Category Archives: Taxes

Unemployment Numbers Update, December

Unemployment, New Jobs, and Jobless Claims Statistics*

  • Monthly change in non-farm payrolls – Flat: 155,000 new jobs were added in December, compared to 146,000 added in November, and 171,000 in October.
  • Unemployment – Flat: December’s rate of 7.8 matched the revised November rate of 7.8% (previously estimated to be 7.7% – which would have been the lowest since December 2008). This is better than some 2012 months over 8% – showing very little improvement. However, keep in mind this ‘Official Unemployment’ rate only tracks those who are without jobs and have actively sought work within the past 4 weeks. Since this statistic does not track all people who are not working, some websites report that the ‘Real Unemployment’ rate is about 15% when all able-bodied people of working age are considered. For a historical perspective: The unemployment rate during the Great Recession peaked at 10.10% in October 2010. In 2012 it has varied in the range of 8.10% – 8.30%, so we are not seeing a lot of change this year. It could be worse when you consider that during the Great Depression it peaked at about 25% in 1933.
  • Initial Jobless Claims for Unemployment Insurance – Positive: The four week rolling average, remained the same at 360,000 as last week. Looking back 52 weeks, the four week rolling average, averaged about 374,750, so we are seeing slight improvement. This number is much better than it was in 2009 when it peaked at over 650,000, better than 2010 when it went from nearly 500,000 to the the low 400,000′s and for 2011 when claims were in the low to mid 400,000′s. The lowest we have seen this rate in 10 years is 282,000 in January of 2006, and the earlier part of the last decade we saw the average similar to what we are seeing now. During the Great Depression from 1929 – 1941 there was not the same level of unemployment insurance that we have today, although unions may have had some. It wasn’t until the Social Security act encouraged it in 1935. Today we have the Federal Unemployment Tax Act (FUTA) tax to fund state agencies.

*Unemployment statistics are an important indicator of how our economy is doing; more people employed points to stronger business growth and to fewer people receiving government entitlements. However, this is a little difficult to track, since the government doesn’t really publish a combined statistic that truly indicates what is happening. Most people who study this issue follow these three indicators: percentage of people unemployed, monthly change in non-farm payrolls, and jobless claims for unemployment insurance. The most discussed statistic is the unemployment rate; reading the explanation above illustrates how this number falls short.

The Fiscal Cliff Deal, Winners and Losers & What It Means To Your Personal Finances

The showdown in Washington over Federal taxes and spending ended with an agreement signed into law this week. Here are the losers and winners that we can see at this point. Further analysis is forthcoming of H.R.8 – American Taxpayer Relief Act of 2012, and will be reported to you later this month.


  1. Overall Taxes: Joint filers with incomes below $450,00, individuals with incomes below $400,000 and heads-of-households with incomes below $425,000 WILL CONTINUE to enjoy tax reductions put in place by George W. Bush.
  2. Alternative Minimum Tax: Tax payers with incomes below $50,600 (individuals) and $78,750 (married couples filing jointly) respectively, WILL NOT be faced with the Alternative Minimum Tax (AMT). It was set to go to $33,750 (individuals) and $45,000 (married couples filing jointly). This will be indexed for inflation.
  3. Unemployment Benefit Recipients WILL have benefits EXTENDED this year.
  4. Entitlement Recipients of things like Social Security, Medicare and Medicaid WILL NOT face reductions, however expect battles over this one in the coming year, and changes affected by Obama Care, as the economy continues to struggle and deficits increase.
  5. Investors owning stocks that pay dividends, or the long-term sales of stock WILL NOT face increased tax on dividends and capital gains if their income is below the above amount.
  6. Itemizers: Tax filers with incomes below $250,000, heads of households below $275,000 or married joint filers below $300,000, WILL CONTINUE to enjoy the same itemized tax deductions for things like home mortgage interest and contributions to charities.
  7. Politicians benefit by not having to reduce spending for entitlements or cut back on special deals made to specific industries, thus enabling them to continue to receive political support from those groups and entities – in the short run.
  8. Pork Recipients: About $70 billion worth of special tax breaks were written into the bill.


  • Employees: Anyone paying federal payroll taxes will see an INCREASE in the amount withheld from their paychecks from 4.2%  to 6.2%. If you make $50,000 expect your pay to decrease by 2% or approximately $1,000 for the year, or about $83 per month. This restoration of a tax holiday was inevitable to pay for current and future Social Security and Medicare benefits.
  • Self-employed people will see an INCREASE in their payroll tax from 8.4% to 12.4%, or an increase of about $2,000 if making $50,000.
  • High Incomes Earners with incomes above $450,000 will see an INCREASE in their top tax rate to 39.60% from 35% (individuals with incomes above $400,000 and heads-of-households with incomes above $425,000).
  • High Income Investors owning stocks that pay dividends, or those that sell stock (held long-term), will face INCREASED tax on dividends and capital gains to 20% from 15%, if their incomes exceed the levels described above.
  • Large Estates: Individuals dying with estates in excess of $5 million will see the tax on their estates INCREASE from 35% to 40%.
  • Alternative Minimum Tax (AMT) Payers: Tax payers with incomes above $50,600 (individuals) and $78,750 (married couples filing jointly) respectively, will CONTINUE to be faced with the Alternative Minimum Tax (AMT). Many have hoped to see the AMT go away completely, or income minimums increased substantially.
  • High Income Itemizers: Provisions of the Bill will REDUCE itemized deductions such as mortgage interest and charitable contributions to those with incomes $250,000 and above, $275,000 for heads-of-households or married joint filers above $300,000.
  • Those served by charities: Anyone who benefits from not-for profit enterprises that rely on charitable contributions, may see less benefits being provided to them, or increased costs.  This is due to some limits now being placed on tax deductions given for contributions made to these institutions, from higher income people. Charities and non-profits may be faced with shrinking budgets due to lower contributions.
  • Charities MAY LOSE income due to the reduction of itemized tax deductions for high income donors.
  • Politicians on the right may LOSE political clout, since they relinquished some of their goals for reduced spending. Politicians on the left may LOSE political clout in the long-term, if the the economy fails to recover or we go through another recession. Most US citizens overall opinion of all political leaders continues to decline amidst poor leadership.
  • All US Citizens and succeeding generations will suffer from poor federal leadership when it comes to current economic policy of run-away spending and lack of balanced budgets.

