Free Money Finance

Going John Galt

The following is a guest post from Marotta Wealth Management. This could be a controversial post (as many are from Marotta) since it deals with politics, so please keep the debate civil. 

If you're not an economist, you may vastly underestimate the negative impact of taxes on the U.S. economy. In fact, our current tax laws encourage every American to avoid the taxable economy, forgo the benefits of specialization and lose competitive productivity. Taxes plus compliance costs rob us of more than 50% of our wealth.

The top marginal total tax burden is currently 44.6%. It is expected to rise to 62.4% by 2011 when the current tax relief law expires. As if that is not discouraging enough, businesses spend billions (yes, billions) of hours struggling to understand and abide by the requirements of our current intricate tax code. These costs impose a surcharge equal to more than 20 cents on every dollar actually collected by the government. Businesses bear most of this burden, with small firms hit the hardest.

Those businesses earning $250,000 or more annually are the veritable engines driving U.S. economic and job growth. But strangely, it is exactly those businesses on which we currently heap all the burdens of society. The top 5% of taxpayers pay over 60% of the income tax collected by the federal government.

These taxes have a dire effect on output, especially among small business owners, the most productive members of society who are responsible for 120% of job growth. Small businesses expand; larger businesses consolidate. If these captains of industry were ever to decide to cut back, or worse yet go on strike, the other 95% of society would suffer, no longer able to enjoy their free ride.

The threat of small business owners purposefully scaling back their productivity has been called "Going John Galt." It refers to Ayn Rand's novel "Atlas Shrugged" in which Galt and his supporters "stopped the motor of the world," as Rand phrased it. Many sniff disdainfully at the idea, confident that such coordination against self-interest would be impossible to muster.

But it is exactly at this juncture where the foes of freedom don't understand capitalism. "Going John Galt" does not require a collaborated effort. Rather it is the natural consequence of rational businesspeople adjusting to higher taxes.

Imagine three contractors who by specializing and working together could build six houses. Now imagine that working independently outside of the taxable economy, they can each build only one house in the same amount of time for a total of three houses. You might think they should work together. But any tax rate over 50% keeps them apart. The taxable economy halves their productivity, requiring them to pay more than the three houses in taxes.

Consider a highly skilled surgeon. Her talent and time are too valuable for her to mow her own lawn, change the oil in her car or paint her own house. But taxes provide her a great incentive to spend her time on chores rather than help more patients. If she has a 50% marginal tax rate, she has to earn $200 just to pay a lawn service their fee of $100. The higher her tax rate, the greater the motivation to do the job herself--and as a result, the greater the loss to society.

Edward Prescott, winner of the 2004 Nobel Prize in economics, compared the highly taxed European countries and the United States. He found that Europeans work a full 50% less than Americans. Incentives toward work actually succeed. And lest you attribute the difference in work hours as simply cultural, in the early 1970s before Reagan lowered the top marginal tax rate, it was Europeans who worked nearly 50% harder than Americans.

Lower taxes produce jobs. Contractors hire specialists, and surgeons contract for services. Higher taxes, especially targeting those earning over $250,000, result in small business owners hunkering down to make sure they don't go out of business. The margin between profit and chapter 11 is nearly always smaller than a company's tax burden. And that burden is scheduled to rise at the end of 2010 when the Bush tax cuts expire.

The most productive wage earners are among the hardest workers. According to a study by Steven Landsburg, leisure used to be evenly divided among the classes, but it isn't any longer. Although Americans as a whole have an extra four to eight hours of leisure per week, it is primarily those in the lowest tax bracket who have gained this extra free time. Today, more than ever, it is the working rich and the idle poor.

Many believe it is acceptable to redistribute income but would consider it absurd to redistribute leisure. It turns out there really is little difference.

Without taxes, you could leave work at 2:25 p.m. Many small business owners will choose to do exactly that, not in some coordinated revolution but as a natural consequence of shouldering a greater and greater percentage of society's burden.

Only since 1992 have Americans paid more for government programs than they spend on food, clothing and medical care combined. For the amount of money we pay in taxes, government could already provide universal health coverage and feed and clothe us as well.

The U.S. Constitution was supposed to limit government, not private individuals. It was never designed to give us good government. It was intended to limit government's power so people would be free to make choices, because only when you freely choose can you be good. It isn't a virtue to be generous with other people's money.

And it certainly is no virtue when 95% of our country puts over 60% of the burden on the remaining 5%. We need representatives who will do less harm. We need representatives who will just vote no. And we need representatives who don't try to justify $160 million of earmark requests from my district alone by saying, "This project is a valuable use of taxpayer funds because . . ."

Low taxes should not be a political issue that divides us. Every American should agree with the goal of keeping taxes as low as possible. In 2011 all of the federal tax cuts enacted since 2001 are scheduled to expire. If this happens, Tax Freedom Day, the day people in theory have earned enough to fund their annual tax burden, will move an entire week later. In the words of John F. Kennedy, "An economy hampered by restrictive tax rates will never produce enough revenues to balance our budget--just as it will never produce enough jobs or profits."

Net Worth for the US House of Representatives

Check this out -- it's a list of the net worth of every US House Representative. Quite interesting indeed!!!

Two things to note as you look at the list:

• There's wiggle room. When members of the House file their financial disclosure, they are only required to report approximately how much they have/owe in each account. For example, in a savings account, they can report that they have between $15k-$50k, or between $50k-100k, etc. Same for their liabilities. As you can imagine, things could become skewed rather quickly. That said, these numbers at least need to be in the ballpark, right?
• The numbers used are MINIMUM net worths. So the actuals are higher -- just how much higher, we don't know.

Anyway, here are some things I found interesting about the 435 Representatives:

• 125 are millionaires (have a net worth of $1 million or more.) This is 29% of the total.
• 29 have negative net worths (less than zero). Another 38 have net worths of $20k to $1k. In all, 15% have net worths less than $20k.
• The median net worth is $380k.
• 222 (over half of the 435 Representatives) have liabilities of "$0". 26 have liabilities of $1 million or more.
• 11 have assets of "$0" and another 15 have assets of $10k or less.
• Speaker of the House Nancy Pelosi has assets of $25 million, liabilities of $13 million and a net worth of $13 million (numbers off a bit due to rounding).
• Majority Leader Steny Hoyer has assets of $148k, liabilities of $0 and a net worth of $148k.
• Minority Leader John Boehner has assets of $1.7 million, liabilities of $0 and a net worth of $1.7 million.
• The highest net worth goes to Darrell Issa (R-California) with a net worth of almost $165 million.
• The lowest net worth goes to Alcee Hastings (D-Florida) with a net worth of NEGATIVE $2 million.

It's enlightening to see what these folks are doing with their own money since it gives us some insight into how they are managing our (tax) money.

See anything that you found especially interesting?

Fourteen Tax Management Techniques

The following is a guest post from Marotta Wealth Management.

No one approaches financial planning with the goal of paying more taxes. Tax management, like all financial planning, is based on the premise that small changes made over time can achieve big goals. Good investment returns are important. But over the next few years, comprehensive tax management may reap even greater gains.

