Welcome To Josh's Blog O' Thoughts: Finance

Last year around this time, I posted an article about Tax Reporting For Employee Stock Purchase Plans (ESPP).

Last year, I learned the that there are specifically different rules for handling these types of capital gains/(losses) when compared with your standard stock transactions. My mistakes caused me to refile my tax returns (federal AND state) for the previous 3 years). I ended up getting about $1000 back so I didn't complain too much.

So this is just a reminder. If you sold any stock from an ESPP this past year, please follow the link above and read my detailed article on how to report this on your taxes. Also, you might want to take a look at using my spreadsheets which will help you calculate your gain/(loss) for these types of transactions. You can get the spreadsheets from the original post, or download them right from here:

I dedicate these two ESPP Tax Calculations files to the public domain so feel free to use them any way you wish.
ESPP Tax Calculations.ods - Open Document Spreadsheet format for OpenOffice.org
ESPP Tax Calculations.xls - MS Excel spreadsheet

Happy Tax Filing!

I'm sure everyone has noticed lately that gas prices have been coming down. In my part of the country, we are almost back below $2 per gallon. (I still can't believe we're happy to be paying $2 per gallon). Part of the reason for the decrease in gas prices is the decrease in oil prices. Oil topped out somewhere around $140 per barrel back in July. It is currently trading around $65 per barrel. That's about a 50% decrease in just a few months.

So what about all these people that a few months ago said oil would NEVER come back down below $100? They said that oil prices going up was purely a function of increased demand and stable supply. Well some of us (myself included) disagreed. Check out a few of my previous blog posts:
More Signs Of Oil As The Next Big Market Bubble - June 16, 2008
Are Crude Oil Prices A Bubble Waiting To Burst? - November 7, 2007

My take on the situation was that while there probably was some increase due to demand, the increase in oil prices was disproportionate to the demand increase. This led me to believe that investors were throwing their money into oil to try to make a quick buck. It's one of the things we do best in this country. We see someone else get rich and we copy them so we can also get rich. Eventually TONS of people are involved in the same investment plan. But when we find out that most of the people buying are just get-rich-wannabes, prices collapse. In recent history you could easily refer to the housing market bubble, or the tech industry bubble.

So, I hate to say it, but...

"I told you so"

It's pretty obvious now that a huge portion of this price increase was due to speculative buying by investors. Check out this interview with Scott Bleiler, president of CreateCapital.com. He claims the price increases were solely due to speculative buying. I won't go quite that far. While I do think that maybe 90% of the price increase & decrease was due to speculative buying, I also think prices were also moved a little by changes in demand and the strength of the US dollar. But again, spec buying was the largest part.

Now that I got that out of the way, I can comment on how annoying OPEC is. When prices where out of control this summer, we were practically begging OPEC to increase supply to help lower prices. Their evaluations showed that supply and demand were matched fairly well so they did not increase output. Now that prices have come back to reasonable levels, they decide that they liked it better when they were getting $100+ per barrel so they've decided to decrease output. That is a pretty obvious slap in the face to us. I'm so glad that the recent ncreases in the strength of the dollar helped nullify their supply reductions to meaningless. It literally had no effect on the price of oil. Yet another indication that the price of oil does not move based solely on supply-demand.

That pretty much sums up how I view the whole oil market situation over the past 2 years. Now when will prices of other goods (food, retail, air travel, etc) that went up "due to the increase in fuel costs" go back down? Not any time soon is my guess. Many retailers tried to wait as long as possible to raise prices. This means some may have taken significant losses during those periods. As a result, they will probably be hesitant to reduce prices so they can recover some of those losses. And good luck for airfare. The only way that will come back is if one of the airlines starts a fare war.

To conclude this post, I just want to say that it was a great marketing ploy run by Chrysler this summer. Buy a new car and they would guarantee you $3/gal gas for 3 years. They got a person to buy a car with this deal in mind and now they don't have to pay anything out for it. Great job marketing, Chrysler.


If you want to leave a comment, I'd be interested in hearing what gas prices are doing in your neck of the woods.

If you're at all like me, then you like the convenience of having a cell phone, but you don’t use it enough to make a standard cell phone plan a cost-worthy option. Most cell phone plans are going to run you at least $30 per month ($360 per year), and when you use your phone only a few times per month, it's just not worth it.

Luckily, because of people like us, there is a whole market for pre-paid cell phones. These generally give you the convenience of not having a monthly plan while still keeping your costs relatively low. Unfortunately, when you start to look for a pre-paid cell phone, you will find that there are a multitude of options available, and if you're not careful it's easy to get overwhelmed.