Summary observations from a Christian perspective

I covered this in the article linked in the next paragraph some, but I wanted to add an observation from a friend and top stewardship leader. While we were discussing various issues such as increases in taxes and entitlements… and church giving. He recalled that if every Christian who receives an income tithed 10%, that the revenue would exceed the annual cost to provide Social Security, Medicare, Medicaid and Federal unemployment benefits. I don’t recall where he got this number, or if this is true, but I’d bet it would be close when you consider the payroll tax rate. Also Barna reports that a small percentage of Christians of all denominations tithe 10%. Imagine the resources the church would have to care for the poor, infirm, widows and orphans if all Christians tithed. My friend commented that when the church fails to give and provide, then the government is put into the position to tax and provide. Not saying that is the best solution, but doesn’t it seem like this is what has happened?

This battle took so long to remedy, due to major philosophical differences, that I wrote about earlier this week, “Do you want to know what the fiscal fight is really about.” Expect the battle to rage on in the coming year. This information should not be relied upon for your individual tax situation: consult your tax, legal and financial advisers.

Do you want to know what the fiscal fight is really about?

This is a non-partisan article about what the fiscal cliff fight is really about. It is a philosophical battle, but if you read the newspapers and watch TV news, you will not get this story. Believe you me, I have watched and read many commentaries and opinions about this, but no one has yet to boil it down to one article–so I will take a shot at it. In addition, since this is a financial blog, I will try to render a non-political opinion about what this means to your personal finances. Since readers from both sides of the political spectrum read this, I will try not to take sides.

First of all, we have an economic crisis in the United States of America.  Real unemployment is about 15%, not the less than 10% that you read about. Secondly, government spending both today and into the future exceeds income or revenue (mainly taxes). The budget deficit exceeds $1 trillion per year, and the total federal deficit is almost $16.5 trillion.  Manufacturing is down, growth of our gross domestic product is lack-luster, and we are headed to long term double- and, who knows, maybe triple-dip recession. Yes, housing is gaining strength, some industries are doing quite well, and there are other reasons to be optimistic, but a strong argument can be made that we are headed to economic disaster because our federal balance sheet is a disaster.

Coming through a recession, we have a lot of people with their hands out wanting financial help. With high unemployment we have people on unemployment benefits. With an aging population we have a large, increasing number of people on Social Security, Medicare, and Medicaid. With low incomes coming out of the recession we have a large percentage of people not paying Federal income tax. We have have a large number of people without health insurance or under-insured (who should be provided for). We have a large percentage of people on food assistance, income assistance either in the form of weekly benefit or an annual bonus check called the Earned Income Tax Credit.  These are a lot of open hands, some very well justified that need help, I agree, but none-the-less, at the end of the day a lot of open hands with no long term plan to pay for helping them.

Even if we aren’t paying Federal income tax, we pay a lot of our income out to sales tax, payroll tax (Social Security, Unemployment Insurance, Medicare and Medicaid), gas tax, real estate tax, toll roads, corporate tax that we pay in increased cost of goods, to mention a few. So the poor and low income do pay tax; the point here is that government–federal, state, city and local–has high revenues.

The Left’s Viewpoint: To meet the financial needs of our country, such as entitlement programs, the tax plan that President Obama wants congress to pass would increase income or revenue through increase in taxes on the rich and modest cutbacks in spending but not on entitlement programs, and in some instances Obama wants to increase expenditures, for example  by extending unemployment benefits.  Class warfare seems to be used as a motivator: “The rich and big business caused the economic crisis, therefore we want to take from them to help everyone out and fix our economy.” A few of them definitely did contribute to the recession, but really, can we tax our way of this mess?

The Right’s Viewpoint:  To meet the financial needs of the country, reduce spending (including entitlements) and move towards a balanced budget, keep taxes low for everyone and leave more wealth in the hands of the wealthy and businesses, who create jobs and expand the economy. Really, can we not increase taxes some with spending so high. Okay they say, but reduce spending first.

The 113th Congress of 201 Democrats and 234 Republicans in the House of Representatives don’t want to budge on these issues because it is coming down to these philosophical differences. If the House can pass something agreeable, then the Senate’s 54 Democrats and  45 Republicans will approve it and send it to Obama for his signature.

The philosophy on the left says: We want to be more like a European style social democracy, with high taxes and a high level of social programs. It puts faith in the government to care for the people in a fair and just way. Society weilds power from 3 entities: government, people, and business. Therefore this style of government seeks a shift to have more power than people and business. The hope here seems to be that government will maintain the freedom and welfare of the majority of people. Government is self seeking, so those in power don’t always care for people well. I am not saying if you are on the left you totally believe all of this, but this is seems to be what they are saying.

