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Kerstetter Letter®
Issue 98-1
Spring 1998
© 1/30/99 by Kerry
M. Kerstetter, MBA~CPA~ATP~ATA
This is the
complete text from the Spring issue of the Kerstetter Letter. Annual (four quarterly issues) subscriptions
to the blue-paper printed version, including all of the hilarious cartoons and
animal pictures, is available by mailing or faxing a check for $19.95 to
Kerstetter Letter, 11802 Deer Road, Harrison, AR 72601-6550 Fax:
1-800-839-3008
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SURPLUS SCAM
Bill
Clinton has been going all over the place bragging about producing the first
surplus in the past several decades and claims that it was all due to his work
in Washington. In a similar vein, Mr.
Clinton also takes credit for the sun rising every morning and the ebb and flow
of the tides around the country. While
you may think this to be a facetious remark, it isn’t. During his 1996 reelection campaign, he made
it quite clear that we would not be able to cross the bridge into the 21st
century without his help.
As
much as the Clinton gang claim to have eliminated the economic cycles
(prosperity ~ recession) that have been with humankind for millennia, that is
as valid a claim as stopping all tidal action.
It is well documented (yet mysteriously underreported in the mainstream
media) that the current prosperity stage of the natural economic cycle had its
beginnings in the early 1990s, well before the election of the Clintons. Rather than being the reason for the current
good times, the Clinton tax increases and expansion of government have done a
lot to prevent it from being a more wide spread prosperity.
Back
to the current year’s surplus, which both Bill Clinton and Newt Gingrich are
crowing over. A year earlier, it was
projected to be a deficit of close to $180 billion dollars. Am I the only one in this country who sees
such a miscalculation as something to be embarrassed about and not a mark of
excellence in fiscal responsibility?
The geniuses in Washington, who tell us the effects of every single
minute change in tax laws, would be committing hara-kiri if they worked for the
Japanese government. They could just as
easily have been off by $200 billion in the opposite direction, as they usually
are. It’s just another perfect
illustration of what I have been saying for decades; that the tax numbers being
projected by Washington, and reported as gospel by the press, are bogus from
the get-go.
To
make matters worse, as only Washington politicians can do, everyone is now
fighting over how to spend the indefinite surpluses that are projected by those
same Washington geniuses for the next several decades. The truth of the situation is that the
federal government did receive a lot more tax revenue than it had expected
because of all the extra income being earned in this prosperous cycle of the
economy. It was a fluke windfall. To bring it to a more personal level, it’s
the same thing as if you had won $50,000 from a slot machine and then budgeted
your future spending as if you were to win $50,000 every year from here on
in. That is how our illustrious leaders
in Washington see this windfall; as something that can be expected to reoccur
with predictable regularity. That’s
just insane; but since when has that ever stopped them in D.C.?
Based
on these future “surpluses,” almost every politician in Washington has chimed
in with a new federal program or expansion of existing programs, led of course
by the Clintons and their State of the Union laundry list of new ways for the
federal government to raise your kids and run our lives. Now here’s the question nobody else seems to
be asking. After all of these new
programs are started, and when the federal tax revenues are not as high as
predicted, resulting in an operating deficit, will those programs be eliminated
or scaled back to their pre-surplus levels?
If you think so, you are so naïve, I can’t even think of a nice way to
describe it [please fill in your own example of extreme gullibility]. Once a government program is started, it is
never closed down, even when its intended goal is accomplished. In fact, these bureaucracies do their best
to perpetuate the problems in order to justify their existence. The military is still spending billions each
year on new infrastructure for bases that are scheduled to be closed down in
the next few years; so don’t even try to tell me that the Feds have a clue as
to how to pull the plug on the spending spigot. Once it’s turned on, it’s on forever.
Federal Debt
Have
any of you noticed that, even with the predictions of federal operating surpluses,
those same financial geniuses in D.C. are projecting the federal debt to grow
at around $200 billion each year, forever?
How can that be? Shouldn’t
surpluses reduce the federal debt, or at least freeze it? This is because our leaders have been able
to redefine their own terms in regard to the government’s finances. They have moved several types of
expenditures off budget so that they are not counted in the official operating
budget. Costs such as those for
military actions and disaster relief are not counted in the operating
budget. Those costs are projected to
continue to need borrowed funds to be paid for.
Here’s
another smart-ass question that I can’t hold in. What if all of the publicly traded corporations around the
country were to use the federal government’s definition of operating income and
move the same kinds of expenditures off budget and then release their official
earnings reports to the investing public?
How long before the first lawsuit is filed against the corporate officers
for fraud, by stockholders or the SEC?
That time span would be measured in minutes in this day and age of
instant communication. There are
literally gangs of lawyers currently waiting to sue corporations whose earnings
don’t live up to investors’ expectations.
That’s with proper accounting techniques. They would have a field day if the corporations adopted the
federal government’s accounting methods.
Those attorneys will just have to wait because I doubt if anyone in the
private sector is stupid enough to invite such an opening. Being immune from lawsuits gives the Feds
carte blanche to continue cooking the books.
