Agranovich Accounting

Thursday, September 1, 2016

September 2016 Letter

Classrooms are now filling up as our summer days draw to a close. The IRS recently warned incoming students and their parents of a new scam targeting them. A review of this scam is outlined here. Also included is an article with ideas to consider if you want to prepare for a possible early retirement. An article on the disturbing trend of some taxing authorities targeting revenue from people and businesses that have no voting authority rounds out this month's newsletter.

Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

In the News: The Student Tax Scam

IMPORTANT: Please pass this information on to each of your children and any family with kids in school. Your best defense is awareness.

With school just around the corner, the IRS has reminded us to pay attention to a new scam that is targeting students and their parents. Here is what you need to know.

	The scam. Callers will contact your student and demand payment of an unpaid Student Tax. This tax does not exist. The contact is typically via phone call, but can take the form of a realistic looking email.
	It will seem real. The caller will say they are from the IRS. They will have your student's name and some of their personal information stolen from another source. There may be a caller ID displaying IRS. They will often call multiple times and may even threaten arrest.
	Their goal. To get your unwary parent or student to provide them with payment through a prepaid debit card, credit card, or other type of gift card.

What to do. If this happens to you, hang up. If they call back, do not answer. Students should inform parents of the call. Remember, the IRS NEVER initiates a tax question with a phone call or email. You can also report the scam to the Treasury Inspector General for Tax Administration: IRS Impersonation Scam Reporting Form

Your data must be stolen

Should this scam occur, one thing is certain. Personal data has been stolen. If you receive this scam call, you may be targeted for other scams. So be alert and consider reviewing your credit reports to ensure someone is not trying to access your identity in other ways.

Tips for Early Retirement

When would you like to retire? Even if the answer is later versus sooner, most of us would like the freedom to decide. To do this, consider what it would take to create financial independence in retirement. Here are some ideas to help plan for an early retirement.

	Start early. Establish your desire to retire early as soon as possible. Have a discussion with your spouse and loved ones to ensure you have the same retirement date goal. With this stated goal, meeting savings targets and establishing spending priorities get much easier.
	Know what you want to do. Have you always wanted to visit national parks? Do you have a passion for art? If you have a dream that can be fulfilled in retirement, it makes any hardships to get there more tolerable. Once you set retirement goals, creating a plan to get there will have more meaning.

	Pay yourself first. People who retire early have higher savings rates than most of us. Consider saving in excess of 10% of your earnings. To do this might mean holding off on a big vacation once in a while or delaying a major home improvement or purchase. While a hardship, knowing the long-term dividend makes it worthwhile. The larger your savings become, the more flexible you are in acquiring assets that generate more wealth for you.
	No debt and credit cards paid in full. It's hard to retire early if you are making large loan payments. Having a mindset to save money before you buy something versus taking out loans is the way to go for prospective early retirees. Why pay the credit card company interest when you could use that money during your non-working days?
	Financial independence mindset. Save enough to not have to worry about Social Security or other government programs to take care of you. Said another way, never over-spend your own resources as you will need to depend on yourself and not others for your financial independence.
	Use common sense when investing. Many investment alternatives may no longer make financial sense when compared to the income potential of the underlying asset or property. For example, if you own rental property, determine if the cash flows create a reasonable rate of return for the price you paid for the property. If you use common sense, more of your investments may help generate income in retirement.
	Other resources. Go through a retirement planning process with a qualified expert. This exercise can help you understand what your projected financial needs will be during your retirement years. Project your potential savings. Look into other sources of projected income from pension plans and retirement savings accounts. Create an estimate of possible Social Security benefits. Understand what other resources will be available to you during retirement.

While this list is not meant to be all-inclusive, it should help start the conversation toward your early retirement dream. Remember to ask for help to understand your situation and to develop your own personal plan.

What to Do With Your Social Security Statement

The Social Security Administration is now doing a better job in sending out earnings reports by mailing paper statements to workers every five years beginning at age 25. The reports are also available online. These reports recap historic earnings and contain an estimate of potential benefits.

When you receive your report, spend a few minutes reviewing the statement. Here are some suggestions on how to do this.

