Category: Tax Planning

The Republican tax bill – a burden to families, homeowners, and students


Important note: I am not a CPA or tax attorney and I don’t play one on TV. My explanations and descriptions of the proposed changes to the tax code are simplified (which is the goal of this blog). Nothing contained here should be construed as tax advice. I also want to note that I am a Conservative, and I am firmly against this bill.

In early November, 2017, the Republican party released their version of tax reform. You can find the full text of the tax code here: https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf. Most people agree that the tax code needs some simplification and that some loopholes need to be closed. While there are a few positive aspects of the bill, the bill, as a whole, is a disaster and should not be passed.  Let’s start with the positive aspects of the proposed bill:

  • Tax brackets are reduced from seven to four, which could lower taxes for some.
  • The standard deduction is doubled, which will make taxes easier for many individuals and families.
  • Repeal of the Alternative Minimum Tax (AMT).
  • Repeal of the estate tax.
  • An increase in the child tax credit from $1,000 to $1,600.
  • Corporate tax rate lowered from 35% to 20%.

Now for the negatives:

  • Removal of the personal exemption (currently $4,050 per person). You can find this removal on page 33 of the tax bill. The doubling of the standard deduction is supposed to make up for the removal of the personal exemption, which you get for each dependent and taxpayer on a return. In my family, with five children, we get seven personal exemptions. In 2016 the personal exemption was $4,050, which equates to $28,350. We would get this on top of the standard deduction, which was $12,600, for a total of $40,950. Our deduction under the new bill will be $24,000. This bill penalizes anyone with children, and certainly penalizes large families. Even with the increased child tax credit we still come out behind. I thought Republicans were in favor of families.
  • Mortgage interest deduction would be capped on homes up to $500,000 (see page 100 of the tax bill). In many areas of the country $500,000 is an average home[i]. This only applies to new mortgages, so if you have a mortgage now and the value of your home is $1,000,000 or less, it won’t affect you. Republicans obviously don’t want you to buy a more expensive home.
  • Under current laws, as long as you are using your home as your primary residency, you can move every two years and not pay capital gains taxes on the increase in value on your home. The new tax plan increases that to five years (see page 137). This will be devastating to the starter home market, and challenging for many others. For most individuals that tax will be 15% of the gain. For some reason, Republicans don’t want you to move very often.
  • Graduate students often pay for their tuition by doing research and teaching undergraduate courses. In exchange, they are paid a wage (which average $20,000 – $30,000 a year) and receive a tuition waiver (which averages $12,000 – $50,000 a year). Under current law, the wages are taxed, while the tuition waiver is not. Under the proposed changes, both the wages and tuition waiver become taxable income (see page 98 in the tax bill). This will dis-incentivize students from going to graduate school, and raising their tax bill by a large amount, especially for those that go to more expensive schools.[ii] An analysis by Forbes shows that an in-state University of Florida grad student pays about $1,424 a year in taxes currently, but under the new plan they will pay $4,052 a year, which is 17.6% of their income. A Princeton grad student pays $2,849 (8.8% of their income) now, while under the GOP plan they will pay $13,499 (41.9% of their income)[iii]. That is a heavy, and unacceptable, tax burden on those trying to get an education. For an excellent analysis of how this would affect students, click here.  Why do Republicans not want individuals to go to grad school?
  • Elimination of state and local tax deduction (see page 105).
  • If your employer offers adoption assistance that is not currently reported as income. This bill repeals that and it will now be reported as income. NOTE: This was included in the original bill (see page 142), but has since been removed.
  • If your employer offers tuition assistance, it is currently not reported as income. That benefit will be repealed and it will now be reported as income (see page 96-98). Again, this will discourage individuals from going to school.
  • If you work at an educational institution you or your children may get reduced or free tuition. Currently this is not reported as income. Under the new bill it will be (see page 96). For example, as an employee benefit my children get free tuition at Utah Valley University. Their tuition would be reported as income.
  • The student loan interest deduction will be repealed (see page 96 – Section 221).
  • The itemized deduction for medical expenses will be repealed (see page 113).
  • The bill adds a “Chained CPI” to the tax code, which essentially means that Social Security income will grow at a slower rate than true inflation[iv].

