Posted on October 18, 2013May 31, 2016 by Jan Roberg

How Can Social Security Be Out of Money If We Only Take Out What We Put In?

Photo by Scott at Flickr.com

I hear this question all the time. We all put our own money into Social Security so how can it run out of money?

First, let me point out that Social Security is not out of money. It’s estimated that it could run out of money by 2035 if changes are not made, but it is not out of money yet. But, how could it run out of money if it only pays out what we pay in? The problem is–and I hate to call this a problem, but we’re living too long. (Like I said, hate to call that a problem.)

Let me use a real example of a real person. I’ll call him Sam. Over the years, Sam has paid $120,698 into Social Security. His employers have paid $131,693. So all together, $252,391 has been paid in.

According to Social Security, Sam will receive $2,611 a month in benefits. At that rate, Sam basically uses up all his money in just over 8 years. ($252,391 divided by $2,611 = 96.66 months. 96 months divided by 12 months = 8 years) So assuming that Sam retires at age 66, if he lives to age 75 then he’s used up all the money put in for him in the first place.

But you don’t quit getting social security when it runs out. Social security payments go on until you die.

But what about interest? Isn’t the money invested, shouldn’t it go farther?

Well yes, I did over simplify things. The Social Security trust funds are invested in “special issue” securities of the US Treasury. For 2012, the annual effective interest rate of return was 4.091%. (But that’s because of some special circumstances, the actual rate right now is closer to 1.48%.)

There is no social security withholding on wages over $113,700. Why can’t the wealthy just contribute more to social security?

I hear that all the time too–why not just have the higher income people keep contributing and eliminate the cap–but here’s a catch–if you are supposed to take out what you put in–then those higher wage earners are going to want to take out what they put in too. Given that people are living longer than their benefits are holding out–do you really want people taking even higher benefits? That would actually make the situation worse than it already is.

Let’s go back to Sam for our example. If Sam lives to age 80, that’s 4 extra years of social security. At his current rate of $31,332 a year, that’s an extra $125,328 more than what he originally paid in. In reality, Sam earns well above the social security base wage. Let’s say his contributions to social security are unlimited. Based upon Sam’s “unlimited” contributions, when I run the numbers, I get Sam’s monthly payment to be close to $7,500 a month ($90,000 a year.) Now if Sam lives an extra 4 years, that’s $360,000 more than what he paid in. So having the wealthy pay in more to social security actually costs more than keeping it capped like it is now.

So how do we “fix” social security? I wish I knew the answer to that one, but I don’t.

Posted on October 8, 2013May 31, 2016 by Jan Roberg

Why Social Security Wants You to Retire at 62

If you are going to life past that age of 83, then Social Security comes out ahead if you take your retirement benefits early.

Social Security would rather have you retire at age 62 than at your full retirement age. That sounds a little backwards, but it’s all about money. (Of course!)

When Social Security started back in 1935, the average person died before ever claiming any benefits. Now, people are living longer than ever and Social Security payments continue through the end of your lifetime and even beyond for widow(er) benefits.

So, if the Social Security Administration is paying out so much money, why would they want you to retire early? Let’s do the math. (Don’t worry, I’ll keep it simple.)

Frank has worked all his life and he’s tired. He doesn’t have to, but he’s thinking about retiring at 62 so he can spend more time with his wife, Delores. If Frank retires at his full retirement age of 66, his monthly Social Security benefit would be $2,000 a month. If he retires at age 62, he’ll get $1,500 a month.

So the first round of math is going to be–how much does Frank get before he ever turns 66? He’s got 4 years of benefits, 12 months in a year, at $1500. So he gets $72,000.

$1500 per month x 12 months = $18,000 per year

$18,000 per year times 4 years = $72,000 per four years

So at first blush, it makes a whole lot of sense for Frank to take the money and run.

If Frank waits until he’s 66 to start claiming Social Security benefits, how long would it take for him to make up the $72,000 that he’s lost by waiting? He’d catch up at age 77. So if Frank’s family has a history of dying young–it might not make sense for him to wait until he’s 66 to retire. You can do that math with different numbers, but generally it will take 12 years to catch up to your benefits.

But what if Frank comes from a family with an average life expectancy of 90 years? What then?

Remember, by retiring early, Frank loses 25% of his payment every month. In this case, that amounts to $6,000 a year ($500 a month x 12 months). So if Frank catches up at age 77, then he’s got 13 more years with $6,000 a year extra, now Frank is ahead by $78,000.

