Personal Finance

Reduce your California tax withholding to avoid an IOU next April

As far as I know, California state has raised the tax withholding rates twice this year. The first was for payrolls starting from May 2009 and the second is for payrolls starting from November 2009. The latest increase is reported in this LINK.

If I remember correctly, the increase in May 2009 was due to the increase in the tax bracket from 9.3% to 9.55%. This led to the corresponding increase in withholding from 9.3% to 9.55%. This is a reasonable change (I am just saying that the change in withholding is logical; NOT that the increase in tax rate is in any way logical in a recession).

2009-11-02_CA tax old

Above: Tax withholding rates (before 11/1/09)


2009-11-02_CA tax new

Above: Tax withholding rates (from 11/1/09)


In the most recent increase, the withholding rate was increased by 10%. For most people, this  increases the withholding from 9.55% to 10.505%. There is no logical reason behind this; the only reason for this was that the state government wants an interest free loan from the tax payers.

Below are some comments reported in the LA times regarding this change:

“Many families are sitting at their kitchen table wondering how they’re going to make ends meet,” said state Sen. Tony Strickland (R-Thousand Oaks). “At the same time, the state of California is taking a no-interest loan.”

Such temporary measures as the withholding tax increase don’t really fix the budget gap, “they just more or less hid it,” said Christopher Thornberg, a principal with Beacon Economics in Los Angeles. “I call it a fraud.”

But there is a way out of this:

Savvy taxpayers can get around the state’s maneuver by increasing the number of personal withholding allowances they claim on their employer tax forms, said Brenda Voet, a spokeswoman for the state’s Franchise Tax Board.

“People can get out of this,” she said, noting that most people would have to change their allowances through their employers. California’s budget leaders are banking on the hope that most won’t.

This is exactly what I did. I submitted the DE-4 form to slash my additional state tax withholding to zero and added the corresponding allowances as provided by the withholding guidelines. This will bring me very close to the 90%-mark for the amount of taxes to be withheld without paying an under-withholding penalty come April 15, 2010.

If you are in a situation to already receive a refund next year, take some time to update your withholding by completing the DE-4 form

http://www.edd.ca.gov/pdf_pub_ctr/de4.pdf

For all you know, as it already happened this year, when it is time to get your refund, the state might not even have the money to pay you and you will get an IOU instead. I would rather owe the state money than the other way round.

Additional links

[1] http://www.bogleheads.org/forum/viewtopic.php?t=45134&mrr=1257174149

[2] http://online.wsj.com/article/SB10001424052748703932904574511923279377100.html

[3] Sign the petition to repeal this additional withholding — No to Sacramento!

Refinance Started

I have been watching the mortgage interest rates diligently for the past two to three weeks. Yesterday, I kicked off the refinance process.

I had already obtained quotes directly from the big banks (Bank of America, Wells Fargo & Chase) but most of their rates included an one point fee (which I do not want). And even with that, their rates were not very competitive.

I also obtained several quotes from brokers using Zillow’s online mortgage quote system. One of the quotes actually looked promising and I got to talk to the broker who called back quite promptly. His quote (for 9/28/09) was:

  • 30-yr fixed, “conforming” loan (<$625.5k) @4.875% with zero point. Fees $2800 ~ $3000 out-the-door.

By “out-the-door”, he meant that it included lender fees plus title charges and recording fees (but excludes prepaid items like home insurance or interest). This broker had a handful of reviews, most of which were good. But one negative was that the loan required impounding for property taxes and insurance. To waive this,  an additional fee of $780 was required, bringing the total closing costs to $3600 ~ $3800 (note: my LTV or loan-to-value, is below 70% so a high LTV was not the reason for the impound).

I then looked at the credit unions in my area (San Francisco bay area). The most promising rates were from Star One credit union. Their rates yesterday were:

  • 30-yr fixed “conforming” loan (<$625.5k) @5.00% with zero point.
  • 20-yr fixed, “conforming” loan (<$625.5k) @4.75% with zero point.
  • 15-yr fixed, “conforming” loan (<$625.5k) @4.375% with zero point.

Their estimated “out-the-door” closing cost is around $2000. This closing cost number is quite accurate according to a friend who closed a mortgage with them last year.

I crunched some numbers to compare the three options. This is illustrated in the figure below:

2009-09-29_Refi Compare

The 20-yr mortgage requires 20% more monthly payment than the 30-yr mortgage but gets paid off 10 years earlier. The 15-yr mortgage requires 41% more monthly payment compared to the 30-yr mortgage but gets paid off in half the time. Given the relatively high discount (25 basis points) in going from 30-yr to 20-yr yesterday, I decided to apply for the 20-yr fixed mortgage.

As I already had an account with Star One, it was a relatively painless process to apply for the mortgage. Everything was done online, and I was charged $12 for the credit reports (paid by credit card). I was approved instantly by the online system and I locked in the rate on the spot.

According to the warning in the online application, mortgage applications with Star One are taking an average of four to six weeks to close. We will see how it goes.

Addendum

By the way, the rates for Star One today are

  • 30-yr fixed, conforming jumbo loan (<$625.5k) @4.875% with zero point.
  • 20-yr fixed, conforming jumbo loan (<$625.5k) @4.75% with zero point.
  • 15-yr fixed, conforming jumbo loan (<$625.5k) @4.375% with zero point.

On hindsight, there is a 50% chance that I might have picked the 30-year fixed mortgage if I were to lock today.  🙂

Application for the Bank of Internet High Yield Savings account

Earlier last month, I decided to apply for Bank of Internet’s High Yield Savings account. With a name called “Bank of Internet”, one would expect that the application would take place at “internet” speeds. Unfortunately, my experience is quite the opposite. As far as the speed of processing is concerned, this application seems to take place at a historic dial-up speed rather than the broadband that everyone else are using.

Here’s the timeline:

  • 1/21/09 : Emailed BoI to ask them if they do a hard inquiry for account opening.
  • 1/22/09 : BoI replied that it will be a soft inquiry.
  • 2/08/09 : Submitted application online. Received automated reply that I need to either send or fax in a copy of my driver’s license & utility bill for address verification. I faxed the documents back on the same day.
  • 2/18/09 : Received email saying that my account was approved.
  • 2/19/09 : Received email requesting me to verify the two trial ACH deposits for the bank account I used to fund the account. I checked the linked bank account but the deposits had not been made yet.
  • 2/20/09 : The two trial deposits and a withdrawal appeared in the linked bank account. I successfully validated the linked account — “You have successfully completed the ACH funding option authentication process. Your new account agreement is in the mail. Once we have received the signed account agreement, we will send you an email confirming the account funding via ACH option.”
  • 2/20/09 : Received signature card to sign. Mailed it back on 2/21.
  • 2/26/09 : Received email that account was funded by ACH. Money was debited from the linked bank account.
  • 2/28/09 : Received letter with login information. Was able to register online but the account balance showed a zero balance!
  • 3/3/09 : Account was still showing a zero balance in the morning. Called the bank 7.50am PST — the CSR told me that it will take 3 business days for the credit from an electronic transfer to show up. The CSR was rather unfriendly, like she couldn’t wait to get off the phone. She slammed down the phone when the call was done. Later the same day, the credit showed up as being posted on 3/3/09. So BoI cheated me of 5 days of interest for this initial electronic deposit.
Overall, I am very UNIMPRESSED with this bank.