“Real World” Personal Strategy Blog

The coming tax ‘Armageddon’ for you

Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbour. Catch the trade winds in your sails. Explore. Dream. Discover.

- Mark Twain

Can you believe it’s almost October?

Really, though–2010 is almost finished. And while this continuing sensation of time’s swift passage may be interesting, the reality is that the end of 2010 will be bringing some major changes to the tax code–and it will be here sooner than you think!

If you think that you have a handle on your tax situation in 2010, you will be shocked at the changes in 2011.

I’ve been hesitant to put together this list, because I don’t want to A) scare you or B) appear overly-political here [if I'm partisan, it's that I'm in the "Save My Clients' Money" Party].

But this piece may really shock and surprise you. There’s one answer for it, of course, but I’m going to be extra sneaky and make you wait until the end of the article to find out what it is. You know how it works–that’s called a “tease”.

So you’ll read the whole thing, now, of course!

The Coming Tax Armageddon in 2011 (Part 1)

I know this sounds hopelessly dramatic, but I’m being completely upfront about the fact that I want to prompt you into action. I would not be doing an excellent job as your advisor if I did anything *but* pull out all the stops to get your attention pointed to this coming train wreck for your finances.

Here’s what’s coming, starting January 1, 2011…

The Personal Income Tax Increase

The top income tax rate will rise from 35% to 39.6%. The lowest rate will rise from 10% to 15%. All the brackets in between will also rise. Itemized deductions and personal exemptions will be phased out if you have “too much income”, which has the same effect as higher marginal tax rates. Here’s the complete list…

* The 10% bracket becomes an expanded 15%

* The 25% bracket becomes 28%

* The 28% bracket becomes 31%

* The 33% bracket becomes 36%

* The 35% bracket becomes 39.6%

Though these increases may seem small, their ramifications for your wallet, and your monthly budget are quite significant.

The Return of the Estate Tax

This year, there is no estate tax. However, for those dying on or after January 1 2011, there is a 55% top death tax rate on estates over $1 million. (And you thought you weren’t “wealthy” because your net worth –including real estate– was only $1.4 million?)

And, unfortunately, this will have an impact on gifting, charities, and more.

New, Higher Taxes On Married Couples, Families

The “marriage penalty” (these are compressed tax brackets for married couples) will return starting with the first dollar of your income. The child tax credit will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples and the dependent care tax credit will be cut.

Higher Tax Rates on Savers and Investors

The capital gains tax will rise from 15% this year to 20% percent in 2011.  The dividends  tax will rise from  15%  this  year to 39.6% percent  in 2011.  These rates  will  rise  another  3.8%  in  2013.

Further, there are over twenty  new or higher  taxes in  the  new Patient  Protection and  Affordable Care Act (the  Healthcare  Reform  Act), many of which  will  first  go  into  effect  on  January  1,  2011.

I’ll share more about those next week.

Now, all of these things I’ve listed above (and what I’ll be sharing next week) are contingent, of course, on Congress *NOT* acting to change them. Unfortunately (or fortunately, depending on your opinion), that’s probably a safe assumption.

What You Should Do Right Now

First of all, don’t be surprised at what comes down on the pike on New Year’s Day. I’m giving you plenty of warning.

Second, take advantage of these remaining months in 2010 to have your income count during this tax year, instead of 2011 (as much as you’re able to do so).

Third–look over your specific information, compile a list of questions for me and my staff, and let’s sit down to talk things over…together (and as soon as possible! Our schedule has been extremely busy with savvy clients who have already seen the ‘writing on the wall’).

Send me an email, or give us a call [952-445-8753]. We’ll make sure you (and your wallet) survive this coming Armageddon.

Does our government encourage tax cheating?

“The ultimate reason for setting goals is to entice you to become the person it takes to achieve them.”

- Jim Rohn

Many people think that preparing taxes for a living is an easy assignment. Can I say that nothing could be further from the truth?

It’s NOT just “filling in the boxes” and having the numbers spit out the results. I WISH it were so simple. There’s two big reasons why it’s so hard–even for many professionals.

1) The tax code is incredibly long, complicated–and carries contradictory incentives for taxpayers. Sorting through all of them is indubitably not a task for a computer software program. It requires sitting down with an individual, a business owner, a family–and determining what they most care about, and how to plan for it properly. Really, that’s the only way to do it. Everything else is just ‘after the fact’ clean-up work.

This is why it’s so critical to meet with someone in the fall to make sure that you’re set up to hold a tax position which represents the real picture of where you are going. This is the essence of tax planning. Some may say that this is overstating it–but after years of doing this, I’ve become convinced that it’s the truth. I’m in the business of helping you fulfill your dreams by helping you hold on to as much income/revenue as possible!

2) The other big reason this job is no cupcake is what’s required to stay up to date with how the law *changes*…and it’s made much worse by what happens in Congress.