The philosophy on the right says, we want to maintain more freedom for business and people, and the answer to economic problems is better financial management and business growth (which will in turn generate more taxes). The hope is that business and capitalism, hard work and self determinism, good personal financial management (spending saving and investing) will, in the long run, pay for entitlement needs, not taxes and government programs- it doesn’t always do that well, but that’s its hope. The right believes in entitlement programs, but seeks a balance. The people on the right are not heartless, since well researched analysis validates that conservatives give much more money to non-profit entities benefiting the poor than those on the left.  I am not saying if you are on the right you totally believe all of this, but this is what seems to be they are saying.

What is the Christian viewpoint, since I am writing this in a Christian personal finance blog? Evangelicals, protestants and Catholics are in both camps, so I don’t think it would be fair or possible for me to make the final determination on that one. But what I do believe is that perhaps one side doesn’t exclusively have the only answer–both can actually be right and wrong in part. Compromise doesn’t mean giving up one’s philosophy, but agreeing to work together on a balanced approach with some give and take. I think the Christian way is a balanced approach that takes care of needy, preserves freedom by not shifting too much power to government and business, has modest taxes, AND something that neither party seems to be mentioning much, encourages new business startups and growth. A rising economy alleviates many of the financial problems struggling economies face.

A good president and majority and minority leaders are ones that support compromise, work together, and bring both sides together. This battle is frustrating, but actually it makes good political theater. Will one philosophy win out here, or will we end up with a good compromise and the best part of both parties will help everyone, not just those on the right and left?

Conclusion: The longer we take to answer questions of budgets, taxes and deficits, the longer our economy will languish. The more it languishes the greater the toll to average people’s personal finances. A government that manages money well, taxes fairly, takes care of the poor, secures freedom and encourages business growth by working together will be one that leads us to prosperity.


2013 IRA and Retirement Plan Contribution Limits

The Internal Revenue Service (IRS) recently published the new rules for contributions into retirement plans and IRAs for 2013. Some of these numbers have increased. They are good for you to know if you participate in IRAs (individual retirement accounts) or retirement plans such as 401(k)s sponsored by employers.

The most an individual can contribute to any kind of IRA, whether it be deductible, non-deductible or a Roth IRA, is $5,500 or $6,500 if you are age 50 or older. The amount that you can deduct or contribute to Roth depends on your income and whether or not you are eligible to participate in a retirement plan through your employer. For the current income tables, go to for IRAs and go to for Roths. This does not cover contributions to spousal IRAs.

Retirement plans

  • 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan: employees contribution increased from $17,000 to $17,500. The catch-up contribution limit for employees aged 50 remains unchanged at $5,500.
  • Defined benefit plans commonly referred to as pension plans: maximum benefit increased from $200,000 to $205,000
  • SEP IRA annual contributions the employer makes to an employee’s account can’t exceed the lesser of 25% of compensation or $51,000 for 2013, up $1,000 from 2012.
  • Simple 401k limit is 12,000, up from $11,500 in 2012.
  • Total contributions (employer and employee) for 401k and Profit Sharing plans can’t exceed lesser of participant’s income or $51,000 (or $56,500 including catch-up contributions), up from $50,000 in 2012.

There are many other types of retirement plans. The ones listed above are probably the most common types, but the information provided doesn’t compare exactly to those other plans. Go to the document for other plan limits.

Some of these limitations are subject to IRS updates, changes in interpretation, and actual plan type and design. Refer to and your plan description for complete information.

Tax Planning: In Uncertain “Fiscal Cliff” Times & Year End

With the completion of the presidential elections there has been much discussion focused on the so-called “fiscal cliff”. Many economic forecasts have stated that President Obama and Congress need to reach some agreement to avoid the fiscal cliff if the nation is to avoid another recession.  As you probably know, the Bush tax cuts are set to expire at the end of 2012 and there are many other tax changes set to take place in 2013, such as the implementation of the taxes from the Obamacare health care plan. Given the disagreements between the President and Congress, it is difficult to predict what will happen to all of the tax cuts that are set to expire at year-end and what the outcome will be.  Year-end tax planning is always a challenge, but many long-time tax practitioners have noted that this could be the most challenging environment they have faced.

Whatever the outcome of the any agreements between Congress and the President, it is likely that at least some taxes will be increasing and it is almost certain that dividend and capital gains tax rates will not be going down in 2013.  Maximum long-term capital gains rates are set to increase, generally, from the current rate of 15% to 20%. Dividends will be taxed at ordinary income rates instead of the current capital gains rate of 15% in most cases.  The top marginal rate will increase from 35% to the “pre Bush rate” of 39.6% and the rates for other income brackets would increase as well. Regardless of the outcome of any agreements reached between the President and Congress regarding the expiring Bush tax rates, taxes on investment income will rise next year because of the funding provisions in the President’s health care plan by at least 3.8 percent on taxpayers with higher investment income . Beginning in 2013, an additional Medicare hospital insurance tax will apply to wages or self-employment of married individuals with earnings exceeding $250,000 or single individuals with earnings greater than $200.000.  There will also be a new 3.8% net investment income tax for individuals exceeding these same income thresholds.  If Congress and the President do not make changes, the combined effect could result in an average tax hike of approximately $3,500 per household for up to 90% of Americans, and in a much higher rate for upper-income taxpayers.

It is reasonably likely that rates will be going up for investors, small business owners, and high income individuals. Traditional tax planning strategies to defer revenue and taxes may not be applicable this year.  Taxpayers should consider an approach that involves addressing many of the possible changes directly while also making use of all options for deductions, credits, and other tax-advantaged opportunities to lower their taxable income. Planning for these changes should begin now, since it may involve significant modifications in your tax strategy.

