Posted on July 17, 2012May 31, 2016 by Jan Roberg

Does the New Health Care Bill Have a 3.8% Sales Tax on Selling Your Home?

Photo by therichbrooks at Flickr.com

I received a question from Laura who asked:

“I just received an email from a friend that said that there will be a 3.8% tax on all home sales after 2012 and that this tax is part of the Health Care bill. Do you know anything about this and can you clarify it? Thanks.”

I’ve heard that one too, but it’s not exactly true. Last week I wrote about a 3.8% Medicare tax on investment income which includes long term capital gain transactions of real estate—and that’s the rule that people are referring to when they talk about a sales tax on selling your home.

Let’s sort this out so you know exactly what’s going on.

Bottom line: if you sell your house after you’ve lived in it for at least two years, $250,000 of the profit is excluded from capital gains tax. ($500,000 if you’re married.) Let’s say your house cost $200,000 (this is usually referred to as “basis” in the tax prep world) when you bought it and you sell it for $400,000, that’s a gain of $200,000. You’re not even in the running for paying the 3.8% Medicare tax because all of that gain was excluded from your income. For you, this Medicare tax would not be an issue at all. None of the proceeds from the sale of your home in this instance would even show up on your tax return.

Now let’s say you live someplace where the property values have gone up astronomically. (Clearly you don’t live in my neighborhood if they did. Our values just seem to drop while our property taxes go up. Sorry, I’m whining.) Okay, let’s say you live someplace where real estate values have increased way more than they have here in Missouri—then you could have an issue.

Let’s say you bought your house for $100,000 and sold it for $800,000 so that you’ve got a profit of $700,000. A $700,000 profit is a good thing! Assuming that you’re married, you get to exclude $500,000 of that gain from the capital gains tax so you would only pay tax on the extra $200,000.

Let’s do the math: $800,000 sales price – $100,000 purchase price = $700,000 capital gain.

$700,000 capital gain – $500,000 capital gain exclusion = $200,000 that you have to pay capital gains tax on.

A transaction like that will kick you into a high enough tax bracket to pay that extra Medicare tax in addition to the capital gains.

For most normal folks—we’ll never have to pay the Medicare tax on the sale of our homes.

If the value of your home has increased so much that you have to pay that tax—then to quote Charlie Sheen, “Winning!” Seriously, you’d have gained $700,000 on the sale of your home. That would be awesome. And you’d only have to pay capital gains tax on $200,000 of it.

Right now—the capital gains tax for 2013 is scheduled to be 20% (who knows what Congress will say before the year is out but that’s what it’s scheduled to be.) And the extra Medicare tax will be 3.8%. So—let’s do the math on that:

200,000 taxable gain x .2 capital gains tax = $40,000

200,000 taxable gain x .038 Medicare tax = $7,600

So the total tax on that gain would be $47,600. As bad as that sounds, remember we’re looking at a $700,000 gain to begin with so you’re really only paying 6.8% (or 47,600/700,000 * 100) tax on that amount. Granted, we’re talking about one little example with crazy numbers—but remember—that’s for someone who has enough gain to have to pay in the first place. Like I said earlier, for most of us—we’re looking at zero tax money spent on the sale of our homes.

(Note from editor: So I checked the web and saw that many people were receiving emails claiming that there was this 3.8% sales tax on the sale of your home. However, what these emails failed to explain was the exclusion amounts (250k single or 500k married) that are shielded from tax. They later went on to criticize the health care bill and our current president. Since it is an election year, you are probably more susceptible to emails or messages like this to try to get you to vote a certain way. Do your research and keep checking in with this blog for the most recent and accurate information.)

Posted on July 13, 2012May 31, 2016 by Jan Roberg

Claiming Meals as a Business Expense

Photo by loop_oh on Flickr.com

I was working on a client’s tax return and he had a whole lot receipts for business meals. A whole lot. I do a lot of tax returns and I’m pretty familiar with claiming meal expenses. This guy wasn’t in one of the jobs that I normally associate with lots of meal expenses – so I had to ask him about it.

He told me, “Well yeah, I own my own company and my wife helps me and so we go out to dinner together all the time and we talk about work so I write it off as a business expense.”

Here’s the problem – that’s not going to fly with the IRS. If you are just going out to dinner with your spouse, even if you do nothing but talk about business – well then, it’s not a deductible business expense.

