Archive for October, 2009

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Marital Status and Filing Is An End Of Year Thing

Thursday, October 15th, 2009

Kim Isaac Greenblatt reminds you that when it comes to deciding what kind of status you can file at tax time, you should make it your business to plan for taxes before the end of the year.  The reason is that your marital status is usually determined by what your status is as of the last day of the year.  If for example you were married all the way from Jan 2009 thru Dec 30 2009 and were divorced as of Dec 31 2009, you are considered Single.  If you had raised your children by yourself and were actually living separately and there may even be a court order keeping your ex from you, you might be able to qualify for Head of Household.

 

Nobody bothers to tell parents or people these things and generally as sad as it is to talk about, divorces need to be planned for sometimes to avoid a bad tax sting for both sides in the separation.  If both sides are talking to one another, they can help mitigate the damage if they can hold on to staying married till at least Jan 1 or 2 so they can both benefit from the Married Filing Jointly status (MFJ).  If one who is taking care of the kids cannot claim Head of Household (HoH) the only other recourse is Married Filing Separately (MFS) and that sucks.

A lot of benefits and tax breaks that work for couples or Head of Household are denied because of the MFS status.  I know it stinks but you need to write your Congress person to get it changed and I doubt with the bruhaha over family values that the tax status law will be changed in the near future easily.

If you know anybody planning on getting married as well, please tell them that if they wait till Dec 31 and get married prior to New Year’s Eve, they are considered as if they were married the whole year.  They should also plan on having their incomes lumped together and they need to plan it if they can (unless the elope) so they aren’t thrown into a higher tax bracket the first year.

My book, Bad Tax Idea Good Tax Idea available from Amazon goes into detail with that and other great suggestions.  You may want to look for it, order it and let me know how things are working out for you.

Be well people and stay healthy.  Without good health, your life gets taxing and you may have a happiness deficit.

October 15 2009 Mid Day

Kim Isaac Greenblatt

Marital Status and Filing Is An End Of Year Thing

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Kim G on Unemployment Benefits

Thursday, October 15th, 2009

The economy for the average person overall has been lousy.

Congress may be enacting some other unemployment extensions because things are just so lousy in the economy.  Yes, we are in a financial Depression.  Here is some information that your pal, Kim Isaac Greenblatt, is providing for those amongst the many that are on unemployment, in terms of how it works and what happens with it at tax time.

The American Recovery and Reinvestment Act of 2009 (ARRA) excludes the first $2,400 of unemployment benefits from tax in 2009. The act also increases the benefit by $25 per week and extends the time to receive the benefits.

When a taxpayer faces a period of unemployment, he is often eligible to receive benefits under a state or federal unemployment insurance program. Unemployment compensation is reported to the taxpayer in Form 1099-G, box 1, a copy of which you should get at the end of the year if you were on unemployment.   Unemployment compensation is fully taxable and is entered on Form 1040EZ, line 3; on Form 1040A, line 13; or on Form 1040, line 19.  A taxpayer who receives unemployment compensation may request that the payer withhold 10% of the benefits from each check to go toward his federal income tax liability. This may be done by filing Form W-4V with the payer.

If a taxpayer received an overpayment of unemployment compensation during 2008, and repaid all or part of it during 2008, subtract the amount repaid from the amount shown on Form 1099-G and enter the result on the appropriate line on the tax return. In the space to the left of the line, write “Repaid” and the amount repaid.

If the taxpayer repays unemployment benefits received in a previous year, things get a little more complicated. For that situation you will need to do some additional research if you encounter it. Page 88 of IRS Publication 17 contains a discussion of repaying unemployment benefits from a a previous year and you can find that file on the IRS website or order directly a copy from them by snail mail.

Good luck everybody and have a great day.   If you need somebody to help you with your taxes, please send me an email or post.  I am always looking for new clients.

Oct 15 2009

Kim Isaac Greenblatt

Kim G on Unemployment Benefits

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Qualified Home Mortgage Interest