Since most advisors are confident that capital gains rates and rates on investment income will be higher next year, taxpayers may want to consider some of the following strategies concerning the potential for higher rates in 2013:

If your portfolio includes significant long-term capital gains, you should take advantage of the lower rates in 2012.  For upper-income taxpayers who will be facing rates of 20% (barring any changes) on capital gains and the additional 3.8% health care tax on investment income, their top rate will rise to 23.8% versus the current capital gains rate of 15%.  It may pay to take advantage of the lower rates in 2012 by selling investments with potentially big profits.

While advisors often recommend that taxpayers offset their capital gains by selling investments with capital losses, it may be beneficial to hold off incurring losses to offset against potential gains in the following year that will be taxed at higher rates.

Consider various strategies to accelerate ordinary income into 2012. If you have flexibility on when you can receive payments of income before year end, consider that the income may be subject to lower taxes this year than in 2013. Again, this is counter to tax strategies that are often employed to defer taxable income. Similarly, taxpayers would normally look to increase deductions before year end; it could be beneficial to defer expenses such as charitable deductions until the following year when tax rates will likely be higher.

Another option may be to convert a traditional IRA to a Roth IRA this year, if a conversion otherwise makes sense.

You may want to move dividend paying equity investments into tax deferred or federally non-taxable investments such as municipal bonds.

Many taxpayers are accelerating gifts under the current $5 million ceiling on lifetime giving. Not only is there a good chance that estate tax rates will rise (the scheduled Sunset provision is for rates to revert to 55%) but the exclusion amount for estates and gifts will revert to $1 million.

Some other acceleration strategies include exercising stock options, taking bonuses, foregoing 1031 elections, and electing out of installment sales.

The alternative minimum tax (AMT) will apply to 2012 income for many more Americans if not indexed for inflation. At the end of 2011, the AMT exemption was $74,450 for married taxpayers and $48,450 for singles. In 2012, the AMT exemption is $45,000 for joint filers and $33,750 for single filers. In making their estimated payments, taxpayers will need to consider that for 2012 they could be exposed to a higher AMT tax if Congress does not revise the exemption amount.  Additional care will need to be taken to help avoid potential AMT taxes.

Business owners will want to look at accelerating taxable income, but they will also need to evaluate the fact that the Section 179 deduction can be significantly reduced in 2013.  Under Section 179 of the tax code, small businesses can deduct the total cost of some qualifying property in the year it is placed in service, within certain limits, rather than depreciating it over time. The limit on the cost of property (including real property) that can be expensed is now $139,000, but it will drop to $25,000 if no changes are made. The total value of the equipment purchased cannot be higher than $560,000. In 2010 and 2011, businesses were allowed to expense as much as $500,000 in equipment and property on one year’s tax return. Additionally, bonus depreciation which was 100% in 2010 and 50% in 2012 is set to expire in 2013.

Business owners need to evaluate the potential for immediate write-offs and 50% bonus depreciation for capital purchases made in 2012 versus being stuck with the longer term depreciation MACRS depreciation schedules for purchases made in 2013. It may pay to make planned purchases of equipment in the current year. On the other hand, faced with higher tax rates, businesses may not want to elect Section 179 or bonus depreciation treatment to preserve more deductions for future years when the rates are scheduled to be higher at least for individual owners operating as Schedule C or as pass-through entities.

Like so much in life, we can only plan ahead, confidently, based on what we know to be fact.  Today, we know that tax laws will change back to “pre-Bush tax cuts” on January 1, 2013.  Of course, Congress and the President can intervene, before year end, or even afterwards (and make new rules retroactive.)  This unprecedented level of uncertainty makes good decision making difficult. Consequently, seek tax advice about your specific circumstances.  If you have large, pending transactions, the timing of which you can control easily, then this is a good year to engage your advisors soon in order to harvest sizable benefits.

*Kevin Koval, CPA, ABV, CFP and Roger C. Nagel, CPA, CMA of Nagel, CPAs. They can be reached at 505-898-2558 or email They are located at 2240 Grande Blvd SE Suite 103, Rio Rancho, NM 87124.

Rules for Tax Deductions to Charities and Political Groups

There are many regulations regarding the reporting requirements, privacy and income tax deductability of cash donations to organizations. Here is a brief list of some of the rules for cash gifts:

  • Non-Profit charities 501(c)(3) institutions include schools, churches, universities, hospitals and politically titled groups with a main emphasis of education. Deductions for contributions are limited to 50% of the donor’s adjusted gross income (AGI). There are usually no limits on donations for individuals.
  • Donations of cash gifts to Private Foundations organized as 501(c)(3) for religious, charitable, scientific, literary, or educational purposes, are deductible up to 30% of AGI.
  • Social welfare non-profits 501(c)(4) contributions are not deductible, but if they are $5,000 or larger, they must be reported. These groups primarily promote social welfare; they can lobby and participate in campaigns, but they can’t contribute to candidates.
  • Donations to Super PACs are not deductible, and there are no limits or reporting requirements to the IRS. Information about the donors are not private, but the information might not indicate the actual person who made the donation, since it can be routed through a private company.
  • Individual’s donations to political parties, campaigns, and some super PACs are limited to $2,500 per election or campaign, $5,000 to a PAC, and up to $30,800 to a national political party committee. Donations of $200 or more must be reported to the Federal Election Commission (not the IRS) by individuals; they are not deductible and the information is made public.
  • Membership dues to 501(c)(6) organizations are deductible, except for the portion used for political causes.

In addition, there are many other rules, sometimes complex, for donations of cash and non-cash gifts such as property, partial interests in property, property that earns income, life insurance, annuities, artwork, IRAs and qualified assets, securities, and assets in charitable trusts. This is just a brief review. Individuals should seek the advice of professional tax advisers.