Don't file your taxes in April and then forget about them for the next 10 months. By investing a little time throughout the year, you can create compounded value. The 14 techniques described here may help you lighten your tax burden.

1. Check line 45 on your 2008 IRS form 1040 to see if you paid any alternative minimum tax (AMT) last year. People subject to AMT pay an average of $6,000 more than they would otherwise. AMT turns tax planning upside down. Because conventional wisdom may not apply, be sure to review your financial affairs with a professional.

2. This year offered a spectacular opportunity for realizing capital losses. Realized losses can offset realized gains. They can also be deducted against ordinary income up to $3,000 a year. Any excess above $3,000 is carried forward and can be deducted in future years.

3. You can realize capital losses and still stay fully invested. Sell the security, and then wait 31 days before buying it back. Alternately, double up. Purchase the same number of shares you currently hold. Wait 31 days. Then sell the original shares for a tax loss. Waiting a month between the sale and the buyback avoids a so-called wash sale, which would prevent you from taking the tax loss.

4. Individual stocks offer more opportunities to realize capital losses or gift capital gains. This is useful primarily in larger portfolios. A portfolio of individual stocks collectively may mimic the return of an exchange-traded fund and still provide additional tax savings. For example, although the total return might be 10% for the year, one of the individual stocks has doubled and two others lost 50% of their value. By holding individual stocks instead of the fund, you are able to sell the two stocks that have a 50% negative return and take the loss on your taxes. Holding the stock that has doubled in value postpones paying capital gains.

5. Using appreciated stock for charitable giving can avoid paying capital gains entirely. This allows you to contribute up to 15% more than you could with a cash gift.

6. This year also extended the opportunity to make qualified charitable distributions. If you are 70 1/2 or older, gifts you make directly to charity from your IRA are not counted as income. In this way you can reduce your tax deduction phaseouts for additional savings.

7. Perhaps you are considering funding a 529 college savings plans for your children or grandchildren. Contributions in some states (including Virginia) qualify for a state tax deduction if executed before the end of the year. Up to $4,000 per account can be taken, with the remaining amount carried forward to future years. Account owners over age 70 are allowed to deduct any amount they contribute to a 529 plan in 2009.

8. Keep in mind that if you make your fourth-quarter state estimated tax payment prior to year-end, you can use it as an itemized deduction next year.

9. You may also give $13,000 per person in 2009 to an unlimited number of individuals without gift tax implications. Families interested in maximizing intergenerational wealth transfers should explore with a professional how trusts can minimize their tax burden and maximize estate planning.

10. Putting investments in the correct investment accounts can also generate significant savings. Fixed-income investments belong in traditional IRA accounts. Interest is taxed at ordinary income tax rates, but the entire value of an IRA account is taxed at ordinary income tax rates anyway upon withdrawal. Appreciating assets should be in taxable investment accounts where the growth will be at a 15% capital gains rate, which is likely much lower than your ordinary income tax rate. Additionally, any foreign tax paid on foreign stock investments is tax deductible in a taxable account. Finally, those investments with the greatest potential for growth belong in Roth accounts where no tax will ever be paid. This tax management alone may boost your after-tax returns by as much as 1% annually.

11. Although small business owners shoulder much of the tax burden, they also enjoy more tax-maneuvering flexibility than other taxpayers. Reducing your taxes may be as simple as deferring income until next year or accelerating Section 179 expenses in the current year.

12. If you own a business, consider stashing cash in a retirement fund to reduce your tax liability. With a solo 401(k), you can contribute to the plan both as the employer and as the employee. As the employer, you can contribute either 20% of self-employment income or 25% of compensation income, depending on your company's structure. Plus, as the employee, you can contribute another $16,000 ($22,000 if age 50 or older). Finally, for the employee portion, tax planning can help you choose between a Roth 401(k) or a traditional pretax contribution.

13. Converting traditional IRA assets to Roth IRA accounts offers a chance for additional tax savings. Couples with an adjusted gross income below $100,000 can always consider a Roth conversion. Next year everyone, regardless of their tax bracket, can convert or contribute to a Roth IRA. And because 2010 is also the last year of the Bush tax cuts, you can use the conversion as a way to avoid the coming tax tsunami in 2011. Make plans now to prepare for next year's conversions.

14. Finally, a complex technique called "Roth segregation accounts" could earn your investments even more savings over the next two years. By segregating your Roth conversions in 2010, you can undo (or "recharacterize") those that underperform and keep the winners. This strategy offers you 20 months to determine which accounts to keep. It's as profitable as betting on the horse race after you know the winner.

Although just a small part of a larger comprehensive financial plan, savvy tax management requires professional assistance. Seek the guidance of a personal fee-only financial planner and certified public accountant (CPA), fiduciaries with a legal obligation to act in your best interests. The laws and ensuing complexities are changing annually, and as a result so is the optimum path.

Four Options if You Can’t Pay Your Taxes

The following is a guest post from M Davis at Back Taxes Help.

With the troubled economy it is becoming very common for individuals and business to not be able to pay their taxes. It is an understandable situation when a taxpayer must use funds to pay for necessities after losing some sort of income or incurring large unexpected expense prior to making their tax payments. If this has happened to you it is important to understand your options. If you realize your problem right away and take actions to resolve it you will likely receive a favorable outcome.

When you cannot pay your taxes owed it really isn’t that big of a deal to the IRS. The IRS knows situations do arise when a taxpayer can’t pay their taxes and they have created various methods for a taxpayer to pay back the taxes owed or even settle the taxes for less if they meet specific requirements. Below are the 4 most common methods that can be used by taxpayers to resolve taxes when they cannot pay in full.

1) Installment Agreement – An installment agreement is the most common method used for taxpayers to pay back taxes when they cannot pay in full. With an installment agreement the taxpayer is allowed to pay back taxes owed over time in monthly increments that are manageable to the taxpayer. With an installment agreement it is typically required that the taxes owed are paid off in a period no longer than 60 months. It is typically better to pay off the installment agreement quicker because the IRS still charges interest on the outstanding balance. The good thing to know about IRS interest is typically lower than most credit card interest rates and bank interest rates. Once your installment agreement has been accepted you will be considered in good standing with the IRS as long as you do not default on your monthly payments.

2) Partial Payment Installment Agreement – With a partial payment installment agreement the taxpayer is allowed to make smaller incremental payments towards the tax debt owed than what is required with the normal form of an installment agreement. This type of installment agreement is available only to those taxpayers that can’t meet the monthly required amounts of a normal installment agreement. In order to qualify for this you must prove to the IRS that even if you were to sell your assets you would still not have enough to pay back the IRS and you have no other repayment options available. The IRS will require an updated financial statement from you about every two years to determine if they can collect more money on a monthly basis. Many times a taxpayer will end up paying less than the total amount of taxes owed because the statute of limitations on the tax debt expires before the total amount is collected. The good thing to know about this type of payment plan is that you will be considered in good standing with the IRS as long as you can maintain the required monthly payments.