Some of the big players in the pre-paid industry are Tracfone, Net10, Go Phone, and Boost Mobile, but nearly all of the major monthly plan companies (Alltel, Verizon, T-Mobile, etc) have added pre-paid plans to their product list. The difficulty is in choosing the plan.

For me, it all boils down to recurring costs. The purchase of the phone itself is a one time cost for me because I won't be constantly upgrading it to something "cooler". I just need my phone to be a phone. I don't want it to take pictures, play music, play games, access the web, etc. I already have gadgets that fit all those categories. Now, if you want the other features, knock yourself out. This will be something to look at when choosing a plan because some providers (like Tracfone) come with very simple phones, whereas others offer a wider variety of “cool” phones.

Assuming the cost of the phone is a one time expense, we can then compare the different plans that are out there based on service costs. As I see it, there are basically two different times of pre-paid plans out there:

1. You buy a certain number of minutes that have a certain expiration date on them.
2. You put a certain amount of money into an account which is used to pay for your minutes and service as you use them. This money usually has an expiration date as well.

Tracfone's plans are type one. You buy a card that comes with a certain number of minutes that lasts a certain number of days. At the end of the minutes or days (whichever is first), you must purchase and activate a new card to keep using the phone.

Type two plans, like Verizon's InPulse plan, will allow you to add money to an account which will expire in a set number of days. To my knowledge, if the money expires, it's just gone. The money in the account is automatically debited as you make calls. Most of these plans charge a set rate per minute. Sometimes different rates will apply for roaming, nights, and weekends. Some plans also charge a daily fee, while some plans charge a use fee just on the days the phone is used.

To help me decide which plan to go with, I created a spreadsheet that I could use to help find the lowest cost plan to fit my needs. The spreadsheet files are attached at the end of this post for your convenience. Simply fill in the yellow boxes on the Enter Data Here tab. This data is about your expected use for this phone. Based on that data, the spreadsheet will show you the lowest cost option from the plans I have added to the file. Switch to the Plan Comparisons sheet to see the analysis.

The lowest cost option for me ended up being Tracfone. As you will see in the spreadsheet, Tracfone has an option called the Double Minutes For Life (DMFL) card. If you get one of these and activate it, every minute card you activate after that will give you double minutes. It’s hard to beat the per-minute cost of a Tracfone with DMFL as you’ll see in the file.

You can normally purchase the DMFL card separately for about $50, but most of the time you can find a deal on the Tracfone site to get it free with the purchase of a phone. I ended up getting a phone, a 1 year / 400 min card, and a DMFL card for only $99 (the regular price for just the 1 year card).

One nice thing about Tracfone is that if you run out of service, but still have minutes, the minutes will carry over as long as you keep the service active by adding cards. And when you add a service card, the additional service is added to any remaining service you still have. So you could theoretically add three 1 Year cards at once and have service for 3 years. Also, check to see if the phone you are buying is part of their Single Rate plan. If so, there is no roaming at all. If you can't get a Single Rate phone because of your service area, then roaming calls are charged double minutes.

I'm now using my cell phone for occasional calls home when out running errands, but we've also decided to start using the cell phone for our long distance needs since it is now cheaper than pre-paid long distance cards (a topic for another post). Hope you’ve found this helpful.

These files are donated to the public domain so feel free to do with them whatever you wish.

PrePaidCellPhoneCostComparison.ods - OpenDocument Spreadsheet for OpenOffice.org. (14KB)
PrePaidCellPhoneCostComparison.xls - Excel Spreadsheet for MS Office. (76KB)


If you have anything to add, or other plans that you'd like to put in the comparison list, leave me a comment.

Last November, I wrote a post stating my opinion that crude oil prices are in a price bubble that would eventually pop similar to the tech stocks in the early 2000's and the housing market in 2007. To me, it just seems to make sense. The VERY rapid increases in oil prices that we have seen in the past year alone can not be simply related to supply and demand fundamentals. The increases have just been too huge.

Today, Yahoo! Finance has a video interview with David Herro who was named one of the "World's Greatest Investors" in 2007. In the interview, he reaffirms my position that oil, as well as other energy commodities, WILL see a price bubble burst. After that, he expects oil to retreat to the $60-80 per barrel range. Those numbers are still much higher than they were a few years ago, but that has been SOME increase in demand since then, primarily in developing countries.

