Wednesday, December 23, 2009

Year End Tax Planning

The best motivation for planning your taxes is to legally minimize how much of your money goes to the IRS. Many years ago, Judge Landis of the U.S. Supreme Court declared that everyone has the right to legally minimize his or her taxes. To do this, you need to have an idea of what your income and deductions are now, and what you expect them to be next year. You must then move income and deductions in a way that minimizes what you pay in taxes this year. Sometimes it is worth paying taxes now in order to save even more in taxes next year.

However, ” take the money and run” is a valid alternative. In this case you worry about tomorrow tomorrow. You delay as much income as possible to next year and accelerate as many of your deductions as you can to this year. This way, you pay the least taxes possible.

Step One: Analyze your situation. Will you be paying taxes this year? If so what is your tax bracket? Are you in the 15% bracket or the 35% bracket? If you are in the lower tax bracket you will only get back $15 for every $100 you lay out for a deductible expense. If you are in the 35% bracket then the deduction gets more attractive.

Step Two: Determine where you think you will stand next year. Will you be in a higher or lower tax bracket? With the way the economy went in 2009, many people will have a better year in 2010.

Step Three: Set your goal. Do you want money now or later?

Delaying income is tough when you have a job, a house, and no other tax complications. You get your salary each week and it is hard to push it off to next year. It might happen if you get a year-end bonus that might get paid in 2010. Your interest income or dividends is paid on a set schedule, so you cannot postpone them to next year.

Here are some ways to legally delay income to next year:

· Weigh your options if you are thinking of selling some common stocks. If you have gains, you may want to wait until January to realize them. That way you are not liable for the taxes for a year. If you have losses, then take them this year. However, always make a good investment decision first. If it’s time to sell then don’t worry about the tax consequences.

· If you are self-employed you can delay billing your customers so that you receive the income next year rather than this year. Please note, if you receive the money this year, you are legally required to report it this year. Keeping a drawer full of checks that you get in December and then deposit in January is illegal. You should report all your income in the year you receive it.

Here are some ways to accelerate your expenses

· Pay your mortgage before Christmas. That way the bank will include the interest you normally would pay in January on their annual statement for this year, making it easier to deduct it.

· If you are making donations to your favorite charity, make them by the end of December, rather than in January. If you mail the check on December 31st, you can deduct it on your 2009 tax return.

· If you have a lot of junk, (oops, I mean valuable furniture and other items), you can consider donating them to charity and getting a tax deduction for it. You must get a receipt if it is worth more than $250, and you must provide additional information on your return if it is over $500. Really valuable items might require an appraisal. Be careful, the appraisal might cost more than the tax benefit of making the donation. Generally charities will not value the items for you. They will just say that you gave them seven bags of clothing.

· If you were looking for a job in 2009, keep track of your job search expenses. They can be used as itemized deductions to reduce your taxes. Some examples of these expenses would be the cost of printing your résumé, fees for help in your job search, or hiring a career coach to help your efforts. However, the total must be above 2% of your income to reduce your taxes.

· Often the biggest job search expense is the use of your automobile for your search. Keep track of the mileage for getting to the printer, going to various employment agencies or job fairs, and traveling to interviews. Write it all down to make sure you get the benefit of all the mileage.

· If you pay your real estate taxes yourself rather than through a bank’s escrow account, you can pay them in December rather than January. That way you can deduct them this year.

· Medical expenses must be more than 7.5% of your total income to be deductible. Look at your income and medical expenses and pay any outstanding medical bills this year if you are over this limit. If you are paying for your own health insurance, you should not have a problem exceeding this limit.

Here are some suggestions for the Self-Employed: (These only should be used if you have a good business purpose in spending the money. New “toys” like the newest fanciest computer, don’t make good financial sense.)

· You can write and mail the checks for your business expenses on December 31st and deduct them on your 2009 return. This includes expenses like rent or office supplies.

· Items you charge on a bank credit card can be deducted when they are purchased rather than when you pay the charge card bill. So those office supplies you bought in late December on your Visa card are deductible in 2009. If you charged it on your Staples card, then they are not deductible until you pay Staples. The theory is that Staples has not gotten their money yet so you cannot deduct it.

· Upgrade your equipment. This is only a good idea if it will help you run your business better, lower your future costs, or increase your revenue. Again, fancy toys don’t make financial sense.

Careful tax planning can help you keep some of your money at a time when every dollar counts.

If you pay the dreaded Alternative Minimum Tax (AMT), then you have to be careful what you move deductions from year to year. Generally it does not help you to pay your real estate or other deductible taxes or things like job search expenses in December if you are subject to the AMT. The AMT would take a several blogs to explain. I might tackle it in a future blog.

These are general ideas that can help reduce your taxes. If you plan to implement any of these suggestions, it is well worth it to consult a tax professional.

Monday, December 14, 2009

Final Tips

Self Employment Blog #7

Quick Hitters

Tax Professionals

Owning your own business can be confusing and lonely. Legal and tax obligations appear at any time. If you hire a tax professional, they can help with your tax return and estimates. A good tax professional will also advise you on running your business and work with you to make it more profitable. They also can advise you on legal ways to reduce your taxes. Don’t depend on your friends and family when you are self-employed.

Checking Accounts

It is best to set up a separate business checking account for your business. Pay all your business bills from the business account and all your personal bills from your personal account. Transfer money from the business account to your personal account so your checks won’t bounce

Health Insurance
You can get health insurance from several sources. Chambers of Commerce offer health insurance options and there are various other organizations that offer this benefit. Your payments for health insurance are not deductible on Schedule C as a business expense, but could be deductible on the first page of your Form 1040.
Massachusetts requires that you offer health insurance to your employees if you have more than 10 employees. Most group health plans state that anyone working more than 20 hours a week must be covered under your plan unless they are covered under a spouse’s plan. The expense for covering your employees is deductible on your business tax return.

At some point you may need help in running your business. Often the first person hired is an administrative person to do all the things that keep you away from your clients and customers. You should talk with your tax preparer before you hire someone so that you understand your obligations. I’d recommend a payroll service to take care of all the myriad of details that go along with paying an employee.
Employees are expensive. You must have worker’s compensation insurance, match their taxes, and may even need to cover them with health insurance. Be careful who you hire and that you really need the person to help your business progress.
A quick bit of advice. If you view your employee as an expense rather than an asset, get rid of them and hire someone else.

Sales taxes
Be aware that if you sell a product you must collect and pay sales taxes in most states. Some states, such as Connecticut, have a sales tax on services.

Talk with your CPA before starting a partnership. They are harder to keep together than marriages. Generally partnerships break up because the various partners do not agree on the direction they are going in and how to get there.

In Massachusetts you are required to register with the town or city clerk where you live if you use a fictitious business name. That would be any name other than your own. If you are an LLC or corporation you are required to register. If you do register, you can expect that the city or town will eventually show up at your door and want to tax your business assets. Other states probably have similar requirements.


There are many different pension plans available to business. There is no perfect type for all business. A sole proprietor often wants to use a SEP plan because it is simple and inexpensive. Large companies use the 401(K) plan because it shifts the burden of funding the plan to the employee. There are many alternatives in between. You should discuss the options with your CPA as well as your financial advisor.

There is an old Vermont saying, “The eye of the farmer fattens the stock.” Of course, now there are very few farmers. What this means is that the business will run better when you are there. Too many things can go wrong when you are not there. To minimize this problem, you need to have procedures in place that help your employees understand what is expected of them.

Customer Service
The measure of customer service is not what happens when things go right. It what happens when things go wrong. It is critically important to deal with complaints and problems quickly and effectively. The proper handling of a complaint can turn a problem into an asset. If someone is happy with your service they will tell one person— if they are unhappy they will tell ten.

S Corporations
This is a special tax designation for corporations. A regular corporation pays taxes on its net income.

An S corporation does not pay taxes on its income. It transfers the income to the personal tax returns of the owners. This prevents the double taxation of the income and provides some tax-reducing benefits to corporate owners. You need to make a special election to be allowed this privilege. Check with your CPA as soon as you set up the corporation to see if this is an appropriate thing to do.

Wednesday, December 9, 2009

Paying your taxes

Self Employment Blog #6

Important details #3

Paying your taxes

Your goal should be to pay a lot of taxes, but the least amount legally required. The government would like to take all your money but have not yet found a way to accomplish this.

Be sure you are sitting down. The taxes on the income from your business can be as high as 40 to 50% of your net profit. It all depends on what other income shows up on your tax return. Your spouse’s salary can push you into this level of taxation, as can investment income, unemployment compensation, or rental income. Here is how it breaks down:

The Social Security Administration gets about 15% of your wages or net income from self-employment to cover your Social Security benefits and Medicare. When you are an employee, you pay half and your employer pays half. When you are self-employed you pay the whole 15%. Your itemized deductions, such as mortgage interest and real estate taxes, do not affect what you pay for Social Security taxes.

Your federal income taxes depend on your taxable income and marital status. This blog cannot provide all the alternatives. A large majority of taxpayers end up in either the 25% or 28% tax brackets. Your actual percentage will vary with your return.