I deal with this issue all the time. Heck, my own husband will say, “Hey we talked about business, you can deduct our dinner!” And yes, my husband often gives me excellent business advice during dinner (he’ll read this blog post so I have to say that) but I still can’t deduct having dinner with him for business purposes. (As smart as he is at business, he stinks at taxes.)

Here’s the IRS rule: “Generally you cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose for providing the entertainment.”

So, I can bring my husband, Mark, along if I’m entertaining a client who needed to bring her husband along as well. For example, someone is in from out of town and wouldn‘t want to leave her husband all alone in the hotel. But if I’m just having dinner with my husband alone – no deduction.

There are lots of other rules about claiming meals as well. You’re supposed to record the expense “contemporaneously”. That’s a fancy way of saying you should write down on the receipt who and why. For example, Helene is one of my advertising people. We both like the grand slam breakfast so I’ll meet her at Denny’s. On the receipt I would write, “Helene, advertising.” Quite frankly, Helene is the only person I meet at Denny’s so if I’ve got a Denny’s receipt, I know who I was meeting and what we were talking about. But a Bread Company receipt? Well I probably meet someone there once a week. If I don’t write that down that might not survive an audit. It’s just a good business practice to write who and what on the receipt every time.

Here’s a silly little tip that makes the IRS happy: when you’re paying for a business meal with your credit card, write the name and reason for the meeting on the slip that you sign and give to your waitress. That way, your “contemporaneous reporting requirement” is proved on your receipt carbon. Your waitress might think you’re a little weird but chances are she won’t even notice.

If you want more information about entertainment meal expenses, you can check out the IRS publication 463: http://www.irs.gov/pub/irs-pdf/p463.pdf

And now, I’m headed off to a non-deductible dinner with my husband!

Posted on July 10, 2012May 31, 2016 by Jan Roberg

Obamacare – What You Need to Know (Part 3)

Photo by BaseballBacks on Flickr.com; St. Louis Cardinals outfielder, Carlos Beltran, put on a strong showing in yesterday's homerun derby! Go Cardinals!

Part 3: Medicare Tax on Investment Income to Start in 2013

If your income is less than $125,000 a year, then you don’t need to worry about this. But if you are a high income earner, then you should really make sure you check this out.

First, there are two things you need to be aware of about taxes on investment income for 2013. One is that the current maximum tax rate on long-term capital gains is scheduled to go up to 20% instead of 15% which it now is (unless Congress decides to act). This is due to the sun setting of the Bush Tax Cuts. It has nothing to do with Obamacare – that’s already in the tax code.

The second issue is that higher income folks will also be taxed with an additional 3.8% Medicare contribution tax. (This is what’s in the Obamacare tax package.) This Medicare contribution tax will only apply to higher income earners so those people will also be in the 20% long term capital gain tax as well.

What makes the 3.8% Medicare tax kick in? It’s all going to be based upon your adjusted gross income (AGI), kind of like the higher Medicare tax on wages that I wrote about last time. The Medicare tax will kick in if your AGI exceeds:

$200,000 if you’re single or filing as head of household
$250,000 if you’re married and filing jointly, or
$125,000 if you use the married filing separate status

Before I go on, what exactly do they mean by net investment income? When I was reading the rules, I was thinking about stocks and bonds – that’s what I consider to be investment income. But for this tax, investment income also includes interest, dividends, royalties, annuities, rents, income from passive business activities, income from trading in financial instruments or commodities, and of course, gains from assets held for investment like stocks and other securities. As you can see, this category is much larger than just stocks and bonds. One thing that’s not included here are gains from assets held for business purposes – those won’t be subject to the extra tax.

So how does the tax get applied? Now this is where it gets a little funky – the 3.8% tax is going to apply to the lesser of your net investment income or the amount of your AGI in excess of your net investment income. Whew – did you feel something fly right over your head? Trust me I had to read that over a few times to figure out what that meant. And trying to word it differently didn’t always give the right meaning – so let me explain with some examples, okay?

Let’s say you’re a married couple and your joint income is $275,000. $225,000 in wages and $50,000 in investment income. You’re going to pay the 3.8% Medicare tax on the investment income that is over the $250,000 threshold. Here’s the math:

275,000 – 250,000 = 25,000 (Long version: $275,000 income – $250,000 threshold = $25,000 amount of investment income subject to the extra tax)

25,000 x .038 = $950 (Long version: $25,000 investment income subject to Medicare tax x 3.8% Medicare tax rate = $950)

So even though you had $50,000 of investment income, you only pay $950, or 3.8% of the 25,000 over the $250,000 threshold.