So even though we are currently paying around $140 for a barrel of oil, and around $4 for a gallon of gas, we can expect better prices to follow.

I found it interesting today that Yahoo! had two articles posted with seemingly conflicting advice.

The first article was posted in their Yahoo! Green site which is focused primarily on the environment and energy efficiency. The article was entitled Rethinking the cost of hybrid cars and was focused on showing how the added up-front expense of purchasing a hybrid vehicle can pay for itself when compared with the cost of a similar, non-hybrid vehicle. The second article, posted on Yahoo! Finance was titled When Buying a Gas Guzzler Makes Sense and focused on convincing people that a gas-guzzling SUV could be the right choice for them.

Just by looking at titles of these articles one would assume that they would be giving advice in opposite directions. But while the one does point the user toward a hybrid, the most fuel efficient car available, and the other points the user toward a big SUV, the least fuel efficient vehicle available, there is a common link between the two articles. The link being that they are both trying to save the reader money, and that your particular driving scenario dictates which purchasing decision will be cheaper overall. The basis of this decision is that hybrid cars will get MUCH better gas mileage than an SUV, but are likely to be more expensive, especially now that SUV prices are plummeting in response to high gas prices.

So which is cheaper in the long run? To simplify it, you can base it simply on initial cost and gas cost over the time you own the vehicle, and ignore additional factors such as government rebates for efficient cars, differing insurance premiums, interest rates, registration fees, etc. If you do this, it mostly boils down to one thing: mileage. How much do you plan to drive? If you drive relatively few miles, or only plan to keep the car for a short amount of time, it will be hard for you to recoup the additional cost of the higher-priced hybrid vehicle. With SUV's hitting record lows, a low-MPG SUV may actually be a better bargain if you drive relatively few miles.

Once you start to take into account other long-range factors like insurance premiums, interest rates on the loan, and registration fees (to name a few), the hybrid becomes even more enticing. Plus, there's the added benefit of knowing that you are helping do the environment good, and helping reduce our reliance on fossil fuels.

My personal financial philosophy is that recurring costs are bad. If I can spend a little more up front to reduce recurring costs, it's usually worth it. Knowing this (and my predisposition to save the Earth), I would tend toward the hybrid vehicle if I was in the market for a new car. However, I don't expect that I'll ever purchase a new car, so hopefully hybrids will soon be prevalent in the used car market. When that happens, I'll be switching over.

I recently discovered that there are special tax laws regarding gains made from selling stock acquired through an Employee Stock Purchase Plan (ESPP). Below is the result of my research to understand these laws.

Normal Stock Transactions

In a normal stock transaction, you report a capital gain and pay tax on any money you make on the sale of the stock beyond what it cost you to buy the stock:
Capital Gain = Total Sale - Total Cost

If you were selling a batch of stock that was all purchased at the same time at the same price, this calculation can be very simple. However, it can become complex when you sell a batch of shares that have multiple purchase dates and prices. Most brokerages will keep track of this information and just tell you what your gain is for that sale thus facilitating tax reporting.

Aside from calculating your gain, the other thing you have to look at is how long the shares were held. If there were held for less than a year (short term), it will be taxed differently than shares held longer than a year (long term). Again, your brokerage's year end report should break this down for you.

Tax Reporting For ESPPs

An Employee Stock Purchase Plan is a program offered by your employer that allows you to purchase shares of the company's stock often at a discounted price. The program will usually have an offer period during which you will have a payroll deduction that goes into a holding account. When the offer period is over, the money in that account is converted to stock.

When you sell the stock, you will have a gain or a loss based on what you paid for the stock and what you sold it for. On the surface, this appears to be just another regular stock transaction, but as I found out, there is a significant difference. The difference is that the amount of discount you received when purchasing the stock will have to be reported as ordinary income (not capital gains).

Consider a plan where you get a 10% discount on your stock. At the end of the offer period, the market price for a share is $10. With your 10% discount, you pay $9 per share. If you bought 100 shares, you just got a discount of $100 ( (10 - 9) * 100 ). That $100 should be reported as ordinary income, and instead of using $9 per share as your cost basis for your shares, you use $10 per share.

The above example is overly simplified to demonstrate the principle. However, the actual law is quite a bit more confusing. Different rules apply if you sell your shares after holding them for at least two years (Qualified Distribution) than if you hold for less than two years (Disqualified Distribution) so we will examine each separately.

Disqualified Distribution

In a disqualified distribution, you held your shares less than two years. If you held less than one year, they are also a short-term gain.