Obama Versus Romney Tax Rates

The presidential race tax debate faces Romney’s lowering them 20% for all, versus Obama’s increasing them for those in middle to higher incomes. For quite a while the tax burden has continued to shift to higher income people, and those on the opposite end pay less and less taxes, per the Wall Street Journal. If you want taxes lowered for all bracket, it seems as if your candidate is Romney lowering them and if lowered just for the upper income earners, then you may favor Obama, per Bank Rate.

According to the Wall Street Journal, the following chart outlines the tax policy for Obama and Romney.


Future of the Federal Estate Tax

The Federal Estate Tax is the tax paid on assets that transfer at death.

The current top rate is 35%, but it could increase to 55%, reverting to the 2001 tax rules if Congress doesn’t continue the lowering of tax of the Bush Administration. The current tax only applies to estates of $5,000,000 or larger, but the prior law applied to estates of $1,000,000 and larger.

Analysts believe the future of estate taxes will probably go one of three ways: 1) let the Bush tax cuts expire to help balance the budget, thereby reverting to system that had a top rate of 55% and began taxing estates of $1,000,000 or more 2) compromise, perhaps with a top rate of 45% and an exemption amount of $3.5 million. 3) continue the tax cuts and leave the exemption and rates where they are today.

What should they do depends upon your political and economic beliefs. Those who lean more to the right favor low or no tax, stating that estate tax is arbitrary and confiscatory redistribution of wealth, and have negative ramifications to business growth. Those on the left feel that funds are needed to help balance budgets, and redistribution helps prevent large amounts of wealth (and power) gradually ending up in fewer hands, recalling a few hundred years ago of America’s monopolies. Perhaps there is room for compromise here, I favor a law that penalizes fewer small businesses and farms, yet considers some of the thoughts contained in the “Gospel of Wealth” by Andrew Carnegie. Carnegie argues the tension created by having an estate tax, has social philanthropic benefits and satisfies the concerns of those in both ends of the spectrum.

Tax Prep Assistance

People have many option these days for tax preparation, all have their strengths and weaknesses:

  • Doing it yourself:
    Tax preparation software like Turbo Tax, Tax-Cut, or just doing it in paper and pencil can be learning self educating experiences for those willing to invest their time. The software is easier to use and is getting better all the time. This is a good option for those with simple taxes, very comfortable with computers, identifying financial records and is very careful to input information correctly. The software is sometimes free (depending upon income or very low-cost. Some ‘free’ services may charge for electronic filing. The advantages of this option are the learning you get, low-cost, the quick turn around time to complete the return and get a refund. The disadvantage is a good tax professional can sometimes do better and help file a more accurate return, get you a higher refund or pay less in taxes, and plan better for the future.
  • Getting Free Help
    Free tax preparation assistance may be provided through one of the  Benefit Bank sites in your state. In Columbus Ohio there are several sites of the Ohio Benefit Bank including the Vineyard Community Center, leave a message: 259-5352. Many county agencies provide this for low to moderate income people for no cost. Just doing a search in your browser can help you find one in your area, be sure the url contains a .gov to insure you are not being snagged to a commercial site. The service is really good, but not extensive, so many people will benefit from working with a professional.
  • Professional Assistance
    Tax Preparation Professionals (accountants, CPAs, and tax attorneys) can often save you money, even if your situation is simple. Be very careful, however, to help ensure that you are not over-charged. Get competent advice, referrals, and meet a few before choosing one. Remember, during tax season –February to April 15th these Professionals are extremely busy. Also, professionals can also be helpful by providing pointers for next year’s taxes, so that you can plan or keep good records now. This is especially applicable for self-employed people. If you owe taxes for other than last year, consider having your tax advisor review your old returns.

Tax Refund Loans
Some tax preparation services will loan you an amount equivalent to your tax refund. There is usually a fee and interest charged; only consider this if an emergency and after reading the fine print.

What to do with your Tax Refund

When we find out we are going to receive what might be thousands of dollars in tax refunds from the Federal or State Governments, we have two competing impulses:  wants versus needs. Those that are struggling may want to give this issue serious consideration, because any windfall like tax refunds or bonuses can really help us get out of financial crisis, or at the least set us on the path to doing so. Those doing okay, can really use these funds to plan smarter. Research indicates that most people who get windfalls and raises seldom see any change to their day-to-day cash flow management, since life just seems to happen and soak up any extra money that flows our way. These demanding recessionary and inflationary (i.e., health care, gasoline and food) times require diligence.

Needs: Basic items that are necessary to sustain basic living. In Dave Ramsey’s Financial Peace University class he advises that people should cover these things first, because sometimes people will pay for wants or debt and then not have money for important things like food and rent. Good for some to be reminded when they have money forthcoming.

  • Housing: rent or mortgage, utilities (basic phone only), real estate taxes and insurance
  • Groceries: food and personal care items
  • Transportation: car payment, gasoline and car insurance
  • Health: prescriptions and doctor provided care
  • Clothing
  • Childcare if working fulltime
  • Tithe: this is essential, and could be in either this or the next category. Special counsel is advised to those in very difficult financial situation

Tier 2 Needs: Items that are not always necessary for day-to-day living, but help people with things such as health and not fall into pay-check to pay-check lifestyle. Again good for some to be reminded when they have money forthcoming.