Now let’s say you’re single with those same numbers. Because your threshold is lower, you’d wind up paying the 3.8% tax on all of your investment income. Here, let me show you the math again:

275,000 – 200,000 = $75,000 (Long version: $275,000 income – $200,000 threshold = $75,000 amount of investment income that could be subject to the extra tax)

But $75,000 is more than the $50,000 investment so we only use the $50,000 to compute the tax.

50,000 x .038 = $1,900 (Long version: $50,000 investment income subject to Medicare tax x 3.8% Medicare tax rate = $1,900)

Got it?

Now remember, I’m just computing the new Medicare tax here – I haven’t taken into account the increase in the long term capital gains rate that is also scheduled to go into effect. And I haven’t even discussed the fact that the tax rate for qualified dividends (which are currently taxed at the long term capital gains rate) is scheduled to change to the ordinary income tax rates. Those changes, if they are not addressed by Congress before the year ends, will have an even larger impact on investment income tax than the Medicare tax and will be affecting persons of all income levels.

Remember, these tax changes are scheduled for 2013 so they are not in effect for 2012. You just need to be aware of what’s coming so that you can make intelligent decisions about your investments.

Posted on July 6, 2012May 31, 2016 by Jan Roberg

Obamacare – What You Need to Know (Part 2)

Part 2: New Medicare Taxes to Start in 2013

Photo taken by José Goulão on Flickr.com

In my last post I wrote about the penalty you could pay if you don’t have health insurance. Those taxes start in 2014. Today, I’m going to talk about the new Medicare taxes that are supposed to start next year in 2013.

First thing to know – if your income falls below $125,000 a year – you don’t even need to read the rest of this, it’s not going to affect you. (You’re welcome to stay, I like when you stay, and I just don’t want to waste your time.)

But the additional Medicare tax is really targeted at higher income earners. Starting in 2013, an additional .9% hospital insurance (I’m going to call that HI for short) will be imposed on wages in the following categories:

over $250,000 for married taxpayers filing a joint return (MFJ),

over $125,000 for married taxpayers filing separately (MFS), and

over $200,000 for singles and head of households (Single and HOH)

* Employers will begin withholding the HI tax on any wages that are in excess of $200,000. Wages earned by your spouse are not taken into account in the withholding calculations.

So let’s say you’re married and your joint income is $300,000. Your additional HI tax would be computed as follows:

300,000 – 250,000 = $ 50,000 (that’s the excess over the threshold)

50,000 x .009 = $ 450

If you are an employee at a company, your boss would be withholding the excess from your wages.

If you are an employer and you have employees that earn over the threshold, you do not have to pay the employer match like you do with the regular Medicare tax – this HI (hospital insurance) tax is for employees only. You’re still paying it with your payroll tax return because you withheld the funds, but you’re not matching the funds with your own money.

If you are self employed you have to pay the HI tax on your earnings.

What that could mean to you – Let’s say you’re married and you and your wife each earn $190,000 a year. Your combined income is $380,000 a year so you’d have to pay a HI tax of $1,170 ((380,000 income – 250,000 MFJ threshold from table above) * 0.009). Because neither of your individual incomes put you over the threshold, you won’t have withheld enough and you’ll have to pay the additional tax.

Likewise, let’s say you’re married with a non-working spouse. You make $250,000 a year. Your employer has withheld an extra $450 from your pay because you made over $200,000 – but since you’re married, your filing threshold is $250,000 so you should be getting that excess $450 back. (To get to this $450 withholding, we take ($250,000 income – 200,000 employer holding threshold) * 0.009.)

So that’s the new Hospital Insurance tax on higher wages and self employment income.

There’s also a new HI tax on investment income. Once again, that will also be on folks with higher incomes. I’ll be tackling that in my next post.

Note from Editor: Since I am a numbers guy, I added a chart to demonstrate the amount of HI Tax you could incur. Because the 0.9% is a flat rate (meaning it never changes), for each increase of $1,000 in income, the HI tax will increase by $9. Here I am going to show increments of $5,000 which will result in $45 increases.