I have a bit of a rant this week, which is triggered by last week’s news that 950,000 tax payers will have to repay portions of the home-buyer tax credit. As YOUR advocate, this simply frustrates me to no end. But there is hope, especially for our clients…

How The Legislative Process Creates Tax Cheats

You may have seen the news that Capitol Hill is stuffed with people who owe back taxes. But that’s not what I’m talking about here.

[That article is here: http://www.washingtonpost.com/wp-dyn/content/article/2010/09/16/AR2010091601770.html ]

Rather, I’m pointing a finger at the actions taken by Congress which hurt our voluntary tax payment system.

Now, of course, the truth is that we don’t have the choice to not file or not pay what the tax laws say we owe. That’s why the IRS audits returns and has all sorts of mechanisms (liens, refund offsets) to encourage us to file by each April 15, and to do so correctly.

But even with payroll deductions, etc. we U.S. taxpayers are trusted to fill out the forms, ensure the correct amount was withheld and let the IRS know what our true final bill was. That’s called tax filing. And if we discover that we owe the U.S. Treasury, then our system, as it stands now, relies on us to send in the necessary payments. This, of course, is what we spend much of our time on around here–helping YOU do this ethically, but ensuring you’re not overpaying.

But Congress seems to encourage tax cheating.

They do this–probably unintentionally–by tinkering with our tax laws so much. They change them, sometimes slightly, sometimes quite a bit, and they do so constantly. What’s worse is the procrastination in the House and Senate. I see this all the time. As a regular course of business.

And these delays in tax changes — or the decision to make some laws retroactive months later (extenders, estate tax, etc.) — totally screw up basic tax planning, sometimes negating options that could have been used to legally lower a tax bill.

(Which, incidentally, is why I have to pay so much attention to what’s happening in the legislation. I do this so you don’t have to!)

So some people cheat. And, unfortunately, they feel justified in doing so.

Last week, I saw a blog comment by a tax-filer which opened my eyes:

I did take the original tax credit and … felt cheated when the revised 2009 credit was passed. This is especially true since I closed just 11 days too soon to take the revised credit. So I will dutifully pay back the $500 credit on my 2010 tax return, but I will also find a way to skim $500 (read: cheat) somewhere else on the return (not hard to do since I’m self-employed and can easily “forget” to report some income) and will continue to so for the next 15 years.

That person was talking specifically about the first-time homebuyer tax credit and the many ways Congress fiddled with it after its creation in 2008. But there are plenty other tax laws with similar histories that tick off filers enough so that they look for ways of getting payback when they fill out their 1040s.

Now I’m not condoning this taxpayer’s or anyone else’s decision to “even up” the tax code where a person might find it unfair. Life is unfair and taxes are a huge part of life.

But Congress can do a lot to prevent such “they hurt me so I’ll hurt the tax system right back” attitudes by doing its tax-writing job in a more rational and professional manner.

Until it does, then Capitol Hill is going to keep creating tax cheats.

But here’s where the hope comes in…

For my clients and contacts, you can rest assured that we are paying attention…and will be on top of even the procrastinating legislators. We’ll make sure you don’t make moves that you’ll regret after the fact.

And the best way to help us help YOU, is by giving us a call to talk things through this fall:

952-445-8753

I’m personally dedicated to the success of your family–your peace of mind! Can other tax professionals say that?

The quiet millionaire

Our greatest battles are with our own minds.

- Jameson Frank

If there’s one thing that this downturn has shown me, it’s that certain truths really are eternal.

(By the way–I hope you had a fantastic weekend. As I sit down and write this, I’m staring at mounds of client paperwork and a lot of tax “season” preparation for my staff to boot…but after an incredibly restful weekend myself, I have an almost caffeinated excitement about the week. So forgive me in advance if this email is a bit punchy!)

As a tax and accounting professional, it’s true that I tend towards financial conservatism. But that doesn’t mean that I don’t make it a point to study *exactly* how money “works”, and that I simply default towards savings. No–even for one such as me–these are still learned behaviors.

I’m hoping that I can contribute to YOUR learning a little this week by opening the closet doors of your millionaire neighbor…

15 Closed-Doors Truths From Your Suburban Millionaire Neighbor

That’s right.  Although having a million bucks isn’t as impressive as it once was, it’s still nothing to sneeze at. In fact, Reuters recently reported that in 2009, there were 7.8 million millionaires in the United States.

That’s a lot of people, people.  And the odds are one or two of them are living near you. Heck, one of them might even be your neighbor.  In fact, the odds are very good that it is your neighbor.

“But, Roger, you don’t know my neighbor.  That guy doesn’t look anything like a millionaire.”

Well, guess what?  Your suburban millionaire neighbor called (yes, we go way back) and the two of us had a nice little chat. And here are a few things he shared with me–but apparently doesn’t want to tell you.  (No offense, I’m sure.)