According to Social Security Statistics, the average person today lives to be 83 years old. Going by the numbers, Social Security saves money on people claiming their benefits at age 62.

This is a very simplified example. Frank has many things to think about–his wife’s benefits, what if he waits until age 70, how long does he expect to live? What other benefits might he be entitled to? Social Security won’t tell you all of your options. If you call them to file for benefits, they take your application and you’re done.

At Roberg Tax Solutions, we’ll sit down with you and chart out your benefits so that you know all of your options. At the end of the day, the decision is yours, but you deserve to know what all your options are before you have to make that decision.

Posted on October 4, 2013May 31, 2016 by Jan Roberg

Small Business Healthcare Tax Credit

http://www.smallbusinessmajority.org/tax-credit-calculator/

“Starting in 2010, up to 4 million small businesses that offer healthcare coverage to their employees may be eligible for a tax credit. Fill in the amounts below to find out what your tax credit will be.

To qualify, a small business must:
Have fewer than 25 full-time equivalent employees
Pay average annual wages below $50,000 per FTE
Contribute at least 50% of each employee’s premium

Notes:
Owners are excluded, and should not be counted in number of employees, wages, or premium contribution amount.
Tax credits can’t be larger than actual income tax liability.
For detailed information about how the tax credit works and other issues related to the new law and small businesses, see this list of frequently asked questions. We’ll be adding to this document regularly.”

Posted on October 1, 2013May 31, 2016 by Jan Roberg

Introducing Two New Tax Forms for High Income Individuals

Photo by 401(K) 2012 at Flickr.com

Back in July of 2012, I wrote about the new Medicare taxes that higher income earners will be subject to under the Affordable Care Act starting in 2013.

Briefly, there is an additional Medicare tax of .9% on wages and self employment income over $200,000. ($250,000 for married filing jointly couples/$125,000 for married filing separately) For more details and a complete breakdown of the taxes you can read the post at:

http://robergtaxsolutions.com/2012/07/obamacare-what-you-need-to-know-part-2/

And there’s also the new Medicare tax of 3.8% on your investment income. 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 a certain threshold amount. The thresholds are $200k-singles and Head of Household, $250K-MFJ, and $125K-MFS. For more information you can check this post out.

http://robergtaxsolutions.com/2012/07/obamacare-what-you-need-to-know-part-3/

Now that 2013 is more than halfway through and the income tax filing season will be here before you know it, how are you supposed to report those taxes on your 1040 tax return? Well, the IRS has introduced not one but two new tax forms for you to fill out.

I don’t know why, but introducing new tax forms makes me feel a little like a late night talk show host, so forgive me for saying, let’s bring out our first guest, Form 8959! http://www.irs.gov/pub/irs-dft/f8959—dft.pdf Okay, it’s no Johnny Depp. It’s not even as interesting as the Aflac Duck. But it is new. If you click on the link, you’ll have to scroll past all the warning it’s only a draft signs. (If you’re reading this in 2014, you should be able to find actual forms instead of drafts.) The Form 8959 is what you’ll be filling out if you have to pay the .9% Medicare tax on wages or self-employment income.

If you have investment income, the new form is called the Form 8960 and here’s a link to that: http://www.irs.gov/pub/irs-dft/f8960—dft.pdf That’s going to be the form you file for the 3.8% Medicare tax on investment income.

Now the upside to both of these forms (if there’s an upside to paying more taxes) is that if you’re using computer software (like the 1040.com software you can access from this website) — the software will compute everything for you. I have 100% confidence that Turbo Tax, H&R Block at home, and all the others will get the 8959 right. The 8959 form is for the .9% tax on wages. The form is very straight forward (as far as tax forms go, at least to a tax geek like me.) You basically take numbers from your W2 or self employment tax form and do a little multiplication. Bam—you’re done.

But I am a little concerned about potential errors in the 8960 forms. There are 21 official lines to the form and there are 16 places where the form says “see instructions.” That’s telling me there’s a lot of room for error there. You’re still going to be better off using a tax software if you have to file the form 8960, but I’d be cautious. Don’t rush to be the first one to file your return. During tax season, software programs are updated daily. This form is likely to have bugs, so let the IT folks work those bugs out before you submit.

As a tax professional, I’ll be going over those forms with a fine tooth comb until I’m confident the numbers are all flowing correctly.

The taxes that you compute on forms 8959 and 8960 will be reported on line 60 of your 1040 tax return: http://www.irs.gov/pub/irs-dft/f1040—dft.pdf Line 60 used to just say “other taxes” but now it will specifically 8959 and 8960 with little checkboxes.

