August 2014 Letter

Now that home values are on the rise once more, it makes sense to review the tax benefits of home ownership. Also included this month are simple ideas to save money, a summary of an IRS announcement regarding direct deposit of refunds, and an overview of an interesting 3D printing phenomenon that may impact all of us in the next few years. As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Tax Benefits of Home Ownership When it comes to tax savings it really is home sweet home. Here are some of the popular tax benefits of owning your own home and how to get the most out of your home's tax advantaged status. Mortgage interest. Interest paid on your home mortgage is still tax deductible. This deduction is taken on Schedule A as an itemized deduction. Certain upward limits apply. Property taxes. Property taxes paid on your home are also tax deductible as an itemized deduction. Home Equity. Most homeowners can take out a second mortgage on the "equity" in their home. In most cases, this interest expense is also tax deductible. Many use home equity loans for purchasing autos, boats, and the like since interest on traditional loans is not tax deductible. Idea: Consolidate credit card debt within a home equity loan or home equity line of credit if your home is worth more than your outstanding mortgage balance. You have the double advantage of deducting the interest on your tax return PLUS you avoid the higher interest rate on your credit card. A word of caution however, if you default on a payment your house is now the collateral. Capital Gains Exclusion. When you sell your home, up to $500,000 for joint filers ($250,000 for single taxpayers) of the increased value over what you paid for the home can be excluded from tax. To take advantage of this capital gains exclusion you must make the home your principal residence in two of the last five years.   Idea: The capital gain exclusion on home sale can be used more than once. For example, you could sell your qualified main home and take the exclusion. If you then made a second (vacation) home your new main home you could also take the gain exclusion once again. You would need to meet the IRS ownership and use rules to qualify. Special allocation rules might apply if this second home was also rental property. Second home benefits. A second home (cabin or vacation home) can also benefit from interest and property tax deductibility as long as total mortgages do not exceed certain limits. Should you have any questions regarding your situation please feel free to call.

The 3D Printing Phenomenon Just as nobody could have predicted the impact of the steam engine in 1750 - or the printing press in 1450, or the transistor in 1950 - it is impossible to foresee the long-term impact of 3D printing. But the technology is coming, and it is likely to disrupt every field it touches. The Economist, February 2011 While 3D printing has been around for a number of years, just recently it has started to make inroads into mainstream America. So what is 3D printing and why should you care? What is it? 3D printing (also known as Additive Manufacturing) is the process of producing a three dimensional object of various shapes from digital program input. The process reads the design instructions and then lays down successive layers of material to produce the object. The material creating the object could be plastics, metals and many other source materials. What's the big deal? The 3D printing industry is now a multi-billion dollar category. If it is fully adopted, it could change many manufacturing processes from mass production to individualized manufacturing. Here are some applications currently being used. Part replacement. Need a missing or broken part? Instead of large inventories at far away locations, the part could be made to order locally using a 3D printer. Medical applications. Dentists use this to create personalized material for their patients. Limb replacement companies also use the technology to build better fitting products. Scientific applications. From scientists making fossil replicas to creating sandstone coral structures to help coral colonies prosper, the application of the technology by scientists is expanding every day. Even space exploration becomes easier if you can manufacture a broken replacement part on location. Endless ideas abound. Want a custom smart phone case? Perhaps you need a replacement part or your student needs a shape for a school project. With open source files from places like Thingiverse and 3D Warehouse, you have instant access to many great ideas. Why Care? Price. The cost to own your own 3D printer is now within reach of most households. What once cost $10,000 - 20,000 now can be owned for less than $1,000. Open Source. There are groups dedicating themselves to making sure the digital plans to create objects stay in public domain. The more digital models available for everyone, the more likely you may find a use for one. Personal Products. Want to make personal trophies for the soccer team? No problem. Don't have a digital plan to replace that broken part? No problem, just add a digital scanner and you can create the digital plan to output the part to your 3D printer. Small Business Applications. If you have an idea and you wish to create a prototype, it now is very easy to do. Simply create a model, digitally scan it and then output it to your 3D printer. Is it all good? While the buzz around 3D printing is getting louder, there are those that wonder if the 3D phenomenon is a good thing. A recent open source digital file was made available to create a working hand gun. Authorities quickly moved to try to make the plans inaccessible. Many firms are trying to corner the intellectual property rights to digital files limiting the availability of 3D designs to produce items of interest. Other manufacturing processes using lasers also show promise versus the 3D printer "additive manufacturing" approach. While there are many doubters, if 3D technology catches on it could become a mass-market household product that enables consumers to save money by creating versus purchasing household items.