Commingling
Speaking
of cooking the books, another aspect to all of the surplus discussion that is
rarely mentioned is the fact that a good chunk of the money being counted as
revenue by the Feds is the Social Security taxes that are being collected. Currently, more money is collected than is
being paid out to benefit recipients.
Most people are led to believe that this Social Security surplus is
being stashed in a special account for their retirement years. Not true.
It is being commingled with general funds and used to pay for Federal
government costs that have nothing to do with Social Security.
Again,
I can’t resist a similar question. What
would happen to a corporation that took its employees’ pension money in order
to pay its operating costs and report a profit to its shareholders? The answer is that the officers responsible
would be tossed into jail on fraud and theft charges. While many people continue to claim that government and business
are so dissimilar as to make such analogies worthless, I’m obviously not among
them. I challenge anyone to explain why
the exact same behavior that is considered criminal in the private sector is
revered as brilliant public policy when done by the government.
Conclusion
Where
is all of my ranting leading, besides setting the record straight on the
federal surplus? The same place it
always does. How will it affect those
of us who do our best to survive in the real world private sector and away from
the federal entitlement trough? If you
are counting on a reduction in your taxes in order to return your portion of
the surplus to you, think again. If you
are counting on the federal government to stop growing in size and influence
over your life, think again. We will
end up with a larger and much more expensive government, which will require you
to sacrifice more of what you earn and have when the current level of economic
prosperity runs its course; which it will, in spite of claims to the
contrary. Tax savings strategies will
become even more important for anyone who wants to hold onto what they have,
guaranteeing me plenty of work for the rest of my life. Of course, there will be those whose spirit
will be broken and will just go along with the plan and become wards of the
state. I suppose that’s their right in
the socialist utopia being crafted by the Clinton gang.
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REMINDERS
These
are some topics I have discussed previously in great detail that are still
popping up in my work with people, so it seems that a little re-emphasis is in
order. Repetition should assist in
understanding these points better.
The mass paranoia around having to file tax returns by April 15 is hard for me to overcome. When we tell people that they will have to go on extension if they want me to prepare their tax returns, they freak out, fully expecting to be tossed into the slammer if their return isn’t in the mail by April 15. Just to mention some of the reasons to file tax returns after April 15:
It is often impossible to assemble all of the information necessary to prepare a complete and accurate tax return by April 15. Extending the due date allows more time to make sure everything is complete and accurate. It is much better, for several reasons, to file as accurate an original return as possible, even if it’s late, than to whip something together that has to be amended later. Some elections can only be claimed on original returns.
It has been proven that the later a tax return is filed, the lower its chances of being selected by IRS for audit.
If you are planning to fund a Keogh or SEP-IRA for last year, extensions for the tax return also extend the due date for the money to be deposited into the account.
Tax preparers are not as busy and under less stress, enabling higher quality work.
FILING
ELECTRONICALLY
You may be hearing all of the publicity about how more and more people are filing their tax returns electronically either through their own computers, special services, or through their touch tone phones. Of course, the implication of any such report of a new trend is that this is a good thing and that if you want to be hip, you’ll join the crowd. Conformity with the majority is the goal nowadays, if we are to believe those oh so smart folks in the national news media. Luckily, there is one naysayer still among us, who takes a contrarian view of going along with the mob and doesn’t believe that just because a lot of people agree on something that it is automatically the best approach. (Remember that the Clintons were elected as president twice.)
Basically, filing electronically is a crazy way to file a tax return unless you have nothing but a W-2 and a few 1099s. If you have a Schedule C, E or F, electronically filing your return will either cost you more in taxes, invite an IRS audit, or both. Preparing a tax return that minimizes your taxes plus minimizes your chances for being selected for audit requires that you break your figures into much more detail, and include more detailed explanations than is possible by using the format that is required for electronic filing. A tax return is a self defense mechanism on which you explain what happened during the last year in such a way that the IRS can’t challenge you. For asset sales, as well as dozens of other common normal events, it is important to include much more detail with the tax return than is required or even has a pre-printed place on the forms. With electronic filing, such attachments and explanations are impossible. This is why I continue to refuse to file returns electronically and will continue to fight the ongoing efforts by IRS to require that all returns be so prepared.
The reason most often given for wanting to file electronically is to be able to get a refund a few weeks earlier. In fact, preying on these desperate folks has become a very profitable business for finance companies and H & R Block type firms who make refund anticipation loans with fees and interest charges that equate to loan sharking (up to 225% APR per a recent example by Jane Bryant Quinn). As I have long said, getting a big refund from IRS is not something to brag about, but actually an admission of financial stupidity. Estimated payments and withholdings should be adjusted during the year to avoid a big overpayment. That will prevent you from becoming a victim of loan sharks while waiting to get back your own money.