To calculate the total amount of discount that must be reported as ordinary income, you must take the market price on the day the shares were purchased, minus the actual price paid (the discounted price), times the number of shares:
Discount = (Market Price Per Share - Discounted Price Per Share) * Number of Shares

The discount amount should be included in your ordinary income (Wages, Tips, etc). For a disqualified disposition, your employer should INCLUDE this in the box 1 (wages) of your W-2. Mine did, and in box 14 (other), they listed ESPP DISQ DISP and the amount of the discount that was ALREADY included in my box 1.

If you used the actual discounted price as the cost basis, you would be double taxed on the discount amount as it will be included in both your ordinary income AND your capital gains income. When you do your capital gains worksheet (Schedule D), you should use the Market Price as the cost basis of these shares thus avoiding the double taxation.

Qualified Distribution

A qualified distribution is a sale of shares held more than two years. This automatically means it is also a long term capital gain since it has been held for more than one year. The rules for a qualified distribution are slightly different than for a disqualified one.

First, you still have to calculate the amount of discount that your received on your shares. However, this is done by taking the LESSER of two calculations.

First, calculate the actual gain based off of the discounted price:
Actual Gain = (Sell Price Per Share - Discounted Purchase Price Per Share) * Number Of Shares

Second, calculate the discount based off the offering price (this is the market price per share on the beginning of the offer date):
Discount = Market Price on Offer Date * Discount Rate% * Number of Shares

Take the smaller of these two numbers and this is the amount that you must report as ordinary income. However, unlike a disqualified disposition, the amount is most likely NOT already reported by your employer in box 1 of your W-2. That means that you must manually add this to your income (wages, salaries, tips, etc).

Again, you need to adjust the cost basis of your shares upward by the amount you reported as ordinary income so that you are not double-taxed on that amount.

Summary

Overall, the wording of the laws is fairly complex. It took me many hours of research to get to a point where I now have a pretty good understanding of what to do for these types of transactions. I have put together a spreadsheet to help me do my ESPP reporting. You can download it here and use it to help you in your own reporting.

I dedicate these two ESPP Tax Calculations files to the public domain so feel free to use them any way you wish.
ESPP Tax Calculations.ods - Open Document Spreadsheet format for OpenOffice.org
ESPP Tax Calculations.xls - MS Excel spreadsheet



Links

TurboTax Page Regarding ESPP
Fairmark Page Regarding ESPP Qualified Distributions
IRS Publication 525 - PDF File 1.1MB


Disclaimer

I am not a tax professional, so this information should not be taken as tax advice. I'm simply stating how I have handled the situation.

If you've been a reader of this blog for a while, you know that I've had a history of commenting on mortgage interest rates. The main reason was that I was in the midst of building a house and was watching to determine at when I should lock in my mortgage rate for the next 30 years. Well I'm happy to say that the research paid off.

Let's go back in blog history here and see what happened. I started really watching the rates about a year ago when we started doing the math to see if we could afford to build a house. At the time that I was crunching numbers with the bank (May 2007) the interest rate for a 30 year fixed mortgage at my lender was 5.625%; which I considered to be a decent rate. By the time we got ready to build, the rates had risen to 6.25% which was a substantial increase. I wondered if there was a correlation between gas prices and mortgage rates since gas prices had been steadily increasing at that time as well (doesn’t seem to be now).

By early July, I stated in a blog post:

I fully expect to interest rates to come down the second half of the year here. Actually, I've already seen a little bit of a dip.

I knew our build process wasn't supposed to be done until the end of January, 2008, so at this point I was just watching to try to identify trends. Well, interest rates DID start to come down, slowly, throughout the entire second half of 2007.

By the time January hit, I was really watching hard. I was now in the 30 day lock range and was just waiting for a good rate. One day in mid January, a 5.375% became available. I had only seen the rate this low 1 time in the past 7 month, so with 3 weeks until closing, I locked in. I was pretty happy with this rate considering it had come down from 6.25% since we started building.

However, over the next couple weeks, it would inch even a little lower. Then, 2 days before my closing, the rate at my lender took a huge dip to 4.875% (with no points and no early payment penalties)! I was beside myself. I called the bank to see if I could switch even though I'd already locked in. I was surprised to find out that for a $400 flipping fee, I could switch. The $400 would be made up in no time by the lower monthly payments. This switch also moved the closing back a week, but it didn't really matter because they still let us move in on time.