So technically, Congress can say that your 1040 form won’t be longer. You’ll just have extra pages to attach to it.

Posted on September 27, 2013May 31, 2016 by Jan Roberg

What is a W-9 and Do I Need One?

I’ve you own your own business and provide service to another company, they may ask you to fill out a W9 form.

If you own a business and you pay for services to an individual, and you expect to pay over $600 for those services, then you should have that person complete a W9 form for your files. You’ll need the information in order to prepare the 1099MISC forms next January. Also, you only need a W9 if someone is working for your business. For example: when I have Brad the Painter come to my house to replace my damaged siding—I don’t give him a W9, it’s a personal service to me. Now if I hired Brad to paint my office, then I’d have to collect the W9 because it would be a business expense.

The general rule here is if you’re writing the service off as a business expense, then you’ll need to collect a W9 from the vendor.

Who should I give a W-9 to? This is an important question because I received numerous complaints from people who were asked to complete a W9 form. Basically, if you’ve done work for a business and they’ve paid you over $600 you should just hand them a completed W9. That was the instruction I was given by the IRS for my own company. You might think you’re not self-employed, or that you don’t have a business—but if you are doing work, getting paid, and not on the payroll; that means you’re self-employed.

When you look at the W9, the check boxes indicate if you’re an S Corp, C Corp, or sole proprietor. The instructions also recommend that sole proprietors use their social security numbers instead of EIN numbers. This is where I’m going to disagree with the IRS, in light of the huge number of identity theft cases this past year, do not use your social security number on your W9 form. Anybody can get an EIN number for their business. You can do it for free and it takes about 5 minutes at the IRS web-site: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-(EINs)-

When completing the EIN application, a sole proprietor is anyone who is filing a schedule C (self employed), E (rental real estate) or F (farm) for their business. It’s important to know that the minute the IRS issues the EIN number, it’s good. If you have to submit a W9 but don’t have an EIN, you can go online, get the EIN, and use it on your W9. The business issuing you a 1099 must accept your EIN even if you did the work a year ago.

Is there any way to avoid having to complete a W-9 form or issue a 1099MISC? The easy way to avoid having to issue a 1099 MISC (and collecting a W9 form) is to pay by credit card. Credit card companies are now issuing 1099K forms so that revenue to the vendor is already being reported to the IRS by another reporting agency. If you don’t want to be collecting W9 forms and issuing 1099s, then use your credit card. This is the easiest way to avoid 1099MISC and W9s, but remember that there are lots of fees associated with using credit cards. As my Mom used to say, “Pick your poison.”

What about home office expenses? Do I need to collect a W9 from my landlord? I think this is a case of the overzealous W9 collector. If you have a home office, you’re reporting that on your Form 8829. Whether you are reporting mortgage interest or apartment rent, it is considered to be a personal expense that you are attributing a percentage of to your business expenses. You do not need to collect W9s from your mortgage company, landlord, or utility companies to claim your home office deduction. (I’ve been asked this question enough times that I felt it necessary to include it here.)

What about purchasing an item from an individual? Do I need a W-9 then? The example that was given to me was buying a claw foot bathtub from Aunt Bertha. I tend to think of this kind of like going to a garage sale—you wouldn’t dream of giving a 1099 to the person running the garage sale would you? Now if Aunt Bertha were in the business of refurbishing bathrooms; that might be another story. But if you just buy something, a private transaction between two people, that’s not a W9 issue.

What about small jobs that are repeated monthly so the total will be over $600. Do I need to get a W-9 for those? Once again, if you’re talking about business expenses then you should collect a W9 and issue a 1099MISC for the work. For example: I used to pay $50 a week to a guy to edit my blog posts and monitor my website. (Now Mike does that.) Although the payment was only $50, over the course of a few months, it exceeded the $600 threshold so I had to issue a 1099.

Generally, if you’re unsure about needing a W9, it’s safer to err on the side of collecting one and issuing a 1099MISC than it is to not have it.

Posted on September 24, 2013January 14, 2017 by Jan Roberg

Small Business Expenses: Advertising vs. Charity (Purple Pig Purchases)

Purple-Pig

At first blush, you might think that advertising and charity don’t go together at all. But when you own a small business, your advertising and charity might just go hand in hand. Let me explain.

When you own a small business, you’ll get lots of calls from organizations wanting your business to make donations to charities. When you’re a sole proprietor, partnership, or S Corporation, your charitable donations don’t reduce your business income, they only count as a charity donation on your Schedule A personal tax return.