GET
YOUR CHECKS
For years, many banks have been trying to convince their customers to allow them to not return the cancelled checks with the monthly bank statements. The banks sell this as a convenience for the customers; helping them save all of that storage space that cancelled checks would take up. My opinion of this has never changed. Always get your checks back. Whether you need to prove a payment for the IRS or for a credit card company, cancelled checks are the best proof of payment you can get. In order to get a copy of a cancelled check from a bank, they normally charge a dollar each. That’s not a big deal when we’re dealing with one or two checks; but a client I am working with now is looking at over $1,000 in order to get copies of all of his checks for one year. Another reason I don’t trust the banks to be able to provide the promised copies is the never-ending merger mania in the banking industry. When big banks continue to swallow up smaller banks, records are often lost in the shuffle.
IRS
AUDITS
Sometimes it’s a phone call. Sometimes, it’s a letter. The IRS wants to audit your tax return. They will usually tell you that you have to meet with them next week. Basically, they give the impression (intentionally) that they are in control of where, when and with whom the audit will be conducted. They tell you that you have to meet with them personally at the time and place that they dictate. That is simply not true, on all three counts. They would obviously like to meet with you as soon as possible so that you have little time to prepare. They would also love to go against you personally because they can intimidate you and get you to say self incriminating things.
The truth is that you are allowed to designate someone else; usually a CPA, attorney or Enrolled Agent, to be your official interface with the IRS. From the time that you submit the power of attorney form to the IRS, they will have to make all of their contacts through the rep. The rep will then be in charge of when and where the audit is handled. This can be several months later and thousands of miles away from the original scheduled appointment.
TAX
PREPARERS
Now that I have been preparing 1997 tax returns for a few months, and dealt with some of the new tax changes foisted on us last year, all I can say is that it is even more important to know that your tax preparer is working for you and not for the IRS. While it’s hard to believe, there are so many more variables that influence the tax figures that it does take more work than ever to test out various permutations until you find the best fit. Such trial and error approach is only possible with a good computer program.
The annual ritual has begun, with contests among tax preparers to take the same data and try to come up with the correct bottom line tax figure. As always, the answers run the gamut, ranging from huge refunds to huge amounts due. Again, as always, I do not take part in such contests for a very simple reason. While both a big refund and a big tax due could be legally correct, the contest sponsors inevitably ask representatives from the IRS to be the judges. Which bottom line do you think they want to be the correct one? While it may sound prestigious to win such a contest, anyone who does is actually wearing a scarlet I, signifying IRS endorsed. Would you want to pay someone to prepare your taxes to the IRS’s satisfaction, when the same information can be reported a little differently to save thousands of dollars in taxes? I have prepared returns where just a few minor changes reduce the taxes by several hundreds of thousands of dollars.
TAX
PROTESTORS
There never seems to be an end to the folks who are going around the country preaching that they can help people “untax” themselves. They make claims that taxes are not constitutional or that they are voluntary, or they only apply to employees of the federal government, or money isn’t money because it’s no longer backed by gold, etc, etc, etc. As I have explained in great depth on several occasions, these are bogus claims and if you are so foolish as to follow one of these scoundrels, your life will be hell. The person who sold you the untaxing plan will be long gone, if not in jail, by the time you will be looking at a jail term for following such idiotic advice. The worst thing you can say in front of an IRS employee is one of those bogus arguments, because they can levy an automatic $10,000 fine for merely mentioning that. Remember, the Constitution, including the First Amendment, does not apply to tax law in this country.
This is why I make a big effort to point out the difference between someone who uses the legitimate tax laws in creative and aggressive ways to minimize or eliminate taxes, versus tax protestors. In fact, people are always asking me if IRS attacks me and my clients because of my outspoken opinions. They don’t bother me because they know I am playing by the rules. If you follow the advice I include in these newsletters, as well as work with a creative and aggressive tax advisor, you can very legally reduce or eliminate your income taxes. If you spend $10,000 to buy an untaxing guide, which is normally a binder of fifteenth generation (very blurry) copies of obscure and outdated materials, you are asking for trouble. That $10,000 would be much better spent working with good tax and legal advisors to set up corporations, trusts, and family limited partnerships. Consider yourself warned, again.
IRS
& STATE NOTICES
When you receive a notice from the IRS or the state tax agency, advising you of a mistake on your tax return, do not make the assumption that it is correct. More often than not, the notice is wrong.
Another reminder is that penalties are negotiable, in spite of what some IRS personnel persist in saying. If you have a reasonable cause for filing a return or paying a tax late, IRS can waive the penalties. In fact, the more personal and traumatic the reason your life had problems, the more likely the penalty will be dropped. Health problems, deaths, marriages, divorces, bankruptcy, cross-country moves, are all reasons that I have seen work to eliminate penalties. Of course, these have to be true.
INTEREST
DEDUCTIONS
Ever since the 1986 Tax Reform Act screwed around with the deductions for interest payments, I have seen countless people either toss out perfectly legitimate deductions, or use them in a less efficient manner (e.g. less tax savings than possible). This is usually based on erroneous advice from lenders, IRS, and some tax practitioners. Here is just a summary of some of the most common mistakes I see.