This tax bill is terrible and should not be passed. However, remember that this bill is not a law yet! I encourage you to contact your elected officials and encourage them to scrap this bill entirely. You can find contact information here:

https://www.usa.gov/elected-officials

Call them, e-mail them, post on their social media pages. Let them know you don’t support this bill.

I conclude with two quotes:

“This is a Republican plan that targets people wanting to adopt children, homeowners, small businesses and people with high medical bills.” – Carol Markowitz[v]

“If the goal of the new tax plan is to shift the tax burden from wealthy, older Americans onto young, already-indebted students pursuing their higher education dreams, it’s poised to be a smashing success.” – Ethan Siegel[vi]

 

END NOTE: If you are looking for a comprehensive review of the GOP tax bill you can find that here: https://www.kitces.com/blog/tax-cuts-and-jobs-act-2018-house-gop-tax-reform-proposal/

 

[i] In Los Angeles county, for example, 23% of mortgages are over $500,000. In San Francisco that number jumps to 56.6%. http://www.latimes.com/visuals/graphics/la-na-g-mortgage-interest-deduction-tax-calculator-20171106-htmlstory.html

[ii] https://www.wired.com/story/grad-students-are-freaking-out-about-the-gops-tax-plan-they-should-be/

[iii] https://www.forbes.com/sites/startswithabang/2017/11/07/the-gop-tax-plan-will-destroy-graduate-education/#427787703d2f

[iv] https://newrepublic.com/article/145688/biggest-trojan-horse-republican-tax-plan

[v] http://www.foxnews.com/opinion/2017/11/07/im-conservative-and-hate-republican-tax-plan.html

[vi] https://www.forbes.com/sites/startswithabang/2017/11/07/the-gop-tax-plan-will-destroy-graduate-education/#7c929ce63d2f

Droids or Tax Time?

Have you started receiving forms with names that sound like droids from Star Wars?

I’m fairly certain that all these droids will be in Star Wars episode 18:

  • W-2
  • 1099
  • 1098
  • W-4P

That can only mean one of two things. Droids are finally making their long awaited arrival on Earth, or it is tax time.

Droids or Tax Time

 

Just in case it is tax time, here are some answers to common questions to help make tax season a little less taxing.

1. How early can I file my taxes?

Wait to file your taxes until you have ALL the tax forms. This includes W-2s, 1099s, Interest statements, etc. Employers and companies have until January 31 to send you everything, so you should have everything shortly after that. Make a list of what you should receive and wait to start until you have it. The most common forms are:

  • Form W-2: You should receive one from each of your employers
  • Form 1098: If you paid interest on a home or student loan or paid college tuition you will receive a 1098
  • Form 1099-DIV: If you received dividends, distributions or capital gains on any investments, watch for one of these to grace your mailbox
  • Form 1099-INT: Any interest paid to you, such as interest on a CD or bank account, will be reported on this form.
  • 1099-MISC: If you did work as an independent contractor you’ll get one of these.
  • If you donated to a charity they will either provide you a receipt when you donated, or an end of year statement.

There’s other forms as well, but those are some of the most common ones.

Here’s a great printable checklist from TurboTax:

http://images.turbotax.intuit.com/iqcms/marketing/lib/TurboTax_TaxPrepChecklist.pdf

 

2. Should I file my own taxes or have someone do it for me?

There’s a few different ways you can file your taxes:

  • On paper
    • I don’t recommend this – calculations can be complicated
  • Software such as TaxAct, TurboTax or H&R Block at home
    • As long as you use top-rated software you’ll find it’s intuitive and simple. You’ll enter your tax forms in and the software will search for possible errors. I personally use TaxAct.
  • Discount tax preparation services, such as H&R Block or Jackson-Hewitt
    • These companies have their place, but can be expensive. Their tax preparers are trained, but basically use similar software that you can use on your own. If you want the peace of mind from having someone do your taxes, this can be a good option.
  • Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE)
    • VITA and TCE volunteers are IRS-certified and will file your taxes for free. You read that correct. It’s free, and there’s no catch. VITA is available for anyone that makes under $54,000, and TCE is available for those over age 60. You can find them here: https://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers. Both VITA and TCE tend to fill up quickly, and many are first-come, first-served.
  • Accountant or CPA
    • Unless you run a business you probably don’t need an accountant or CPA to prepare your return. I have several small businesses, and we still file our own, but if your business starts to move beyond small you should work with the accountant or CPA throughout the year.