So—let’s say you want to donate $100 to Cystic Fibrosis from your business. That’s all fine and good, but that donation doesn’t reduce your business income by $100. It doesn’t reduce your business income by anything at all. You still get to deduct it on your Schedule A—but if you don’t itemize your deductions, that $100 donation doesn’t help your tax return at all.

This is where advertising comes in. Instead of just donating $100 to a charity, you can buy an ad in a charity event program, that way you’re giving money to the charity, and getting a 100% business write-off for the advertising. The charity still gets your money, and you get a better write-off.

Why do you want to your business donation to be advertising? The taxes! If you have a sole proprietorship and you’re in the 25% tax bracket, your business income is actually taxed at 40.3%. (25% regular tax rate plus 15.3% self employment tax.) If you itemize your deductions, your $100 donation would really only cost you $75 (but only if you can itemize your donations.) But if you can count it as a business expense, then your $100 donation would really only cost you $59.70. ($100 minus $40.30) See why this is a good thing?

Of course, there are some things that are just going to be charitable donations no matter how you try to align them. Your tithe or temple dues simply won’t count as advertising. But when you’re looking at charities that you like to support, be sure to check out the advertising opportunities.

So what’s with the purple pig? A not for profit I support held an event for kids. Instead of just donating money, I got to set up a booth and hand out my fliers to the parents. The pig was part of a pig race game for the kids. The pig is a 100% deductible business expense—and he’s really cute. Cute and deductible—that works for me.

Posted on September 20, 2013May 31, 2016 by Jan Roberg

More Balance Sheet for Dummies

Small Business Balance Sheet (part 2)

Disclaimer: Realize that this blog post is not an accounting class. This is just simple, basic information for small business owners who would normally freeze up when they hear the word accounting. If you’ve got an accountant preparing your return for you, you have the right to ask questions and not be intimidated. Sometimes the balance sheet numbers just look like mumbo jumbo. My goal here is to help you get a little handle on what your balance sheet is showing you.

Photo by Joe Shlabotnik at Flickr.com

In the last post we learned that

Assets = Liability + Owner’s Equity

We left off with partners Peggy and Sarah having a very simple balance sheet of $12,000 in cash and $12,000 in owner’s equity. (example 1) But in real life, there’s usually more to a balance sheet than just your cash.

So let’s say that Peggy and Sarah (I’m going to call the company P&S from here out, okay?) bought a piece of equipment for $5,000 cash. That’s going to change the balance sheet—but not the owner’s equity. Look. We took $5000 out of cash, so now they only have $7000 left. But they have a $5000 piece of equipment—equipment is also an asset so their assets still equal $12,000. Since they still have no liabilities, then their owner’s equity is also still $12,000.

But maybe they didn’t feel like they could spend $5000 cash on that equipment, so they charged it on a credit card instead. (example 3) They still have their $12,000 cash, plus they have $5,000 in equipment so their total assets are $17,000. But since the equipment is on a credit card, they now have a liability of $5,000. Their total Liabilities + Owner’s Equity = $17,000 (because it has to equal the total assets, right?). So the Owner’s Equity is $12,000. They could have taken out a loan instead. A loan would also be a liability and would affect the balance sheet in the same way.

Now over time, the equipment will get used and worn down. In accounting, it’s called depreciation. (Oh yeah, that’s a whole other thing to tackle but not today.) But just for the very simple balance sheet side—let’s say P&S’s equipment depreciated by $1,000 during the year. In example 4, we haven’t changed anything else so when the book value of the equipment goes down, so did the owner’s equity.

(Kind of like the housing market crash—maybe you bought a house for $200,000 but then the market crashed and the house was worth $150,000 instead. When the value of your house when down—do did your equity. It’s a similar situation.)

You see how every little thing affects the balance sheet. As P&S earns income, the cash goes up—and so does the equity. As they spend money, the cash goes down—and so does equity. It would drive you nuts to monitor the balance sheet every minute, but it’s constantly changing. But you do need to take a good look at it at least once a year to see where you stand.

Posted on September 17, 2013May 31, 2016 by Jan Roberg

Understanding Your Small Business Balance Sheet

(Balance Sheets for Dummies)

Photo by elycefeliz at Flickr.com

I learned how to do balance sheets from an ex-Israeli special ops soldier turned CPA. (Go ahead, take a minute and morph Judd Hirsch and Arnold Schwartzenegger, it’s more fun than math.) Although my balance sheet training was a little “intense,” this is just a brief overview to help you understand your balance sheet.