Personal Interest – The 1986 tax law classified many kinds of interest as personal and not deductible. The examples of personal interest were car loans, credit cards, student loans and boat loans. The problem is that many people assume that all of these kinds of loans are always non-deductible personal interest. Such ASSumptions can be expensive. A very important concept of taxation is often overlooked in this regard; that of “interest tracing.” Essentially, if loan proceeds, including credit card charges, are for a tax deductible expenditure, all related interest is deductible on the same schedule, for most people. The most lucrative deductions are for credit card and car loan interest for sole proprietorships on Schedule C and farming activities on Schedule F. A common mistake is forgetting that car loan interest is deductible in the same prorata percentage as the vehicle’s business usage, even if the standard mileage rate is used. The IRS’s standard rate doesn’t include interest. However, for those W-2 employees who use their personal vehicles for their employers’ business, there is no deduction whatsoever for any interest on the vehicle loan. This is just another big difference between the very lucrative tax deductions for self employed independent contractors and W-2 wage slaves.
Boats and motor homes that are used as primary or second personal homes will not have a normal mortgage, as reported on Form 1098. I have seen big banks actually tell their borrowers on motor-home and houseboat loans that their interest is personal and not deductible. Again, not true.
INCORPORATING
We all suffer from bouts of procrastination, putting off tasks that we know will be good for us, often because we are nervous about delving into something new. Setting up a corporation in order to reduce taxes scares many people, when it is really ridiculously easy to do. It tears my heart each year when I see someone’s tax return reflect tens of thousands of taxes that could have been avoided through the use of a corporation.
Paying an attorney $1,000 to have his secretary fill in a
couple of forms is crazy. The best
source of do it yourself incorporation books that I have found is Consumer
Publishing in Tennessee. They have
specialized books for each state that are very easy to work with and are much
less intimidating than others I have seen.
Their phone number is 1-800-677-2462, and they have a website at www.consumercorp.com.
LIVING
TRUSTS
In a similar vein, too many people are still putting off their estate planning and establishment of a living trust to ensure that things are handled according to their wishes after they pass on. If I had to choose between which is more crucial in terms of procrastination, I’d have to say this one wins. If you miss another year without a corporation, you might have to pay several thousand dollars in extra taxes; but you still have time to set things up for next year. If you haven’t set up a living trust by the time you make that final trip, it’s too late. With the relatively large exemption from estate taxes, most people won’t have to worry as much about the IRS and estate taxes reducing the estate as the costs and hassles of probate.
As much as I am in favor of doing your own incorporation
work and saving the $500 to $1,000 cost of an attorney to fill in a few forms,
I have the opposite opinion in regard to living trusts. This is one area where you really need the
knowledge and expertise of a good estate planning attorney. There are fill in the blank living trust
kits and even some software packages that will enable you to establish the
trust itself. There are even some
living trust salesmen who will set up the trust for you for a few hundred
dollars. The problem with this is that
the establishment of the trust is just the beginning of what needs to be done.
I have been around long enough to see the results of these half-assed
living trusts. Assets have to be
transferred into the name of the trust, and with a husband and wife, there are
some important decisions that need to be made as to which spouse should have
title to which assets. Each person has
his/her own living trust. A good estate
planning attorney will prepare a package that also includes a pour-over will
that automatically pours any personally owned assets into the living trust upon
the owners’ death.
FRANCHISES
When starting or buying a business, many people still believe that a franchise is the best way to go. Every new franchise company claims to be the next McDonald’s. There is no universal answer here. However, having worked with clients in hundreds of franchise and non-franchise businesses over the past quarter century, I feel comfortable in saying that most franchises are rip-offs. The money spent on franchise and royalty fees can be put to much better use. If the franchise sounds like a potentially profitable business, you’d be better off just copying their ideas and setting up your own shop.
SWEEPSTAKES
Our society has changed in so many ways. It used to be that when someone did something stupid or illegal, they kept it to themselves and hoped that nobody else noticed. Nowadays, those people go on TV to brag about their deeds. Some even try to extort money out of others for their own stupidity. Specifically, I’m referring to the idiots who sued American Family Publishers and Publishers Clearing House for misleading them into thinking that they had won the big $11 million prizes. While everyone with a brain knows that those contests are scams, what can you say about someone who flies to Florida to claim the grand “prize” and then files a lawsuit when he is told that he should have read the fine print that explains that the odds of his actually being the big winner are more remote than his being hit by an asteroid in the year 2028?
REAL
PEOPLE
With all of the reports of Bill Clinton’s popularity reaching record levels during the disclosures of his sex scandals, has anyone else wondered on what planet those pollsters are conducting their surveys? I haven’t met any of those people; so I still believe that real people are disgusted and embarrassed about the current occupants of the White House. If you share those sentiments, you are a real person and not an occupant of another planet.