Wednesday, October 14th, 2009

There are several kinds of loans on which taxpayers may pay interest.
Among them are personal loans, business loans, loans to purchase
investments, and home mortgage loans.
Interest paid on personal loans, such as car loans, credit card finance
charges, and installment plans, is not deductible at all. Interest on
business loans is deductible from business income on the appropriate
schedule. You will learn how to deduct business-related interest later
in this course. Qualified home mortgage interest and investment loan
interest are deductible on Schedule A. Both are described below. For
either of these types of interest to be deductible, the taxpayer must be
legally liable for repayment of the loan.
Qualified Home Mortgage Interest
Most interest paid on home mortgages is fully deductible, but there
are exceptions. It is important to distinguish qualified home mortgage
interest from personal interest because the former is usually
deductible while the latter is not deductible.
Home mortgage interest (interest on debt secured by a principal residence
or second residence) must be categorized as interest on acquisition
debt or interest on home equity debt. Acquisition debt is debt
incurred to buy, build, or improve the home. Home equity debt is debt
incurred for any purpose other than buying, building, or improving
the home.
Interest on acquisition debt is fully deductible as long as the debt
does not exceed $1 million ($500,000 MFS) at any time during the tax
year. Interest on home equity debt is fully deductible, as long as the
debt does not exceed $100,000 ($50,000 MFS) at any time during the
tax year, or the difference between the fair market value of the home
and the remaining acquisition debt, whichever is less.
-Example: In 2003, Mary Mahoney purchased her principal residence
for $500,000. In 2007, when she owed $400,000 on the original
mortgage, she borrowed $60,000 secured by the home and used the
proceeds to build a sunroom and install an indoor pool. By 2008, the
home was worth $700,000, so Mary borrowed $130,000 secured by
the home and bought a sailboat. On her 2008 return, Mary may
deduct, as qualified home mortgage interest, the interest she pays on:
 The $400,000 left on the original mortgage (acquisition debt)
 The $60,000 sunroom/pool loan (acquisition debt)
 $100,000 of the sailboat debt (home equity debt)
The remaining $30,000 of the sailboat debt generates personal nondeductible
interest.-
-Example: Jack Michaels purchased his home for $80,000. His debt
remaining on his original mortgage used to acquire the house is
$70,000. The 2008 fair market value of the house is $95,000. Jack
used a home equity line of credit in 2007 to borrow $15,000 to purchase
a new car. All of the interest paid on the original mortgage
(acquisition debt) and all of the interest paid in 2008 on the $15,000
car loan (home equity debt) are deductible as qualified home mortgage
interest.-
Under the mortgage interest rules, all debt incurred before October
14, 1987, and secured by a main or second residence is treated as
acquisition debt. Such debt is not subject to the $1 million cap, but
does reduce the $1 million and $100,000 limits if any additional debt
is incurred on the residence after October 13, 1987.
-Example: Mabel Warren’s principal residence is worth $3.2 million.
In 2008, she had $2 million outstanding debt on the residence, all
incurred prior to October 14, 1987. For 2008, she may deduct in full
the interest she pays on the $2 million debt. If she now borrows any
more money, even for a home improvement, the interest is nondeductible
personal interest because she has already surpassed the $1
million acquisition debt limit and the $100,000 home equity debt
limit.-
Recall that the interest paid on home equity debt is deductible up to
the lesser of the following:
 $100,000
 The difference between the fair market value (FMV) of the home
and the remaining acquisition debt
Consider the following example.
-Example: Joe Matthews purchased his home in 2003 for $155,000,
incurring $147,250 acquisition debt (his original mortgage). In
January 2008, he took out a home equity loan to consolidate his
other debts at a lower interest rate. The lender, the Cash Market,
allowed him to borrow up to 110% of the fair market value of his
home. His remaining mortgage principal at the time was $138,600,
and the fair market value of his home was $165,000. [$165,000 
110% = $181,500 limit] Joe borrowed $42,900, the maximum amount
allowed. [$181,500 limit - $138,600 existing mortgage = $42,900]
In 2008 the interest Joe paid on his home equity loan is not fully
deductible. Why? Because the home equity debt limit has been
exceeded. The difference between the FMV of the home and the
remaining acquisition debt is $26,400 [$165,000 - $138,600 =
$26,400], which is less than $100,000. Joe borrowed $42,900; therefore,
the interest on $16,500 [$42,900 - $26,400 = $16,500] of his
home equity debt is not deductible.-
The computation of such mortgage interest limitations can get
rather involved, requiring multiple worksheets.We do not ask you to
complete the worksheets, but it is important to be aware of the
deduction limitations, because these types of home equity loans are
rather popular. If you encounter a similar situation, you may wish to
consult IRS Publication 936, Home Mortgage Interest Deduction.

 

Oct 14 2009

 

Kim Isaac  Greenblatt

Qualified Home Mortgage Interest

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Reminder on Schedule A No Cosmetic Surgery Unless

Wednesday, October 14th, 2009

I was teaching my students about business and Schedule A deductions for medical expenses.  Inevitably, the topic of cosmetic surgery comes up and I always need to explain it.  Generally, cosmetic surgery is treated as an elective surgery so that nose jobs, boob jobs, tummy tucks and the like are not tax deductible as medical deductions.