3) Prove IRS Hardship – When you prove IRS hardship you will be considered uncollectible to the IRS. When you are considered uncollectible they will not enforce collections of the taxes owed for the time being. Getting declared uncollectible happens when you can prove to the IRS that you cannot pay your taxes now and cannot pay them in the near future. A typical case for this would be if someone is disabled and because of this they are unable to work to gain funds to pay their taxes. If this person is able to prove to the IRS their disability then they may be declared uncollectible by the IRS. When a taxpayer is declared uncollectible the IRS will check back to reassess the financial situation of the taxpayer every year to couple of years. If the IRS determines that the financial condition of the taxpayer has improved enough then they will begin to enforce collections again, as long as the statute of limitations has not expired. Being declared uncollectible can be a financial life saver for those taxpayers in need because it will allow them time to get back on track with their financial situation before the IRS requires them to pay what is owed.

4) Offer in compromise – An offer in compromise is a tax settlement program offered by the IRS to allow taxpayers to settle their taxes for less than the total amount owed. This form of settlement is only available to those taxpayers that are financially burdened. The IRS really only accepts this form of settlement if they believe there is doubt to the tax liability or doubt to collectability. The IRS says they will not accept an offer in compromise unless the amount offered is equal to or greater than the amount the IRS expects they would ever be able to collect from the taxpayer, even if they sold off their assets. This type of tax filing is one of the most complex tax filings and is very difficult to obtain. Many people who may qualify for this end up in a partial payment installment agreement or are declared uncollectible because of how tedious the filing is. If you have your offer in compromise accepted by the IRS and you make the required settlement payment then you will be considered in good standing with the IRS.

No matter what your financial situation is there will always be a method for you to get back into good standing or remain in good standing with the IRS. When choosing the best method it is important to take a look at your current financial situation and your anticipated future financial situation. Just remember that the IRS has it in their best interest to make many options available to taxpayers to pay back their taxes because they end up collecting more in the long run. Don’t be scared of the IRS and work with them on a resolution with them because with the proper documents and filings you can find a manageable alternative to paying in full.

Preparing For The Death Tax Debate

This post is part of the one day blog event “The Spectrum of Personal Finance.”  In this event, Brian of My Next Buck, will discuss 8 different emotions and relate them to personal finance.  Here at Free Money Finance we will be looking at Death. To view the rest of the event look at the bottom of the page to see the other blogs hosting articles.

In the coming weeks we are going to hear more and more stories coming from Congress discussing the death tax.  For those that don’t know, the death tax, more appropriately known as the “estate tax”, is a tax on wealth being transferred (i.e. inherited) from one generation to the next upon the death of the owner.  The estate tax has always been dubbed as a tax on the uber rich, but if Congress doesn’t make some changes in the near future, this will be a tax on anyone with taxable wealth of over $1 million beginning in 2011.

Unfortunately, $1 million sure can’t buy what it used to, especially if you plan to retire someday.  It is likely that a lot of us will shoot for nest eggs well over the million dollar exemption by the time we reach retirement, making our wealth eligible to be taxed at an alarming rate of 55% upon our deaths.

Don’t Plan on Dying in 2011

This topic does have a sense of morbidity about it.  It’s really not cool to think about an appropriate time to die.  Then again, with the way the taxes are currently set up, dying in 2009 vs. 2010 vs. 2011 could mean millions of extra dollars in taxes for dependents.  Here are those three years’ exemptions and maximum tax rates:

• 2009 - $3.5 million; 45%
• 2010 – No exemption, 0% (tax repealed)
• 2011 - $1 million; 55%

If an individual with a net worth of $3.5 million dies in 2011 compared to 2010, the individual’s family would pay $1.375 million in additional taxes.  Regardless of your political affiliation, I think it’s safe to say that no one would want to pay an extra $1.4 million in taxes on January 1st 2011 compared to $0 on December 31st 2010.

Why You Should Care

The $1 million exemption limit that will go into effect in 2011 may sound like a fair amount.  After all, a million dollars is a lot of money.  For those that have worked hard and accumulated wealth over the years to afford retirement, and for those that have helped their parent’s estate plan, this could mean that a bulk of hard earned money could be going to the Fed’s coffers instead of your family’s.

It’s never too early to worry about these issues.  At the age of 25 I plan on saving, investing, and growing my wealth to a nest egg that greatly exceeds $1 million.  I would hate to put 40 years of work into building my wealth, only to see 55% of anything in excess of $1 million be taken away from my dependents by the government.

If you are a small business owner, you have to be even more concerned as a lot of small businesses get liquidated as a means for families to pay the estate taxes of the deceased.  Speaking of liquidation, if your assets are tied up in real estate and other non-liquid investments, beware that those assets are likely to be sold promptly to pay off these taxes.  Many families lose their businesses and even their homes because the majority of the owner’s assets are not liquid.

What Can You Do About It?

While estate taxes are going to be unavoidable in the future, it’s in the best interest of you and your dependents to take a few steps NOW to minimize the effect of the tax on your wealth.  Here are a few things you can do today to plan for tomorrow:

• Make lifetime gifts (up to the point of hitting a gift tax) – You can give up to $13,000/year per recipient without paying any tax. You can also pay someone’s medical bills, tuition or give to charity without paying tax. This reduces the size of your estate and the eventual tax bill.

• Create an irrevocable trust – These trusts allow you to “remove” ownership of the assets held inside the trust (usually cash, investment assets, a business). Therefore you are technically removing the assets from your taxable estate. Furthermore, the grantor is also relieved of the tax liability on the income generated by the assets in the trust.

• Create a Living Trust with “A-B Provisions” – This trust is complex, but in short, it allows you to pass your estate onto your heirs, while still allowing your spouse to have full access to the funds. The funds will not be transferred to the heirs until the spouse passes. However, the tax bill is for the original amount of the grantor’s estate, which means any appreciation in value of the estate will not be taxed.

• Set up and Transfer a life insurance trust – A life insurance trust exists to own a life insurance policy. If the owner of the policy transfers ownership of a life insurance trust to a beneficiary, the proceeds will be completely free of estate taxes.

• Go see an attorney and an estate planner – This stuff is complicated and an attorney can help you sort through all of the fine print and possibly come up with some more creative ways to mitigate your estate tax liabilities.

Keep an eye out over the coming weeks as the estate/death tax starts to make more news.  It is unlikely we will see a repealing of the tax for 2010, but it is possible that new legislation will be passed that may impact your estate plans.  Pay attention and meet with your financial advisors to ensure that your family is taken care of with or without you.

For further reading of the Spectrum of Personal Finance Event, please see:

• Fear at Bargaineering
• Hope at Budgets are Sexy
• Avarice at Consumerism Commentary
• Willpower at Debt Free Adventure
• Death at Free Money Finance
• Compassion at Get Rich Slowly
• Love at Mrs. Micah
• Rage at Poorer Than You

To view a recap of the event, check out the Spectrum Roundup at My Next Buck

Tax-Friendly Places to Retire

Have you ever thought of moving when you retire -- you know, someplace that's warmers AND can save you a bundle on taxes?

MSN Money lists tax-friendly places to retire but says it's not as simple as looking at income tax rates. Their thoughts:

Seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- have no state income tax. New Hampshire and Tennessee tax only dividend and interest income that exceeds certain limits.

But many of the remaining 41 states (and the District of Columbia) offer generous income tax breaks to retirees. If you qualify, moving to one of these retiree-friendly areas could be cheaper than relocating to a state with no income tax.

