Five steps to financial security The income tax business is one of eternal learning. If it’s possible to keep your brain young by always learning, tax professionals’ brains should never get old—tired, maybe, but not old. Tax laws change constantly, both at the federal level and at the Michigan level. We get e-mail newsletters from a variety of sources, and it seems that these newsletters always have new information. It’s not unusual to get 20 pages in a week, explaining the latest changes and clarifications. However, we also read newsletters and books, attend seminars and conferences, and watch DVDs and videos that don’t have one new thing in them. They are all about current and old laws. It’s all about learning more about these current and old laws, so that we can help our clients navigate through our very complicated tax system. I read in one of those newsletters that there are currently over 14,000 pages in the Internal Revenue Service’s publications and regulations. I can’t verify that figure, but I also don’t doubt it for one minute. I have a reproduction of the 1913 Form 1040 hanging on my office wall. That first Form 1040 was a grand total of one page. The attachments and instructions are a grand total of three more pages. We have gone from four pages up to a potential 14,000 pages in less than 100 years and, unfortunately, the 14,000 pages seems reasonably accurate to me. Some of those 14,000 pages deal with Individual Retirement Accounts and retirement accounts. There are many experts in the field and there have been a myriad of books written on the subject. One of the country’s foremost experts on the topic of IRAs is Ed Slott. He has written a multitude of books, gives seminars throughout the year, and writes one of those newsletters I discussed earlier. Mr. Slott is a proponent of education, education, education and more education, not only for tax professionals but also for taxpayers. As taken from his book, “Stay Rich for Life, Growing & Protecting Your Money in Turbulent Times,” Ed’s five steps to financial security are as follows: 1. Know who you are and where you are. 2. Educate yourself. 3. Avoid mistakes. 4. Don’t be shortsighted. […]
Useful tax tips and information from Jerry Coon of Action Tax Service.
Taxable Social Security income There are few items on a tax return that are more confusing or more difficult to explain to taxpayers than that of taxable Social Security. Prior to the late 1980s, Social Security was not taxable. Tax-free income is the best deaa still too good of a deal, because the law was changed to tax up to 85% of gross benefits received. It seems like the logic in taxing benefits was that this would help extend the time when the Social Security system would go bankrupt. One never knows for sure when trying to figure out where federal tax money ends up, but I find it hard to believe that any of the tax dollars due to taxable Social Security tax end up at the Social Security Administration. I think that big black hole in Washington just sucks up those dollars. I wouldn’t be surprised that at some point in time, 100% of benefits will become taxable just like a distribution from any pension. The fly in the ointment is that today everyone pays into Social Security. These payments made at the rate of 6.2% of earnings are not voluntary. Granted, employers pay in another 6.2% matching contribution, but employers get to deduct this amount on their tax return. The 6.2% each taxpayer pays represents a nondeductible cost to that taxpayer. Taxpayers should be able to recover the amounts they paid in to the Social Security system using one of two options: either the taxpayer would be able to recover his cost as a nontaxable amount received each year over his life, or he would be able to recover his cost in total from the first benefits received before any benefits become taxable. Either approach has tax theory behind it, but there is a larger book of theory that would require taxpayers to recover their cost over their life. The Social Security system keeps track of how much tax is paid in to the system by each taxpayer. Up to now, it’s just kept for statistical reasons, because benefits are calculated on earnings, not taxes paid in. But it would not take much of a software program to calculate the taxable benefit based on recovering the taxes paid in. I hope […]
Non-taxable fringe benefit disappearing A non-taxable fringe benefit that appears to be disappearing is the employer-provided vehicle. This type of fringe benefit is called a Working Condition Fringe. It is non-taxable to the employee, because the expense is a deductible business expense whether the employee or the employer is paying for the auto. For example, General Motors supplies a vehicle to its Grand Rapids regional marketing director. This is a deductible business expense for General Motors on their corporate tax return or, if the director was using his personal auto in his capacity as a General Motors employee, the expenses would be deductible on his personal 1040. Because the company is supplying the auto, the expenses are considered non-taxable to the director. It’s a legitimate Working Condition Fringe. As long as there is no element of personal usage by the director, none of the expenses of the auto will be taxable to him. However, if there is an element of personal usage, there will be some taxable income allocated to the director. Just what constitutes an “element of personal usage”? The most common element of personal usage occurs when the