3. What is the due date to file my tax return?

It’s normally April 15, but this year it is Tuesday, April 18. Why? The 15th is a Saturday, and anytime tax day falls on a weekend it is pushed to Monday. However on Monday the 17th Washington DC has a holiday (Emancipation Day), therefore tax day gets moved to the next business day.

 

To close up this week’s article, I strongly encourage you to check out one of the VITA sites if you make less than $54,000 a year. Almost anyone who uses a discount tax preparer could have their taxes filed for free instead.

One last note – don’t ever get a Tax Refund Anticipation Loan. Companies will offer to give you your tax refund right then, for a fee that ranges between $30 and $150. Don’t fall for it – if you file electronically you’ll have your refund in 1-2 weeks.

Small Business Taxes

taxes for small businessFor those of us who run a small business almost nothing causes more challenges and stress than tax time.

Today’s post is meant for those of you running, or thinking about running, a small business, and how you can make tax-time easier.

I want to establish up-front that I am not a tax accountant or tax lawyer, nor do I play one on TV.

My wife and I do, however, run three home-based businesses and I have filed my own taxes for years. My wife runs a business called Hair Springs and I have an insurance business and maintain and host a few websites for some friends.

The key to doing your taxes is to KEEP GOOD RECORDS!

What should I do in order to maintain good records?

There are four steps to maintaining good records in order to make tax time easier.

Step One: Open a checking account that you only use for your business. Get checks and a debit card.

Step Two: Download business accounting software. For a long time, QuickBooks was the only player in this market, and for years they offered a free version for those running home-based businesses. This ended a few years ago, though, and the cheapest version is now $10 a month. QuickBooks holds over 90% of the market, and is a great choice for many businesses.

If you have less than 9 employees, though, you should check out WAVE, which is free. You can find it here: https://www.waveapps.com/accounting/.

Step Three: Make all purchases and pay all expenses with your business account, and make all deposits from sales into this account.

Step Four: Get a receipt for EVERYTHING, and anytime you make a sale print up a receipt. Enter all sales and expenses into your accounting software.

If you plan to use a professional tax preparer, that is pretty much all you need to do. This person can handle all the accounting details for your company and they will file your return and other taxes for you.

The IRS has a post that discusses in detail what type of records you should keep. You can find that here: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/What-kind-of-records-should-I-keep

How do I figure out how much I need to pay in taxes?

Most home-based businesses will file an annual tax return and you will do so with your regular tax return. Your business income and expenses will be entered on Schedule C, then your profit or loss is  transferred to Form 1040.

You are going to either have a business loss or profit. If you have a profit (which is the point of having a business) you are going to pay self-employment tax of 15.3% plus income tax. To figure out if you have a profit or loss you deduct all business expenses from your business income. If the number is still positive, you have a profit. If the number is negative, you have a loss.

A profit gets added to your income and a loss can actually lower your income, meaning that you will owe less in taxes.

NOTE: The IRS understands that you may have a loss for a year or two when starting up, and occasionally you may have a bad year. The point of having a business, though, is to make a profit. If you don’t make a profit at least 3 out of every 5 years the IRS will classify your business as a hobby, which means that losses are only deductible up to the amount of profits, and you may have to pay back the taxes you avoided by taking a loss.

15.3% plus income taxes can add up to a big number. Many experts recommend setting aside 25-30% of your income for taxes. I think this is wise advice!

Do I have to pay quarterly taxes?

When you are an employee your employer withholds part of your check and sends it to Uncle Sam. As a self-employed individual, though, no one is withholding anything. The government wants their money regularly, so you may have to pay quarterly taxes.

If you are in your first year running a small business, you don’t need to pay quarterly taxes. After year one, though, you may need to pay quarterly taxes if:

  • You paid more than $1,000 in taxes the previous year
  • You expect to pay more than $1,000 in taxes this year

If you paid no income tax last year you probably don’t need to pay quarterly taxes this year. It still can’t hurt to set some aside for later taxes, though.