Most states have an income tax. Even some states that do not have an income tax have a business tax that applies to self-employed people. New Hampshire is one of those states. Massachusetts has a tax rate of approximately 5%.

Using the numbers above you would be paying either 45% or 48% in total taxes. Now that you are totally depressed, let me back off from that statement a bit. The taxes you pay depend on how your tax return goes together. High mortgage interest and real estate taxes will reduce your federal taxes. A non-working spouse reduces your taxes. Many of my self-employed clients only pay Social Security taxes because their income is low.

My advice to my clients is to put 40% of their net income into a savings account to pay their taxes. Maybe there will be enough left over after paying the taxes for a cup of Starbuck’s coffee.

The IRS and state departments of revenue require you to pay your taxes during the year, not when you file your return. So you must pay estimates each quarter to avoid being penalized. The due dates are April 15th, June 15th, September 15th and January 15th of the following year. There are vouchers that must be sent in with your check.

The final blog is a glossary of terms you will need to complete the process

Friday, December 4, 2009

Tax Deductions

Self Employment Blog #5

Important details #2

Tax Deductions

The reason you need a bookkeeping system is so that you can deduct all the expenses possible to minimize the taxes you will be paying.

There are a couple of expenses that you will not collect in your bookkeeping system.

The first is your automobile expense. You have two choices in calculating your deduction for your automobile. With either choice you need to keep a log of your business miles and know the total miles you drive your car during the year.

You could record every expense, (gas, insurance, repairs etc.) you incur using your automobile. Once you get a total cost you multiply it by your business-use percentage. (Business-use percentage is your business miles divided by your total miles.) Alternately, you use the IRS automobile mileage rate of $0.55 per mile for 2009, times the business miles. The vast majority of my clients use the IRS standard mileage rate. It’s simpler to work with and the IRS adjusts it every year.

The second one is the deduction for a home office. To legally deduct the cost to maintain an office in your home, you must use the area exclusively for business. Thus you cannot deduct the expense if you work at your kitchen table. You are allowed to deduct the business-use percentage of all the expenses to run the house. This would include mortgage interest, real estate taxes, utilities, heat, insurance, and general repairs. You cannot deduct repairs to the non-business use portion of the house, like your kitchen. As this is a complex deduction, it would benefit you to hire a tax professional to help you figure it out.

Here is a partial list of the other categories you should use to collect your expenses together:
• Advertising
• Insurance
• Interest
• Professional Fees
• Office Expenses
• Rent
• Repairs
• Supplies
• Taxes
• Licenses
• Travel
• Meals
• Entertainment
• Utilities
• Telephone
• Bank Charges
• Dues
• Subscriptions
• Computers
• Cleaning

Monday, November 30, 2009

Record Keeping

Self Employment Blog #4

Important details #1

Record Keeping

The IRS requires that you keep accurate records of your income and expenses. Unfortunately, they don’t tell you how to do it. You want to establish a system that is simple, accurate, and easy to maintain. It can be a paper system or computerized, whatever works best for you. It is important to do your record keeping regularly. Do it at every week or at least every month. The goal of record keeping is to collect information together into the categories of income and expenses to determine your net income.

Do not throw your receipts under the seat of your car, in the basket on your counter top, or in a box under your bed. Do not take a big box of receipts to your CPA to prepare your return. Be organized. You need to know how you are doing as the year progresses, but you can also save yourself a lot of money in tax preparation fees when you come prepared.

One of the simplest systems on the market is the Dome Bookkeeping system. You can buy it at most office supply stores. It is a paper and pencil system and is smaller than a crossword puzzle book. With this system you record your income and expenses as they are incurred. So when you make a sale today, write it down. When you pay a bill, write it down. At the end of the month you summarize your expenses by category and tally up your year to date activity. At the end of the year you hand the book to your CPA to have your taxes prepared. Quick, simple, accurate, cheap, and it saves you money with your accountant.

Another paper system is called a One-Write System. You buy checks and a check register from a company like Deluxe ( A check register is created at the same time you write checks and makes a permanent record of each transaction. It also keeps your checkbook in balance. The check register has columns to “spread” your expenses. So every time you buy office supplies, you put the amount paid in the office supply column. At the end of the month you tally up the sheets. At the end of the year you summarize your activity for the full year to prepare your tax return.

You can use Excel or another spreadsheet program to collect your records. This would be set up like the One Write Systems mentioned. It can get very cumbersome if you have a lot of transactions. A power-user could come up with a higher-tech solution to doing the summary.

Quicken ( or a similar personal finance program can do a good job of collecting the information together for you. It forces you to select a category and then prints reports telling you how the business is doing. You write your checks through the system and can then track what is owed to you. You should set up a data file for the business that is separate from your personal data file to reduce the confusion. These programs are fairly simple and accurate, and reconciling your checkbook is a breeze after the first month.

QuickBooks ( is the premier small business bookkeeping program and it is related to Quicken. It can handle sophisticated business transactions and complex companies. The key to QuickBooks is to not over-think it. Use it to track your receivables, keep your checkbook balanced, and write your checks.

A one person sole proprietorship or LLC can generally keep good records with Quicken or Money (from Microsoft). QuickBooks is appropriate if you have a lot of clients you are billing or have a more complex business. If you are incorporated, QuickBooks or some similar program is the best choice. Excel is cumbersome, and the paper systems will become tedious.

Just remember to keep it simple.

The next blog will cover the tax implications you will face.

Wednesday, November 25, 2009

Corporations, LLCs, and Sole Proprietorships

Self Employment Blog #3

Corporations, LLCs, and Sole Proprietorships


Incorporating your business requires filing long and formal documents with the Secretary of State and the spending of a lot of money on filing fees, legal fees, accounting fees, insurance, etc. just to set up the corporation. Then you have to pay $4,000 annually in various expenses just to keep the corporation alive.

The major benefit of a corporation is to limit your liability in case something bad happens. All your business assets are on the line if the business is successfully sued, and you could be put out of business. However, the corporate structure should protect your personal assets from being seized in a judgment. I only know of one of my clients who was successfully sued and that was because they neglected to deal with a complaint.

There is a marketing benefit to being incorporated. You appear to be bigger than you are. With today’s technology, you can look like a big company with vast resources, when in fact you are one person sitting in your spare bedroom. Appearance of size matters. Unfortunately, some big companies will not deal with you unless you are incorporated.

Finally, there can be a tax benefit to being incorporated. You need to be earning a significant income to take advantage of these opportunities. My rule of thumb is the benefits start to be available when you are earning over $50,000 per year and you break even when you reach $100,000. If you are losing money, a corporation just costs you more money.

To accomplish this you must observe all the niceties of having a business. You will need a separate business checking account in the business name. You should always use business stationery in the company name and sign as president, not just your name. Everything you do for business should be in the Corporation’s name.

Limited Liability Company (LLC).

Like a corporation, you are required to register your LLC with the Secretary of State and pay a filing fee. The fee varies by state. The registration process is easy and generally just a one page form. Then you have to keep the LLC alive by filing an annual report each year. There is of course another filing fee for the annual report.

There are two benefits to an LLC. First, it limits any liability that arises within the business from affecting your personal assets. For example, you start a business painting houses. The first house you paint catches fire and burns to the ground. An LLC will hopefully protect you from losing your house and other assets.

There is more good news about the LLC. If you are the only member you do not need to file a separate tax return for the LLC. The income and expenses of the business go on Schedule C of your personal 1040 tax return. It is also less expensive to run because you are not paying a tax preparer to prepare an LLC return and your personal return.

An LLC has the same marketing benefits as a Corporation but none of the tax benefits.

Like the corporation, you need to be careful to transact all business in the LLC’s name.

Finally there is the sole proprietorship.

Essentially when you stand in the middle of your living room and declare yourself a business you have become a sole proprietor. The niceties of the LLC or corporation do not have to be observed. You can run the business through your personal checking account. You do not have to register with the Secretary of State. You do your work, collect your invoices (hopefully), pay your bills, and keep the rest of the money. At the end of the year, your business activity is reported on Schedule C of your 1040 Form.

The plus side... It is simple to start and close a sole proprietorship. You end it by standing in the middle of your living room and saying, “I’m out of business!” Your record keeping requirements are much simpler. (Record keeping will be explained later.) The cost to stay in business is much lower than a corporation or LLC.

The downside... If something goes wrong, all your personal assets are on the line. They can take your house and all your assets. A homestead exemption will help protect your home. Under federal law, retirement assets are generally not available to creditors.

More bad news… Many large companies will not deal with you as a sole proprietor.

The next blogs will cover the details of business ownership.

Sunday, November 22, 2009

Franchising and Multi-Level Marketing

Self Employment blog #2

These are two quick ways to get into your own business.

Franchises: One option for starting your own business is to buy a franchise. This can be a great way to get a business going and, if you get the right one, it can be a great financial boon. The big benefit of a good franchise is that all the set up work and on the job training has been taken care of. A good franchise will give you great training in their proven system of doing things and then help and monitor you as things progress. They will help with a location and get you going. If you do it their way you are almost guaranteed to succeed. One problem is that the franchises you can afford are the ones who don’t do any of these things. They take your money, mail you a Xeroxed copy of their manual and say “Where’s my royalty check?” There are exceptions of course but generally you need the big bucks to get a good franchise.