Plus, in tough economic times, states without a personal income tax have fewer sources of revenue and are more likely to raise property or sales taxes and other fees to shore up their budgets. State tax revenues plunged nearly 12% during the first three months of 2009, the sharpest decline on record, reports the Nelson A. Rockefeller Institute of Government. And it may take states years to make up the shortfalls.

So, I'm thinking:

1. If you can save a bundle on taxes AND improve other areas of your life (get closer to family, get a better climate, etc.), why not?

2. You have to be sure you don't increase other living costs when you move.

3. You'd probably have to have a really high income to make this a worthwhile effort, wouldn't you?

But this brings up a related topic -- are you thinking of moving when you retire? If you're like us, retirement is still some time away, so I really have no idea what we'll do. But for those of you who are retired, closer to it, or have talked about the issue, what are your plans?

Who Doesn't Pay Taxes

I was struck by these tax numbers in a recent CNN Money piece:

In 2009, roughly 47% of households, or 71 million, will not owe any federal income tax, according to estimates by the nonpartisan Tax Policy Center.

Some in that group will even get additional money from the government because they qualify for refundable tax breaks.

The ranks of those whose major federal tax burdens net out at zero -- or less -- is on the rise. The center's original 2009 estimate was 38%. That was before enactment in February of the $787 billion economic recovery package, which included a host of new or expanded tax breaks.

The vast majority of households making up to $30,000 fall into the category, as do nearly half of all households making between $30,000 and $40,000.

Nearly 22% of those making between $50,000 and $75,000 end up with no federal income tax liability or negative liability as do 9% of households with incomes between $75,000 and $100,000.

Of course, income taxes don't tell the whole story. Workers are also subject to payroll taxes, which support Social Security and Medicare.

When considering federal income taxes in combination with payroll taxes, the percent of households with a net liability of zero or less is estimated to be 24% this year, according to the Tax Policy Center's estimates.

A few thoughts here:

1. Wow. Almost half the people pay nothing to help run our federal government.

2. Yes, there are other taxes besides federal income taxes. Believe me, I know them well.

3. That said, 24% of people in the US pay absolutely nothing in any sort of tax? Really? I understand that these people are at the very lowest of income levels, but talk about a good gig financially -- getting to live in a great country, with all it's benefits, for no cost at all.

4. Are we near the end? Consider this quote by Benjamin Franklin: "When the people find they can vote themselves money, that will herald the end of the republic."

I've always found it interesting that many people pay nothing in federal taxes and yet get the same benefits (including the right to vote) as people that pay the entire tab. It's like being able to use the health club without paying any sort of fee to do so while the other members foot the bill.

I'm guessing that it's even more skewed in other countries like Canada, France, etc. that have more progressive tax systems. Anyone know if this is correct?

Update: Just found this. If 40 (or 47) million people are in poverty, that explains why they don't pay taxes, huh?

10 Ways to Lower Your Taxes

Here's a list of 10 ways to lower your taxes from Kiplinger:

1. Boost your 401(k) contributions.
2. Make the most of your flexible spending account.
3. Buy a house.
4. Buy a car.
5. Sell losing investments.
6. Maximize your tax credits and deductions.
7. Pay college bills.
8. Give to a charity.
9. Max out tax breaks for the self-employed.
10. Keep track of medical expenses.

Here's where I stand on each of these:

1. I've been maxing out my 401k for years, so I get the full tax advantages here.

2. Does a HSA count? If so, I put in the maximum allowed each year.

3. I already have a house and it's been paid off for over a decade -- so I don't get the new homeowner credit or the mortgage interest deduction. And I'm ok with that.

4. I thought about buying a car this year and saving the state taxes, but I think my car will last another (hard) winter and it's probably a better deal to keep it longer. So I'll look for a new car in 2010.

5. I have enough investment losses to carry over for years. Ugh.

6. We're looking at buying a new heater/AC and the $1,500 tax credit is one reason why. That and the fact that the repairman said, "Your heater is making a funny noise. My suggestion is to never turn it on again."

7. Our 529 contributions save us on state taxes (a few hundred dollars a year) because we invest with an in-state 529 plan.

8. Our biggest deduction for the past several years.

9. If you have a business (or a side business), you can save a bundle on taxes by having the business cover many costs (such as a deduction for home office use, magazine subscription, books, computer equipment and support, etc.) I could make much better use of this option, but I seem to maximize revenue and minimize expenses (which is not a bad thing.)

10. I'd prefer to have no medical expenses at all than to have massive ones that save me on taxes (which is probably the same way everyone feels about this issue.) But if you do have big medical bills, it's at least some consolation that they can save you some on your taxes.

How Long You Should Keep Tax Returns?

Here are some thoughts from the great personal finance book Grow Your Money!: 101 Easy Tips to Plan, Save, and Invest. They list how long you should keep tax returns as follows:

• If your tax situation is very straightforward, the minimum required time to keep your income tax returns and supporting documents is three years from the return's original due date, including extensions.

• If your tax situation is more complicated, save all your tax returns and documents for at least six years.

Our tax situation is fairly complicated (one reason we use a CPA to do them), and I keep our returns forever. What does "forever" mean? It means that I've never thrown one away. I have the returns as well as supporting documents in separate files in a file cabinet. I have the room, so why not keep them around?

The book then lists stuff you should hold on to indefinitely as follows:

• Records supporting the cost basis of investments such as stocks, mutual funds, and collectibles.

• Records supporting your home purchase and home improvements.

I keep these as well -- in the same file cabinet. :-)

How about you? Do you keep all your past tax records or do you toss (shred probably) them after a bit of time?

10 Top Tax-Savings Ideas

Here are some thoughts from the great personal finance book Grow Your Money!: 101 Easy Tips to Plan, Save, and Invest. They list 10 tips for saving money taxes as follows:

1. Maximize contributions to retirement plans.
2. Consider a Roth IRA conversion.
3. Own a home.
4. Pay attention to how your investments are taxed.
5. Make tax-wise charitable contributions.
6. Make the most of your employer's fringe benefits.
7. Own a business.
8. Look for tax credits.
9. Look for deductions available for nonitemizers.
10. Timing is everything.

Here's how I stack up on these ideas:

1. Check. I've been contributing the maximum amount possible to my 401k for 15 years now.

2. I'm not sure of all the ins and outs of a Roth conversion, but I'm looking into it (and will likely have an upcoming post on it.) I do believe in the tax diversification idea of having some funds taxable and others non-taxable, so the concept of a Roth is appealing.

3. Check. I can deduct property taxes, but I haven't had a mortgage in a looooong time.

4. Taxes are one of the costs you need to minimize to get the best investment return possible. Yet another reason to love index funds.

5. We track our contributions closely and get receipts for every one of them.

6. I already talked about the 401k contributions I make, but I also put away the maximum amount possible in our firm's HSA. Trying to do all I can to minimize taxes.

7. I do own a small business, but it's better at generating income than tax write-offs (which I consider a good thing.)

8. We're working on a nice tax credit right now that I'll update you all on in the future.

9. I itemize. And as far as looking for deductions, I keep my eyes open for anything new and expect the same from my CPA.