YEAR
2000
I don’t want to waste time debating the issue of whether or not the next millennium begins on January 1, 2000 or January 1, 2001. Either way, we will have to start entering 2000 on our checks in a little over a year and a half from now. The hysteria around the upcoming turn of the “big odometer” is growing, as more and more people are predicting gloom and doom at the stroke of midnight as governments and power companies are forced to close down. I receive dozens of high-tech computer magazines every week and I have been watching these predictions for the past several years, and for some reason it escapes me as to what the big deal is. In my very first computer programming class back in high school, well over 25 years ago, we learned how to insert condition statements to test for appropriateness of results. Everyone is so paranoid about computers thinking that the year 2000 is really the year 1900. As far as I know, technology is a bit more sophisticated today than it was a quarter century ago, when we were working on teletype terminals and paper punched tape. I feel like the only one who has confidence in the computer programmers to cover this simple test. Anyway, as far as I’m concerned, it’s about as big a problem as the prediction of an asteroid passing within 600,000 miles of the Earth and wiping us all out 30 years from now.
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As
I have long believed, if it’s possible to avoid (often forever) paying capital
gains taxes on the dispositions of real estate through 1031 like kind (a.k.a.
Starker) exchanges, that is the best strategy for maintaining your and your
family’s wealth. Swap ‘til you
drop. However, that doesn’t always work
out, especially if you want nothing more to do with any kind of real
estate. The next best strategy is the
installment sale, where the sales price is collected over several years. The tax laws allow the capital gains taxes
to be paid on a prorata basis as the funds are collected. This has a lot of money saving aspects
besides just delaying the payment of the taxes. Having seller financing as part of the transaction often allows a
higher sales price. The note will also
normally earn a much higher rate of interest than would alternative investments
of after-tax proceeds. Normally, it’s
best to carry back as much as you can afford.
The more of the sales price that is deferred, the more capital gain is
also deferred. For example, if you
carry back 90% of the sales price, 90% of the capital gains tax will be
deferred. Of course, interest received
on the note is fully taxable as it is collected.
Now
comes another problem. You may have
sold a property with a huge capital gain and a ten year payment schedule. However, in just the very next year after
the sale, you receive notification that your buyer is either selling the
property or refinancing it and you will be paid off. What do you do? Most
people think that is the end of the game.
They just have to accept the pay-off and pay the taxes. Those people would be wrong. While I do believe it is a good idea to do
everything you can to discourage early pay-offs, such as hefty prepayment
penalties, those aren’t always 100% effective.
What
I am about to describe is not very well known among the tax practitioner
community around the country, but is something I have done extensive research
on and have actually used on several real life occasions for clients all over
the country. So, while it may sound too
good to be true, I assure you that it is, if it is handled properly.
Contrary
to popular belief, there is no requirement in the tax code that an installment
sale note be with the original buyer and/or secured by the property you
sold. In fact, there is no requirement
in the tax code for collateral of any kind.
All that is required is for the sales price to be paid out in more than
one tax year. Of course, while not
required by the IRS, it would be foolish not to have collateral on your note
just as a matter of investment prudence.
In fact, the more collateral the better. I often advise having the buyer put up his own or his parents’
residence as collateral in order to provide a maximum of motivation for keeping
the payments on schedule.
Now
back to the issue at hand. You’ve been
notified that you will be receiving a lump sum payment for $500,000 in a few
weeks from a sale that took place last year.
The capital gains taxes on that payment would be about $160,000. Is that your fate, to end up with $340,000
after taxes? Most people would say that
you have no control over this. Wrong!
You
can decide how much, if any, of that $160,000 you want to pay this year. You are allowed to substitute a new borrower
and/or collateral for the original ones.
You can even modify the terms of the note. While the original note may have been for a ten year amortized
payment schedule at 10% interest, you can break that up into several smaller
notes with different payment terms and different maturity dates. This is part of my “not all of your eggs in
the same basket” philosophy. The odds
of all of your notes coming in prematurely are lower than risking everything on
one.
A
couple of additional tips. As bad as
the capital gains taxes may be, they are not as bad as losing the whole
thing. Don’t just loan the money to the
first schmuck who asks for it. Make
sure the borrower is credit worthy and the collateral is substantial.
The
most important point is that you can’t touch any of the cash, even for a split
second. If you can’t line up a new
borrower to take the funds at the time of the payoff, you’ll have to park them
with a neutral unrelated third party, in much the same manner as for a 1031
exchange. However, while funds in a
1031 exchange must be reinvested within 180 days, there is no deadline for the
installment sale money to be reloaned.
Of course, the sooner you do reloan it, the sooner it will start earning
top dollar for you.
You
should definitely work with your tax person to see how much of that money you
can afford to keep. You may have some
capital losses that would offset all or part of the capital gain. The long running double standard in the tax
code for capital gains and losses is still around. Gains are taxable with no maximum, while losses can only be used
to offset capital gains and only $3,000 can be used to offset other types of
income per year. It’s not fair, but few
things in the tax code are.
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I really don’t want to spend much time discussing the sex scandals surrounding the White House. However, I can’t help commenting on the irony involved. By all rights, and in a perfect world, the Clintons would be tried and fried for the scores of crimes they have committed since becoming President. Perjury, soliciting and accepting bribes, witness tampering, obstruction of justice and treason, are just a few of the misdeeds that should have put them in the slammer for the rest of their lives. However, since those concepts are beyond the mental grasp of most Americans, it was a more low brow crime that sunk them, Bill’s insatiable animal urges.