Multi-Level Marketing: This type of business is also called Network Marketing. Here is Wikipedia’s definition of MLM:

The basics of MLM are fairly simple. MLMs are usually centered on a consumer product. The product is always top quality (according to the company) and more expensive than similar products you can buy at your local store. You are recruited to be a distributor of this product by someone who is already in the business. This might be a friend or colleague. You are encouraged to sell the product and to recruit distributors. You earn money on your own sales and a commission on the sales of the people you recruit and those that they recruit, ad infinitum. This organization is called your “downline”. The more people in your downline, the more you earn.

MLMS are generally inexpensive to enter. They also entail much more work than you are led to believe. The success rate in this type of business is no better than starting any other small business and is probably much smaller. You can be fabulously successful but that is a rarity. Most participants plod along and then drop out. My observation is that companies in MLM pop up, are very popular, and then settle into a maintenance mode. Then someone decides that you can MLM dog biscuits and folks jump on this bandwagon. I have had some clients who have generated some income from this business model but most have dropped out within a year of joining. For an MLM to work, everyone needs to sell product as well as recruit more people to sell. Setting up a wholesale club by recruiting distributors and using the products but not selling will not work.

Next time, I will discuss corporations, LLCs, and sole proprietorships.

Wednesday, November 18, 2009

Starting Your Own Business

This is the first blog in a series about starting your own business.

Many people dream of being in business for themselves. They think about the financial rewards, the independence of being their own boss, and the freedom you get when you do not have to answer to someone else. It all sounds wonderful. Doesn’t it?

Let me fill you in on an alternate reality.

We all know the urban legend about Bill Gates. He dropped out of Harvard to start Microsoft. He worked hard, made some good decisions, (except Vista of course) and is now the richest man in the universe. Well, that rarely happens. The financial fact of small business is that 80% fail. Most of the remaining 20% struggle to get by and a rare few end up with the big bucks.

It is true that you are your own boss (except maybe for your spouse, clients, and employees). The (big or small) buck stops at your desk. That means that when something goes wrong, you also do not have anyone to pin the blame on. All the decisions rest on your shoulders and you can’t ask for advice from your friend in the next cubicle. It can be very lonely having your own business.

You now have the freedom of working all day and then doing estimates, billing, record keeping in the evening. Oh and don’t forget those phone calls you need to make and the supplies you need to pick up. Oh and paid vacation. Who are you kidding? When you go on vacation, there is no one back at the shop to earn money for you.

We are going to explore the world of options you have for starting your own business. To end this section, I want to share some definitions with you, which will be expounded on in subsequent blogs:

Break Even – This is the point where the revenue from your work equals the expenses to accomplish that work.

Contractor – This is a person who is working for your company and does not have any taxes withheld from their pay.

Corporation – A well-established form of business with shareholders, stock, and well-defined limits of liability and operating characteristics. It is a separate organization and must file its own tax return.

Employee – This is someone who works for you and has taxes withheld from their pay and receives whatever benefits your company offers.

Franchising – A quick way to get into business. You pay to be part of a large company with established policies procedures. Dunkin Donuts and MacDonalds are well known franchises.

Homestead Exemption – A document you can file at the registry of deeds that protects you from being forced to sell your home to satisfy creditors. Consult a lawyer for more specifics.

Limited Liability Company (LLC) – A form of business that provides some protection from liability. An LLC may or may not file its own tax return.

Liability – In this context, liability is defined as having a business problem spill over into your personal life and assets.

Limiting Liability – This means keeping your personal assets safe from business problems. The idea is that if the business gets sued, you get to keep your house and personal checking account.

Multi-Level Marketing – Another quick way to get into business. MLM is almost always selling consumer goods. You are compensated for your own sales and earn a commission on the sales of people you recruit into the business.

Self-Employed Individual – That would be you. This is a person who runs their own business and takes on the risks associated with it. Even if you have only one client you are still self-employed. You must run the business, do the work, pay the bills, collect the money, and pay your own taxes.

My next blog will discuss Franchising and Multi-Level Marketing.

Saturday, November 7, 2009

New Homeowner’s Tax Credit – Part Trois

Well, well, well. The federal government has extended the new homeowner's tax credit to cover purchases that close on or before June 30, 2010. They have also added another important date--you must sign the contract to purchase the home by April 30, 2010. I guess a little more of the stimulus money will be going to everyday people.

The Feds have also changed the rules a bit. You still must have not owned a home for at least three years to qualify for the full $8,000 new homeowner's tax credit. However, the amount of income you can have to qualify for the full credit was raised to $125,000 if you are single, and $225,000 if you are married and file a joint return.

They also added a new wrinkle. If you have owned a home for five of the previous eight years you can qualify for a credit of up to $6,500. This expands the pool of potential house buyers substantially.

Now for the bad news. The new homeowner's tax credit is not retroactive. The new rules are effective for sales that happened on or after November 6, 2009. All those folks who have owned a home for more than five years and closed on their new home on November 5, 2009 are out $6,500. The same goes for buyers who exceeded the income limits and thus did not qualify for the new homeowner's tax credit earlier in 2009.

Friday, October 2, 2009

How to Protect Personal Data

You need to have a methodology for protecting both your electronic data and any physical records you have.

The best way to protect physical (hardcopy) files is to lock file cabinets and restrict access to files to only those who need to have access. You also need to protect against an outside effort to view the files either from a break in or by leaving files open on a desk where the public can see them.

Protecting your computer files is difficult. If you are connected to the Internet, you are vulnerable to any number of attacks. Hackers are constantly trying to break into computers. Robot programs exist that spend all their time trying to break passwords and access computers hooked to the internet. The popular thumb drives are dangerous. They are easy to lose and, if lost, work on any computer. You need to make sure no information is located on the drive that is not encrypted, and the encryption key cannot be on the thumb drive.

Laptops are also dangerous. If you lose a laptop, it is easy to take the hard drive out and put it into another computer, even if it is protected by a password. Remember, the hackers are smarter than you when it comes to computer security. Use the tools that are available to you.

You should have a firewall between your computer and the internet and highly secure passwords to access the computer and key programs. The password should be a combination of letters, numbers and symbols that have no meaning in any dictionary in the world (good luck on this one). Personal information should be encrypted. A lot of computer consultants are going to make a lot of money with this one.

The key is to put a plan into place that protects the information you gather from unauthorized use.

There are heavy penalties for failing to put a program into effect and for the failure to notify the proper authorities if a breach occurs. For most small businesses, the penalties would probably put them out of business. These can include having an injunction taken out against you, restitution, civil penalties, and the cost of the investigation. A civil fine of up to $100 per data subject affected and $50,000 for each instance of improper disposal will be imposed.

There is much more that can be said about the new law. Do you have any experience with identity theft and any tips on protecting data?

I wonder if the rush to protect this information will produce the same yawn and ho hum reaction as Y2K.

Monday, September 28, 2009

How Safe Is Your Idenity

I was at a doctor’s office last week. The X-ray technician came out and asked for me by first name. I followed her through the door and she checked my last name. She told me that they are not allowed to say a person’s first and last name in front of other patients. Why did this happen? It is all part of the current effort to prevent identity theft.

A couple of years ago Massachusetts passed a very tough data security law. The law imposes strict security procedures on any business that collects personal information? The law has had several implementation dates that have been postponed. Currently the drop-dead date is March 1, 2010. The general consensus is that the date will not be postponed again.

What is interesting is that your first and last names as well as your address are not considered personal information. Thus, the law does not cover the basic demographic information kept in your contact manager. However, if you combine your client’s first name or initial and last name with a list of other information then you become subject to the law. The other information covered by the data security law are: Social Security Number, Drivers License Number, State Issued ID Card Number, Credit Card Number, Debit Card Number, or Financial Account Number. The last one is interesting because checks have first and last name and the financial account number. So every time you send a check to someone you are risking identity theft.

Whom does this law cover? Any business that collects personal information from its customers must comply. If you sell a product to a customer and they pay you any way other than cash, you have to follow the law. That pretty much covers all companies. How many businesses accept only cash? Practically none. So the only folks who are not covered by the law are drug dealers and other illegitimate businesses. (Wouldn’t it be interesting if such businesses could not be caught for their more dangerous activities but did get caught by the Data Security Breach Law)?

What does this law cover? Any physical or electronic files that contain the covered information are subject to the law. So if you have names in one file and credit card numbers in another file and no method for connecting the two files you would not come under the jurisdiction of the law. Not many businesses would do this—it would make your business difficult to manage.

The law requires four things:

1. Assess your files and systems to indentify Personal Information.
2. Adopt policies and procedures to protect the information.
3. Destroy the information on a regular basis as required by law.
4. Report any unauthorized use or acquisition of the information.

Your policies and procedures must be in writing.

My next blog will cover HOW you protect your data and any physical records you have.

Thursday, September 3, 2009

New Homeowners Credit Revisited Again

The new homeowner’s credit mentioned a couple of times in my previous blogs expires in about two months. To take advantage of this credit you must actually close on your new house by November 30, 2009. You also must fit the IRS definition of being a new homeowner, which is you must not have owned a home in the three years prior to the closing on your new home.