Review your earnings history. Towards the back of the report is a recap of your earnings record. This should accurately reflect reported earnings on your tax return. This number is a summary of all your earnings subject to Social Security as reported by your employer on your W-2 forms. But if you are self-employed or have many employers, you must make sure that the income properly reflects what you earned.

Action:
Employees:	Pull out your W-2s and make sure the totals match
Self-employed:	Pull out your tax return and confirm totals match
Review history:	Review historic figures as well. Your Social Security benefits use your full work history to calculate future benefits.

Review your potential retirement benefits. The Social Security statement will provide you with an estimate of your benefit amount using current dollars and current work history. The value of your benefit will show three benefit amounts. One for the minimum retirement age of 62, one for the maximum amount if you start your benefits at age 70, and one for your full retirement age between the ages of 65 and 67.

Action: Consider these monthly benefit amounts in terms of your retirement plan to help create a realistic picture of what you will have available to you when you retire.

Note other benefits. Remember, Social Security is not just about your retirement benefits. There are also estimates presented for disability and surviving family benefits. Please review these estimates to understand the potential benefits these programs may provide.

Remember current benefits are just estimates. The benefits noted on this statement are estimates. Actual benefit amounts rise with inflation, change with tax laws, and adjust with your future earnings. Your benefit statement will show you the assumptions used in creating your estimated amounts.

Action: Review the assumptions used by the Social Security Administration. Pay special attention to the future earnings used by them to create the benefit amounts. If you do not think they are accurate, you may need to create revised estimates with more accurate assumptions.

Should you find any errors in the statement correct them immediately. The last page of the statement provides a means for doing this.

Taxation Without Representation is Alive and Well

Our forefathers launched the Revolutionary War with the claim "taxation without representation." What few of us realize is that taxing the other guy who has no say in the matter is now a prevalent technique. Here are some examples.

Hotel taxes to fund sports stadiums. New professional sports stadiums across the country are using hotel taxes to fund their construction. This tax is added to every visitors' bill without input on whether they agree to the tax or not. In perhaps the most brazen example, supporters of a potential new NFL stadium referendum in San Diego are promoting getting fans from competing football teams to pay for their new stadium through hotel taxes.

High property tax on vacation property. Own a cabin or other vacation property? The property tax you pay for this property is set by local officials. Temporary residents do not have a vote in electing these people. So out-of-town cabin owners end up footing the bill for local initiatives without a vote.

Taxation Without Representation is Alive and Well

Small business taxes. While the legal system treats corporations as legal entities, they have no voting rights. In addition, millions of small businesses are taxed on individual tax returns as flow-through entities, but the owners have no voting authority to represent their business if they do not live in the same community as their business. This means things like property taxes and sales taxes are set without representation.

Out-of-state taxes despite no physical presence. Many states are taxing non-resident individuals and businesses with new legislation. For example, a consultant working for a California company may be subject to California income tax, even if residing and working in another state. Out-of-state businesses are challenged with newly defined "nexus" rules. As non-residents, these new taxpayers have no voice in the matter.

What's the big deal?

Unfortunately, the pace of targeting taxes towards people and businesses with no voting rights is increasing. This is often due to legislatures taking the path of least resistance. Why not place the tax burden on someone who does not vote? Here are some suggestions on what you can do to manage this problem for you.

	Manage your stay. Know which cities have hotel taxes to support construction projects. Vote with your wallet by selecting your location for business and vacation stays. Sometimes the tax only applies to select counties around a stadium. This is the case with the tax to fund the construction of the Minnesota Twins baseball stadium. So select a nearby county that does not collect the tax.
	Shop wisely. When looking for a new vacation home or cottage, pay attention to the property tax. There are cases where two similarly valued properties on the same lake have different property taxes because the lake is in two different communities.
	Squeak. While you have no vote, you can still try to apply influence. If a community is not business-friendly in their tax proposals, getting the word out is often your only approach. Visit city council meetings and voice your concerns. Support local candidates that understand your plight. Consider challenging property valuations to minimize the impact of tax increases.