employee has 24-hour access to the auto, personal use of the auto is not specifically forbidden by the employer, and the employee does incur some personal usage of the auto. In the example above, because the director is expected to visit dealerships and attend various conferences which entail many overnight stays, General Motors assigns to the director a vehicle for his exclusive 24-hour use. General Motors does not forbid him from using the auto for personal use and he does use the auto occasionally to run personal errands. There will be some taxable income allocated to the director in this case. Last year, he put 30,000 total miles on the auto. Of this total, 4,500 miles, or 15%, were for personal use. It cost General Motors $15,000 to operate his vehicle for the year. Without any personal usage, this would all be considered a Working Condition Fringe benefit and non-taxable to the director. However, we have to deal with those 4,500 personal miles. General Motors has a variety of methods it can use to calculate the taxable amount of the personal usage. First, it […]
Healthcare providers declare profits, increase rates You wonder what the thought process is sometimes when you read a headline like we read last week. One of the largest health insurers in California, Anthem Blue Cross, a subsidiary of Indianapolis’ Wellpoint Inc., declared record profits on one hand and then on the other hand announced it was raising its rates by 39%. Several other national health care providers also announced record profits in conjunction with rate increases. What are they thinking? I’m neither a person who believes in conspiracies nor a believer in grand schemes and cover-ups, especially on a national scale, but this causes even me to stop and question this turn of events. Is there a better way to get Congress out of its present deadlocked position on a national health care plan than by having private companies announcing record profits and almost simultaneously announcing record price increases? Granted, the proposed increases affect only individual policy holders—about 800,000 for Anthem Blue Cross in California and about 13 million nationwide—but these increases are on top of sizable 2009 increases, up to 68% in some instances, assessed to these same policy holders. Individual policy holders take in the group of people who are not provided insurance through an employer. This number is growing daily because employers are still terminating, laying off and reducing the hours worked of employees. By losing their employer-provided coverage, they are forced to buy an individual policy. Granted, even employer-provided insurance has seen average price increases of 7% to 10% for the last few years, but that’s a far cry from 39%. According to Sandy Praeger, a spokesperson for the National Association of Insurance Commissioners, “You’re going to see increases of 20, 25 and 30 percent for individual health policies in the near term.” These increases will put unemployed or under-employed people in a terrible position. Buying health insurance or paying the mortgage or rent is not an enviable position to be in, but the way things are heading, it could be a common one. That brings me back to the original point of this article. If the health insurance industry cannot find a way to regulate itself, I don’t think it takes much of a crystal ball to see the government […]
Words on tax refunds The tax season is well under way. As is usually the case, each tax season takes on a flavor of its’ own. Some tax seasons are known as early filing tax seasons. Everyone’s refund seems to be large and they want it today. We find that some seasons have so many changes that affect their tax returns; it seems that people put off filing their returns and the season becomes known as a late filing season. Neither of those scenarios applies to this year. Allow me to make an observation about this year. Even though it was projected that refunds would be smaller or non-existent this year; so far that doesn’t seem to be totally the case. Some taxpayers are getting smaller refunds than they expected but others are being pleasantly surprised by the size of their refunds. It’s been an orderly tax season with the Internal Revenue Service and the State of Michigan efficiently processing the returns as they are submitted. No big technical snafus have taken place. As always, there are one or two legislative changes put into place that effect many returns. This year, we are seeing many taxpayers taking advantage of the return of the Residential Energy Credit and the upgrade of the Hope Education Tuition Tax Credit (HOTC) to the new American Opportunity Tax Credit (AOTC). Much has been written about the Residential Energy Credit but I have not read much about the American Opportunity Tax Credit. It’s really a misnomer to say the AOTC upgraded the HETC. It totally replaced the credit. Since so many taxpayers claim the tuition tax credit on their returns, I’m going to hit the high points and the differences between this year and the past years. First, the Hope Credit resulted in a maximum of $1,800 credit, none of which was refundable. The American Opportunity Tax Credit can result in a maximum credit of $2,500. 40 percent of the credit, up to $1,000 is refundable. This is a huge change. Many taxpayers paying tuition in past years zeroed out their tax liability without using the full $1,800 of credit. Now, they will at least get 40 percent as a refundable amount. Second, the HOTC credit was based only on […]