With the slow pace of mortgage approvals you need to identify the house now and get the mortgage process moving to be able to close by November 30th. We refinanced our house starting in January of this year and did not close until the first week of April. A three month turnaround is not acceptable if you want to take advantage of the credit. $8,000 is a lot of money to lose out on.

See my blog of February 25, 2009 for more information on this credit.

Monday, August 31, 2009

Electric Cars

I am on an automobile kick this week. There was a big story on the news about electric cars hitting the market with some history of the vehicles and some interesting information on the cars.

The Chevrolet Volt was prominently mentioned. It is supposed to get 230 miles per gallon of gas and cost about $43,000. What a deal that must be. Let’s take a look at that.

Assume that you buy a Volt and drive exactly 230 miles per week. That’s a gallon of gas a week. Suppose in 2 or 3 years gas is at $5 per gallon. It’s going to cost you $5 per week or $260 per year. Not bad.

Instead you buy a Toyota Prius for about $23,000. It gets 50 miles per gallon. You drive the same 230 miles per week it’s going to cost you $23 a week — essentially five times the cost of gas for the Volt. So you will be spending $1,200 per year on gas, an increase of $940 over the Volt. That means that it will take 21 years to get back your added investment of $20,000 in the Volt. Of course this calculation changes if you drive more or less than these numbers or if the price of gas is different than $5 per gallon. You also can get a tax credit of $2,500 for the Volt but no credit for the Prius.

Taking it one step further, you buy an economy car for $15,000 that gets 25 miles per gallon (is that an economy care anymore) and drive that same 230 miles per week. Total gas cost for the year is $2,400 or an increase of $2,140 over the Volt. This time it will take you 13 years to get your money back BUT you will have to swap out the batteries in the Volt at some time in that period.

It takes about 7 years to get your money back if you compare the economy car with the Prius.

These electric vehicles certainly save gasoline but are not necessarily economical. However, being economical is not necessarily the reason you but a Volt.

Saturday, August 22, 2009

Gas Prices Revisited

Back in January, I predicted that gas prices would be at $3 per gallon now. I missed by about 40 cents. Some areas of the country did see gas prices at this level and eastern Massachusetts saw some stations selling premium gas above that price. Generally I should stick to accounting and not predicting the future.

However, the idea of trading up to a car that gets better mileage is still a good idea. Gas prices have bounced around lately but they will be headed up (there I go predicting the future again). The “Cash for Clunkers” program (see my previous blog) is in full swing and may be over by the time you read this. Getting more bang for your buck is always a good idea.

Tuesday, August 18, 2009

Cash For clunkers

Vacation is over. Time to get back to the computer!

The “Cash for Clunkers” program is in full swing and the auto dealerships are very happy. People are buying cars again thanks to a gift from Uncle Sam. With all the money they are throwing around in Washington, it is good that a little of it is actually going to everyday people.

I would like to add just a few personal comments on the program.

Is the money really going to everyday people? Hopefully, yes. The Toyota Prius sold for $24,000 when it qualified for a tax credit of $3000 and if you wanted one, you had to go on a waiting list. Once the credit expired the Prius sold for $21,000 and there were plenty of them on the car dealership lots. Is the same thing happening now? Are the dealers jacking up the price they accept in the bargaining dance? Probably, some are, after all they need to make a buck too. But my feeling is that the majority of this money is going into the consumers’ pockets.

Congress funded the program with $1,000,000,000 (oops, now $3,000,000,000). Wow, that’s a lot of money. It was supposed to last until November. Wow, that’s a long time. It was supposed to fund the payment on 250,000 cars. Wow, that’s a lot of cars. Wait a minute. Is it really a lot of cars? Historically, annual car sales in the US run between 13 and 15 million vehicles. Currently, it is running at a rate of about 11 million a year. That’s a million cars a month or 400,000 a week. They funded about 4 days worth of sales. Of course, not all vehicles qualify. I think it is time for a few arithmetic lessons in Washington.

The dealers are supposed to scrap the vehicles, the idea being to improve the overall mileage for cars on the road. This is accomplished by replacing the oil with “liquid glass” and running the car, which essentially destroys the engine. This could lead to fraud. Some dealers might certify that the car was scrapped when it was not. Is there a paper trail that needs to be followed to make sure this happens? Luckily this is not the consumers problem.

What happens when the program finally runs out of money? My guess is that car sales will drop a bit but people will have been shaken out of their economic sleep and consider purchasing a new car. There also is pent-up demand for cars as people make their old vehicles work a little longer. Eventually they will want to replace the old clunker.

All in all, I’m happy they have put this program into place. I believe the money is going to the consumer, car sales are revved up a bit, and the vast majority of dealers will be honest.

Here is the official government website to get real information on the program:

Friday, July 3, 2009

Non-Deductible IRAs

A friend recently asked me a question about non-deductible IRAs. She had been putting money into non-deductible IRAs for years and realized she had not reported the deposits to the IRS. Her question “What should I do?”

First, what are non-deductible IRAs?

If you have a job, you can put aside up to $5,000 into an IRA ($6,000 if you are over 50) or the amount of your compensation, whichever is lower. In other words, if you work part time and earn $2,000 then you can put up to $2000 into your IRA. (I’m sure Bill Gates earns more than $5,000 a year so he can put aside ONLY $5,000. Does anyone know if he is over 50?)

If you decide to put money into an IRA, you have to figure out if you can deduct it on your federal income tax return. The first question you need to answer is: “Do you participate in a retirement plan of some sort?” If so, there are income limits that determine whether or not you can deduct the IRA contribution. A married couple filing a joint return can deduct an IRA if their total income is less than $89,000. It cannot be deducted if their income exceeds $109,000. There is a phase-out of how much you can deduct between those two numbers. If your total income is $99,000, you can deduct up to $2,500.

The income-limits for single individuals are $55,000 and $65,000.

You have a non-deductible IRA if you contribute to an IRA, you are in a pension plan, and your total income exceeds $109,000 (if married) or $65,000 (if single).

So you put the money aside, but did not get any tax benefit.

Why would you do this? The investment earnings on the IRA are not taxed in the year they are earned. So you get to accumulate the earnings until you decide to withdraw money from your IRA, possibly when you are not working and in a lower tax bracket.

Eventually, you will withdraw money from the non-deductible IRA. You should pay tax only on the earnings, but not on the money you contributed because you did not get a tax benefit when you made the contribution.

There is a horrendous calculation you need to make when you withdraw money from the IRA. You must calculate the portion of the withdrawal that came from investment earnings and pay tax on it. You do not want to pay tax on the contributions you made. The various tax packages do a good job of making this calculation. Don’t try doing it on the back of an envelope.

This is where my friend’s question comes in. You are supposed to tell the IRS when you put money into a non-deductible IRA. You do this every year on Form 8606. Then each year you add the current year’s contribution to the total of the prior contributions and have all the information at your finger tips. She did not do this.

What she needs to do is go back and total up all the non-deductible contributions that she made. She should not include any income earned in the calculation and she should not include any contributions to ROTH IRAs. It is possible that she can get the information from her mutual fund company. Form 8606 should be completed when she does her 2009 tax return. Line 1 is for her 2009 non-deductible contributions. She should put the total of the non- deductible IRA contributions from all the prior years on Line 2 of that form. A total goes on line 3. Then, going forward, each year Form 8606 should be filed with her tax return.

The IRS will probably not question the change but be prepared to provide the calculation should they become interested. There is a potential annual $50 penalty for not filing Form 8606.

Monday, June 29, 2009

Say What?

I’m a numbers guy. They talk to me. Sometimes words just fail me. Luckily I have a good editor for this blog. But sometimes words speak to me. I administer a group on Yahoo and got the following message:

“Sir am interested in joining ur group found in search seems intrestingfor me so plz accept my membership thanking u.”

Wow. In this case words screamed at me. I know that texting is popular and requires a lot of abbreviations. But this is not texting. This is an email requesting participation in a business networking group. My immediate impression was that this was an ignorant lazy person who was not willing to take the time to form a literate sentence.

Here is my suggestion. Think before you hit the send button.

Now let’s hope my editor reviews this carefully. It would be bad form to have a grammar or spelling mistake.

(Editor’s note: I found two spelling errors.)

Sunday, June 21, 2009

How To Improve Your Business

Employees can provide a plethora of ideas to improve their company. Sometimes, bosses are too self-important to realize this and they squelch any sort of effort on the part of the employee’s to make constructive suggestions. The boss then complains of having unmotivated, uncooperative employees.

Every year, after tax season, we take our team from Arrison & Olden out to a restaurant for a morning of conversation. Because it minimizes any extraneous interruptions, we do it offsite where we are in a better environment to be able to relax and give better feedback.

We discuss three basic topics; what went right, what went wrong, what can we do better. The team has the right to send the two partners (Andy and Thom) out of the room if they wish. This has never happened. So we spend the morning drinking coffee, eating pastry and breaking down the business. It is one of the most valuable times we spend together all year.