A rule of thumb is that is you are going to make more than $15,000 in your business you probably need to pay quarterly taxes. I personally feel that it can’t hurt you to pay quarterly taxes, regardless of how much you are going to make.

To determine how much you should pay, get last year’s tax return and find how much tax you paid (Line 78 of Form 1040). Multiply that amount by .90. If you paid $10,000 in taxes last year you would get $9,000. Divide that number by four ($9,000/4 = $2,250). This is the amount you should pay each quarter.

You pay estimated taxes on Form 1040-ES.

If business slows down (or you do better than expected) you can adjust the amount you are paying.

Quarterly taxes are due April 15, June 15, September 15 and January 15.

As you can see, filing taxes can be quite complex. There are a number of other things to consider as well, such as:

  • What type of business structure to use (sole proprietorship, LLC, etc.)
  • If you are going to keep working full-time or part-time at another job, and how withholding there will affect your business taxes
  • How much of a deduction you can take as a home-office deduction

If you run a very small business you might be able to do this all yourself, but for many people you should strongly consider hiring a tax professional to help you maintain your books throughout the year and file your tax return. Tax professionals understand the tax code and are likely to find deductions you may miss.

You still need to maintain great records, and you should know exactly what your tax professional is doing and why they are doing it. Make sure they take the time to educate you.

Professional tax preparer

Even though I don’t mind filing my own taxes, my business income is getting complicated enough that it’s probably time for me to consider hiring someone to do my taxes for me. A good tax professional is worth their fee.

For additional tax help for your small business, the IRS actually has a helpful page: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center.

To conclude, I want to stress again the vital importance of maintaining good records. Nothing will make tax time more difficult than incomplete or inaccurate records. Set up a separate account, download business accounting software and enter all income and expenses into the software.

Making tax season a little less taxing

taxesby Ryan H. Law

Politicians love to talk about how long the tax code is and compare it to how long the Bible is. I found quotes of politicians who said it ranged anywhere from 2,500 pages to 1.3 million pages.

It’s actually 13,458 pages (and growing every year), and if you want to order a copy of it you can purchase all twenty volumes of the code and regulations for just $10 for your Kindle device!(1) What a bargain!

In what has to be one of the greatest marketing strategies of all time, the U.S. Government Publishing Office, where you can order a printed copy of the tax code, encourages you to “Cozy up with a book from our latest Catalog,” or in the case of the tax code, cozy up with 20 books. Happy reading!

winter catalog

 

 

 

 

 

Here’s answers to common questions to help make tax season, well, a little less taxing.

Q. How early can I file my taxes?

A. Wait to file your taxes until you have ALL your tax forms. This includes W-2s, 1099s, Interest statements, etc. Employers and companies have until February 2 to send you everything, so you should have everything shortly after that. Make a list of what you should receive and wait to start until you have it. The most common forms are:

  • Form W-2: You should receive one from each of your employers

  • Form 1098: If you paid interest on a home or student loan or paid college tuition you will receive a 1098

  • Form 1099-DIV: If you received dividends, distributions or capital gains on any investments, watch for one of these to grace your mailbox

  • Form 1099-INT: Any interest paid to you, such as interest on a CD or bank account, will be reported on this form. If you get a pink one of these, you actually win $1,000(2)

  • 1099-MISC: If you did work as an independent contractor you’ll get one of these.

  • If you donated to a charity they will either provide you a receipt when you donated, or an end of year statement

There’s other forms as well, but those are some of the most common ones.

Here’s a great printable checklist from TurboTax:

http://images.turbotax.intuit.com/iqcms/marketing/lib/TurboTax_TaxPrepChecklist.pdf

Q. Should I file my own taxes or have someone do it for me?

A. There’s a few different ways you can file your taxes:

  • On paper
    I don’t recommend this – calculations can be complicated.

  • Software such as TaxAct, TurboTax or H&R Block at home
    Most of the top-rated software packages are simple and intuitive to use, and they are made for consumers (not accountants). You’ll enter your tax forms in and the software will do the calculations, search for possible errors, and file your taxes electronically. I personally use TaxAct.