  • Emergency savings for things like car repairs and health insurance deductibles
  • Health insurance and fitness
  • Pet expenses for those that already own one
  • Internet

Tier 3 Needs: Things people must do to get debt free, since when debt is eliminated extra money will be there for building up larger savings and investments. With no debt and savings, people will usually be a very good financial situation. If someone gets a tax refund or a bonus, these are the items to use it for:

  • Debt repayment, using the snowball method until all non-mortgage debt is repaid
  • Emergency savings fund for health insurance deductibles, car repairs and the like

Wants:  These are the things that people may be considering with their tax refund, but should refrain considering until they are out of debt and have funded 3 – 6 months of income in savings. Extra courage is needed, especially when we have done without for a long time:

  • New TV, car, furniture and appliances
  • Robust cable TV
  • Vacation
  • Smart phone or fully equipped phone with data and all the bells and whistles
  • Down payment on a new loan for anything

IRS Issues its Annual Dirty Dozen Tax Schemes 2012

The Internal Revenue Service recently issued its annual “Dirty Dozen” ranking of tax scams to remind taxpayers to use caution during tax season

  1. Identity Theft. The IRS is seeing more identity thieves using legitimate taxpayer’s identity and personal information to file a tax return to claim a fraudulent refund. If you receive an IRS notice that more than one return was filed it may be a tip-off. If you believe that has happened immediately contact the IRS Identity Protection Specialized Unit, see the special identity theft page at
  2. Phishing. Phishing is done through unsolicited email or a fake website that pretends to be a legitimate site to lure people to provide valuable personal and financial information. If you receive an unsolicited email that looks like it is from the IRS, government website, forward it to
  3. Return Preparer Fraud. Some fraudulent ‘professional’ tax return preparers sometimes skim off their clients’ refunds and or charge too high fees. Starting in 2012 paid tax preparers must have a Preparer Tax Identification Number (PTIN) that they enter when the return is filed. You may be dealing with a bad preparer if they: Don’t sign the return or place a Preparer Tax Identification Number on it. Don’t give you don’t get a copy of the return. Over promises a large tax refund. Get a percentage of the refund, or splits it as their fee. Ask you to use false information on your return, such as false income, expenses and/or credits.
  4. Hiding Income Offshore. Evading U.S. taxes using offshore financial accounts to hide income. Sometimes foreign trusts, employee-leasing schemes, private annuities or insurance plans are utilized for these schemes.
  5. “Free Money” from the IRS &  Tax Scams Involving Social Security. Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches. Low income and elderly people are often victims of fees using the false hope of money.
  6. False/Inflated Income and Expenses. In order to maximize refunds some people include income that was never earned, or expenses not paid
  7. False Form 1099 Refund Claims. “In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts forU.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.”
  8. Frivolous Arguments. Promoters of this scheme encourage people to make outrageous and frivolous claims to avoid paying the taxes they owe. The IRS has of some frivolous tax arguments to avoid. These arguments are false and have been thrown out of court, and some have served prison time.
  9. Falsely Claiming Zero Wages. “Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation.”
  10. Abuse of Charitable Organizations and Deductions. Tax-exempt 501(c)(3) organizations are sometime used to avoid paying tax by shielding income or assets from taxation. Some donators maintain control or receive income from donated assets, or donating overvalued assets.
  11. Disguised Corporate Ownership. Improper use of corporations to obscure the true owners to under report income and claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and other financial crimes.
  12. Misuse of Trusts. Trust promoters (not true estate planners) use ‘special’ trusts to own assets to provide income and estate tax savings. There are hundreds and maybe thousands of legitimate uses of trusts in tax and estate planning, that have protection and tax advantages, however some trust promoters use them to illegally avoid taxes and hide assets.


New Unearned Income Tax Coming in 2013?

You may have received a chain email about a new real estate sales tax of 3.8% in the President’s health care bill. Is this true, you may be wondering?  Kind of, the tax is on unearned income, and is part of the ObamaCare to help generate revenues for the Medicare Trust Fund, but it only applies to a limited number of people. 

Starting in 2013, the new 3.8% tax is on unearned income of those with a high incomes, defined as those whose Adjusted Gross Income (AGI) is more than $200,000 or married couples filing jointly with AGI of more than $250,000. Unearned income is money received from some business income, capital gains, rents, dividends and interest income, offset by expenses.

Real estate sale’s capital gain, or profit, or the amount of money the property sells for over the purchase price is currently exempt from capital gains tax for  $250,000 (single)/$500,000 (joint), and this exemption remains. So the tax will not effect a sale unless the profit exceeds this amount AND the seller’s income exceeds the AGI limits.

For example, if a married couple sells a house for $400,000 that they purchased for $200,000, they realized a profit or gain of $200,000.  If their income exceeded the AGI threshold, they would pay 3.8% tax on $150,000 the amount that exceeded $250,000. This amounts to a $5,700 tax, not $15,200 as the chain email reported would be due on the entire amount.

With depreciated real estate values and lower personal incomes, probably only a small percentage of people will have to pay the tax. Remember, the amount of outstanding first and second mortgages doesn’t play into this calculation, even if the total loans exceed the sales price. So it is possible if the property was highly leveraged, and profits are consumed by loan re-payment, there could still be a tax due.


9 Common Overlooked Tax Areas

The Ernst and Young Tax Guide for 2012 listed 50 of the most easily overlooked deductions. You may want to purchase this large book or look at what is listed on their website.  Also see for a list of highlights and Whats Hot. My list will touch on a few of them that I often see. Remember – some of these deductions are phased out due to income, circumstance or “floor” limits required.  Check with your tax professional to see if these or others are applicable to you.