In the News. IRS Limits Direct Deposit of Refunds Beginning in January 2015, the IRS will be limiting the number of direct deposits into a single account to three transactions. This includes all bank accounts (savings and checking accounts) and any pre-loaded or pre-paid debit and credit card accounts. Any requests beyond three will automatically be converted to a paper refund check and mailed to the taxpayer. The purpose of this change is to reduce the problem of taxpayers having their refunds stolen by criminals. Taxpayers who file multiple tax returns for different family members and have the refunds all deposited in a single account may be impacted by this new policy. In addition, this new direct deposit limit stops the practice of having filing fees directly paid out of a refund amount. As an additional form of security, the IRS reminds us that direct deposits must be made to an account bearing the taxpayer's name.

Seven Little Money Savings Ideas Money savings ideas are around us every day. Here are seven that can quickly be put to use to save more of what you earn. Play the waiting game. When you want to make a purchase, force yourself to wait before you buy it. If online, leave the site and come back in an hour. For large purchases wait a month. You might surprise yourself how many of these impulsive purchase decisions do not occur when using this technique. Reduce spending as entertainment. Too often the mall becomes a place to burn a few hours with family and friends. This form of entertainment can be a costly one. Find another entertainment outlet. Go for a walk. Review your community bulletins for free events. When going out to eat, do not choose a restaurant attached to a mall. Pay yourself first. When sitting down to pay your bills, pay yourself first. Put the payment in the mail to a bank account that is inconvenient to make withdrawals. Use this account to build up three to nine months of spending needs. This will become your emergency fund. Prioritize your debt repayment. First pay those items that have a strong legal obligation (like your tax bill). Then pay high interest credit card debt. Be very deliberate about the order in which you pay or make extra payments on your outstanding debt. Review annuity payments. Many suppliers rely on the strategy to charge you a little bit each month. Some suppliers actually thrive on charging for add-on services. Review your monthly bills and eliminate items you don't need. Typical vendors include cell phone providers, cable companies, internet providers, and traditional phone companies. Add on fees could be call forwarding, or excess charges for data plans, or monthly fees for premium cable channels. Every monthly bill you eliminate comes back as savings every month of the year. Ask for less. Whenever possible ask for a lower bill amount. Call your credit card company or bank to challenge their fees. Be willing to leave them if they do not. Negotiate for lower pricing on all your large purchases. Use the internet to comparison shop for the same item. While negotiating for a lower price is difficult, you will be surprised how many vendors will say, "yes, I can give you the item for less." Plan large purchases like your parents. In the old days our parents would save their money and then purchase an item. With today's ready access to credit cards, this great savings habit has become somewhat of a lost art. Why not rediscover this habit by identifying something you wish to buy and then saving your money to make the purchase when you have the cash to pay for it.

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

July 2014 Letter

Happy Independence Day! While we look forward to the fireworks that mark the month, there could be fireworks for millions when the IRS tries to take back health care Premium Tax Credits at the end of the year. If you are using the Health Exchange for your insurance you will want to be aware of this tax risk. There is also news on two other fronts, first the newly announced Taxpayers' Bill of Rights and potential payment relief for those with student loan debt. All this and an article exploring the status of home affordability round out this month's newsletter.
As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Prepare for the "Claw Back" Credit

Is a tax surprise of over $1,000 in your future?