Every state, county, and community is different. Know the tax climate before you buy, move, or work in a community that is not your primary residence. It is often your only defense when you are subject to taxation without representation.

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

Monday, August 1, 2016

August 2016 Letter

As summer moves on, so does the continued need to manage your tax obligation. This month includes a review of the charitable donations from IRAs tax benefit recently made permanent. There are tips to improve your home's cash flow and tips to help make school expenses a tax deductible event. A refresher on hotel safety tips to make your summer vacation a safe and memorable one is included for your reference.

Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Charitable Donations from Your IRA

Can you take advantage?

One of the temporary tax provisions made permanent as part of the tax code in late 2015 is qualified charitable distributions from IRAs for those who have reached age 70½. Unfortunately in 2014 and 2015, the law was extended too late during the calendar year to reasonably use this tax law. In 2016 you have the ability to make a planned decision to use this tax benefit. Here is what you need to know.

The rule. For those age 70½ or older, you can have up to $100,000 of your IRA paid directly to qualified tax-exempt charities each year. These pre-tax funds are not subject to income tax by the federal government. This makes the contribution income tax free. No itemized deduction for your contributions is available on these direct transfers.

The benefits

	Taxpayers do not have the contributions from their retirement accounts added to their Adjusted Gross Income. So as a planning tool, this donation strategy can keep Adjusted Gross Income low. This can help avoid things that come with higher income levels like different Medicare premiums.
	The contribution counts towards a taxpayer's annual Required Minimum Distribution. If a taxpayer does not need the income and does not want to be subject to required minimum distribution penalties, this can be a great alternative.
	The contribution is a straight write off. Remember, these funds are sitting in your IRA in pre-tax status. When they are normally withdrawn, the funds are subject to income tax. This tax feature allows you the charitable deduction without the hassle of itemizing your deductions.

Some cautions

As with all tax laws, you must be aware of the rules. Foremost among them are;

	The contribution must be made directly between your account and the charity.
	This benefit is on the federal level. The tax treatment in your home state will vary.
	Since the donation does not go through the taxpayer's income, the donation is not subject to the percentage of income limits on charitable giving by type of organization.
	Don't wait. Since it usually takes time to initiate and complete this transfer, do not wait until the end of the year to make your direct contribution. The money must be at the charity prior to January 1st.

While this tax opportunity is not right for everyone, it is a new tool to use when creating your annual tax plan.

Hotel Safety Travel Tips

As summer vacations continue through the month, please take a moment to review Traveler Safety Tips provided for those who stay in hotels and public lodging. These tips are provided courtesy of the American Hotel and Lodging Association. Be safe out there!

	Don't answer the door in a hotel or motel room without verifying who it is. If a person claims to be an employee, call the front desk and ask if someone from their staff is supposed to have access to your room and for what purpose.
	Keep your room key with you at all times and don't needlessly display it in public. Should you misplace it, please notify the front desk immediately.
	Close the door securely whenever you are in your room and use all of the locking devices provided.
	Check to see that any sliding glass doors or windows and any connecting room doors are locked.

	Don't invite strangers to your room.
	Be aware of potential phone scams and prank calls to your guestroom. Hotel employees will never request credit card or personal information over the phone, nor will they advise a guest to damage hotel property.
	Place all valuables in the hotel or motel's safe deposit box.
	When returning to your hotel or motel late in the evenings, be aware of your surroundings, stay in well-lighted areas, and use the main entrance.
	Take a few moments and locate the nearest exit that may be used in the event of an emergency.
	If you see any suspicious activity, notify the hotel operator or a staff member.

Source: American Hotel & Lodging Association

Ideas to Improve Your Cash Flow

One of the most common reasons businesses fail is due to lack of understanding of cash flow. The same can be said about your household's personal financial statement. So what is this cash flow concept, how does it apply to you, and what are some ways to improve yours?

Cash flow defined

Cash flow equals cash coming in (wages, interest, social security benefits) and subtracting the bills you pay. Unfortunately, calculating cash flow is never that easy. Some bills are due weekly, others monthly. Some large bills come quarterly, or annually. Understanding this flow of cash is the first step in knowing how to improve yours.