10. I don't have a lot of flexibility to play with timing, though I usually do pay my January property taxes a month early to get the donation deduction in the earliest tax year possible.

Last-Minute Tax Savings for College Expenses

The following is a guest post from Marotta Wealth Management. It's a bit tailored for Virginia residents, but still offers some useful thoughts for the rest of us as well.

My youngest will be a first-year student at the University of Virginia this fall. My coauthor Matthew's oldest child is almost two years old. So he is just beginning to think about college funding and I'm about to start withdrawing from my final 529 plan.

With a well-designed 529 college savings plan, you can fund a college education at a deep discount. But even if you haven't saved much for college beforehand, simply passing college expenses through a 529 plan can save you $200 to $2,000.

A 529 college savings plan offers three types of tax savings. Virginia residents receive a state tax deduction in 2009 on contributions up to $4,000 per account. Students are permitted to attend a college out of state. If you don't live in Virginia, you can research your own state's tax benefits. In every state you receive both federal and state tax-deferred growth and tax-free distribution when you are ready to use the money. These latter two tax benefits are the most significant. But you must invest early.

The Virginia state tax deduction, in contrast, is available merely for putting money into a 529 plan. You are allowed to make a withdrawal immediately to pay for college expenses. This worthwhile tax deduction can help trim expenses. Consider it Virginia's way of promoting higher education.

Make sure you understand what counts as an educational expense before you begin this process. The withdrawal must be for tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution. In a recent change, a personal computer now also qualifies.

If you are paying tuition and fees, have a check sent directly from your 529 account to the college. This direct deposit will simplify bookkeeping and make filing your taxes easy. If your fees are spent elsewhere, keep receipts of all the qualifying expenses.

Consider Paul and Ali Hewson, whose oldest child Jordan will begin college in the fall. The Hewsons haven't saved much, but Paul's career is really taking off. So they now have the money to pay for Jordan's college expenses. As Virginia residents, they are entitled to a $4,000 state tax deduction if they put at least this amount into one of the state's approved 529 plans. At the 5.75% state tax rate, they will net a $230 savings for 2009 after they file taxes in 2010.

Jordan has decided to bypass Virginia's fine in-state institutions and attend a more expensive private college. Consequently, the Paul and Ali now have $40,000 of upcoming qualified educational expenses they can pass through a 529 plan to build a decade worth of carry-forward state deductions. Virginia 529 plans allow for an unlimited carry-forward deduction until the amount of contributions has been deducted. Assuming the tax laws and rates remain the same, the Hewsons will take a $4,000 deduction each year for the next decade. They will accrue a total savings of $2,300 savings over this 10-year period.

Paul and Ali can use any of the three different 529 plans in Virginia to accomplish this savings. We estimate it should take no more than an hour to set up the accounts and an hour to make the disbursements.

The CollegeAmerica program, the state-sponsored plan run by American Funds, must be accessed through a financial advisor. Unless you have a relationship with a fee-only advisor, you will pay a hefty commission to use this plan. If you can access the American Funds without paying a commission, invest your pass-through money in the Money Market Fund, the most liquid and stable investment in the plan. This fund requires a $1,000 minimum deposit for the initial setup. With the American Funds, expect to pay a $10 account setup fee and a $10 annual maintenance fee that kicks in if you hold the account through the end of the year.

Investors can access the state-run Virginia Education Savings Trust (VEST) program directly at www.va529.com to begin online enrollment. The plan charges a $25 annual fee in November and no other setup costs. It also has a money market fund available as part of its nonevolving portfolio investment options. Both the VEST and CollegeAmerica programs have received the highest scores from a recent Wall Street Journal report and other rating groups.

Virginia also has a program administered by the Union Bank & Trust called CollegeWealth. You can open a money market account at a Union Bank branch to receive the state tax deduction. If you are comfortable completing this task online, you may find working with a local bank difficult only because you must go there to complete all your paperwork.

Better than waiting until the last moment to start funding a 529 plan, consider investing now. With a depressed stock market, your funds can expect a healthy return for the next several years until your child is ready for college. If you have grandchildren you can get the same tax deductions by opening accounts for them. If you do not have a lump sum available to invest, start a monthly contribution from your paycheck directly into a college savings account. Although you may have to wait until your children bless you with grandchildren, they will ultimately thank you for it.

Four Home Upgrades Worth the Tax Break

MSN Money lists four home upgrades worth the tax break as follows:

• Adding insulation - Insulation is the cheapest home improvement that qualifies for the tax credits, says Karen Schneider, a spokeswoman for Energy Star. And by installing it you could save up to 20% on your energy bills.

• Replacing windows and doors - Before, tax credits for windows and doors were capped at $200. Now you can get up to $1,500. But that's only if those doors and windows meet certain criteria.

• Installing air conditioners - Energy Star estimates the retail price and installation of a 5-ton central air conditioner at more than $1,700. That's hardly cheap, but these systems need to be replaced only once every 10 to 12 years, Schneider says.

• Putting on a new roof - Assuming your roof is around 15 years old, replacing it with a metal or asphalt roof that meets Energy Star requirements will help keep your home cool by reflecting the sun's heat, especially if you live in a warm location, Schneider says.

We could actually be in the market for three out of four of these. The details:

1. We need a bit of insulation added to our attic. It's been on my to-do list for years, maybe this is the incentive I need to get it done.

2. We have several windows that need to be replaced. Thought about doing it last year -- glad now that we waited.

3. Both our AC and heater are on their last legs, so we'll probably be doing this one for sure.

4. Doh! We put a new roof on two or three years ago. Dang!

How about you? Any of these look worthwhile?

And for those of you interested, here are some more ideas for saving while also going green.

Taxes for the "Rich"

During the presidential election (boy, aren't you glad that nonsense is over?), there was a lot of talk about how to define a "rich" person. If I recall correctly, some estimates got as low as someone making $70k per year being "rich", though I'm not sure if that was someone's actual thoughts or their opponent's spin on their thoughts. I guess it doesn't really matter now anyway.

What does matter is that President Obama is now working on his new tax plan and he's defining "rich" as someone earning over $250k per year. Under his plan, these people would be charged higher tax rates and have the level of their deductions reduced. The Wall Street Journal recently detailed the various issues associated with the changes, which are still very much in flux.

Here's what I see as one of the key parts of the Journal's piece:

By any statistical measure, that income level ($250k per year) is at the top of the bracket. But for those closest to the line, the money might be less a sign of affluence than it is of the industry of dual-income couples. It is possible, say observers, that veteran civil servants could fall into the higher tax bracket.

This whole issue brings up several thoughts from me:

1. I don't think anyone is going to say that someone earning $250k per year isn't at least doing "fairly well" for themselves. Look at the numbers, see what most people make, and $250k is pretty good.

2. That said, $250k lasts a lot longer in certain areas of the country (as we've discussed.) $250k in Indianapolis is a LOT more than $250k in NYC or San Francisco.

3. I have no doubt that "those closest to the line" will have the biggest issue/problem with the proposed changes. After all, if someone making $250k is in the same bracket as someone making twice that much or more, doesn't the $250k person feel the impact more financially?