The basic accounting equation (there I go with the math, don’t get scared off yet) for a balance sheet is:

Assets = Liabilities + Owner’s Equity

Assets are the good things like cash and equipment. A more politically correct accounting definition is “Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.”

Liabilities are the stuff you owe like credit card bills and loans. You could also say liabilities are “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Owner’s Equity is what’s left over (assets minus the liabilities). On your tax return, owner’s equity is referred to as “Retained Earnings.” Another technical definition is “the residual interest in the assets of any entity that remains after deducting liabilities.

So let’s take a simple balance sheet. A small business runs on a cash basis. It has no equipment and no debt. There’s $2,000 in the bank account.

Assets = $2,000 cash in the bank

Liabilities = $0

Owner’s Equity = $2,000

In this simple example, as cash comes into the company, the owner’s equity goes up. As cash goes out, the owner’s equity goes down.

Here’s the important part: When the owner takes the money out of his company for his own use (which he does because it’s his money) the owner equity in the business goes down because he took the cash out of the company.

For example: Sarah and Peggy have a Partnership. They started the year with $2,000 in their checking account. After expenses, they netted $100,000. Now if they kept all of that money in the company, their balance sheet balances would read:

Cash: $102,000

Owners Equity: $102,000

But Peggy and Sarah like to eat and pay their rent so they each took $45,000 out of the company (that’s $90,000 altogether) so at the end of the year, the balance sheet balances would have looked like this:

Cash: $12,000

Owner’s Equity: $12,000

This is important to know because many software programs will just plug a number into owners equity to make it tie out. Sometimes the plug goes into cash. If Sarah and Peggy didn’t check their balance sheet, in a few years it could look like they have half a million dollars of equity sitting in their company that’s just not there. I’m not joking about that.

I once had to amend ten years worth of tax returns for a business owner trying to sell his company. His balance sheet had $2 million dollars worth of equity but the figure should have been closer to $200,000. For ten years his tax preparer had let the program “adjust” his balance sheet. The taxpayer didn’t know any better (and clearly that preparer didn’t either.) Sadly, the owner had quite a bit of a “smack down” when he tried selling his $2 million dollar company that was really only worth $200,000.

That’s why it’s so important to be able to read your balance sheet. If you own a business, you need to know what’s on there and why it’s there.

My next post will add some common balance sheet items so you can see a more complete picture. The bottom line is—your balance sheet should tell you what your company is worth. If the “owners’ equity” doesn’t jive with what you think your company is worth—then it’s time to start asking questions.

Posted on September 13, 2013May 31, 2016 by Jan Roberg

Why Doesn’t My QuickBooks Income Match the Income on my Tax Return?

(Explaining the Schedule M1 for Dummies)

Photo by Jenny Kaczorowski at Flickr.com

So you’re a small business owner and you just got your business return back. You take a look at the tax return and it says your net income is $20,000 but you gave your QuickBooks profit and loss statement to your account and it said that your income was $15,000. What happened? Maybe instead it was the other way and your tax income was lower. What’s up with that?

Well first thing, if you have an accountant doing your taxes, she should be able to explain exactly what’s going on. (If she can’t, it’s time for a new accountant.) But the simple answer is right on your tax return. It’s called the Schedule M1. If you’ve got a corporation, it will be on page 5 of the tax return. If you’ve got a partnership, it’s on page 4, right underneath the balance sheet.

Schedule M1 is the part of the tax return that explains what’s different between the books that you handed your accountant and the tax return that you’re giving to the IRS. If you had less than $250,000 in revenue, you don’t need to submit an M1 to the IRS (tax programs will leave them blank), but it’s still a good idea to complete those schedules to make sure your books are straight.

So what are the most common discrepancies between tax and book income? That’s easy; you’ll find it in the meals and entertainment category and depreciation. If you don’t have expenses in either of these categories, most likely your tax income and book income are going to match up just fine. But if you do have meals and entertainment or depreciation, they almost always affect your tax income.

Let me explain the meals and entertainment first. That’s the category where the IRS only allows you to claim a 50% deduction on there. So let’s say you spent $3,000 in meals and entertainment. On your tax return, you’d only get to expense $1,500. That means there’s another $1500 expense that’s recorded on your books that’s not on your tax return. So, in this example your tax net income is higher than your book income.