The government couldn’t convict Al Capone of murder and the other crimes he committed; so they nailed him for income tax evasion. Being a Chicago girl herself, Hillary knew enough to keep away from the IRS by reporting their $100,000 bribe from Tyson Foods as commodity trading profits on their tax return. Unfortunately for her, Bill refused to wear a chastity belt during their time in office and has exposed his Achilles heel. If these were Billary’s only character flaws, I really wouldn’t give a darn about his sex life. While I have no doubt that his Svengali like hold over the American media and public will let him survive these scandals, I have to admit to a bit of visceral pleasure in the hope that he could actually be punished for something.
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In the last issue, I mentioned how I don’t think it may be a good idea to follow the other lemmings in going hog wild over the new Roth IRAs. As is common place with new investment vehicles, many people take an all or nothing approach and switch large portions of their portfolios to the newest fad investment. That is crazy, but human nature.
I didn’t mean to imply that a Roth IRA is never a good idea for someone. Roth IRAs have their own pros and cons that must be evaluated for your own particular needs, as well as with your crystal ball for predicting the future because the big payoff is several years away. You receive no deduction now for the contributions, but the withdrawals can be tax free. As I wrote before, I am not sold on the idea of converting regular IRAs to Roth because of the requirement to pay out real tax dollars today for possible savings much later. I have also always been against the concept of all or nothing where people move their entire portfolios into one or another type of investment. However, in developing a complete well rounded portfolio, having a Roth IRA would be a good addition. Down the road, when deciding which IRA to tap into, it will be nice to have a choice between taxable and tax free.
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What
often comes as a surprise to people is the fact that they are required to pay
capital gains tax to a state in which they don’t live. Most states that have income taxes have long
taxed gains on properties sold within their borders by nonresidents. Their problem has been in enforcing that,
especially after the money has left the state.
About ten years ago, California started forcing a withholding of 3.33%
of the gross sales price from nonresident sellers who didn’t file for an
exemption from the withholding. This
wasn’t the actual tax, but did motivate people to file California tax returns
in order to report the actual tax and recoup any overpaid tax.
As I have long warned, taxing schemes get their
start in California and eventually spread to other states. It sounds like this is happening in some
other states, such as Virginia. It’s
not always a foregone conclusion that you will have to pay those state taxes or
have anything withheld at the time of sale.
If you are doing a 1031 like kind exchange, which can be for property in
another state, the transaction is also state tax deferred. Suppose you dispose of a rental property in
a high tax state such as California and replace it with a rental property in
tax free Washington state. If you do
ever dispose of the new property (or its replacement) in a taxable sale before
you die, you are supposed to file a California tax return and pay tax on the
gain that you had deferred previously.
Since the California Franchise Tax Board will be out of the information
loop for the Washington sale, you will be on the honor system to notify them of
the tax you owe. My experience with
this kind of situation is that amnesia sets in.
If you don’t obtain an exemption from the
withholding, the state will require a certain percentage of the gross sales
price be withheld by the escrow holder.
This has no relation to the tax on your actual profit, because the
escrow company has no way of knowing what that is.
Whether or not you do opt for the tax deferred
strategy, you will still have to file a state tax return to report that
sale. If you do have to pay any tax to
that particular state, there will be an offsetting credit of all or part of
that tax from your home state tax. The
end result will be that you won’t pay two state income taxes on the same
income. However, the way the credit
works, you will end up paying the higher of the two states’ taxes.
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As
I have been describing for years, there are several opportunities for reducing
and/or eliminating income taxes through the use of one or more corporations. However, to best utilize these, it’s crucial
to have good up to date bookkeeping.
It’s amazing to me how many people neglect this very important task. It’s even more surprising in light of the
drastic reduction in the cost of bookkeeping. Ten years ago, a small business owner would turn his checkbook
over to an outside bookkeeping service and a week or so later, would know how
things went. Nowadays, with brand new
super powerful computers selling for under $1,000, and excellent and easy to
use bookkeeping software, such as Quicken for around $50, there is little
financial burden to having accurate data available at any time.
I know how scary it is for computer novices to jump into the world of EDP. For those folks, I continue to stress that the most powerful resource is kids, from five to 15 years old. Buying a book or video, or taking a class at your local junior college is a waste of time. Putting your five year old to work is the most efficient. If you don’t have your own five year old, grab your next door neighbor’s for something like $10 per hour. It’s a skill that would be extremely valuable and could earn a good profit by doing bookkeeping for other small businesses. QuickBooks, produced by the same company as Quicken, is an okay program; but it really isn’t as easy to use as Quicken.