4. It seems to me that some sort of flat percentage could take care of all this mess. As income increases, then total tax dollars increase (though the percentage paid stays the same). But changing our tax code to something simple and even remotely fair is an impossibility IMO. Too many special interests.

5. What's going to happen to taxes? No one knows, especially in this economy. I don't think it's wise to raise taxes on anyone given the frailty of the system now, but what do I know? I never claimed to know anything about economics. Maybe those of you more knowledgeable on this issue can chime in with thoughts.

How to Select a Good Tax Professional

Bankrate has some thoughts on how to select a tax professional. Here are the tips I think are especially important:

• Look for a certified public accountant, an Enrolled Agent or a tax attorney. "Typically, these preparers are required to maintain continuing education credits to maintain their designation," notes Hockenberry. "This is a real plus for the taxpayers because they will have some additional security knowing the preparer they chose is up to date on the latest tax law changes."

• References are easiest to check when you use a preparer recommended by family and friends. If you select someone totally new to you, don't be afraid to ask for references and follow up with them to see if they are satisfied with the service.

• Hockenberry also recommends checking the preparer's fee before any work is done. "This will eliminate any surprises when you go to pick up your return," she notes, "and will also tell you if the preparer overcharges in comparison to other preparers in your geographic location."

A few thoughts from me:

1. I use a CPA to do my taxes and have done so for years. I have several reasons why I do this.

2. Ask people you know and who you think are doing well financially (you don't want money advice from someone doing poorly, do you?) who they use to do their taxes. This should give you several choices. Then call a few of them, schedule a meeting to see if you can work with them, and ask them for references. Call the references and see what they have to say about the preparer.

Of course, they'll give good recommendations (why else would the preparer suggest them?) but I've found that saying something like, "I know that you really love Bob as a preparer, but if you could change how he does anything, what would it be?" This will get you far more information than a simple, "Tell me what Bob does wrong" or similar statement.

3. I agree with my preparer IN ADVANCE what the cost will be. My firm has a habit of trying to raise fees 10-15% per year as well as tacking on a fee for every little thing -- copies, mailings, electronic filing, etc. (And I don't mean small fees, but something like $1 a page for copies.) As you might imagine, I don't go for any of that and I negotiate the TOTAL price in advance each fall (roughly in October) to give myself enough time to find a new preparer in case we can reach an agreeable price.

Tax Day Numbers

It's April 15 -- tax day!!! To lighten the mood a bit, here are some fun tax stats courtesy of BillShrink.

• 60—The number of times around the Earth all the pages of tax forms and instructions filed each year by US taxpayers would stretch if it was laid out end to end.

• 4/16—Unofficially known as “Divorce Day” because of the sharp increase in federal filings after plotting spouses have access to uploaded financial information.

• $100,000—“Consulting fee” a Pittsburgh furniture store owner deducted as  business expense on his tax returns after paying an arsonist that sum to burn down his building so he could collect the insurance money.

• 1916—Year in which the word “lawful” preceding “income” was removed from the Internal Revenue Code, making illegal income also taxable.

• 120—Average number of days a U.S. taxpayer will work each year to pay tax liabilities.

• $240,009—Tax refund claimed by an Iowa man who said all his past payments to the IRS were made in error. His reasoning? The US is a “fictional entity” and can’t hold jurisdiction over him because he is a “citizen of Heaven.”

• 48 Hours—Number of hours within which you are required to pay sales tax to the Tennessee Department of Revenue for all purchases of illegal drugs.

• 351,191,000—Visits to IRS.gov in 2008, a 61% increase from 2007.

• $2,728—Average tax return in 2008.

• 2015—Year in which electronic returns are projected to outnumber paper returns.

• $16,700,000—Amount of back taxes country singer Willie Nelson owed to the IRS in 1990.

• 1817-1861—Years in which the United States Federal Government collected no internal revenue.

• 9,097,000—Number of words in the IRS tax code, a 652% increase from 1955.

Free Tax Advice Tomorrow

Just had this emailed to me:

H&R Block is launching a toll-free tax hotline for one day only - April 7, so consumers can call and speak with a tax pro or customer service rep to get high-level tax advice.

Tax experts from H&R Block will offer 24 hours of “taxpertise” – tax advice for free. Anytime tomorrow, taxpayers can phone or email in their tough tax questions and get free, expert advice. Just call 1-877-HRBLOCK (1-877-472-5625) or e-mail [email protected] to connect with a tax expert.

Some good news for you last-minute filers. ;-)

Filed Your Taxes Yet?

A sort question for today as we get ever closer to April 15:

Have you filed your taxes yet?

Ours have been to my CPA for three weeks now and we'll probably have everything wrapped up in a week or two -- about a week before the deadline.

How about you? Are you one of those February 1 early-bird filers or are you planning your annual before-midnight trip to the post office on April 15?

I Fought the Law and the Law (Mostly) Won

Here's a quick summary of my recent bout with the local tax authorities regarding my home's tax assessment:

• Got my tax notice (not the bill, simply the form stating what my new taxes were based on) on Saturday, February 21.

• The notice accounted for a 4.3% drop in both the appraised and taxable value of our home, a reduction of just under $150 in taxes this year.

• The actual value of our home is much closer to 11.3% down versus the last notice (at best). How do I know this? Because our home was for sale at this price for a month last fall when we thought we'd bought a new place. We had NO ONE interested, hence, as I said, this is "at best."

• The notice said that I had three days to call an assessor if I didn't agree with the numbers (the very next Monday through Wednesday, February 23 through 25). Recall, I got the notice on the 21st. Gee, thanks guys, for giving me plenty of time to consider the issue.

• I called the assessor's office on February 23 and was told that I could come in (no appointments made) and talk to an assessor. If I wasn't satisfied after that, I could appeal to the board a few weeks later.

• So on the evening of the 23rd I spent a couple hours developing a presentation on my rates and history, valuations of comparable properties that had sold near our home (got from my realtor), listing of my home when it was for sale, etc. By the time I was done, the packet was about 50 pages long (I included a page for each comparable home sold.)

• I visited the assessor's office on February 24th. I had to wait my turn (about 20 minutes) and fill out some mindless paperwork that basically was covered in my presentation. But I completed it, then met with an assessor.

• He was very friendly, but also a bit overwhelmed. I can only imagine the number of people contesting their assessments. He looked at my documentation and commended me on the research and presentation. He also told me something I didn't know -- foreclosure sales don't count in any comparable figures the assessors can review. Yep, you got that right. So while the actual value of my home is way lower because of foreclosures in my area, assessors (and me as well) can't count them when developing an assessed/taxable value for my home. What a rip!

• He told me I would get a response by mail in a week or so and I could appeal that if I didn't like it. On March 4 I got my new tax notice and they'd lowered both the assessed and taxable values by another 1.1%, lowering my taxes by another $37 a year. Basically, they threw me a bone.

Now I had to decide whether or not to fight it with the board. Given the facts that: 1) they were probably going to allow very little changes from here on out, 2) I couldn't count foreclosures in the comparable numbers, 3) the time and effort I'd have to take (time off from work, etc.) versus the savings just wasn't worth it, 4) the timing of the appeal -- it was a day after I planned to be out of town for two days which gave me little time to prepare, and 4) I hope to be moved from this home soon anyway, I decided to stop here and call it a day.