Millions of taxpayers may see a surprising tax bill in 2014 as the Federal government asks them to repay (claw back) some or all of the new health insurance Premium Tax Credit claimed on the Affordable Care Act insurance exchanges. Could this impact you or someone you know? If so, here is what you need to know. Background A core part of the Affordable Care Act (ObamaCare) was the establishment of a Health Insurance Marketplace where the uninsured shop and sign up for health care insurance. Some states created their own online system while other states opted for the Federal website known as the Federally-facilitated Marketplace (FFM). When using the Marketplace, qualified participants could apply a new insurance Premium Tax Credit to reduce their health insurance bill. Millions of taxpayers are receiving this tax credit each month. The credit can be paid directly to health insurance companies to reduce monthly health insurance premiums.
The Insurance Premium Tax Credit Problem Per a recent report from the Department of Health and Human Services, over 85% of the eight million participants who selected health insurance in the new Marketplace tool are using the new Premium Tax Credit to help pay their monthly premium. The qualifications to receive the tax credit are based on self-reported income. The contractor hired by the government to audit this information (Serco) is reporting over 4 million discrepancies between what is claimed on the insurance enrollment to qualify for the tax credit and what can be found in government records about these individuals. The problems consist of: Mismatching income Incorrect Social Security numbers Residency and immigration problems Conflicts with other federal health programs
Action Steps If you are currently receiving your health insurance through these new exchanges and have been using the Premium Tax Credit to reduce your premium, please consider the following; File a tax return. Many taxpayers that did not need to file a tax return in prior years must now do so to correctly establish qualifications to receive the Premium Tax Credit. Confirm your health enrollment form. If you have been using the health insurance Premium Tax Credit, review your initial enrollment form. Is it still accurate? If not, please make the necessary corrections now. While it will not alleviate the need to repay some of the excess credit you received, it will help keep the tax credit repayment problem from getting any bigger over the balance of the year. Changes in your situation. If you have any change in your situation, review and update your health insurance enrollment information. This includes, at minimum, a death, birth, marriage, or divorce in your family. Plan for the claw back. You may wish to forecast your potential credit repayment risk. The recent government study shows that the current insurance Premium Tax Credits are reducing insurance premiums by 76% with a monthly tax credit of over $221. As an example, if an error is found on your application that requires a 50% repayment of the credit, you could face a federal claw back tax bill of over $1,300. The government is currently trying to work through the reported inconsistencies on enrollment forms. Should you receive notice from the government please ask for help. The financial impact of waiting could cause an unpleasant surprise at tax time.

Taxpayer Bill of Rights

In June, the IRS announced the adoption of a Taxpayer Bill of Rights. The ten rights are highlighted here for your information. These rights have been in the tax code for years, however per Nina Olson head of the IRS Taxpayer Advocate Service, "...taxpayer surveys conducted by my office have found that most taxpayers do not believe they have rights before the IRS and even fewer can name those rights." The IRS hopes that by centralizing and publicizing these rights, taxpayers will become more aware. How might this impact your experience with the IRS? That is anyone's guess as it is not covered in the IRS Bill of Rights announcement.

1. The Right to Be Informed Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes. 2. The Right to Quality Service Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service. 3. The Right to Pay No More than the Correct Amount of Tax Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly. 4. The Right to Challenge the IRS's Position and Be Heard Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position. 5. The Right to Appeal an IRS Decision in an Independent Forum Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals' decision. Taxpayers generally have the right to take their cases to court.   6. The Right to Finality Taxpayers have the right to know the maximum amount of time they have to challenge the IRS's position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit. 7. The Right to Privacy Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing. 8. The Right to Confidentiality Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information. 9. The Right to Retain Representation Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation. 10. The Right to a Fair and Just Tax System Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

In the News. Student Loan Interest Relief? With student debt loads now over $1 trillion and rising, any relief is a welcome one for students. Especially since over 71% of students leave college with some debt. In a recent presidential executive order, qualified student borrowers of Federal Direct Loans can cap their monthly loan payments to 10 percent of discretionary income. The goal is to make this repayment option available by December 2015. The government is also going to focus on improving communication to holders of student loan debt to better outline the many available repayment options. Remember, those with student loans can also reduce their taxable income in 2014 by up to $2,500 in qualified student loan interest payments.

Ideas to Make Homeownership Affordable

Much is being written about how it is becoming harder to purchase a first home. Is home ownership out of reach?

The problem For years the values of homes kept going up with no visible ceiling in sight. Then came the 2008 recession and housing market collapse. While housing prices adjusted downward, the ability to obtain financing became much more difficult. Added to this problem was the increased difficulty of potential young home-buyers to make ends meet while carrying significant debt loads from college. While the housing market has now rebounded and interest rates are low, the median household income has not risen much to help take advantage of the home buying opportunity.