  1. Be aware of AMT – the Alternative Minimum Tax: AMT affects more people now than ever, and sneaks up and surprises many people with large tax bills. The alternative minimum tax (AMT) attempts to prevent some who benefit from tax savings (deductions and credits) by making sure they pay a minimum tax. For middle Americans, the most typical cause of AMT tax is the level or amount of State, Local and Property Tax combined with miscellaneous deductions like unreimbursed employee costs; especially if your household income is over $100,000.  You can see if the AMT affects you by consulting the AMT worksheet in the Form 1040 instructions. People with more complex financial situations should probably consult a good accountant to help them calculate what they might owe.
  2. Higher Education Expense Deductions and Credits: You may be able deduct $2,000 or $4,000 of qualifying tuition expenses, depending on your income. It applies to expenses for post-high school education for you, your spouse, or your dependents regardless if you had to take out loans to pay for the cost.  It even counts for Grandma to pay for grandson’s college!  Grandma can get the deduction. The Hope Credit or the Lifetime Learning Credit have stricter income limits than higher education deductions to qualify, but provide greater tax savings because they reduce your taxes dollar for dollar. Because both of these types of educational deductions and credits are dependent upon income levels, year in school, and many other factors, it’s not an easy choice which one is right for your case.  Run all the scenarios or consult your tax advisor for the best treatment.
  3. Medical expense deductions: To be able to deduct qualifying medical expenses you must itemize and expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI). Given the high rate of health care inflation, more people are eligible for this than in years past. Be sure to keep records of all medical expenses to see if you qualify each year.
  4. Reinvested stock dividends: This is a tip to avoid double taxation. When mutual fund and qualified stocks pay dividends to investors they are taxed in that year, whether or not those dividend monies were paid out to you in cash or reinvested. Most investors automatically re-invest them in additional shares. When you own investments, keep all of your statements. When an investor subsequently sells qualified shares of stock or the mutual fund, they are taxed on their gain. Meaning if you invested $9,500 and it grew to $12,000, $2,500 could be subject to tax in that year. However let’s assume that $9,500 generated $500 worth of dividends that were reinvested only $2,000 would be subject to tax. Many people do not keep good records and end up paying unnecessary tax. Many mutual fund companies will provide you with records if you do not have them.  Each year when your broker “sells” stocks, a 1099-Div will be generated.  You will need to compare the cost basis of these stocks against their sale price less commission in order to truly know how much gain to include in your taxable income.
  5. Donations and out-of-pocket expenses for charities and not for profits: You can write off donations to and out-of-pocket costs you incur while doing good works for nonprofit organizations such as churches, food pantries and schools. Keep records of item or cash given,  purchased and costs incurred, such as miles driven. Many people give and don’t keep good records and loose good source of deductions:
  6. Child care credit: You may be eligible for the child care tax credit up to 35% of your qualifying expenses (depending upon your income) you paid someone to care for your child (under age 13) or dependents unable to care for themselves (because of physical or mental reasons) while you work or look for work. You may use up to $3,000 of the expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals. If you have a tax-favored reimbursement plan at work, you can pay up to $5,000 of work related child care expenses. If you max-out the $5,000 through work but spend more, you may be eligible for an additional $1,000.
  7. Estate tax on income in respect of a decedent. Did you inherit an IRA or other ‘income in respect of a decedent,’ or IRD? Secondly, was their estate large enough that it was subject to federal estate tax? If so, you may be eligible for a deduction for the amount of estate tax paid on the IRD assets.
  8. Self employment business expenses: If you had any expenses related to self employment, be sure to keep good records. See your accountant and read books like Sandy Botkin’s for more information.
  9. Miscellaneous deductions: See for a list of some that you might have missed.

8 General Tax & Accounting Tips

A very important part of personal financial planning is tax planning. As you prepare for tax season, here some general things to consider: 