Hospital Insurance Tax for High Income Earners

HI Tax Rate		Excess Over Threshold Amount (The amount being taxed)		Total (HI) Tax
0.009	x	$ 5,000	=	$45
0.009	x	10,000	=	90
0.009	x	15,000	=	135
0.009	x	20,000	=	180
0.009	x	25,000	=	225
0.009	x	30,000	=	270
0.009	x	35,000	=	315
0.009	x	40,000	=	360
0.009	x	45,000	=	405
0.009	x	50,000	=	450
0.009	x	55,000	=	495
0.009	x	60,000	=	540
0.009	x	65,000	=	585
0.009	x	70,000	=	630
0.009	x	75,000	=	675
0.009	x	80,000	=	720
0.009	x	85,000	=	765
0.009	x	90,000	=	810
0.009	x	95,000	=	855
0.009	x	100,000	=	900

Posted on July 3, 2012May 31, 2016 by Jan Roberg

Obamacare – What You Need to Know (Part 1)

Editor: Thank you Wendy and Jeff for inspiring such a great post! Jan and myself are deeply vested in the decisions made by our White House. We hope to bring clarification to everyone in the like on this confusing but pertinent ruling. Happy Fourth of July!

Part 1: How Much is the Penalty for Not Having Health Insurance?

In less than an hour after the Supreme Court announced their ruling that Obamacare was Constitutional, my phone started ringing with people asking me questions. I’ll be honest – I wasn’t prepared for that. But the one caller that really got to me said, “Make it simple so that I can understand it.” Her big question was – How much is it going to cost me? So for her – I’m going to try my best to explain it.

Today I’m going to talk about the mandate part – that is – how much tax you’re going to have to pay if you don’t have health insurance. (And yes, it is a tax because the Supreme Court says so. This is a point people argue about but today I’m skipping to the math.)

First thing to know: You aren’t required to have health insurance until 2014, so if you’re reading this in 2012 you’ve got time to figure things out. The actual tax won’t have to be paid until the next tax season which would be in April of 2015. That should give you a time line to work with.

The second issue is – who’s going to have to pay? If you read the law it says non-exempt US citizens and legal residents. This is another part where everybody goes all nutso about illegal aliens not having to pay the health insurance tax. While that’s a genuinely valid concern, I’m not going to touch that today. I’m looking at those of us who are citizens and legal residents – what are we doing? Fair enough for now?

Okay – so what does that “non-exempt” part mean? Here, anybody whose income is below the filing threshold is exempt from having to pay the tax for not having health insurance. Those “non-exempt” people are the ones who have to pay. Filing threshold is the amount of money you make where you have to file your income taxes. Say you’re single, for 2012 the IRS says the filing threshold is $9,750 so if you make less than that you don’t have to have insurance. If you’re married, the filing threshold is $19,500 for 2012. The filing threshold usually goes up a little bit every year so it will be different for 2014, but probably not by much.

So those incomes are pretty low, so what happens to the single person who makes $25,000 a year?

This is where it gets kind of tricky. They compute it as a formula. For 2014 the penalty for not having health insurance will be $95 or 1% of your income over the filing threshold – whichever is greater.

So let’s look at the single guy who makes $25,000 a year. Take his income of $25,000 and subtract the filing threshold (I’m going to use 2012 numbers because I have those) 25,000 – 9,750 = $15,250. Then you multiply that by one percent or .01. That gives you $152.50. Since the $152 is a bigger number than the $95, that’s what he’d pay.

Are you still with me? Now if the married family made the same amount, they’d pay less because they have a different filing threshold. The formula would look like this:

25,000 – 19,500 = $ 5,500 (income minus threshold = excess household income)

5500 x .01 = $ 55 (excess household income times percentage = tax)

Oopsies – except here the number is less than $95, so the family would have to pay the $95 minimum anyway. The $95 is a de minimis amount for those of you who may be involved in law or mathematics.

So that’s how you compute it for 2014. But in 2015, the numbers go up. In 2015, the minimum is now $325 and the percentage of excess household income goes up to 2%.

(Okay, excuse the opinion here but who in the heck called it excess household income? If you’re married and only making $25,000 a year, you ain’t got any excess household income. Just sayin’. I understand the tax, I understand what they’re doing, but excess household income was a stupid choice of words! Okay I’m done.)