There are books on using Quicken, such as in the Dummies series. However, most of them are several inches thick and too intimidating for most people. Last year, I wrote a concise (5 pages) guide of the most important things to know about using Quicken, which I have given away to well over 100 people. One of my goals for that was to get clients to have their Quicken data organized so well that I could use it quickly for the preparation of their tax returns. Having worked with several of those clients’ Quicken data files in the past few months, I feel that I haven’t been very effective in explaining things. I am pondering how best to do this, short of one to one training (in person or online), which would be very expensive at my $150 hourly rate. An alternative medium that I am considering is a video tape. Not a video of me explaining what to do. Filming a computer monitor would be messy because of the resultant flicker from the different scan rates. What I envision is a video of the computer screen, using a screen capture program, such as Lotus Screen Cam, along with my voice over explaining what is happening and why. We would sell this for a very reasonable cost. Please let us know if you would be interested in obtaining such a tape, or if you have another idea for how I can better explain how to use Quicken.
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As I have said several times, I don’t know of anyone who makes a donation just for the tax deduction. However, once the decision has been made to make a donation, is there anything wrong with doing it in such a way as to maximize its tax savings ability? If you think such a thing is sacrilegious, you may want to skip this article. Some pointers on how to most efficiently help support your favorite charities. While there is no “one size fits all,” here are some common mistakes I am seeing a lot of.
A
deduction for an advertising or promotional expense for your business is going
to save you much more tax money than would a charitable contribution. If you are buying advertising in your kids’
high school football program, or a church program, you may think of it as a
donation. However, if you post it in
your books as an advertising expense, you will save much more in income and
self employment taxes than you would with a charitable donation. Anything that increases your company’s
exposure to possible customers could be considered a promotion that could
conceivably produce additional income down the road some day. If the program mentions your company’s name
as a donor, that is advertising.
Generally, when deciding whether to give a donation from your personal funds or your corporation, it is more efficient to do it on your personal return. The deduction limitation is much higher on the 1040 (up to 50% of adjusted gross income) than on the 1120 (10% of taxable income).
When providing services for a charity, it is a big mistake to want to pick it up as a charitable donation. To do so, you would have to recognize the value of your services as income, subject to regular and self employment tax. The charitable deduction on Schedule A would not even come close to generating as much tax savings as the extra taxes caused by the additional income. Remember Means Testing. The higher your AGI, the higher your effective tax rate because of all the sneaky extra taxes.
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It never ceases to amaze me how gullible the American people are for anything that Bill Clinton says. Now that he has proclaimed his goal to fix the Social Security system, many people are feeling as if it’s a done deal and they can rely on it being there for their retirement years. There are several problems with that logic. Part of me feels that people stupid enough to believe such a load of crap deserve what will happen to them. The other part of me can’t resist the impulse to set the record straight for those wise enough to recognize the truth.
The
first major problem is the fact that Bill Clinton has always done the 180
degree opposite of what he says he will do.
I could fill an entire issue describing just the last six years. The best catch-all examples are his promise
to have the most ethical administration in history and his claim a few years
ago that “the era of big government is over.”
As we all know, he has lead the most corrupt administration in history
and he has expanded the scope and power of the federal government beyond even
the goals of his hero, Karl Marx.
Next is the “solution,” using the projected budget surplus to prop up the Social Security “trust fund.” I’ve already described how the idea of budget surpluses for the rest of time is as bogus as all other Clinton promises.
Next is the matter of who will be fixing the system. The idea of allowing the same imbeciles who designed and maintained such a flawed system to now “fix” it is laughable. Here’s another analogy. If you paid a contractor $100,000 to build an addition onto your house and what he does for you is a total disaster, would you then hire that same contractor, and pay him an additional $200,000 to fix what he did? If you say you would, sit back and let our brilliant leaders in Washington fix your retirement for you. If you understand that all we will see is a bunch of finger pointing as to who is more responsible for such a bogus system, I hope you have been paying attention to what I have been saying for the past 25+ years in regard to minimizing the amount of money you pour down the Social Security rat hole.
The truth of the matter, which no politician will admit, is that the Social Security system is like a house built on a foundation of Jell-O. No matter what cosmetic tinkering is done, the house will wobble forever. It is unfixable. The basic underlying concepts on which the entire Social Security system is based are as valid as building cities underwater. People may be able to hold their breath for a few minutes, but they are not going to survive on a long term basis.
I
realize that to most people I sound like a chronic complainer and overly
skeptical. They truly want to believe
that our leaders in Washington are the brightest people ever to walk this
planet and they can solve any problem that crosses their path. These people are also those who ignore and
forget any ancient history, which is anything that happened more than three
months earlier. I, however, remember
how well our federal government has solved all of our other problems. The pattern is the same. Take trillions of dollars from the
productive members of our society and give them to political cronies and those
who promise to vote for them. Then
declare victory in spirit, which means that although everything has gotten much
worse than when we started, we had the best of intentions. Same game plan, different day.
The only solution to the Social Security system is for our leaders to bring back a long forgotten document, which was supposed to be the game plan for this country, the Constitution. Under the Constitution, the federal government was not supposed to be involved in 95% of the things it has taken control of, including the retirement investing for the citizens. Do as our founding fathers wanted and let Americans keep their own money and invest it themselves for their own retirements.