  • Discount tax preparation services, such as H&R Block or Jackson-Hewitt
    These companies have their place, but can be expensive for what they provide. Their tax preparers are trained, but use similar software that you can use on your own. If you want the peace of mind from having someone do your taxes, this can be a good option.

  • Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE)
    VITA and TCE volunteers are IVITA TCERS-certified and will file your taxes for free. You read that correct. It’s free, and there’s no catch. VITA is available for anyone that makes under $54,000, and TCE is available for those over age 60. You can find them here: https://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers. Both VITA and TCE tend to fill up quickly, and many are first-come, first-served.

  • Accountant or CPA
    Unless you run a business you probably don’t need an accountant or CPA to prepare your return. I have several small businesses, and we still file our own, but if your business starts to grow you should work with your accountant or CPA throughout the year.

Q. What is the due date to file my tax return?

A. It’s normally April 15, but this year it is Monday, April 18. Why? Basically it’s because Washington DC has a holiday (Emancipation Day) on Saturday, April 16, and by law when that holiday falls on Saturday or Sunday it is observed the Friday before. A federal holiday on Friday, April 15 means that tax day gets moved to the following Monday.

To close up this week’s article, I strongly encourage you to check out one of the VITA sites if you make less than $54,000 a year. Most people who uses a discount tax preparer could have their taxes filed for free instead.

One last note – don’t ever get a Tax Refund Anticipation Loan. Companies will offer to give you your tax refund right then, for a fee that ranges between $30 and $150. Don’t fall for it – if you file electronically you’ll have your refund in 1-2 weeks.

(1) http://www.amazon.com/Complete-Internal-Revenue-Federal-Regulations-ebook/dp/B006KS43L8/ref=sr_1_2?ie=UTF8&qid=1453835893&sr=8-2&keywords=irs+code+26

(2) Just kidding.

The Importance of Personal Financial Planning for College Graduates

by Ryan H. Law

Over the past 6 weeks I saw more than 500 graduating seniors come through my office (The Office for Financial Success) to receive student loan exit counseling. Exit counseling is required for all graduating students with federal student loans. At the University of Missouri they can choose to do the counseling online or they can come through our office and meet with another student who is trained to offer this counseling.

Seeing all these seniors come through our doors has caused me to reflect on my own graduation and some things I did well as well as some things I wish I had known or done upon graduation.

Today’s post will focus on some specific steps that I think all graduating seniors should take (but don’t worry – it’s good advice for everyone – even if you haven’t graduated yet or graduated years ago).

Become financially literate

Financial literacy in the United States is, unfortunately, not widespread. Most high school students fail a personal finance exam (less than 50% of questions answered correctly) and college students score just 62%[1]. One of the best things you can do for your future is to become financially literate. If you can take a college course in personal finance I highly recommend it. In a 3-credit personal finance class you will learn about everything on this list and you will be more financially literate by the end of the course than most people in America. If you don’t have the option to take one on campus look into one of the many excellent Open Courseware classes – you won’t get any college credit for it, but you can’t beat the price tag – free![2]

As a part of becoming financially literate I recommend you learn the fundamentals of how the U.S. economy works. Learn about the business cycle, unemployment rates, inflation and interest rates. All of these things affect your personal finances, so a basic understanding of them is helpful.

Don’t get your financial advice from amateurs

Financial advice can be found almost anywhere – it is prolific on the internet and on the bookshelves at libraries and bookstores. However, I would caution you to be careful that you are not getting your financial advice from amateurs. For example, a few years back there was a taxi driver who “figured out the system to wealth” day-trading stocks. A lot of people lost a lot of money following his advice. Be careful of advice received from friends or family about the latest “hot tip” on a stock. This tip, like all the others, will take you back to the first recommended suggestion – a good solid class will teach you much about how to win at personal finance.

Establish financial goals and take action to achieve them

You need to start thinking about some short and long-term financial goals. How soon do you want to pay off your consumer debt? How much money do you need at retirement? Do you plan to buy a home eventually? Do you plan to have children and send them to college? What are your plans for increasing your earning potential? I recommend you take some time to sit down and make some decisions about where you are financially, where you want to be, and how you plan to get there.