Let’s stick with our single guy making $25,000 a year. (It would be nice if he got a raise in real life, but it keeps the math easier for this if he doesn’t.) I’m not changing the thresholds either, only the healthcare tax.

Now the formula looks like this:

25,000 – 9,750 = $ 15,250

15,250 x .02 = $305 But now the minimum health insurance payment is $325 so the bite is a little harsher.

For 2016 – the minimum penalty will be $695 or 2.5% of your income. Using the same numbers from before:

15,250 x .025 = $ 381

So by 2016, our single guy will be paying a $695 tax for not having health insurance.

Now just to put a different perspective on it, let’s say our young man here gets a nice promotion and is making $100,000 by 2016, what happens to him then?

100,000 – 9,750 = $90,250 excess household income

90,250 x .025 = $2,256 that’s the tax he’ll pay for not having health insurance.

So if you want to get a good estimate of what your tax bill will be for not having health insurance, you’ll need to follow three steps:

1. Figure your excess household income

your income – your filing threshold = excess household income

2. Take your excess household income and multiply it by the percentage in the table for whatever year you’re looking at.

3. Compare the number you came up with to the minimum amount listed in the table. You’re going to pay the higher amount.

Here’s the table:

Year minimum penalty percentage excess household income

2014 $ 95 1.0%

2015 $325 2.0%

2016 $695 2.5%

After 2016 it will be indexed for inflation.

Filing thresholds for 2012 (that’s the latest I’ve got)

Single: $9,500

Head of Household: $12,450

Married Filing Jointly: $19,500

(Note: the filing thresholds are higher for people over 65 – but if you’re over 65 you should qualify for Medicare and this won’t be an issue for you. Also, these amounts go up by $3,800 (the dependent exemption amount) per 1^st and 2^nd child.

On Friday I’ll address some of the other taxes associated with the Health Care Act. I think I’ve already thrown enough math at you for one day now. Besides, this stuff makes me dizzy!

Posted on June 29, 2012May 31, 2016 by Jan Roberg

Personal Bad Debt

Photo by danielmoyle on Flickr.com

In my last post I wrote about how to write off a business bad debt on your tax return. Today, I’m going to explain writing off a personal bad debt. For example, say you loaned your brother-in-law $5,000 to buy a house and he never paid you back. That’s considered to be a “non-business bad debt.”

The key to claiming a personal bad debt is being able to prove that you tried to get your money. For example, I paid a boatload of money to send my son to college. He’s not paying me back. To be honest, I don’t expect him to – that college money was never meant to be a loan so I can’t claim a deduction for money that I was never supposed to get back in the first place.

If you’re claiming a personal debt, you’ll need to show that the money really was a loan, that you were supposed to receive payment, and that the payment was not and will not be received.

Evidence such as a signed loan agreement and copies of collection letters are going to be necessary. You don’t have to take the person to court – especially if you know that even if you win the court case you won’t get your money – but you do have to show that you tried to get paid. So, using the brother-in-law example, first you’d want a signed agreement showing that he intends to pay back the $5,000. Your agreement should show how he’s paying it back, and when. When he doesn’t pay you, you’ll want to send him a signed letter stating that you expect him to pay you. You will want to send that correspondence via certified mail, return receipt requested. This gives you evidence of trying to extract a payment from him.

Remember: Without some sort of evidence that the money really was a loan, and that you tried to get paid – you can’t claim the bad debt.

As far as the actual reporting goes, it gets reported as short-term capital losses on Form 8949 part 1 line 1. (Back in the old days that would be schedule D. It will still show up on your Schedule D when you’re done, but you’ll be inputting the information onto Form 8949.)

You’d write your brother-in-law’s name in column a. You’d put $5,000 in column f (that’s your basis), and you’d enter zero in column e (because it’s worthless now since he ain’t payin’ ya.) Make sure you check the box “C” because you’re not getting a 1099B form for this debt.

When you write off a personal bad debt like that, you’ll need to attach a statement to your tax return that has the following: a description of the debt, including the amount and when it became due, the name of the debtor and any business or family relationship that you have with him, the efforts that you made to collect the debt, and why you decided the debt was worthless. (For example – maybe your brother-in-law declared bankruptcy or may you know that legal action to collect the debt would probably not result in payment.)