What are the benefits? First, we get great ideas for making next year better. Sometimes it means small changes, but changes that can have a big impact. We have had suggestions like getting electric staplers, or getting our tax return extension process ready earlier. Most importantly, team members get to feel that they are listened to and valued (which they are all year round). An added advantage is the chance to socialize, which we don’t get to do during the tax season. It has proved to be, year after year, a very positive experience.

We hire an outside executive coaching firm to run the meeting and keep it focused. For several years we have used Jan Stewart from Emerge in Littleton, Mass. She has done a great job of guiding the meeting, keeping good notes and providing valuable feedback. If you are thinking of doing something like this, I highly recommend Jan and her team to help you. For more information, Emerge’s website is:

How To Improve Your Business

Employees can provide a plethora of ideas to improve their company. Sometimes, bosses are too self-important to realize this and they squelch any sort of effort on the part of the employee’s to make constructive suggestions. The boss then complains of having unmotivated, uncooperative employees.

Every year, after tax season, we take our team from Arrison & Olden out to a restaurant for a morning of conversation. Because it minimizes any extraneous interruptions, we do it offsite where we are in a better environment to be able to relax and give better feedback.

We discuss three basic topics; what went right, what went wrong, what can we do better. The team has the right to send the two partners (Andy and Thom) out of the room if they wish. This has never happened. So we spend the morning drinking coffee, eating pastry and breaking down the business. It is one of the most valuable times we spend together all year.

What are the benefits? First, we get great ideas for making next year better. Sometimes it means small changes, but changes that can have a big impact. We have had suggestions like getting electric staplers, or getting our tax return extension process ready earlier. Most importantly, team members get to feel that they are listened to and valued (which they are all year round). An added advantage is the chance to socialize, which we don’t get to do during the tax season. It has proved to be, year after year, a very positive experience.

We hire an outside executive coaching firm to run the meeting and keep it focused. For several years we have used Jan Stewart from Emerge in Littleton, Mass. She has done a great job of guiding the meeting, keeping good notes and providing valuable feedback. If you are thinking of doing something like this, I highly recommend Jan and her team to help you. For more information, Emerge’s website is:

Worker's Compensation

Recently, one of our clients got a nasty surprise from the Commonwealth of Massachusetts. A representative from the Worker’s Compensation Board walked into our client’s one-person company and demanded to see his Worker’s Compensation policy. He did not have one. He was shut down until he paid a fine and took care of the Workers Compensation situation.

Usually, this would not be unusual. Companies are supposed to have Worker’s Compensation Insurance and the punishment for not having it is harsh. There is an important exception. The owner of a business can elect out of the insurance.

Our client was the only employee of his incorporated business and he was aware that he did not need to have Workers Comp for himself. He didn’t realize that, legally, he had to make a positive election to not have the insurance. This is where he got in trouble.

My advice is to call your insurance agent to make sure you avoid this situation, and to verify that you have done everything right.

Sunday, June 14, 2009

Electric Cars

Electric Cars

This is what the IRS says about Plug-In Electric Vehicles

“Plug-in Electric Drive Vehicle Credit (Section 1141): The new law modifies the credit for qualified plug-in electric drive vehicles purchased after Dec. 31, 2009. To qualify, vehicles must be newly purchased, have four or more wheels, have a gross vehicle weight rating of less than 14,000 pounds, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. The full amount of the credit will be reduced with respect to a manufacturer's vehicles after the manufacturer has sold at least 200,000 vehicles.”

“Plug-In Electric Vehicle Credit (Section 1142): The new law also creates a special tax credit for two types of plug-in vehicles — certain low-speed electric vehicles and two- or three-wheeled vehicles. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after Feb. 17, 2009, and before Jan. 1, 2012. To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a two- or three-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit is allowable.”

Plug in vehicles have been around for over 15 years and new ones are coming to market soon. The Chevy Volt is one and both Mitsubishi and Chrysler have electric vehicles on the drawing board. You need to make sure any electric vehicle you purchase qualifies for the credit. You also need to determine if the driving range of the car suits your needs. They generally travel less than 50 miles on a single charge although one claims to go 150 to 200 miles.

The new law sets a limit that once the manufacturer sells 200,000 vehicles, they will quickly lose the tax credit. Something a few people noticed is that when the Toyota Prius came out it cost $24,000 and you got a $3,000 tax credit. There was a waiting list and people jockeyed to move up on the list. Toyota quickly sold a lot of hybrid cars and eventually the cars no longer qualified for the credit. Magically the cost of the car dropped to $21,000 and they were available to drive off the lot. Last year they were even offering special deals on the Prius. So expect the same thing to happen with the new plug in cars.

By the way, there is nothing wrong with this. The goal of the credit was to give the financial viability of the hybrids a push. That goal was met and now they are a fixture on the highway.

The IRS has not provided guidance on how the plug in credits will work. Expect the information to be out in the fall.

Here is a link to an IRS article that talks about all the new credits.,,id=206871,00.html

Friday, June 12, 2009

Wind Energy Credits

Energy Credits - Continued

Wind Energy Credits

Energy from the wind has been around for centuries. Ships used to sail the ocean using the wind. It has been used to pump water in Holland where it helped keep the cities dry behind the dikes. Recently the wind has been captured to generate electricity.

You might be familiar with the Cape Wind project in Nantucket Sound and the battle that has been raging for years over whether or not it should be built. From a purely economic and energy perspective, it will help the Massachusetts economy and move us toward energy independence.

A few years ago I was traveling in the west and was awed by a wind farm that just appeared in the desert. There had to be a hundred or more windmills that did not desecrate the desert as far as I am concerned.

A tax credit is now available for small wind turbines that are used for a residence. Thus, you can install a wind turbine and get a credit for 30% of the cost of the unit. It can provide electricity for your house and could generate electricity that you might be able to sell to the electric company. The most common problem with wind turbines is having a site that gets enough consistent wind to justify the unit. A 30% credit is useless if you are limited in how much you can use the turbine.

Like the other energy credits, you use Form 5695 to claim this one. This is not a refundable credit so you need to have a substantial tax liability to take advantage of the credit.

Here are some links for you:

This link could help you understand wind energy for your home. Remember this is an industry group so all the downsides to wind energy may not be presented.

Here is a site that could help you understand purchasing a wind system as well as other energy alternatives.

Here is a link to a government website where you can search for grants.

Thursday, May 28, 2009

Substantial Energy Credits — Continued

Geothermal credits

Quote from the IRS…

“Residential energy efficient property credit. Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs…”

Geothermal energy systems are based on the earth being a constant temperature once you get about 10 feet below the surface of the ground. If you can capture that heat, and run it through a heat exchanger, you can heat your home for essentially the cost of running a fan. You also can cool your home in summer with the same system and get hot water as a bonus. Couple it with a solar energy system to generate the electricity and you can substantially reduce your carbon footprint. It works best with a forced hot air heating system.

All in all this is not a bad deal.

Last year I talked with a company that installs residential geothermal energy systems. Part of my conversation with them was a question about tax credits and the response was “there aren’t any”. That changed in February when the stimulus package was signed. Now you can get 30% of the installation cost of a geothermal energy system back in the form of a federal tax credit. And there is no limit how much your credit can be. Just remember you still pay for 70% of the cost of the system.

Like the other energy credits, you use Form 5695 to claim this one. This is not a refundable credit so you need to have a substantial tax liability to take advantage of the credit.

Here are some links that explain more:

This one is from the Union of concerned Scientists:

This is from Wikipedia:

Here is a link to a government website where you can search for grants.

There are plenty of additional links on Google or any other search engine.

Sunday, May 17, 2009

New Solar Energy Credits

The new stimulus law has expanded the credit available for alternative energy improvements. This incorporates solar, wind, and geothermal investments. The credit is 30% of your cost for the systems. The tax credit can cover any home used as a residence by the taxpayer, but it does not have to be your principal residence. So your vacation home can qualify.

This blog will cover the solar credit which includes the generation of electricity, heating water, and some resources for information on solar power.

As I mentioned, the credit is 30% of the cost of the solar system. The system must be installed by December 31, 2016, so you have plenty of time to put the system in place. You can use it for generating electricity or hot water.

In addition many states offer a credit for energy improvements including solar power. Here is a link to a database that details these credits:

Try Wikipedia for some general information on solar power. Here is that link:

The American Solar Energy Society is an industry association which provides information on solar energy. It has 12,000 members from solar professionals to grass root enthusiasts. They are located at

You can Google “Solar Power” and get about 30,000,000 hits. That should keep you busy for the weekend.

Thursday, May 7, 2009

Residential Energy Credits

Now you see them, now you don’t.  Wait!! Now you see them again.

Those elusive homeowner energy credits are back.  They were available until the end of 2007 and then disappeared in 2008 only to return with the various stimulus packages in 2009.

The energy credit is fairly simple:  You get a credit on your federal income taxes of 30% of the cost of qualified energy products you install in your home in 2009 and 2010.  Qualified products include new windows and insulation, as well as energy efficient heating and air conditioning systems.  The items installed must meet new higher standards of energy efficiency.  The credit applies to the cost of the product but not to the cost of labor for of the installation. 