Do I expect to see such a solution? Of course I do; on the same day that pigs fly on their own power and the Winter Olympics are held in Hades. Our leaders, of both parties, wouldn’t recognize the Constitutional limitations on their power if they bit them on their butts. The Republicans are the biggest disappointment of this century. They claim to support the limited government concept of the Constitution, but they continually vote to support all of the Clinton plans to provide a utopian socialist society because to do otherwise would make them look like cruel cold-hearted meanies.
The answer on an individual basis is exactly the same as it has been for the past 25+ years. Don’t rely on Uncle Sam or the Clintons to tend to your needs. Arrange things so that you are capable of taking care of yourselves. If that means taking certain steps, such as incorporation, to hold onto the tens of thousands of dollars that are taken from you in income and payroll taxes each year, so be it. Again, we do all have choices in this matter. However, if you think such a plan is selfish and unpatriotic, as we are constantly told by our leaders and their sycophants in the mainstream press, by all means maintain the status quo. It’s your call.
Along the same lines, the Clinton plan to add younger people to the Medicare system, which itself is on the brink of financial collapse, is asinine. The promise that it will be self supporting is as valid as the original financial projections made when the Medicare system was established during Lyndon Johnson’s Great Society. The actual costs for the system are hundreds of billions of dollars a year more than were projected by the oh-so-wise financial prognosticators in Washington. Adding more people to the Medicare system will exacerbate its financial problems. However, the Clintons will push for this for one big reason. It will give the Federal government absolute control over the medical care of tens of millions of more Americans. If you think it’s a good idea to allow some Washington bureaucrat to dictate your medical care, let your representatives know that you support this plan. If you think such decisions should be left up to you and your doctor, you should speak up.
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As
much as I try to be perfectly clear as to my meaning, there are times when
misinterpretations can result. In KL
97-4, I mentioned how all too many Realtors select their continuing education
classes based on cost, regardless of quality.
As always, I was speaking of the majority and did not intend to be
describing every single Realtor. There
are, luckily for the future of the industry, at least a few thousand real
estate professionals in this part of the country who are intelligent enough to
attend the higher quality classes, even when they cost much more than
alternative offerings.
When describing some of the alternative continuing education classes as six hour sleepers, I may have accidentally given the impression that this just described the classes presented by the Arkansas Real Estate Commission and that it described all of its offerings. While I didn’t keep a detailed list of the hundreds of descriptions that had been relayed to me by seminar attendees, I am sure that they covered a fairly complete cross section of CE providers. There are plenty of for-profit private industry seminar companies that do nothing more than baby-sit and award six hours of continuing education credit. Many of the offerings presented by the AREC, and the instructors, are of the highest quality as anywhere in the country.
The main point of my little rant last time wasn’t to pick on incompetent seminar providers. It’s a free market and they can do their thing. My point was to ridicule anyone who would waste six hours of their lives sitting in a room learning nothing just to save a few up front dollars. Of course, in a country where people select their beverage of choice based on talking frogs, I shouldn’t be surprised.
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A
lot of your money, as well as a lot of your freedoms, are being given, directly
and indirectly to charities that appear to be working towards noble goals, but
are actually working towards very nefarious ends. They attract billions of dollars in support from private
individuals, charitable foundations, and the government (our tax dollars). They have also been anointed with quasi
governmental powers of their own. If
you share their new goals, by all means contribute as much as you can. If you are contributing to these groups
based on what their goals used to be decades ago, save your money.
ENVIRONMENTAL
Other than just supporting animals and the ecology, the big groups have come out as literally anti-human and anti-capitalism. Their agendas, which advocate the abolishment of all private property ownership, are straight out of the Communist Manifesto. If you doubt this, just check out the Sierra Club’s materials. They don’t hide their goals.
CIVIL
RIGHTS
While these groups had their start when there was a need for some organization against discrimination, the avowed goal of a color blind society where everyone is treated equally regardless of race has been replaced with reverse discrimination where those of us of European ancestry are now supposed to be treated as poorly as were the blacks in prior centuries. If there are any doubts of outright hatred for the European heritage of this country, the fact that George Washington is now considered evil, with his name being removed from schools, should remove all doubt. Professional racists, such as Jessie Jackson, Al Sharpton and Calypso Louis Farrakham, have created quite a profitable industry extorting millions of dollars from private companies, with the full support of the government.
WOMEN’S
RIGHTS
Again, most of the original goals of the feminist groups, such as equal pay for equal work, were admirable. Having worked in some large corporations, I knew firsthand that women were paid much less than men in the same positions. However, their pendulum has also swung too far from the middle of equal treatment to outright anti-male. Most of the top leadership in groups such as NOW are openly lesbian who would just as soon have the male sex exterminated completely and perpetuate the species through cloning. While I have no problem with lesbians, I do doubt that those few at the top of NOW share the same opinions and viewpoints as do all women in this country. When setting the national agenda, the mainstream media, and the government allow NOW to set the rules. Last October, when Promise Keepers held its Stand In the Gap rally for men in Washington, DC, the national media had representatives from NOW voicing the “universal” female opinion. The fact that the wives of those men supported their participation in PK events was completely overshadowed by a handful of lesbians protesting the rally.
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