Because it’s being claimed as a capital loss – you’re going to be limited to the same rules as other capital losses as far as the amount of the debt that can be used to offset your other income. So if the loan is the only thing that’s going to wind up on your Schedule D – then you’ll only be able to claim $3000 of the loss. The rest will carry over to the next year.

If you only take away one point of this blog post it should be that you must try to collect the payment before you try to claim the bad debt as a tax deduction. If you don’t try to collect, then the IRS can treat the debt as a gift and you lose out.

Posted on June 26, 2012May 31, 2016 by Jan Roberg

How Do I Write of a Bad Debt?

Photo by JamesCohen on Flickr.com

I recently received an email from a client about a bad debt. It’s the second time I’ve gotten that same question in one week, so it seemed like a good idea for a blog post.

Here’s the question: “I’ve had trouble collecting on a $500 invoice and I’m not sure it’s worth any more time and effort dealing with it. Is there a way to write it off and get some kind of tax advantage?”

Now most of my clients, including the person asking the question, are on what’s called a “cash basis accounting” system. If you’re on a cash basis accounting system, it means that you don’t record income unless you actually receive it. Same with expenses, you don’t count an expense that you’re going to pay, only ones that you’ve already paid. In a case like this–you don’t have to make a special line item adjustment for a bad debt–it’s just not counted in your income in the first place. So for this particular client, she doesn’t have to do anything (except fume over the dude who didn’t pay him for his work.)

But some businesses are on what’s called an “accrual” accounting basis–that’s where you count income as soon as it’s billed, not when it’s actually paid. Usually, businesses that have inventories, like stores for example, use an accrual basis method of accounting. With an accrual method of accounting, you’d report income as you billed it. Using the example from above, if the business owner billed the $500, he would have already counted it as income, even though it didn’t actually reach his pocket yet. For a business like that, you’d write the bad debt off as an expense. There’s actually a line right on the corporation forms for “bad debt expense”. While there’s no special line on the Schedule C for bad debts, you would just make your own line item for “bad debts” in part V–other expenses.

And that’s all there is to writing off a bad debt for a business. Now if you’re dealing with a personal bad debt–like a loan to a relative that’s never going to get paid, that’s a whole other story. I’ll write about those in my next post.

Posted on June 22, 2012May 31, 2016 by Jan Roberg

The Government Imposes Taxes to Make Us Behave the Way it Wants Us To (An Editorial)

Photo by Tom Lohdan on Flickr.com

The Government imposes taxes to make us behave the way it wants us to. Whew! That sounds like something one of my “nutjob government conspiracy type” friends would say, not me. Except that it’s true. If you don’t believe me, just take a look at the so called “sin taxes”. You know, the extra taxes imposed on cigarettes and liquor.

The federal government taxes each pack of cigarettes by a $1.01. Add to that the state taxes, here in Missouri, we have the lowest cigarette tax in the country at 17 cents a pack, but Washington State has a tax of $3.20 per one single pack of 20 cigarettes. You really gotta want a cigarette to smoke in Washington.

Beer, on the other hand, only brings in 5 cents per 12 ounce can to the feds. But a bottle of tequila will fetch $2.14 cents in taxes. And that’s before adding in the state taxes!

So maybe you don’t smoke or drink, you might think these taxes don’t apply to you. But it’s not just our sins that the government is trying to control; it’s our shopping behavior as well. Think about the First Time Home Buyer Tax Credit–a nice chunk of change of up to $8,000 for buying a new home. The energy tax credit–for making our homes more energy efficient. And of course the energy efficient vehicle tax credit–for buying an electric or fuel efficient car. All of these tax credits were intended to help various industries.

So maybe these programs didn’t apply to you either, but here’s one that probably did: The Economic Stimulus Act of 2008. Maybe you remember that’s the year that everybody got an extra $300 check in the mail. The idea was that if everyone in America got an extra $300, they’d go out and spend it and that would jump start the economy again. Unfortunately, that didn’t work. A large percentage of the population used that money to either pay down their credit cards or add to their savings accounts–we didn’t get the consumer bang that the government wanted. You might remember we later got the “Making Work Pay” credit, which basically gave us an extra $400 but it was doled out in our paychecks in tiny increments over the course of the year. People hardly noticed the increase in their paychecks, so the money just got spent.