Still I left the process with a bitter taste in my mouth. Sure, I saved a bit and my taxes will be almost $200 lower this year, but they're at least $200 higher than what they should be. I pity the poor people who don't know how to fight back at all and/or don't look at their notices for a couple days and realized they are too late to challenge them. They have no chance at all except to take whatever valuation they've been assigned.

Anyone else out there appealed their real estate taxes successfully (or not)? What happened?

Related: Looks like I'm not the only one with a beef.

A Good Reason Why You May Need a CPA to Do Your Taxes

Here's a GREAT comment left recently by Jesse from You Need a Budget on my post titled Why I Use a CPA to Do My Taxes:

I have a master's degree in accounting, but have never done any tax compliance for clients. I know enough to know that I don't know enough.

Had I used a CPA for my 2007 taxes I could have saved several thousand dollars. This year I employed one and it's made all the difference. TurboTax and other tax software don't cut it when there are complexities. They'll ask you questions in their interview fashion, but you don't necessarily know what the implications to those answers are -- your CPA does (or should).

Exactly. I have an MBA and a fairly good grasp of personal finances and basic tax issues. But like Jesse, my taxes are complicated and I know enough to know that I don't know enough.

That said, if my taxes were simpler, I probably would do them myself, especially with the great tax software options out there. But they are really, really complicated, and that's a great reason for using a CPA IMO.

Review: TaxCut 2009

Since I use a CPA to do my taxes, last year I had a friend do a write-up of TaxCut software for me. We did the same thing again this year, and here is his review.

I reviewed H&R Block’s TaxCut 2008 last year and was pretty impressed since it found a calculation error in state taxes that I had made.  So I thought it would be good to see what the 2009 TaxCut had to offer and to see how easy it was to bring over the previous year’s data. After all, part of the reason for buying a tax program is so you do not have to re-punch all the family data in again.

First, let me say that my review might be slanted since the computer that I was loading this tax program on did not have an internet connection. (You can determine that after you read though my review.)  I wanted to use the machine in my home office which is the same machine that I used the previous year and had all my 2008 TaxCut information was on it.  Therefore, I loaded the CD onto the desktop with no problem. Right away it wanted the latest updates from the TaxCut website and tried to connect to the web. I then went to a laptop that I have a semi-high speed cell phone card installed on. I went to the TaxCut website and downloaded the federal and state of Michigan updates. I transferred these files to a USB memory stick and then installed them onto the desktop. The federal update went without a hitch, but the Michigan update kept giving me an error code. After trying to install the update several times I decided to call their customer support for guidance. I was told to uninstall everything and reinstall it. This is not good news, but I did it, and the same problem occurred.

So it was back to the phone for customer support, round 2. The second person told me it was because the state form was not loaded and that I had to connect to the internet to do this. I said the computer was not on the internet but I had an internet connection on another compute, so he then sent me an email with a different link to download the state form. This link was not on their standard website page. He then said to load the state form and then install the update. I completed the task in about 15 minutes, but I continued to get an error when I tried to load the update. I then looked for the version number of the state form by selecting the help menu, then selected “about TaxCut”.  I called the customer service number for the third time if anyone is counting, and asked if this version number 4101 was the latest version. After several minutes of waiting she came back and said it 6201. I said that was the federal number the state starts with a 41. So back on hold I went. She then came back and said it was the 4001 is the latest version. Therefore, I didn’t need to load the update since the manual download was the most current. So, 3 hours later and 3 calls to customer service I finally had TaxCut on the desktop and updated. To be fair, if I had a high speed internet connection I might not have had this problem. But then again, not everyone has high speed internet in their home so maybe this is a fair gripe. I checked the software box and I do not see that a high speed connection is a requirement, but it should be. The federal update was something like 30 mb and the state was around 2 or 3 mb which is way too large of a file for simple dial up connecting.

Anyway, that was over and I am a wiser man, so let’s talk about the program. TaxCut brought over the previous year’s tax information without a hitch and then started to ask if there were any changes to my family member’s data. I was then able to start responding to the questions and logging in my income. What it did was show the previous year’s 1099int, 1099 div accounts, my bank accounts and assumed that I had income from the same accounts as the previous year. You can add or delete the accounts as need and then change the amounts. The same thing happens for the deductions. It assumed that I was giving to the same charitable organizations and that my mortgage was with the same mortgage company.  Though you can add and delete which is what I did. I guess this is faster than logging all new information in. After about a half hour of answering questions I was done with the 1040 federal return. (I had all my information already compiled and in order.) I was then able to print out and review my 1040. A nice feature was a comparison printout of the 2009 verse 2008 year income, deductions and final taxes.

I then went to the state form and answered the questions and plugged in the numbers and was done with that form in about 15 minutes.

I then printed out the forms with the schedules and worksheets, reviewed them. Everything was in order, so I printed selection the finial filing forms for signatures, which give you all the attachment plus instructions and mailed them off. Since I did not have an internet connection on the desktop machine I was not able to e-file.  One thing I noted on the instructions for the state form. It gave a different address than what was on the actual Michigan instruction booklet that I received in the mail. I figured that the booklet from the state was probably correct and thus changed the mailing address from what TaxCut was telling me.

All in all, the program was easy to use once I got the proper updates installed.  My beef is the way they make you go out to the website and get the state forms. It sure is a hassle, even for someone that is computer savvy. Maybe everything is seamless with a high speed internet connection, but that should not be the case. Not everyone has a high speed connection in their home. ( I can’t get one since cable and dsl are not available in the “boonies” where I live.) The TaxCut programmers should be able to figure out a way to include the state forms on the CD and then you download only the updates from any computer transfer the updates to your computer containing the program, and then the update will verify that you have the correct software licensee and then update your federal and state forms accordingly. The software should also note how many returns you are filing and limit that number if they are worried about someone setting up a tax shop with a $40 software package or doing the taxes of all their friends and family members. Then again, who is going to let their neighbor do their taxes or a family member that is beyond their son or daughter? None is my answer.

Frugal Millionaires on Taxes and Accountants

Here's an excerpt from the book The Frugal Millionaires: 70 millionaires anonymously share their ideas about money to help each other and you. Today we're seeing what the millionaires have to say about taxes and accountants. Since I use a CPA to do my taxes, I'm on the same page as they are.

FYI, these are some representative tips from The Frugal Millionaires. There are over 800 tips in the book. The frugal millionaires are only referenced by their initials. The author signed a confidentiality agreement that the millionaires' identities would never be disclosed in exchange for them saying whatever they wanted. If they chose not to have their initials used they were given the initials AFM which is an acronym for Anonymous Frugal Millionaire.

Here's the excerpt:

Taxes

Paying taxes is not everyone’s favorite topic, but it’s a fact of life in a civilized world. There are no magic bullets or secret schemes below on how to not pay taxes. They are an expense, like a lot of other things that can keep you from growing your net worth.