The maximum total credit you can claim is $1500 (or 30% of $5000). The credit can be used only once, so you cannot claim $1500 in 2009 and then again in 2010. You file form 5695 with your 2009 or 2010 tax return.  This is not a refundable credit, which means that if you owe $1000 in income taxes and qualify for a $1500 credit, you will not get a check for $500 from the IRS.  It also cannot be applied to other taxes such as the self-employment tax.

The IRS has not provided a whole lot of guidance on this credit yet.   Based on various sources, the credit applies only to home improvements and not the construction of a new home.  Other details may change as the year progresses.

A final note:  The manufacturer must give you certification that the property satisfies the standards set in the new law.  Be sure to keep the certifications as well as the receipts for the cost of your products.


Monday, May 4, 2009

Energy TAx Credits

This blog is the start of a series on the energy tax credits enacted in February 2009.  I will be discussing the residential energy credits for insulation and new windows, a new credit for geothermal heating and cooling, solar credits, and even home sized wind turbines.  I will also discuss electric car credits.

Ah the wonders of the internet!!  This was posted from San Francisco

Monday, April 27, 2009

What Incredable Re=-Appearing Blog

Hi. I have been floored by a flu that might be lime disease With a little luck I will be functional again in a couple of days. This has just been a roller coaster of a sickness and is now headed toward 2 weeks. Seeing the doctor tomorrow. More later.

Tuesday, April 21, 2009

The Incredible Re-Appearing Blog

You may have noticed that the blog has been a bit erratic over the last few weeks. I was concentrating on my clients rather than you and then got hit by my annual post tax season cold the made my head even fuzzier than normal. Who knows what the blog might have said if I wrote it this last week. But I’m baaaaaaaaaack!

How about a few comments on the tax season.

It turned out to be a delayed rush this year. Many more of my clients showed up at the end of our deadline (March 15th) this year than last year. In case you are wondering, we need our clients tax information by March 15th to get the return completed by April 15th. What seemed to be happening was that no one wanted to open up their investment or retirement statements (I haven’t opened my since September) and then extended the practice to their " Important Tax Documents". Suddenly, with our deadline looming, people started opening envelopes and getting their information to us.

This was coupled with a new software program that had a learning curve that went straight up. It wasn’t until about March 15th that we felt comfortable with the program and this created a double whammy as March changed into April. Hectic would be a mild way to phrase it. Ah but I’m a loyal Red Sox fan. Wait until next year.

My conversations with my clients changed slightly during the course of the 3-½ months. In January and February it was hard to avoid doom and gloom. No one was spending any money, planning vacations or buying cars. Thus we have to bail out GM. March saw a slight positive movement. Some of my small business clients saw an increase in sales, admittedly from dismal numbers. My unemployed clients started to say that they could at least get their resumes out to people and maybe even connect up with a real person rather than the stone wall they were running into before. Are we out of the wood, no but it seems like the uphill climb is starting to get a bit easier.

The only good news that I can glean is that most of my clients are getting refunds rather than making payments this year. Of course this is because they lost money in the stock market in 2008 when then made big gains in 2007.

So I’m back at the keyboard and looking forward to an easier pace of work and blogging until January 1, 2010.

Wednesday, April 8, 2009

Where's My Refund?

You filed your return, set up the direct deposit and are watching your checking account for the arrival of your tax refund, but it has not arrived. What should you do? With the help of the Internet, it is easier than ever to find out what happened to your refund.
Here is a link to take you to the IRS Web site to find out what happened to your refund:

You will need your social security number, filing status, and the amount of your refund. The IRS will quickly give you a status. If your refund has been waylaid somewhere, they will give you a phone number to call to find out what is happening.

Massachusetts has a similar program that requires you to register and set up a user name and password. The link for this service is:

Tuesday, March 31, 2009

New Car Tax Credit? (NOT)

(Thank you to Ruth for the question.)

There is a lot of confusion around the ‘New Car Tax Credit". The truth is, its not really a credit but an expanded deduction for the sales and excise taxes paid on a vehicle.
Here are the basics:

The vehicle must be a new.

It can be a car, light truck, motor home or motorcycle. There is a weight limit on the vehicle.

The vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010

You can deduct the sales and excise taxes paid on a new car for up to the first $49,500 of cost for the car.

You do not have to prepare a Schedule A Itemized Deductions to take advantage of this program. It is deductible on the first page of your 2009 tax return.

You lose the deduction if your income exceeds $135,000 if you are single and $260,000 if you file a joint tax return.

You can deduct it on your 2009 return and cannot take it on your 2008 tax return.

What is it worth? Not much. If you buy a $20,000 car and pay a 5% sales tax on it, you get to deduct $1000 from your income before you figure your taxes. For most people that translates into $250 cash in your pocket. Its better in your pocket than Uncle Sam’s but it does not seem like much of an incentive to go out and buy a new car.

There is not a lot of guidance from the IRS on this topic so things might change a little as the year passes. Here is a link to the IRS website where you will find essentially the same information as above.,,id=205863,00.html?portlet=7

Saturday, March 28, 2009

Do You Have any questions?

One of the good parts about a blog is the interaction with the readers. I enjoy reading the comments and then responding if appropriate. The comments are moderated but that is only to weed out the obscene or the obvious advertisements and spam. So far there has been no edited or deleted comments.

Now its your turn. Please send me questions or comments. If there is some part of the tax law that you want some information on, please let me know. I have a good source of subjects from my practice but could always use a fresh perspective. You can comment on this blog or you can send questions to

Friday, March 20, 2009

Ode To A New Economy

My apologies to Bare Naked Ladies. Connect to their web site here

Once I had a million dollars. (Once I had a million dollars)
But I just lost my house (But I just lost my house)
Once I had a million dollars. (Once I had a million dollars)
Sold the furniture in my house.(Wanna buy a nice chesterfield or ottoman?)
Once I had a million dollars. (Once I had a million dollars)
Bought you a kiddie-car (a nice pedal automobile)
Once I had a million dollars

Once I had a million dollars. Now I live in a tree fort in your yard.
Once I had a million dollars. You could join me, it wouldn't be that hard.
Once I a million dollars. (We would put a little tiny fridge in there somewhere.)We could just go up and hang out. (Open the fridge there would becheap food laid out for us, little half subs and moldy bread and things.)

Once I had a million dollars (Once I had a million dollars)
I sold your fur coat (But not for much cause its not real)
Once I had a million dollars. (Once I had a million dollars)
We ate our exotic pets (both the llama and the emu)
Once I had a million dollars. (Once I had a million dollars)I sold everything that remains (ooh all them crazy elephant tusks and such)
Once I had a million dollars.

Once I had a million dollars (we couldn’t drive to the store.)
Once I had a million dollars (we'd take a bicycle to save some more.)
Once I had a million dollars (we’d have to eat Kraft dinner.)We’d get sick of eating Kraft dinner. Well of course we would and we'd still eat more. ANDSteal all the fanciest ketchup for it...Dijon ketchup! mmmm…

Once I had a million dollars. (Once I had a million dollars)
I'd buy you a Goodwill dress. (but not a real Goodwill dress that's cruel)
Once I had a million dollars. (Once I had a million dollars)
We’d sell all our art. (Poker playing dogs on velvet)
Once I had a million dollars. (Once I had a million dollars)
We ate our monkey. (He joined the llama and the emu)
Once I had a million dollars

Once I had a million dollars (Once I had a million dollars)
Once I had a million dollars (Once I had a million dollars)
Once I had a million dollars…
I was rich.

Tuesday, March 17, 2009

A Worthless Letter

Have you received a letter from Compliance Services that started out "Annual Minutes Requirement Statement"? It then quoted various laws and told you to complete the form and send it to them with a check for $125. It is an official looking form but does indicate that it is not a government form.

What is the purpose of this form? That is a good question. Based on the instructions, the company will prepare some document and send it back to you for filing with your other corporate records. They threaten you with dire results if you do not comply. Their main goal is to scare you into sending them $125. Don’t do it! Dealing with this company does not provide you with any additional protection.

My suggestion: THROW THE LETTER AWAY. The company is not providing any benefits for the fee.

If you are incorporated you must file an annual report with the Secretary of the State of Massachusetts. You can do this online or on paper. The cost is $125. (Guess how the company calculated their fee!) Here is a link to the Secretary of State’s web site where you can get much better information on your filing requirements. There also is a posting about the Compliance Services letter.

Please pass this blog on to your incorporated friends.

Wednesday, March 11, 2009

Is Getting Married A Good Tax Move

I went to a friend’s wedding last week and was thinking about the tax consequences of marriage. Only a CPA would think about taxes on a sunny Sunday while going to a wedding. But getting married changes your tax situation, sometimes drastically.

Many years ago two friends of mine decided to get married. They decided on a New Year’s Eve wedding and planned on getting married at 11:45 PM. They were both clients so I pulled out their tax returns and did a little math. I suggested that they postpone their wedding for a half-hour and save $4000 in taxes, enough to pay for their wedding. They decided to get married the next year, at 12:01.