Now, I see that within that past 3-4 weeks, mortgage rates have risen drastically. They are currently 5.75% at my lender. On the day of our closing we were told that the 4.875% was only available for about 3 hours! I guess watching the rates for a year paid off. I was able to predict the drop at the end of 2007 that led me to an ideal time to lock in a rate.

Researching in this way could help you get a low rate as well.

I'm sure you've seen the massive amount of new headlines stating that the economy is headed for the hole. Well so have thousands and thousands of investors. The result is a massive flock of scares shareholders selling off all their investments because they think the stock market is going down the tubes. Well, I got news for them: YOU'RE CAUSING THE DECLINE!

By over saturating the market with sell orders, the demand for these shares diminishes and so does the selling prices. Other investors see their stocks going downward and they decided to jump ship also which only enhances the downward spiral. Smart investors (the people that get rich off of times like this) are just waiting for the right time to start snatching up all of these stocks at discounted prices. Once these big time investors start buying, the little guys will say "Hey, they know something I don't so I will follow their lead and buy also." And low and behold, demand increases and stock prices go back up. The people who made the most money were the ones who bought in at the bottom and started the upward climb.

So, to those of you who are private investors, don't dump your declining stocks just based on outlook. Don't be part of the problem. Hold on to those stocks. If it's a decent enough company the price will come back. In fact, many of you may want to pad your investments by buying some more of these companies at discounted prices. I know I will be looking heaving at this.



Disclaimer: I'm just an amateur investor and have had no formal training. Please do your own research on a company before deciding to invest wisely. I can not be held responsible if you lose money on the stock market.

Lately, there's been a lot of talk (especially in the political arena) about energy consumption and Global Warming. Most of this, however, has been aimed at making it less enticing for businesses to pollute or to produce inefficient products. What really needs to happen, is that the American people need to start thinking differently about energy use.

Most people think about the cost of gas because they can easily see the cost vs output, but people do not think as much about other energy uses such as home lighting. This is because you get a monthly electric bill that simply lumps together all the electric use of your house. With a car, you know all the gas is used by your car. On the electric bill, it's easy to look at it and think that a large part of the bill is due to things you "need" like a refrigerator or air conditioning.

While an air conditioner can constitute a large part of your electric bill in peak summer months, it's worth noting that people often overlook the effect of household lighting. Lighting can be a very large part of your monthly bill, especially in the dark winter months.

As I drive around looking at new houses, I notice that some of the more popular trends these days include more outdoor lighting (soffit lights, accent lights, spot lights, etc). Most don't really serve any purpose other than to highlight the house. If people thought about how much it cost to actually run these lights, they may reconsider having them.

The old rule of turning a light off when you leave a room still applies. The fewer lights on in your house, the more electricity and money you will save.

A couple years ago, I decided it would be interesting to find out about how much it was costing me to run my Christmas lights during the holiday season. The calculation is quite simple so I'll walk you through it. Some information you need to find out ahead of time:

1. How many bulbs you put up.
2. How often you typically have them turned on.
3. The cost for a kilowatt-hour from your power company. (should be listed on your bill)

And now for a little background information. A typical mini-bulb Christmas light uses about 0.5 watts per bulb. If you have LED bulbs or the large, old-school bulbs, you'd have to find out how many watts per bulb you ware using.

Let's assume that you put up 3,000 lights (on your tree, house, bushes, etc), and that you typically have them on from 5:00PM till 11:00PM from Dec 1 to Jan 14. Let's also assume that your electric company charges you $0.10 per kilowatt-hour (kWh).

So, here we go.

3,000 lights * 0.5 watts = 1,500 watts when they are all on.

1,500 watts / 1000 = 1.5 kilowatts. So, if you have all of them on for 1 hours, you have 1.5 kilowatt-hours.

1.5 kilowatt-hours * 6 hours per day = 9 kilowatt-hours per day.

9 kilowatt-hours per day * 45 days = 405 kilowatt-hours total usage by Christmas lights during the holiday season.

405 kilowatt-hours * $0.10 per kilowatt-hour = $40.50 to run your lights for the entire season.

You can see that this is no small chunk of change. Might make you consider switching to LED Christmas lights which will use only a tenth of the electricity because they are so efficient (they're also nearly indestructible).



As a side note, this calculation can be used for anything that you know the energy use of. For example, four 60 watt bulbs left on for about 3 hours per day. Or an 1100 watt oven cooking for 2 hours. Some of it will make you sick to see how much you are spending to operate that device.