  1. Be aware of the different types of taxes: Many people are not aware of the different types of tax systems that we have. The following are the most common systems that may affect you. Income: Federal, State and Local. Real estate tax. Tax on Investments: Dividends, interest, capital gain, and passive income on savings, stocks, bonds, mutual funds, investment real estate. Estate or Inheritance Tax: Federal and state tax due on the estate or the inheritor. Gift tax: tax on giver of large gifts. Entitlement Tax: Social Security and Medicare (FICA), Federal Unemployment (FUTA). Self Employment and Business taxation. Sales tax.
  2. Consider working with a Qualified Tax Professional. Tax planning can be complex for many people. This is due to the complexity of our many tax systems and your personal and business circumstances. I highly recommend working with a trusted professional tax advisor. Tax advisors not only prepare your taxes but can help make decisions that will affect your future. They can serve as advisors for a whole host of matters and they can represent you if you face the dreaded audit. Consider the following when selecting a tax professional: Local: Someone that you can easily meet with face to face. Personable: Someone that you can interact with and who cares about you.  Proactive: Some tax preparers simply look at your previous year’s return and plug your current numbers into last year’s format. This of course assumes that last year’s preparer knew what he/she was doing. Try to find a preparer who knows your situation. A proactive professional will ask questions that will help you anticipate changes in your tax situation to help you properly plan in advance. Reputable: Find a professional with a good reputation. Ask people you admire for a referral. Skilled: Look for an accountant that is very competent. A degree in accounting or law is very difficult to obtain. Designations such as CPA (certified public accountant), EA (enrolled agent) and LLM (master’s degree in tax law) are not prerequisites but may be helpful. Fees: Find out up front what they estimate their fees to be, what they charge to file electronically and whether they will represent you in an IRS audit. Avoid any ‘early refund’ ploys like the plague. Some well-known tax preparation companies ‘provide’ this service which charges a hefty fee (with a lot of small print) and a lot of advertised hype for you to get your refund ‘early’. It is basically a high-interest loan. Just waiting for your actual refund will save you a lot of money.
  3. Remember, tax preparation entails both art and science. The science involves the mathematical calculations that in most instances can be figured using calculators and software, and the infinite number of complex tax laws. The art of tax planning comes into play with interpretation of any special circumstances. There are some areas of tax law that leave the government’s intentions unclear. No law can completely anticipate each person’s situation. You could call a dozen different IRS agents with the same question and get as many different answers. A proactive planner will research any unusual circumstances you may have and help you plan a course of action.
  4. Doing Your Taxes Yourself? I firmly believe in getting professional tax assistance. However, I realize that many people prefer and insist to do their own taxes perhaps to save money. It has been my experience that often the professional tax preparer has saved us the amount of their fee in our taxes. The peace of mind that the taxes are done right has a value all its own. If you made less than $57,000 you can file your taxes electronically for free through the website. If you choose to mail your return, go to your local post office and send it ‘Certified Return Receipt’ mail to insure that you have a record that the IRS received your paperwork. This will cost around $10 or less and will be worth every penny should the IRS contest the receipt of your return.
  5. Keep great records. If you are already very organized you may read this section just to feel great about your organization skills or skip to the next section.  If, however you have heard ‘get organized’ many times before and if you are the type of person who balks at the idea of organizing that mess of receipts just remember how you felt last year as tax time approached. You could become organized in only one evening of television viewing with the right tools.  Arm yourself with an accordion file with at least 16 sections.  Label them according to your situation or use the following sections:  Auto, Bank, Business, Credit Cards, Dental, Medical, General Receipts, Grocery, Income, Insurance, Mortgage, Utilities, School, and Taxes.  Now sort your receipts into these sections.  Use a new accordion file every year. Not only will this help you find needed information, it will also help you find a receipt in case you need to return an item you purchased. Your tax professional will be sending you a tax organizer the end of December or the first of January. In this organizer will be a list of information that you will need to gather. Becoming organized will help you easily gather the information you need to fill out your tax organizer.
  6. Start early. Do not procrastinate on your taxes. Tax professionals are unbelievably busy the closer April 15th is.  Firms who prepare business returns also have a crazy March 15 business deadline.  We are providing this information because we want you to get the most attention from your preparer during their craziest season.  As soon as you get your organizer, begin gathering the needed papers. If you are only missing one or two pieces of information return the organizer to your accountant with a note that says what is missing.  They will begin entering the information in their software.  Try to get a January or February meeting with your accountant.  These months are the best to meet because they will have more time to spend with you and they will be able to think proactively.  If you are looking for a professional, start looking now. Another reason to start early is allowing yourself time to look for records, ask financial institutions for copies of lost information, or calling investment companies for statements.
  7. Judicious Paycheck Tax Withholding. Many people like to overpay their taxes, so that they get a nice refund in time for vacations or other wants and needs –  Kind of like a forced savings. Overpaying taxes is like a giving the government an interest free loan of your money. Good financial management involves developing savings habits so that you set aside money in an interest bearing account from each paycheck for future needs, wants and emergencies. This helps you to avoid using credit cards for those things and not having to wait until refund time. Secondly it then allows you to manage how much you can afford or are able to put into 401(k) plans at work. This accomplishes two things, first you are managing your money better and you are saving for retirement. Saving for retirement in tax-deductible retirement plans like 401(k)s will also lower your taxes, enabling you to save more for retirement and everyday needs and wants. If you want to lower the taxes that are being withheld from your paycheck, file a new W-4 form with your employer to claim an additional withholding. Make adjustment for getting married, divorced, having children and for increasing contributions to tax-deductible retirement plans. Your accountant will help you estimate this.
  8. Tax planning is not the tail that wags the dog. Taxes consume a large if not the largest single percentage of your income, therefore good financial planning should strive to lessen them, by whatever means possible as allowed by law. However, tax planning is not the only core issue of good financial planning.  Tax planning works in concert with your overall goals and your individual situation.

Tax Cut Deal Agreed to

The House plans to vote on a new version of the Senate-passed bill to extend the payroll tax cut that was set to expire January 1st. What this means immediately to your personal finances is that your net take home pay decrease remains at least for a couple more months, by not reverting to the 6.2% regular tax, but stays at the current 4.2% rate. If you earn $50,000, this means about $80 more per month in take home pay. This means more to you if you are self-employed, because your tax will remain temporarily at 8.4%, instead of 12.4%, if earning $50,000 you will continue to have about $160 more per month in net pay.

The Social Security Tax (also known as FICA Federal Insurance Contributions Act) is made up of Old Age, Survivors and Disability Insurance (OASDI) and Medicare. The FICA tax rate for employees is 7.65% (OASDI 6.2% {temp 4.2}, Medicare 1.45). For self-employed it is 15.3% (OASDI 12.4% {temp 8.4%}, Medicare 2.9%). The taxable wage base for OASDI is $110,100 for 2012, which means your income above this figure is not taxed OASDI, except for Medicare.

Patents on Tax Strategies

Some providers of financial products and services, think that they have found or created a unique tax strategy and will submit that strategy for patent protection. Some believe that owning such a strategy provides them with market protection and potential income when others what to license their strategy. President Obama recently signed the America Invents Act (Public Law 112-49) into law, this patent reform legislation bans future patenting of tax and charitable strategies. With the new law the Patent and Trademark Office will not be allowed to approve any pending or future applications for tax strategy patents. What appears to be unclear is whether existing patents of this nature will be legally enforceable.

Tax Breaks for Students –

Most articles about college education planning provide valuable information for parents who are saving and investing for their children’s education, as well as various options for financial aid and student loans. However, what options are there for students that don’t qualify for aid and want to minimize student loans? This article in the Wall Street Journal on Saturday, October 29, provides excellent information, including tax breaks for young students as well as for adults who are returning to school to further their education and might not qualify for financial aid.

Tax Breaks for Students –