 2012;

3 Bureau of Labor Statistics. “Kindergarten and Elementary School Teachers.” Occupational Outlook Handbook, March 29, 2012a;

4 Bureau of Labor Statistics. “Computer Programmers.” Occupational Outlook Handbook, March 29, 2012b;

5 Bureau of Labor Statistics. “Mechanical Engineers.” Occupational Outlook Handbook, March 29, 2012c;

6 Bureau of Labor Statistics. “Registered Nurses.” Occupational Outlook Handbook, March 29, 2012d;

7 National Center for Education Statistics. “Fast Facts: Tuition Costs of Colleges and Universities.” See



Capital: Goods that have been produced and are used to produce other goods and services. They are used over and over again in the production process.

Human capital: The knowledge and skills that people obtain through education, training, and experience.

Investment: The purchase of physical capital goods (e.g., buildings, tools and equipment) that are used to produce goods and services.

Investment in human capital: The efforts people put forth to acquire human capital. These efforts include education, training, and experience.

Productivity: The ratio of output per worker per unit of time.

Profit: The amount of revenue that remains after a business pays the costs of producing a good or service.

Return on Investment (ROI): A performance measure of the effectiveness of an investment. ROI is calculated as the net gain (gain from investment minus cost of investment) divided by the cost of investment.



Ryan H. Law, M.S., CFP®, AFC


Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director


162 Stanley Hall

University of Missouri

Columbia, MO 65211


573.882.9211 (office)

573.884.8389 (fax)