Create your cash flow snapshot

Before improving your cash flow, you need to be able to see it. There are many online tools to create a map, but you can also take a snapshot of your cash flow using a monthly spreadsheet.

	Put each month across the top of the spreadsheet with an annual total.
	Note all your revenue and corresponding expense descriptions in the left-hand column.
	Enter your income and bills by month. Create a monthly subtotal of all your inflows. Do the same for your expenses or cash outflows. Then subtract the expenses from income. Positive numbers? You have positive cash flow. Negative numbers? You have negative cash flow.
	Create a cumulative total for the year to see which months will need additional funds and which months will have excess funds.

Ideas to improve your cash flow

Identify your challenges. See if you have months where more cash is going out than is coming into your bank account. This is often when large bills are due. Try to balance these known high-expense months out over the year if at all possible. Common causes are:

	The holidays
	Property tax payments
	Car and homeowners insurance
	Annual income tax payments
	Vacations

Build a reserve. If you know there are challenging months, project how much additional cash you will need and begin to save for this reserve in positive cash months.

Cut back on annuities. See what monthly expense drivers are in your life. Can any of them be reduced? Can you live with fewer cell phone add-ons? How about cutting costs in your cable bill? Is it time for an insurance review?

Shop your current services. Some of your larger bills may create an opportunity for savings. This is especially true with homeowners and car insurance.

Don't confuse savings with cash flow. Think of your savings as the accumulation of positive cash flows from prior months. A high savings balance can often mask a monthly cash flow problem where more is going out than is coming in over a period of time.

Create savings "expense" to add to cash flow. Consider adding a "bill to yourself" in your cash outflows. This money saved is a simple technique to create positive cash flow each month to build an emergency reserve.

Tips to Make School Expenses Deductible

It seems like summer has just begun and the Back-to-School advertising blitz has already started. Are there tax savings opportunities within this nightmare for our kids? Certainly, if you are tax smart about your spending. While the amounts may be small, they can add up in a hurry. Here are some ideas:

Purchasing the class supply list could have deductions in it. Often schools send a list of requested supplies for the school year. Some of the items on the list are clearly for personal use (such as an eraser or a ruler) while other items on the list are often for school use and classroom use (such as 24 pencils or paper towels). This classroom supply technique effectively transfers the school expenses to our children. Keep track of these non-cash classroom/school donations for possible non-cash charitable deductions.

Donate funds versus buying the supplies.Instead of buying the classroom supplies yourself, consider providing a check written to the school as a donation. This helps in two ways: First, it becomes a clear cash donation with a canceled check as a receipt. Second, if your school has a good supply agreement, the purchasing power of your donation will go further.

	Whenever you donate, get a written confirmation from the school or your child's teacher representing the school. Most teachers do not have the form, so bring one with you that the teacher can sign. You can get the directions on www.irs.gov or simply use a respected charitable group like Goodwill, or the Red Cross for a format to copy.
	Leverage the school's PTA. This non-profit parent group, if a qualified charitable organization, is a great resource to help your school AND help you get deductible donations for funds you would otherwise provide to your child's school.
	Use checks not cash. If you usually provide donations to the school in the form of cash (like providing additional money to help other kids go on field trips) make those donations in the form of a check. Cash donations without receipts are not deductible.
	Donate funds versus taking the raffle ticket. Raffles, subscription drives, and silent auctions are fun ways schools raise funds. To maximize your ability to deduct your donations, forego the possible prize. Then the entire donation is clearly deductible.
	Don't forget your out-of-pocket expenses for your volunteer activities. Perhaps you donate your time at school functions, donate books to the school library, or help assist the teaching staff. Your out-of-pocket expenses and your mileage should be tracked for charitable deduction purposes.
	Teachers, save your out-of-pocket expenses. The $250 deduction for qualified educators out-of-pocket classroom expenses is a popular tax provision in Congress that is now a permanent part of the tax code.

Finally, don't forget to review state rules for educational expenses. There are often credits available for out-of-pocket school and other educational expenses.

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