May 2013 Letter

The 2012 tax filing season may be a thing of the past, but understanding and adjusting to the changes in store for this year are becoming more important. So what's next? Washington is contemplating more changes; from the introduction of an internet sales tax to a roll back of spending cuts agreed to last year. How will the dust settle? No one is sure. In the meantime, why not review your situation and start taking action to benefit from the rules we now know for 2013.

Ideas to Improve Your Financial Health

No-one likes to be blindsided by financial hardship. Listed here are ten ideas to help ensure your financial health stays healthy.
	Your safety net. Plan to have a minimum savings balance to cover three months of expenses. Ideally this should be six to twelve months. If your reserves are light, start saving now. Even if it is a little amount, it can get you on the right track.
	Budget. At least once a year develop a basic budget. Set goals and try to hit them. If this seems overwhelming, start simple. What is coming in and what goes out eachmonth? Becoming aware is the first step to improving your financial health.
	Spouse as financial partner. If you die, does your significant other know where everything is? Can he/she pay the bills? Does he know where account numbers are? Does your spouse know who you use to help with things? If not, it is time to start talking.
	Review beneficiaries. Once a year review beneficiaries on all accounts. This includes retirement accounts as well as names on wills and estate plans. The legal hassle created without this review can be devastating to your surviving family. This is especially important if you had a recent life event (marriage, divorce, birth, or death).
	Maximize benefits. Make sure you review your retirement plans for maximizing any employer match in your account. Also review your plan's administrative expenses. If they are too high they can cost you 10s of thousands of dollars over your lifetime.
	Disaster plan. If your home burned down or was flooded are your important records easily accessible and protected? If not consider creating a disaster plan, including placing important documents in a safe deposit box.
	Credit report review. With the recent increase in identity fraud, plan to check your credit with the major credit agencies once a year. The agencies are legally required to make their report available to you annually without charge.
	Insurance review. Periodically look at your health, life, home, and liability insurance. With the legal nature of our society you might consider the need for an umbrella policy to cover against potential litigation. But also consider flood insurance and a replacement value homeowner's policy.
	Debt wrestling. Review your use of debt instruments. Understand your net worth (assets minus liabilities). Make progress in reducing your debt load starting with the highest interest obligations first. Is your debt lower than it was last year?
	Plan for fun. It is easy to make a simple financial mistake that can cost you plenty. But while on the path of financial improvement, don't forget to smell the roses. Just do it in a financially healthy manner.

This list is by no means complete, but if you focus on the areas mentioned, your financial life will become more planned and less likely to be struck by an unforeseen surprise.

Is it Coming? The Online Sales Tax

The Marketplace Fairness Act is working its way through Congress and could dramatically impact the collection of sales tax on all internet purchases. If passed, the federal government will empower states to make online merchants collect and remit sales tax. Here is what you need to know. Why now?
	States are begging for more tax revenue. Many states have not recovered from the recession of 2008 and are in dire need to balance their budgets.
	It is already law. Sales taxes are already required by most states on internet purchases. The taxes are simply not being sent in by the people making the purchases. The argument is that an internet sales tax is not a new tax, it is simply requiring small businesses to help their customers comply with state law.
	Big box retailers gripe. Big brick and mortar retailers think online companies have a cost advantage by not collecting sales tax.
	Even Amazon likes it. After years of fighting, it appears even Amazon is willing to accept the tax. Amazon currently collects sales taxes in approximately ˝ of the states already.
	Showrooming and retailer protection.Many customers go into local retailers to see the product they wish to buy, then go online to purchase the item for a lower price, and avoid paying sales tax. This practice has hurt many traditional retailers.

What's in the bill?

If passed in its current form, states would be allowed to require the collection of sales tax for any online sales. To help ease the burden on businesses the states would be required to provide free software to collect the tax. Business' with less than $1 million in online sales would be exempt.

The Arguments Against

	New Hampshire, Montana and Oregon hate it. States that currently have no sales tax do not like other states auditing and taking legal action against their small business community. Nor do they want to create software to comply with the federal law that sends money to other states.
	Small business burden. The major problem for small businesses with online sales taxes is the undue complexity in each state's laws. The current bill does not simplify this process by making one unified online sales tax rate. A look at Minnesota sales tax law illustrates this problem: MN taxes some items but not others...retailers must tax goods sold, but not services. There is no tax on food or clothing. An online retailer would need to know what items it sells should be taxed if the customer is in Minnesota. The Minnesota tax rate varies from county to county. Some Minnesota cities also impose their own sales tax. The result? Every small business needs to keep track of complex sales tax laws in all 50 states.
	Not all states will have the requirement. Online retailers would need to know which states have an internet sales tax collection law and which do not. Some states, like California, already have one in place.