Frugal millionaires are willing to pay their fair share of taxes, but not more than that. And avoiding taxes doesn’t mean evading them. Many of the legal “loop holes” have been eliminated over the years, so it’s back to using the basic common sense principals of planning ahead, knowing what you’ll be in for, and minimizing what you’ll owe. The frugal millionaires have adopted an attitude towards taxes that makes them a lot less frustrating to deal with.

• FJC – Just pay the taxes. I got burned several times trying various tax shelters based on the advice of friends and financial advisors (including real estate shelters, oil and gas shelters and commodity straddles).

• AFM – Avoid filing extensions and always pay your taxes on times. The penalties are a waste of money.

• MG&DG – You’ve got to do it. Don’t cheat the government. It will catch up with you.

• DTA – You have to do it. Don’t sweat the stuff you can’t control, but do minimize when you can. Don’t lose sleep over your taxes.

• AFM – The government is a bad investment, unfortunately it’s a necessary one. Explore your options, take no risks and carefully pay as little as possible.

• JSB – Pay them if you have to…be careful setting up elaborate shelters as AMT gets applied very quickly now and disqualifies nearly every write-off.

DEFINITION: Alternative Minimum Tax (AMT): An extra tax some people have to pay on top of the regular income tax. The original idea behind this tax was to prevent people with very high incomes from using special tax benefits to pay little or no tax. The AMT has increased its reach, however, and now applies to some people who don’t have very high gross income (now $75,000) or who don’t claim lots of special tax benefits. Proposals to repeal or reform the AMT have languished in Congress for years, but effective action does not appear to be on the horizon. Until Congress acts, almost anyone is a potential target for this tax.

The name comes from the way the tax works. The AMT provides an alternative set of rules for calculating your income tax. In theory these rules determine minimum amount of tax that someone with your income should be required to pay. If you’re already paying at least that much because of the “regular” income tax, you don’t have to pay AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax. (SOURCE: Fairmark.com, with edits)

Accountants

• JKB – Tax laws are written to favor the government, not you. Seek the advice of a professional to minimize the impact and always consider additional taxes and save for them.

• AFM – I don’t spend large amounts of time and consideration here trying to save on taxes beyond my accountant’s advice. Try to keep your life simple and just take the hit.

• JC – Don’t waste your time preparing your own tax return. Hire an expert to file for you. Be careful of AMT.

Four Steps to Take Before You Hire a Tax Preparer

Consumer Reports has some good thoughts on making sure your tax preparer is really qualified before you hire him/her. In particular, they share four things you should do before hiring a tax preparer as follows:

• Ask about your preparer's qualifications
• Get an estimate of costs up front
• Find out how your preparer keeps up with changing tax laws
• Ask whether the preparer can represent you in an audit

As many of you know, I use a CPA to do my taxes. Based on my experiences with her, here are my thoughts on Consumer Reports' tips above:

1. Certainly ask about qualifications. In particular, look for advanced certifications like having a CPA. I also asked for references and then called the people to see how they liked her.

2. Yes, yes, yes! Get costs up front! If you don't, you may get a bill much larger than you expect. This happened to me early on in my relationship with my CPA, and I've asked for an estimate in advance every year since.

3. Hard to find this out other than simply asking.

4. Mine does -- and says so up front. Of course them doing so would probably cost me an arm and a leg. Anyone had experience with a tax preparer representing you in an audit? Did it cost a fortune?

My Thoughts on the Economic Stimulus

I haven't posted on the economic stimulus (ES) package during the past month or so that they've been talking about it since it was one huge work in progress. I didn't want to comment on one provision when there was a big chance that it would be eliminated or changed the next day. But now that the ES will be signed sometime later today, I thought I should at least add my two cents as well as hear what you think about it. Here's my take:

• I am NOT any sort of economist or economic expert, so take what I say with a HUGE grain of salt. Then again, it seems as if the "experts" don't really know what's going on either, so maybe I'm in good company.

• I'm not sure we even need to have an ES. Then again I'm not sure we don't need it either. If we do nothing, what will happen? Won't we take our medicine and come out better in the end -- though it may be three to five years down the road? Or will the results be so terrible that we have to do something? I'm not sure. Again, I don't think the "experts" in Washington are sure either.

• I don't know if the stimulus will work. No one seems to know if it will work. When was the last time I spent a boatload of money personally and wasn't sure if what I was buying would work or not? Never. So why is the government spending so much money without knowing whether or not it will work? That's a good question.

• I have mixed feelings on what I think about President Obama and Congress, though in general none of them really rate highly on my list with this ES. The way it was handled was certainly not bipartisan and not the "change" the president promised us all. That said, I'm willing to cut him a bit more slack than I am Congress (after all, he's been on the job a few weeks -- most of them have been around a LOT longer.). And dealing with all of those representatives and senators with their hands out must be like trying to herd cats. It's surprising Obama has any sanity left after three weeks of working with them

• Personally, I'm getting very little from the ES since I'm labeled "rich" or "wealthy" by most of the provisions with stipulations. It's kind of ironic since: 1) I pay a huge amount of taxes and 2) I have a surplus of cash that I'd be motivated to spend if given the right incentives (for example, if they'd kept the $15k tax credit for buying a new house in, I could almost guaranteed we'd buy a place this year -- I know for sure we'd certainly feel an increased sense of urgency), but the government, in its wisdom, isn't giving me any. Seems like there are probably a lot of people in my shoes, people who would spend and help the economy get back on track if given an incentive, but our government likes to keep "the rich" out of incentives. Seems counter-productive to me, but then again, I'm no economist. (BTW, their definition of "rich" is laughable, but that's a different story.)

So in the end, the ES will not encourage me to do anything differently financially. Of course I will hope for its success as we're all paying for it, so we better hope it will work. If nothing else, the journey should be quite "interesting."

How about you? What's your take on the ES?

Tax Software Sale Today at Amazon

For those of you interested, I saw that H&R Block TaxCut 2008 Premium Federal + State + e-file is on sale today at Amazon.com ($20 off).

The 11 Most Overlooked Tax Deductions

Well, we're now on the countdown to April 15. Isn't it about time to rev up the tax-related posts? ;-)

We'll start the season with this one from Kiplinger's that lists the 11 most overlooked tax deductions as follows:

1. State sales taxes.
2. Reinvested dividends.
3. Out-of-pocket charitable contributions.
4. Student loan interest paid by Mom and Dad.
5. Moving expense to take first job.
6. Military reservists travel expenses.
7. Child-care credit.
8. Estate tax on income in respect of a decedent.
9. State tax you paid last spring.
10. Refinancing points.
11. Jury pay paid to employer.

I think the reason these are "the most overlooked" is because they don't apply to many people. Then again, if they do apply to you, you might not catch them because you wouldn't know about them. To me, this is just another reason to use a CPA to do your taxes -- they'll ask the right questions to identify these issues (and thus end up saving you money you might have missed otherwise.) This said, you still need to know at least the basics of what deductions might apply to you even if you do have someone prepare your taxes.

And for those of you itching for more on taxes (and I know many of you are!), here are a few more tax-related posts for your reading enjoyment:

• When to Hire a Tax Professional

• How to Hire a Good Tax Professional

• Review: TaxCut

• Keep Identity Thieves at Bay during the 2008 Tax Season

Happy tax season!!!!! ;-)