Ideas to make home ownership more affordable Given the difficulty to own your first home, here are some ideas to consider to make your dream a reality. Location. One strategy is to buy a more affordable, less expensive house in a great location. Over time this smaller starter home will more likely increase in value providing some equity for your next purchase. Start small. Consider making a condo in a high demand area your first home. As long as you do not over pay for the condo, you will be building equity for your next purchase. Save money. Start saving money for a down payment now. Ten percent is a good target, with twenty percent being ideal. Remember, new regulations make it more difficult to take gifts as a down payment for a home. If you have someone willing to support your home purchase, try to receive the down payment gift long before you need it. Check out low down payment lending programs. There are a number of options to reduce the amount of down payment required on your first home. The most common is FHA, but the fees can be high. The Veteran's Administration has a no down payment option. But also check out local banks that have small down-payment requirements when you purchase mortgage premium insurance. Get pre-approved. Shop banks and financial institutions prior to looking for a home. They can walk you through the financing process, check your credit, and give you an estimate of what you can afford. Have the bank provide a pre-approved letter to help in your negotiations with the seller. Use "handy" to make it affordable. If you are handy with tools and making repairs, consider targeting a well built home that just needs a face-lift. This do-it-yourself attitude can save you money on the purchase price of a home that needs some work. Use tax breaks. Forecast your taxes with the benefit of home mortgage interest and property taxes as itemized deductions. Remember you can also use up to $10,000 in traditional IRA funds penalty-free to help pay for your first home. You will still owe income tax on the withdrawal, but can avoid the 10% early withdrawal penalty. Buy direct. Consider alternatives to the traditional home buying experience. Talk to friends and family to network into target neighborhoods and find homes not yet listed. Perhaps you can even find a seller willing to take a contract for deed for your home purchase to save on financing fees. Control the offer. Offer only what you believe you can afford, not necessarily the seller's asking price. You may get pressure to offer more, but resist the temptation. You are the one that will need to make the mortgage payments in the years to come.

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

June 2014 Letter

With the end of tax filing and the start of summer why not focus on new beginnings? Included in this month's newsletter are some ideas to help find summer employment and some suggestions on the benefits of creating a good accounting system for your small businesses. Wonder what the IRS has in store for audits? Consider reviewing the article on audit statistics and a new area of focus within the agency on alimony reporting compliance. Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

The Chances of Being Audited 2013 audit statistics show changes What are the chances? Every year the IRS publishes the statistics of tax returns they are examining. Provided here are the last three years of published information and a look back to 2008 to see any trends: Audit Rate Statistics for INDIVIDUALS Fiscal Year Year 2013 2012 2011 2008 All Individual Tax Returns 0.96% 1.03% 1.11% 1.00 % No Income (AGI) 6.04% 2.67% 3.42% 2.15% Income under $25,000 1.00% 1.05% 1.22% .90% $25,000 - 50,000 .62% .70% .73% .72% $50,000 - 75,000 .60% .64% .83% .69% $75,000 - 100,000 .58% .64% .82% .69% $100,000 - 200,000 .77% .85% 1.00% .98% $200,000 - 500,000 2.06% 1.96% 2.66% 1.92% $500,000 - $1 million 3.79% 3.57% 5.38% 2.98% $1 million - $5 million 9.02% 8.90% 11.80% 4.02% $5 million - 10 million 15.98% 17.94% 20.75% 6.47% $10 million and over 24.16% 27.37% 29.93% 9.77% Note: These audit rates are stated as a percent of total tax returns in each Adjusted Gross Income (AGI) class as claimed on individual tax returns. In general the examinations are for tax returns filed in the previous calendar year. Source: IRS Data Books Observations: Overall audit rates in 2013 have now fallen below the levels in 2008. Much of this is due to budget cuts from sequestration per the IRS. These lower audit rates did not impact those with no AGI or negative income. This group saw a dramatic increase in audits during 2013. Taxpayers with AGI between $200,000 and $5 million also saw their returns reviewed at a higher rate than last year. Having good records Always retain your tax records and support documents for as long as they may be needed to substantiate your tax return. This is usually three years after the filing due date or when the tax return was actually filed (whichever is later). Include any state record retention requirements as you evaluate when it is safe to destroy old records. Remember some records need to be retained indefinitely. This includes, at minimum, copies of original tax returns, legal documents, confirmation of asset purchases, asset sales and real estate transactions.

Alimony in the Spotlight If you either pay alimony or receive alimony, you will want to know what is happening at the IRS. In a recent audit of the IRS by the Treasury Department, it was found that 47% of the tax returns that claimed an income reduction due to alimony payments did not have a matching tax return that claimed the alimony income. The audit found that the IRS did not have an effective way to match tax returns between those paying the alimony and those that should theoretically be claiming the alimony income. To make matters worse, very few penalties were being assessed for failing to correctly identify the taxpayer receiving the alimony payments. What you need to know Beginning immediately, the IRS will be assessing penalties on tax returns that do not identify the correct Social Security Number or Tax Identification Number of the taxpayer receiving the alimony payments. There will be an alimony-matching program to identify those returns that pay alimony with those that receive it. If you pay or receive alimony or taxable spousal support payments it is worth checking to ensure your figures match those of your ex-spouse. If they do not, you might just be hearing from the IRS.