Many have suggested a more manageable approach would be a uniform single online sales tax rate that is collected centrally and then distributed by the Federal government to each state. This removes the burden of compliance complexity from the business community. The likelihood of this approach is currently remote as most states have their own agendas.

Does it Pay to be Noticed?

If you receive a notice from the IRS most of us will see our pulse rate quicken and a cold sweat break out on our foreheads. Here is some advice if an IRS notice finds its way into your mailbox.
	Open it. You would be surprised how many people simply cannot find the courage to open a letter from the IRS. It can be intimidating. Try to remember the IRS sends out millions of these every year.
	Most notices are produced by computer programs. Most IRS notices are driven by a request for clarification. Things like a name mismatch or a missing 1099 or W-2 can be easily corrected.
	Follow the instructions. The letter will tell you what to do and when to do it. Follow these instructions.
	Changes to your return. Often the IRS will make a proposed change to your tax return and will ask you to confirm the change. If you agree with the change you often need to do nothing. If not, you must formalize your disagreement.
	Ask for help. Do not assume you know the answer. Ask for a review of the correspondence as soon as possible.
	Certify your response. Any written response to your IRS notice should be sent by certified mail. If the IRS later says you did not respond, this certification can be used to defend your timely response to their notice.
	Fraud is possible.Remember the IRS does not correspond via email. Do not give personal information to anyone representing themselves as the IRS without independent verification. This is especially important on telephone calls. How do you do this? Independently confirm mailing addresses and initiate phone calls to the IRS through information on their www.irs.gov website.
	Use alternatives. If you cannot seem to get resolution to your notice via mail, consider calling or visiting a local IRS office. But only do so with proper representation.

Annual Retirement Savings Contributions are Up 2013 marks one of the first years in many that the annual contribution limits to most of the common retirement savings plans has increased. If you have not already done so, please review your accounts and make the necessary adjustments to take full advantage of these new, higher, limits. Retirement Program Current Year 2013 Last Year 2012 Change Age 50 or over catch up IRA: Traditional $5,500 $5,000 +$500 add: $1,000 IRA: Roth $5,500 $5,000 +$500 add: $1,000 IRA: Simple $12,000 $11,500 +$500 add: $2,500 401(k), 403(b), 457 plans $17,500 $17,000 +$500 add: $5,500

As always, should you have any questions or concerns regarding your situation please feel free to call.

April 2013 Letter

Happy tax filing month. To help celebrate, this month's newsletter includes a fun tax quiz. In addition, there are articles outlining recent credit card changes and IRS tax collection updates.

2013 Income Tax Quiz

How well do you know tax facts?