The analogy that I think of here is that it’s kind of like having a $50 bill in your wallet. I don’t get 50 dollar bills very often, so when I do get one I tend to hang onto it for awhile. “I’ve got a $50 dollar bill, it’s special, and I don’t want to spend it!” Now give me a $5 or a $1 bill and it’s gone. My nephew calls it “blowing your money away.” (He actually uses a slightly different phrase but I’ve been edited for my G rating.) You understand though, it’s much easier to let small amounts of money slip through your hands than larger amounts. So these little tax games have made us spend more money–without us even being aware of it.

And I have a problem with that. I don’t like the idea of being manipulated for one thing. But more importantly, I think our tax code sends a message about American values that I don’t think we as a country should be sending. As a nation we talk about the importance of marriage and of children being raised in a two parent family–and then we pay a premium to unmarried parents through the Earned Income Tax Credit. I don’t think it was intentional, but that’s what happens. Young married families with two incomes get phased out of that tax credit, but if you don’t get married–then you get the money. And it’s huge! We’re talking thousands of dollars a year. That’s a big incentive for not getting married. Why are we doing that?

There’s already been lots of talk from the politicians about changing the tax code. “Tax the rich”, “don’t tax the rich” those arguments can go on for hours. But what I’m not hearing, and what I’d really like to hear, is where should our country be headed? How do we get there? How much is it going to cost? And how are we going to pay for it over the long haul? These quick-fix one-year only tax incentives aren’t the way to run a country. And while the rich are very concerned about their taxes (and rightly so, they seem to have the most to gain or lose during this election) the tax code affects everyone; rich, poor, and middle class. We need long range planning, long range goals, and a long term tax plan. Let’s bring the grownups to the table, drop the manipulation games, and get to work on a real solution.

Posted on June 19, 2012May 31, 2016 by Jan Roberg

Saving for Unemployment

Photo by 401K 2012 at Flickr.com

I know what you’re thinking—don’t I mean saving for retirement? That’s what everybody talks about, right? Correct. Everybody talks about retirement, including myself, but this time I really mean saving for unemployment.

Why? It’s simple really. Hopefully, unless we die first, we all get to retire once. Some people go back to work, but it’s usually a “retirement job”. But for those of us in the baby boomer generation (post World War 2, 1946 to 1964), according to the US Bureau of Labor Statistics, we can expect to be unemployed an average of 5.2 times over our working lifetimes.

Us Baby Boomers are all headed towards retirement already. So if the Boomers experience an average of 5 bouts of unemployment—what about then Gen-Xers and the groups after them? The Boomer generation experienced some of the greatest economic growth our country has ever seen—it’s quite possible that the younger generations could experience even more bouts of unemployment than we have.

So when I say you need to save for your unemployment, I am very serious.

Here’s what I’m seeing in the tax office. People come to me to do their taxes after they’ve been laid off. They have no savings so they dip into their 401(k)s to pay for groceries and stuff until they find a job. They keep spending at the same level they did while they were still employed, but their 401(k) money often has no withholding and there’s a 10% penalty for taking it out too soon. Tax time rolls around and they are stuck with a huge income tax bill—which they can’t afford to pay—so they take more money out of their 401(k)! It’s a vicious cycle. Sadly, there’s not much I can do to help here, especially after the damage is already done.

The big concern all these people have in common is that they did not have anything in their savings accounts when they lost their jobs. That’s a big problem all across America—people don’t have money in their savings accounts!

Think about this: Suppose your take home pay is $2,000 a month. Let’s say your rent is $1,000 a month. You spend about $500 a month on food and other necessities, and you’ve got about $500 extra that you play with. (Yes, I’m making the numbers easy.) Your bare minimum to survive is $1500 a month. Now, if you have zero dollars in your bank account and you lose your job—well you’re in dire straits in less than 30 days, right? You can’t make your rent payment. But if you have been putting $200 a month away for the past year, you’d have $2400 in the bank. At least your rent would be paid for another month and if you qualified for any unemployment benefits you might have 2 months worth of rent and food. Having some savings set aside buys you an important commodity: time.

Ideally, you want to have enough money to support you for at least six months of joblessness. The fellow in our scenario above would want to have $9,000 put away. ($1500 of monthly minimum expenses times 6 months = $9,000.) At $200 a month, that would take him almost 4 years of saving and I know that’s a little intimidating. But baby steps are how you get there. Everybody has to start someplace. Unless you’ve already been saving, it’s going to take some time to shore up enough money to support yourself for half a year. The big point here is to get started.