Learn to budget

No company would go one day without a good, solid budget. They understand how much is coming in, how much is going out and exactly where those dollars are going. You should likewise have a budget. A budget is not a record of where your money went (though that is important as well); it is a plan for where you want your money to go. Learn the process for budgeting then discipline yourself to take action and stick to your budget[3]. A key component of your budget should be to spend less than you earn and to pay yourself first. As part of your budget you should work diligently to build up a 3-6 month emergency fund.

Develop a net worth statement and update it annually

A net worth statement is a snapshot of a particular moment in time. It should list all of your assets (everything you own that is worth money) and all of your liabilities (debts). Minus your liabilities from your assets and you will come up with your net worth. You should update this annually to see how you are doing. Over time this number should increase.

Care about your credit

You should know what your credit report contains[4], what your credit score is and what steps you can take to improve that score[5]. Your credit score determines what interest rate you pay on loans, what your auto insurance will cost, if you can rent certain apartments, and in some cases if you can even get a particular job.

Pay off consumer debt as quickly as possible

Carrying consumer debt, especially credit card debt, is toxic to your financial goals. Pay it off as quickly as possible by paying more than the minimum and refusing to take on additional unnecessary debt[6].

Start saving now for retirement and take advantage of employer-sponsored retirement plans such as a 401(k) or 403(b)

If your employer offers a tax-advantaged retirement savings plan, such as a 401(k) or 403(b), take advantage of it! You will save on taxes now and can often get free money through a company “match” of your savings.

Time is your best friend when it comes to saving for retirement. If a 23-year old saves $3000 a year at 8% interest until he or she is age 65 they will have about $912,000 in the bank. If a 33-year old does the same thing they will have about $402,000. That is the power of compound interest!

Understand taxes, insurance and basic estate planning

Even if you pay someone else to prepare your tax return for you, you need to understand your own taxes. You should know your average tax rate, your marginal tax rate, and some steps you can take to reduce your tax burden. You should understand the difference between taking the standard deduction and itemizing deductions.

You also need to understand your insurance products. We spend a lot of money on disability insurance, life insurance, auto insurance, renter’s or homeowner’s insurance and other types of insurance. You should understand what your policy covers, what it doesn’t cover and how much you are paying for each one. You should occasionally check around to see if you can get lower cost insurance.

Everyone needs to do some basic estate planning. Even if you are single with no dependents you at least need a basic will, healthcare directives and a power of attorney. As your situation changes you should review these documents and update them and add other important estate planning documents as necessary.

Start an uncomplicated financial record-keeping system

You and your loved ones should know where important financial documents are and what each one is for. For example, if I were to pass away today I would want my wife to know exactly where my life insurance policies are and how to begin the process of collecting that money. The system I use is a fireproof file box with the HomeFile Organizer system[7]. With this low-cost system I can file and find auto titles, insurance policies, medical records, warranties and any other financial documents.

Give yourself an annual financial checkup

I recommend that you set aside a day each year to give yourself a financial checkup. Review your goals, your budget, your net worth, your insurance and estate policies, your savings and your debt level and determine some steps you can take to improve in each area. As part of the review I recommend you choose a new personal finance book to read over the next year. Take this opportunity to reassess where you are and determine a plan for how to get to the next level.

Conclusion

Hopefully you got some good ideas about improving your financial situation from this list. I recommend you choose just one or two things from this list that you can take action on today. As that becomes a habit you can incorporate another item until you have implemented all of them that fit your situation.

[2] If you are looking for an excellent course I recommend Alena Johnson’s Family Finance course from Utah State Open Courseware: http://ocw.usu.edu/Family__Consumer____Human_Development/Family_Finance/index.html. This is the course I took that convinced me to change my major and helped determine my life’s work.
[3] www.Mint.com is a great, free resource for budgeting. The software I personally use can be found at www.YNAB.com. It isn’t free, but I highly recommend it.
[4] www.AnnualCreditReport.com is the only place to get a free copy of all three of your credit reports annually
[5] www.MyFico.com has a great explanation of credit scores and is the most reliable place to purchase your score.
[6] www.PowerPay.org is a great free resource to figure out how you can pay your debt off quickly