Why did this happen? They both had about the same substantial income. They had both gotten a package to leave their jobs and would be earning a lot less the next year. They would have jumped into a higher tax bracket that year filing as a married couple rather than as two singles.

This is called the marriage penalty. Congress keeps vacillating between a marriage penalty and a singles penalty. Currently there is a marriage penalty and every year congress talks about changing it. Who knows what they will do next?

The rule of thumb is that if two people’s incomes are about equal, they will probably pay a higher tax as a married couple. If their incomes are significantly different, they pay more in taxes as singles. Other things, like kids, medical expenses and home ownership can effect this calculation.

I’m wondering if a few people will plan their wedding based on this blog.

Thursday, March 5, 2009

Why Did I Get a Retirement Tax Form if I’m Not Retired?

Why did that get that 1099-R form from my 401(k)? The 1099-R form reports distributions made from your 401(k), IRA, or other pension plan. This form is issued when money is withdrawn from your tax-deferred retirement account. Luckily, losing money in the stock market does not generate this form.

Hopefully, if you have withdrawn money from your retirement account, it is because you have retired. This is a taxable transaction. If you’ve lost your job and needed the money to pay day-to-day bills, you have to report the distribution as income and pay taxes on it. You also may pay a 10% penalty for withdrawing the money.

Switching trustees or investments are also reasons for receiving a 1099-R. Transferring money from one IRA to another or from your 401(k) to an IRA is not a taxable event. You do not have to pay tax when you transfer money in this fashion. This is when "Why did I get that retirement form?" becomes a very good question. IF I don’t have to pay tax, why is the IRS being told I took the money?

The reason they are being told is simple: the law requires that all distributions be reported to the IRS. If you take a good look at the 1099-R you should see that the IRS is also being told that it is not a taxable event. Box 7, Distribution Codes is the spot to look for on the form. A "G" in that box tells the IRS that you transferred money directly from your 401(k) to your IRA (or wherever you transferred money from and to). It also tells the IRS that you do not have to pay tax on the distribution

If you get one of these forms with a G in box 7, you report the gross distribution in box 15a or 16a on your 1040 form. You do not put anything is box 15b or 16b. By doing this you are telling the IRS that you know you got the form and that it is not taxable. This should eliminate any nasty letters from the IRS I mentioned in a previous posting

Wednesday, February 25, 2009

New Homeowners Tax Credit – Revisited

This is an update to my blog of January 13th on the 2008 New Homeowners Tax Credit.

There have been changes made in the Economic Stimulus Plan concerning the new homeowner credit. Here are the highlights of the new law:

The credit is now available if you close on your home between January 1 and November 30, 2009.

You cannot have owned a home for three years prior to closing on your new home.

The credit amount is 10% of the purchase price of the home to a maximum of $8000. So if you buy a house for $50,000, you only get a credit of $5,000. Previously, the maximum was $7,500.

You do not have to pay the credit back if you buy a house in 2009. If you qualified for the $7,500 credit by purchasing a home in 2008, you still have to pay the credit back over 15 years.
You must pay the credit back if you sell the home within 3 years.

The tax credit is refundable. This means that if your total taxes are $3000, the IRS will send you a check for $5000 ($8,000 credit less the $3,000 you owe in taxes).

The credit may not exceed a total of $8000. If two individuals buy a house together, the $8,000 is divided between them rather than each getting a credit.

You cannot buy the house from a related party, like your parents or grandparents.

You can claim the credit on your 2008 tax return even if you bought the house in 2009.

You start losing the credit when your income exceeds $75,000 if you are single or $150,000 if you are married.

How do you claim the credit? File Form 5405 with your 2008 tax return. You can still claim the credit If you are buying a home after your filed your 2008 tax return. Just file an amended return to claim the credit.

Here is where some planning comes in handy. If you owe the IRS, file an extension. After you buy the home, file the return with the credit, and avoid having to write the IRS a check. Suppose you owe the IRS $2,000 and close on your house in May of 2009. File an extension (Form 4868) for your tax return. Then, after you have closed on the house, file the return with the $8,000 credit. You get a check for $6,000, the $8,000 credit less the $2,000 you owed in taxes. This is a great deal and you should take advantage of it. Call it your own personal bailout.

The law was recently signed. The details are still being worked on and the IRS has not issued any guidance. So keep an eye on the news and this blog as things develop.

Comments anyone?

Sunday, February 22, 2009

Throwing Away the Old Financial Records

"How long do I need to keep my financial records?" is a common question. Here are some pointers:

Financial records (such as bills) that do not effect your tax return can be destroyed as they are paid. Unless you are using your phone, electric, and gas bills as tax deductions, there is no compelling reason to keep them. The major exception to this would be records of home improvements, like the new kitchen or garage.

You should keep your tax records for a minimum of 4 years and a maximum of 8 years. This would be copies of your W-2s and 1099s, real estate tax bills, business expenses etc. Anything that effects your tax return should be maintained. Why the difference in holding period? If the IRS can prove that you have substantially understated your income or taxes, they can go back 7 years from the date of the filing of your return. So a return for 2001 can be audited up to sometime in 2009. The vast majority of taxpayers have a W-2, some investment income and a house. The odds of these taxpayers understating their income are remote. So, to be on the safe side, keep your records for 8 years.

You should keep your investment records permanently. However, this does not mean that you need to keep every scrap of paper that comes from your broker, mutual fund or bank. Most mutual funds send out a statement each quarter and then an annual one summarizing all the activity for the year. Once the annual statement arrives, get rid of the quarterly ones. The same goes for brokerage accounts. Nowadays, the mutual fund companies and brokerage firms maintain a record of your investment purchases. BUT these can get lost if you switch brokerage firms and some mutual fund companies don’t have the records if you opened the account a long time ago.

Some other notes:

With all the identity theft that is going on today, it is best to shred rather than throw out any records you decide to get rid of. Definitely do not put financial records that are not shredded in the recycle bin.

Keep electronic copies of your records. This is easy if you have brokerage accounts or mutual funds. You can download PDFs of your statements and store them on your computer. You can do the same thing with your charge card statements. You can also get PDFs of your tax returns, and can scan and store the basic records. Think of all the trees you can save by not getting paper copies of everything.

To guard against a computer crash, be sure to backup your data if you keep electronic copies of your records

Tuesday, February 17, 2009

Can't Pay the IRS?

What do you do if you can’t pay the IRS the taxes you might owe in April? You have a few options:

You could borrow the money from a bank or your parents. You could put it on a charge card. Or you could borrow the money from the IRS.

Taxpayers have always had the option of paying their taxes over time by entering into an installment agreement with the IRS, a process that has recently been made easier. Historically, you had to prove you couldn’t pay the taxes in full before they would agree to a payment plan. Then the IRS realized they could save time and effort and raise more money by making the installment agreement process almost automatic.

To make such an agreement with the IRS you just need to complete Form 9465. You will have to divulge personal information such as your phone number and bank account information. You then submit a down payment and determine how much you will pay each month so you can pay off what you owe within one year. You can even pick a day when the payment is due and have the IRS automatically deduct it from your checking account each month.

Some good advice: Don’t skip a payment. The IRS gets really testy if you do. This could void your installment agreement and cause the IRS to put a lien on your bank account and other property. And expect a problem if you ask for an installment agreement every year.

Here is the catch: You are going to be charged interest and penalties on the balance due until it is paid in full. The total interest and penalties can rival charge card interest rates, so make the payments as high as you can afford, and pay extra if you can.

If you cannot pay your federal taxes, you may not be able to pay your state taxes either. The states also have installment plans in place to collect the taxes. However, if all the states are like Massachusetts, the process is difficult to go through. Usually, your state taxes are much less than your federal taxes, so my suggestion is to pay the state taxes in full if you can, and get the installment agreement with the IRS for your federal taxes.

Friday, February 13, 2009

Fast Refund?

Are you familiar with the ads on the radio and TV about getting your federal tax refund fast -- sometimes in as little at three days? Is this a good deal? Let’s examine what these "refunds" actually are:

Suppose you have Company X prepare your return. They complete your tax return and then offer to get your refund to you in three days. Your first thought might be "Wow, that’s a down payment on a car!" and agree to the deal. You return three days later and your refund check is substantially less than you expected. What happened?

These fast refunds are not coming from the IRS. The company that prepared your return is actually lending you this money. They then get your refund when it comes from the IRS. The company is charging you a fee for making the loan, a separate fee for preparing your return, and could even be charging you interest.

The best idea is to say no to the offer. Have your refund direct deposited into your checking account by the IRS and the state. You will have your money in two to three weeks. You can then make that car down payment and probably have a little money left over.

Another good idea is to go to my blog at and look in the January archives. Check out the posting called File your return Free with the IRS. If you have a fairly simple return you can file it, get direct deposit of your refund, and pay no fees for the preparation of your return.

Tuesday, February 10, 2009

Writing the IRS

About 3% of taxpayers get a notice from the IRS each year. Luckily, it’s not the same 3% every year. What should you do when you receive a letter? First of all, don’t ignore it. That would be a big mistake. The IRS will not forget and will harass you forever.
Most of the time the IRS is asking you about a mistake they think you made on your tax return. Take a deep breath and read the letter. Then read it again because you freaked out just opening the envelope. Compare what they say to what is on your tax return (you did keep a copy of your tax return didn’t you).