As April is tax month, included here is a short quiz to see how well you know your taxes. Enjoy!
	Match the highest (nominal) federal income tax rate with the correct tax year. 70% 2013 50% 1990 40.5% 1983 28% 1970 7% 1913
	70% - 1970; 50% - 1983; 40.5% - 2013; 28% - 1990; 7% - 1913. While available deductions varied greatly over these same tax years, there is little doubt when comparing the 7% marginal tax rate applied to incomes over $500,000 in 1913 that income tax rates are much higher today. Note: The tax rate noted for 2013 is 39.6% plus a .9% surtax to help pay for health care legislation. If you steal someone's property do you owe tax on it? Yes, according to the IRS. But don't expect the person whose property was stolen to issue you a Form 1099. Tax instructions tell you to list this as "stolen property" on your tax return. Perhaps listing it as "other income" might be a better idea as it does not lead to self-incrimination. Which famous personalities have crossed paths with the IRS and lost? Pete Rose (baseball player) Nicolas Cage (actor) Willie Nelson (singer) Wesley Snipes (actor) All of the above All of the above. While each case was different, all the above celebrities ended up owing significant amounts in back taxes; Pete Rose, for failing to report income from autograph signings, Willie Nelson, for having tax shelters disallowed, Wesley Snipes, for failing to file tax returns while taking a position that federal taxes were unconstitutional and Nicolas Cage who settled part of his tax bill for over $6 million.   The Interchange Change Retailers and other Merchants have long been plagued by increasing costs associated with taking credit card payments without reasonable control over the expense of those payments. There is now a proposed settlement in a long-standing price fixing lawsuit between Visa/Mastercard and retailers that may change the playing field. Here is what you need to know. Background Retailers and "merchants" of all sorts that accept credit cards as a form of payment have to pay an interchange fee every time a credit card is used to pay for purchases. This fee varies, but can be as much as 3 - 5% of the transaction cost. Larger merchants, like Target and Walmart, can often negotiate a lower fee. The interchange collected is then split between many providers including; the card issuing bank, the credit card company, the merchant's bank, the credit card gateway provider, and any other distributors. The Problem The merchants in this system are often powerless at controlling their costs. Why? Merchants cannot differentiate. If they accept a card, like Visa, they cannot charge you any extra for using the card. So if a customer who pays with a Visa costs a merchant 2% more than someone who writes a check, the merchant cannot pass that additional cost on to the customer. Prices are not fluid. Banks are the historic owners of Visa and Mastercard, and the pricing models used are very inflexible. In other words, according to many merchants, the credit card pricing is fixed between providers. Losses flow downhill. If there is a problem with the credit card transaction, often the merchant is the one taking the loss. Why? The credit card banks have auto access to the merchant's bank account and if a disputed claim is ruled against them, there is little practical recourse other than to accept the loss. Rewards cards become penalty cards to merchants. If you use a credit card with a rewards program, the merchant is the one who foots the extra cost. Theoretically, two customers could use the same type of credit card (Visa, Mastercard, American Express), but the credit card cost to the merchant can vary depending on the reward program attached to the card. What is Happening Now In a recent class action lawsuit, merchants have challenged Visa/Mastercard over their business practices claiming price fixing. The merchants wish to recapture some of their pricing authority. If the proposed settlement is accepted: Participating Merchants will share in a $6+ billion settlement payment. Merchants will be able to add a fee if you use a Visa or Mastercard to pay your bill, as long as you are located in a state that does not prohibit a credit card surcharge. Merchants will see a .10% drop in their credit card rate for a 6 - 9 month period of time. Why Care? Ultimately, merchants must pass the cost of these credit cards on to the consumer. Here are some ideas to use this information to your benefit: Negotiate cost. If purchasing an expensive item, offer to pay cash for a discount. If it is a small merchant you might suggest a 1 - 3% discount to share in the interchange savings. Be aware of surcharges. Given the nature of the settlement, it is unlikely that large retailers will be adding credit card surcharges, but smaller retailers might do so. Please be aware of the store's policy before you buy. Leverage your credit card costs.Being aware of the interchange profits being made on your credit card provides you negotiating leverage on your credit card bill. Remember, your bank is making money every time you use your card, even if you pay your bill in full each month. Consider challenging a late fee or credit card interest on a late payment. The IRS Collects $2.2 Trillion in 2012 Each year the IRS releases a Data Book that recaps Internal Revenue Service activities for the prior fiscal year ending in September. The 2012 Data Book was recently published which recaps the 2011 tax year. Here is what you need to know: The $2.2 trillion in gross revenue collected was up 4.3% from the prior year $1.3 trillion of the revenue collected came from individual income tax returns 2 million notices were sent out involving 2.7 million math errors on tax returns Approximately 1% of all individual tax returns were audited Automated programs yielded over $13 billion in additional tax assessments Of specific interest was the data that recapped two of the major automatic programs in place at the IRS; the Automated Under Reporter Program and the Automated Substitute for Return Program. Automated Under Reporter Program Description: This is the IRS computer program that compares information returns (W-2s and 1099s) provided by third parties with the information provided by taxpayers on their tax return. If there is a mis-match, the program automatically sends out a form to have you explain the difference. Results: The 2.2 billion information returns received by the IRS identified 4.5 million discrepancies resulting in $7.1 billion additional tax assessments. Action: This program is an efficient way for the IRS to find missing revenue. Make sure you receive all your information forms and that the information stated on them is correct. Errors can be corrected on your tax return, but it is always best to get your employer or provider (bank, brokerage or customer) to issue a corrected 1099 or W-2 form. Automated Substitute for Return Program Description: This is the IRS computer program that uses third party information and automatically creates a tax return with that information if you do not file one. Results: This program identified 803 thousand non-filed tax returns. The created returns yielded an additional $6.7 billion in tax assessments. Action: If 1099s or W-2s have been issued, the IRS expects you to file a tax return or will do it for you if you don't. While it is possible that this might create a refund, do not expect the IRS to grant you all your available deductions. It is always best to file a return, or file an extension if needed to provide some time to get your information to them. The IRS Data Book is loaded with useful information. Next month: What is your chance of being Audited? A look at updated IRS audit information. As always, should you have any questions or concerns regarding your situation please feel free to call.