Depreciation usually goes the other way. Often small businesses ignore depreciation. Or they run depreciation through their software program, but it’s not the same depreciation schedule that’s used for taxes. For example, using the straight line method for book purposes but using the Modified Accelerated Cost Recovery System (MACRS) for tax purposes. Usually that makes for a tax adjustment the other way.

Let’s look at an example so you can see what the Schedule M-1 looks like and how it affects your net income. In the example below, the business owner showed $20,000 of net income on his QuickBooks profit and loss statement. He had $2,600 of travel and entertainment expenses, so half of that get’s added to his taxable income. He also had $4,500 of depreciation that showed up on his tax return, but he didn’t include in his QuickBooks, so that reduces his taxable income.

$20,000 (net income from the profit and loss statement) + $1300 (half of the meal and entertainment expense) – $4500 (the depreciation expense) = $16,800 (the net income shown on the tax return)

There are lots of other items that can affect the Schedule M1. These two are so common that many tax programs automatically plug them in for you. Another common item that might show up on the M-1 is when you’ve got an expense on your profit and loss statement that your accountant says, “No, you can’t count that on your tax return.” (We don’t do that to be mean, we just don’t look that good in prison orange.)

Why you want the Schedule M-1. Let’s say you file your business tax return and you get audited by the IRS. The first thing they do is ask for your profit and loss statement and your bank records. The examiner takes one look at your P&L and sees you have net income of $20,000—but you’re tax return says you made $16,800. He’s licking his chops because he gets to assess you additional taxes and he hasn’t even opened your bank statement yet. Aha! You’ve got your M1 showing the depreciation. Your butt is covered.

Now in real life, the IRS examiner would notice the depreciation eventually anyway. But sometimes there will be items in the M-1 that aren’t so obvious. That’s why you want this reconciliation, because by the time the IRS gets around to auditing your books, you’ll forget the little adjustments—unless they’re tracked. M-1 keeps you neat and tidy.

Posted on September 10, 2013May 31, 2016 by Jan Roberg

VA Disability Benefits Taxability

The IRS doesn’t tax your VA Disability, but if you owe the IRS money, they count your benefits as part of your ability to pay the IRS back.

I was having a bout of writer’s block and had a blog post due. Fortunately, I just received this email from Morgan, a disabled Navy vet, and it seemed like a worthy topic.

I was placed on “uncollectable status” by the IRS last year. Now, to keep my uncollectible status, they want me to provide them with the amount I receive from the VA each month along with my SSDI amount! Am I missing something here? I am totally
confused. I was told that VA disability benefits are tax exempt. So is my SSDI benefit. If that’s so, why is it considered income by IRS? Can you help me with this so I can understand?

This is a good question—if VA and SSDI payments aren’t taxable, why does the IRS ask about them when settling tax debt? Or in Morgan’s case, when determining collectability status?

The answer is—there’s a difference between “taxable” income and “money that you have that you can use to pay bills.” So even though things like VA payments and SSDI are not taxable, they are counted towards money available to pay bills.

So here’s what the IRS is doing. They’re taking all of your income—whether it’s taxable or not, and adding it together. Then they’re looking at all of your expenses and if there’s any money left over, that’s what they consider is available for you to pay your taxes with.

Here’s how the formula works: Income includes wages, interest, dividends, business income, rental income, distributions, pensions, social security, child support, alimony, and other income. VA payments and SSI would count as “other income”.

Expenses include: Food, clothing, and misc., housing and utilities, cost of owning and operating a car or using public transportation, health insurance, out of pocket health care, court ordered payments, child or dependent care, life insurance, taxes, and other debts.

Here’s the kicker. Expenses are limited to what the IRS calls “national standards.” The national standard for food, clothing, housekeeping supplies and personal care products is $583 for one person. Out of pocket healthcare is $60 if you’re under 65 and $144 if you’re over. If you own a car, the allowance is $517 for owning and operating it. If you use public transportation, you’re allowed $182 a month.

Housing and utility expenses vary greatly by area. Here in St. Louis County, the expenses allowed for one person is $1,426. If you live in St. Louis City, you’re only allowed $1,208.

You can look up all of the collection financial standards on the IRS website: http://www.irs.gov/Individuals/Collection-Financial-Standards

When dealing with the IRS on this issue, you are allowed to use the national standards for your family size without them questioning the amount you actually spend. The housing allowing will be the amount you actually spend or the local allowance, whichever is less.

So while the IRS is asking about VA payments and SSI to determine if you’re capable of paying a tax debt, SSI and VA payments will remain non-taxable income on your tax return.