If they are right, sign the notice and send them a check. If they are wrong, and they are 20% of the time, you need to explain why they are wrong.

If they are wrong and you write them back, here is what you DON’T say:

* Don’t tell then how stupid they are.
* Don’t explain all the circumstances around the transaction or error. (They really don’t care that Aunt Sarah is somehow involved.)
* Don’t apologize.
* Don’t address the envelope to the Infernal Revenue Service.

And here are some DO’s.

* Do type the letter. You want them to be able to read your response.
* Do keep the letter short, one page should be enough.
* Do stick to the facts.
* Do be polite.
* Do sign the letter.
* Do respond quickly
* Do thank them for their help, no matter how much it galls you.

Tuesday, February 3, 2009

Should you EFile your tax return?

Sending your tax return to the IRS via the Internet as an electronic file is called EFiling. You need special software to do this. It is available if you use one of the popular personal tax preparation products like Tax Cut or Turbo Tax. It is also available if you file directly through the IRS Web site. For more information see my blog called File Your Return for Free with the IRS.

Here are a number of good reasons to EFile your return:

1. You will get your refund faster
2, Your return will not get lost in the mail
3. It is safer than mailing your return
4. The IRS will have an accurate return. They can make a significant number of errors that result in letters going out to the taxpayer.
5. Your refund check will not get lost in the mail if you opt to direct deposit your refund

Should you opt to direct deposit your refund? Absolutely. You do this by providing your bank routing number and checking account number to the IRS when you EFile. The number one reason given for not choosing direct deposit is the fear of providing your checking account information to the IRS. Guess what? You give them the same information when you mail them a check. The IRS has strict guidelines dictating when they can legally take money out of your account. The situation would have to be pretty extreme for them to do this without warning you. Unless you are filing a fraudulent tax return, there are safeguards that should protect you.

Saturday, January 31, 2009

File your return for Free with the IRS

This is a repeat blog from a year ago. The only thing that changed was the dollar limitation.

Do you have a simple federal tax return to file? You can do it on-line free through the IRS. You qualify if you receive a W-2 from your employer, and have some interest and dividend income. You even can own a home and qualify. The major restriction is that all of your income must be below $57,000.

You can file your return through an IRS partner, or you can complete the tax forms found on the IRS Web site,,id=118986,00.html?portlet=4. This is a fast, easy, and free way to file your return. Would you like to have your refund in less than 3 weeks? You can have it deposited directly into your checking account. Have a personal check in front of you when you file your return so you have the numbers they require to take advantage of direct deposit. This system is appropriate only for uncomplicated returns.

This link to the IRS Web site can help you file your return.,,id=118986,00.html?portlet=4

Thursday, January 29, 2009

Pension Distribution

You Do Not Have To take that Pension Distribution

If you have money in a pension or IRA and are age 70-1/2 or over you are required to take distributions every year so that you will withdraw all of your tax deferred money over your expected life. This is called a Required Minimum Distribution (RMD). Congress enacted a special rule for 2009 only that allows you to skip the RMD for 2009. This means that you do not have to take a distribution. This is a one-year provision only.

There is also a special rule for the year you turn 70-1/2. You may take the RMD up to April 1st of the following year. Thus, if you turned 70-1/2 in 2008 you must take the RMD for 2008 by April 1, 2009. The law mentioned above does not apply to the RMD for 2008. You still must take your 2008 distribution by April 1, 2009 but you may skip the 2009 distribution that should be taken by December 31, 2009

Confused? Comment on this blog with a question or try this IRS link to get more information,,id=96989,00.html

Tuesday, January 27, 2009

Buying Equipment for your Business

Do you buy a lot of equipment for your business? Equipment is any business purchase that should last more than one year. Paper, staples, boxes etc are supplies not equipment. Desks and machinery etc are equipment. Computers may be technologically obsolete when you first plug them in but they are considered equipment because they will physically last for several years.

The IRS requires you to deduct the cost of your equipment over 3 to 7 years rather than all at once. This is called depreciating the equipment. This can present a cash flow problem. You spend $35,000 for a nice fancy piece of equipment and then you get a tax deduction over 7 years. You pay $35,000 but only deduct $5,000 that year. It doesn’t seem fair does it?

There is a special provision in the tax code for small business. You can buy up to $125,000 ($250,000 in 2008) in equipment in a year and write it off in full that year. So in the case sited above the full $35,000 is deductible in the year you bought it. Then next year you can buy more equipment and expense it. That seems fair to me.

There are several hurdles your must clear to take this deduction. If you spend more than $800,000 on equipment in one year, you start to lose the right to expense your equipment that year. $800,000? That doesn’t sound like a small business to me. None of my clients have ever spent that much in one year.

You also cannot take this deduction when you buy real estate. You must depreciate business real estate like an office condominium over 39 years.

The various tax packages you can use to prepare your tax return will handle this very well. However, if you are in business, hiring a tax professional could be a great idea.

Saturday, January 24, 2009

Gassing Up

I have a prediction: gasoline will hit $3.00 per gallon by July 4th. Why do I say this? Adjusted for inflation, gas prices are lower now than they were when I was in college…and that was a long time ago. The major oil producing countries are finally lowering production. The federal and state government are proposing raising gas taxes to pay for road repairs and construction. Massachusetts has a proposal to up the gas tax by 29 cents per gallon. Drivers are becoming less interested in conserving gas. In my opinion, this means that gas prices will rise.

Couple that with the current inability of the automobile industry to sell cars. The spike in gas prices killed off the market for monster cars. Then the drop in gas prices lessened interest in small cars. Toyota is even having trouble selling the Prius. This presents a glorious opportunity. Prepare for the increase in gas prices by buying a fuel-efficient car now at what are probably bargain basement prices. Once the price of gas goes up, the price of these small cars will rise too. Think of the savings when the price of gas goes over $4 or $5 per gallon permanently.

What does this have to do with taxes? Nothing. But preparing for it now will improve your own personal finances in the future.

Wednesday, January 21, 2009

The Economic Stimulus Payment

Did you get your stimulus payment in 2008, the check for $600 per person you were supposed to receive? Don’t despair if you haven’t, you can still get it.

There are a couple of reasons you might not have gotten your rebate in 2008. Your income might have been too high to qualify or you might have filed your tax return late. You are out of luck if your income was too high. That is not bad news. It is better to have a high income than to get a few dollars from Uncle Sam. If your return was late you can get the money by using the Rebate Recovery Credit on your 2008 tax return. Just remember to file the return. The earlier you file the sooner you will have the money.

Suppose you got your stimulus check in 2008. You could be eligible for more if any of the following has occurred in the past year:

* Your income went down from 2007 to 2008.
* You added a child as a dependent during 2008. This could be by adoption or birth.
* You became legally independent in 2008. This happens to people who graduate high school or college.
* You got a Social Security number in 2008. This would apply if you received your green card in 2008 and then got your Social Security number.

How do you calculate the additional amount? Here’s the good news: the IRS will calculate it for you if you wish. Just file your return and wait for the check.

Again you must file a return for 2008 to collect your money.

Check out this link to the IRS web site if you want more information:,,id=186065,00.html?portlet=7

Monday, January 19, 2009

Swapping Your House

Are you having trouble selling your house?

The real estate market has slowed to a crawl and its probably going to continue being slow into 2010. That creates a problem for people who have to move now. This could be because of a job change, retirement, health issues, or just wanting to be closer to family and friends. Houses sell now but only at aggressive prices (translation: less than you want to sell it for).
Here’s a possible solution: how about trading houses with someone in a similar situation? People are moving all over the country. Maybe someone in sunny Florida wants to move to Buxton, Maine. They could trade houses with a resident of Maine who wants to move to Florida. That’s right, swap houses permanently.

How would you go about this? Thank heavens for the Internet. Go to Google and search on "Swapping Homes". This should result in 1.5 million links. That should keep you busy for a while. They represent all sorts of opportunities. There has been a thriving vacation swap presence for years. That is when you trade your house for a week for someone else’s house for a week and both of you have inexpensive vacations. The market has expanded to sites that promote house trades where you "sell" your house and get paid for it with another house. These sites have boomed since the dramatic drop in real estate activity.

Once you have located a desirable property, you need to treat the transaction like a purchase and sale. A swap is more complicated than a sale. A direct value for value swap is rare so haggle over the value of both houses. A cash payment usually is necessary to even out the values. Have the house inspected and hire a lawyer to do the legal work to reduce the chance of a problem. You can even hire a real estate agent to help.

Swapping can have some tax complications. When you swap houses you must deal with the tax consequences as if it were a sale. Generally this is not a problem. You only pay tax if the gain exceeds $250,000 if you are single or $500,000 if you are married. In this market, few people will exceed this threshold. You also must have owned the house for more than two years. Most people will not have to pay any tax on the transaction.

Remember this is not a do-it-yourself proposition. Enlist help from real estate, legal, and tax professionals who are familiar with the process.

Check out this link to Smart Money for some pitfalls that you might encounter: