Curmudgeon’s Law of Numerical Fiction

Regular readers of Bad Money Advice will not be surprised to hear that I prefer numbers to words. (Allegations that I prefer computers to people, however, are greatly exaggerated.) I think this is a natural inclination. Any halfway thoughtful person favors evidence over feeling, and numbers have the appearance of being hard facts.

But not all published numbers are factual, even when widely repeated in respectable places. Which presents a difficulty for us lovers of digits. How can we separate the real from the realish? Not to worry, because today I am revealing for the first time my Law of Numerical Fiction which will help identify the imposters.

To be successful, that is, repeated widely as if it were true, a fake number must satisfy three criteria.

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Forgiven Debt is Taxable Income

Last Thursday I ran a post that discussed the grim state of the credit card business. In it I discussed a New York Times article about consumers settling their credit card debt for less than what was owed. I even passed along some simple negotiating tips.

One thing I (and the Times) failed to mention is that if you settle your $3000 credit card debt for $2000, the $1000 that was written off by the credit card company is often considered taxable income. You will get a 1099 on it and come next April 15 you will either have to pay taxes on it or file a special form to explain why you don’t have to pay taxes on it. (This is discussed in detail in a great post at Don’t Mess With Taxes inspired by the same Times article.)

That it may be taxable doesn’t quite seem fair, does it? You’re broke, you manage to convince the card company to be "reasonable" and then Uncle Sam wants a cut. Actually, it’s not completely nuts. You really are up $1000. You got $3000 of stuff (and interest payments) for $2000. And the $1000 reduces the card company’s taxable income, so it seems mildly reasonable it might increase yours.

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The Roth Segregation Conversion Strategy

The other day in my post on Marotta Asset Management’s posts on Free Money Finance I mentioned a maneuver that could make a person some money that involves converting from traditional to Roth IRAs. It’s a fairly obscure strategy.  Google and I were only able to find one other explanation of it, in an article in the Journal of Retirement Planning from 2007. (See page 57.)

So Marotta may deserve credit for introducing this trick to the blogosphere.  Of course, last week I said that I thought that Marotta didn’t explain it very well.  It seems only sporting that I try explaining it myself.  In case it needs to be made clear, I am neither a CPA nor a lawyer, just a sneaky jerk who likes to do things that make him feel clever.

First, a few preliminaries.  Traditional IRAs can be converted into Roth IRAs, but a person has to pay tax on the balance that was in the traditional on the day of conversion as if it was income earned in that year.  Currently there is an eligibility limit based on income to be allowed to convert, but that limit goes away in 2010.

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A Guest Poster Who Has Worn Out His Welcome?

The blog Free Money Finance has a recurring guest blogger usually identified as Marotta Asset Management.  In fact, Marotta posts often enough and has been doing so for long enough that the designation of "guest" seems a little strained.  I assume that this is one of those mutually beneficial barter arrangements that make the blogosphere go.  FMF gets free content and Marotta gets free advertising for their business.  (They are a financial planning firm in Charlottesville, VA.)

The only flaw in this swap scheme is that the posts aren’t very good.  I mean that both in the sense that the content falls short of what you would hope to see from an actual working financial advisor (not "just a blogger") and in the sense that the posts are not written as well as I would like.  Indeed, on more than one occasion I have aborted plans to write about them here because in parts I am not sure what they are saying.  And that makes it hard to argue that a post is wrong, even when I am pretty sure that it is.

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Get Rich Slowly’s Tax Rate Embarassment

As readers of this blog probably know, Get Rich Slowly is one of the most important and widely read blogs in the personal finance space.  Wise Bread ranks it #8. It has more than 81,000 subscribers and a Google PageRank of 5.  (That’s good, trust me.)

Early yesterday morning it posted a guest post from CJ at WiseMoneyMatters entitled “Why You Shouldn’t Keep a Mortgage Just for the Tax Deduction.”  It is not, to say the least, a work of great insight.  Filled with breathless explanations of the painfully obvious, it contains such gems as an explanation that a tax deduction reduces your taxable income not the taxes you pay.  And it makes some remarkably unfounded generalizations, such as that the reader is unlikely to itemize deductions in the absence of mortgage interest.

But what made the post worth discussing here is something that it lacked, or at least lacked by the time I read it yesterday evening.  Apparently, as originally posted the piece contained an “offending section” that betrayed a fundamental lack of understanding of how income taxes work, specifically the difference between marginal and average tax rates.

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