Pick a goal. Don’t have one? I’ll give you one. Start with $1,000 in the bank. $1,000 is way better than nothing isn’t it? Gives you a little cushion, right? If you’ve already got $1,000 saved, then your next goal is $5,000. If the $1,000 is still too intimidating then your goal is $100. You don’t even have to have the $100 in a bank—you can hide that under your mattress if you want. But by the time you get to $1,000 you really need to have a bank account.

Don’t get me wrong, it’s still important to save for retirement. But statistically speaking, you’re five times more likely to be unemployed for awhile before you ever reach retirement age. Oh, and what if I’m wrong and you never go jobless even once during your entire working career? Well that’s okay, now you’ve got some extra money saved for your retirement!

Oh and a note from my editor: Also know that you can deduct certain job search expenses as miscellaneous itemized deductions only if these expenses exceed 2% of your income and the job is in the same line of work as your prior one. Such expenses include employment agency placement fees, resume expenses, travel and transportation expenses, and local and long distance phone calls. And another note from me: The IRS keeps telling us that all the time, but in real life I have very few clients who actually get any tax benefit from that deduction. Keep your receipts, just in case, but for most folks, that deduction is pretty worthless.

Posted on June 15, 2012May 31, 2016 by Jan Roberg

DOMA Unconstitutional? Protecting Your Tax Rights

Gay pride 225 - Marche des fiertés Toulouse 2011.jpg

Photo by Guillaume Paumier on Flickr.com

The First Circuit Court of Appeals ruled that the Defense of Marriage Act (known as DOMA) is unconstitutional. This issue certainly isn’t settled and is going to go to the Supreme Court. The Supreme Court may or may not agree, but one thing I know is that it’s going to take some time. That’s why, if DOMA affects your taxes, you might need to act now.

If you are a gay married couple, you haven’t been allowed to file a joint federal tax return because of DOMA. If DOMA is overturned—then you can. And, if DOMA is overturned—you can go back and amend old tax returns as far as three years. You can amend a tax return from 2009 up until April 15, 2013. After that, any refund you might qualify for is lost.

Here’s the catch—the Supreme Court might not hear the case for at least another year so you’d lose out on some of your refund money just because of timing. But there’s a way to protect your interests now so that if the Supreme Court rules your way, you won’t lose out because of the timeline.

Sorry, but I’m going to get really tax geeky here. If this applies to you, you might want a tax professional’s help. Bottom line—if you would have benefitted tax wise from filing your return as “married filing jointly” then stick with me, it’s important.

You want to file amended tax returns for the tax years you were married with a “protective claim for refund”. Basically, a protective claim for refund means that your right to the refund is contingent on future events. In this case, you won’t have the right to claim your tax refund until the Supreme Court issues a decision on DOMA. For your 2009 tax return, your right to claim that refund could expire before the Supreme Court makes its decision.

Basically, a protective claim is going to preserve your right to claim your refund even if the tax deadline has expired. So if the Supreme Court makes its ruling after April 15, 2013–if you’ve filed a protective claim then you still have a right to your refund even though the statute of limitations for that refund has expired.

When you file your 1040x, you’re going to want to say in the explanation box that you are filing a “Protective claim for refund, contingent upon the US Supreme Court decision on the First Circuit Court of Appeals case regarding the Defense of Marriage Act, Gill v OPM.”

Generally, the IRS won’t do anything on your protective claim until the contingency is resolved—in this case, when the Supreme Court actually makes its ruling.

You will mail your 1040X with the protective claim for refund to the same address that you mail a normal 1040X. It varies depending upon the state you live in, but it will be in the form instructions.

Definitely use certified mail, return receipt requested when you send your amendment in. That’s your back up that you filed.

There aren’t that many people who will qualify to file these protective claims for refund returns. I’m in Missouri, we don’t recognize gay marriage. Illinois, next door just recognized it last year so there wouldn’t be any 2009 tax returns for gay couples. And for some couples, filing jointly doesn’t really reduce their tax burden anyway so it won’t make a difference. But if this could help you, then you need to know about it.

If you’d like to read the full case Gill v OPM, here’s a link: http://www.ca1.uscourts.gov/cgi-bin/getopn.pl?OPINION=10-2204P.01A

One of the points it specifically references is federal income tax returns.