1. He always spends less than he earns. In fact his mantra is, over the long run, you’re better off if you strive to be anonymously rich rather than deceptively poor.

2. He knows that patience is truth. The odds are you won’t become a millionaire overnight.  If you’re like him, your wealth will be accumulated gradually by diligently saving your money over multiple decades.

3.  When you go to his modest three-bed two-bath house, you’re going to be drinking Folgers instead of Starbucks.  And if you need a lift, well, you’re going to get a ride in his ten-year-old economy sedan.  And if you think that makes him cheap, ask him if he cares. (He doesn’t.)

4. He pays off his credit cards in full every month.  He’s smart enough to understand that if he can’t afford to pay cash for something, then he can’t afford it.

5. He realized early on that money does not buy happiness. If you’re looking for nirvana, you need to focus on attaining financial freedom.

6. He understands that money is like a toddler; it is incapable of managing itself.  After all, you can’t expect your money to grow and mature as it should without some form of credible money management.

7. He’s a big believer in paying yourself first. It’s an essential tenet of personal finance and a great way to build your savings and instill financial discipline.

8. Although it’s possible to get rich if you spend your life making a living doing something you don’t enjoy, he wonders why you do.  Life is too short.

9. He also knows that the few millionaires that reached that milestone without a plan got there only because of dumb luck.  It’s not enough to simply declare that you want to be financially free. This is not a “Secret”.

10. When it came time to set his savings goals, he wasn’t afraid to think big.  Financial success demands that you have a vision that is significantly larger than you can currently deliver upon.

11. He realizes that stuff happens, that’s why you’re a fool if you don’t insure yourself against risk. Remember that the potential for bankruptcy is always just around the corner and can be triggered from multiple sources: the death of the family’s key bread winner, divorce, or disability that leads to a loss of work.

12. He understands that time is an ally of the young. He was fortunate enough to begin saving in his twenties so he could take maximum advantage of the power of compounding interest on his nest egg.

13. He’s not impressed that you drive an over-priced luxury car and live in a McMansion that’s two sizes too big for your family of four. Little about external “signals” of wealth actually matter to him.

14. After six months of asking, he finally quit waiting for you to return his pruning shears.  He broke down and bought himself a new pair last month.  There’s no hard feelings though; he can afford it.

15. He doesn’t pay taxes which could have been avoided with a simple phone call. He plans ahead before tax time. Oh, and here’s the number he calls (in the fall, every year, without fail): 952-445-8753

So that’s it.  Now you know what your millionaire neighbor won’t tell you.

Oh, and, um, would you be so kind to keep this just between you and me?  I’d hate to ruffle anyone’s feathers or cause of any kind of neighborly spat.

I’m personally dedicated to the success of your family–and in your neighborhood relationships, after all! Can other tax professionals say that?

Planning to enjoy the fruit of your labors

“Respect your efforts, respect yourself. Self-respect leads to self-discipline. When you have both firmly under your belt, that’s real power.”

- Clint Eastwood

How was your long weekend? Hey–whatever your opinion about labor unions, I think we all appreciate an extra “day off” now and then (though, as with many business owners, my “day off” wasn’t exactly just burgers and the pool…working hard on getting ready for tax season around here)!

Yes, as you may have heard, “Labor Day” originated during the time of 7-day workweeks of 12-hour days, in the late 1800’s, as our country was in the throes of the Industrial Revolution. Times have certainly changed since then–and our economy is no longer driven by the manufacturing jobs of the past.

Now, it’s about *knowledge*…and that’s why I take the time each week to inform YOU about the “real world” steps you should be taking with your family’s finances, and how to be prepared for any circumstance.

Including the upcoming tax season–it’ll be here sooner than you think!

I’ve put together a simple primer on what you should be pulling together, but the BEST way to be prepared is to have a conversation now about proactive strategy to minimize your burden. January through April may be “tax season”, but September-October is “tax planning season.

How To Prepare For Tax Season Well

Believe it or not, now is the time to start making sure that you’ll be ready for a few months from now, and tax time is upon us!

Generally speaking, you should keep any and all documents that may have an impact on your federal tax return. Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

• Bills, Credit card and other receipts

• Invoices, Mileage logs

• Canceled, imaged or substitute checks or any other proof of payment

• Any other records to support deductions or credits you claim on your return. You should normally keep records relating to property until at least three years after you sell or otherwise

dispose of the property. Examples include…

*A home purchase or improvement

*Stocks and other  investments;

*IRA transactions

*Rental property records

If you are a small business owner, you must keep all your employment tax records for at least four years after the tax  becomes due or is paid, whichever is later. Examples of important documents business owners should keep include:

• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC

• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices

• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments

• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

Here’s the best part of all of this: By pulling together this information NOW, we can do our “magic” and ensure that we aren’t simply playing catch-up for you after the fact. That’s what tax planning is all about. So…

I’m personally dedicated to the success of your family–and to your finances! Can other tax professionals say that?