Setting up Your Business Accounting System You've done the hard work. You have a new business idea or you've found an existing business to purchase. Want to help ensure your business success? Pay attention to correctly setting up your business' accounting system. Why it matters Honoring cash flow. Often success or failure of your business is predicated on whether you have enough cash to pay your bills. Determining your cash needs means understanding the cash situation of your business. To do this requires a good set of records. This includes recording your current situation on a timely basis and establishing a forecast of cash needs throughout the year. Fortress balance sheet. Banks love a strong balance sheet. If you think your business may need money for expansion, you will want to focus on developing a strong balance sheet that is low in debt and high in liquid assets like cash and accounts receivable. The irony here is that it is easy to borrow money when your records show you don't need it and it is hard to borrow money when your business records show you need the funds. Understanding financial pressure points. Every business has a few financial items that drive profitability. Do you know yours? It might be payroll in a labor-intensive business. It might be rent in a retail establishment. Perhaps your margins are low because of heavy promotional costs. A strong accounting system will help you stay focused on the more important financial elements of your business. Understanding seasonality. By setting up a good accounting system AND forecasting performance over a twelve-month period, you will understand the true needs of your business. This is especially important if your business is seasonal in nature.     Things to consider Separate books. If starting a business from scratch, remember to set up separate bank accounts and recordkeeping. IRS auditors are quick to disallow expenses when your business expenses are mingled together with personal expenses. The same is true with credit cards. Use a separate credit card for your business transactions. Consider business entity. Choosing the right legal and tax entity for your business is important. Consult experts to discuss your options. On the tax side, sole proprietors use a Form 1040 Schedule C to report their activity, while other business entities "flow-through" profits to your individual tax return through a Schedule K-1. Still others like C-Corporations require separate tax returns without flow-through of profits onto your personal tax return. Cash versus accrual. There are different approved methods of accounting. You will need to determine which is best for you. Sometimes your business dictates a required method, but not always. The basic difference lies in when you can book revenue and expense. One method (cash) is based upon when you actually receive or make payment. While the accrual method allows capturing this same information when there is an established obligation. Sub-ledgers. Well-run businesses understand the need to organize elements of their business into accounting categories. These categories often use their own reporting system called sub-ledgers. Common areas are sales, accounts receivable, accounts payable, fixed assets, and inventory. Remember, by spending time setting up the accounting system that is right for you, you are increasing your business' chance for success. As a final thought, if recordkeeping and accounting is not a strength of yours, ask for help.

Looking for a Summer Job With summer upon us, you may have a teen looking for summer employment. Here are some ideas to help find a summer job. Things to consider When trying to land a job, remember you need to stand out from the pack. What can you do to help yourself be the one hired? Create a resume. Even if you do not have solid work experience, a quick and simple recap of who you are and what things you believe you are good at could help set you apart from other summer job seekers. Dress the part. Dress neatly and cleanly. Do not over dress for the job, but make sure you look like you belong. Not sure what this means? Scout the place you wish to work and notice what people are wearing. Then dress the part. Be confident, even if you are not. Speak clearly. Look the person in the eye. Ask for the job. Have a firm handshake. All these little things add up in the eye of the employer. Be ready for no. Someone once said looking for a job can be summed up in one sentence: NO, NO, NO, NO, NO, YES. If you are turned down for a job, politely thank the manager for their time, reiterate how you would like to be considered for future openings and leave your contact information. Leverage your network. Many summer jobs are landed because employers rely on current workers to help find qualified new workers. So pass the word you are looking for work. You never know what opportunities might develop. Follow up. If you really want to work somewhere, be persistent. Follow up an interview with a thank you note. Then periodically check back. Some things to avoid. Being late or not showing for an interview Being meek or timid Having spelling errors on any correspondence Showing up with a friend or parent. This is your job not theirs. Not having a way to get to and from a job. Plan this out ahead of time. Ideas for summer work Not sure where to look? Here are some ideas. Grocery store Seasonal areas; garden stores, landscape, summer camps, vacation areas, resorts, festivals and fairs, construction Restaurants. Especially in areas with heavy summer traffic Nanny/child care. With school out, many homes are looking for summer help with their kids versus sending them to full-time daycare. Craft fairs and conventions. Summer is the time for many community events. All of them need help. Light manufacturing. Many workers are looking to take some vacation. Summer help can step-in and fill-in while current employees take a well-deserved break. Often the difference between landing the dream summer job and not having one is simply taking action. To win the game, you must be on the playing field. So go out there and get your job.

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