A lot people try to claim the cosmetic surgeries that they need it for business, as part of marketing, etc but that isn’t an easy thing to prove and the law is pretty clear as to what is considered required by a doctor.  The IRS deals with a lot of doctor’s letters and by extension, a lot of doctored letters so they know the difference and so does the Franchise Tax Board here in California.  It is important to take what legal deductions you can and not try and stretch the truth which will only cause you heart ache and cause more medical visits (which in turn I suppose will generate more medical deductions).

The exceptions are if the cosmetic surgery is required for a life threatening situation.  For example, if the cosmetic surgery is restore a face after being in a horrible car accident that should be a qualified medical deduction.  To voluntarily get the lap band isn’t a deduction unless you were considered morbidly obese and had a letter from a doctor stating that.

If you are an actress or adult entertainer, there have been tax cases where the IRS has held that in tax court certain things like breast augmentations were a legitimate enhancement that helped business but that would be a business expense and probably should be on a Schedule C with the rest of your business income and deductions.  Letters of supporting information such as showing income before and after any breast implants would enhance your standing and chances of the deduction sticking.

Didn’t realize that income tax information could be so informative and entertaining, did you?

Stay well everybody.  And Happy Birthday to Arianna!  Whoo hoo!

Oct 14 2009

Kim Isaac Greenblatt

Reminder on Schedule A No Surgery Unless

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What Should I Study In College?

Tuesday, October 13th, 2009

When asking oneself what would be a great Depression era vocation to get, one supercedes the important question that you should ask in business, namely, do you love what you are doing?  When you are in college or trade school, you are training to do something that you will try to do for the rest of your life.

Unfortunately, the reality is that in this day and age, you will probably become obsolete or your vocation may require a lot of retraining so you need to think in terms of training or schooling for what can I do to get to where I want to be right now, with now being anywhere from 2 to 8 years of schooling.

You should study somethiing that you think you will like.  I have a client and friend who has a daughter who is thinking of going into law school.  The daughter is incredibly bright and should not have a problem with it but will she be happy with that kind of life?  Lawyers out of school work long days of 10-14 hours and are expected to continue to put in the overtime and get the billings.  Unless one is fortunate to get in a law firm that is one of the top ten in the nation, the starting salaries aren’t going to be in the six figures like they use to be fifteen years ago.

For the same amount of short term effort, is there something health care that the person might be interested in.  Of course the long term goals are that in the case of being an attorney that you get a practice built up and can make money.  The truth is in places in California there are enough attornies so that every 3 people has an attorney as of the posting of this entry.

I am certain that my client’s daughter will decide prior to entering law school if that is what she wants because she is savvy of the cost that it be for her and her parents.  It pays to really want to study or love what you are doing but if you are doing something for the money, make sure at least that you have more than a passing interest in it, especially if it is going to cost you in time, money and aggrevation.

Hope you are all doing well and having a nice October.  Be healthy and happy.

October 13 2009

Kim Isaac Greenblatt

What Should I Study In College?

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Viatical Settlements Again?

Monday, October 12th, 2009

Question from a reader:”I was approached by insurance people saying that I could sell my life in separate insurance policies and that it is tax deductible.  I can’t find anything about this on the IRS website so I am asking you.  Can you help me?”

My answer is if by help, can I keep you from breaking the law, sure.  It sounds like you are about to think about getting Viatical Settlements.  I don’t think they are illegal and from a more practical point I think you are setting yourself up to get murdered.  Here is a reprint from an earlier blog that may shed some light on your question.

Question for Kim from a reader:”Hi Kim, I invested in a Viatical Settlement Investment.  The deal is that you buy a portion of someones life insurance policy and become a beneficiary.  When the person died, I received from the company a portion of the benefits in the form of 1099-Misc income.  Can I expense anything from it?  How do I report it?”

My answer is that this must be the hot new scam in investing.  You aren’t the only person who has been talking to me about these investment insurance deals.  I met one guy who claimed to have resold his life several times a year ago and I haven’t seen him this year.  Maybe he oversold himself and the people who had insurable interest on him murdered him or as they would say in business “cashed out their investment”.   Esssh.  Or should that be a red laser sniper scope dot on the forehead followed by a “BAM”?

Anyways, my take on this is that I suspect the IRS is going to look a lot closer at 1099-Misc statements in general and more specifically Viatical Settlements.  It sounds like you would have to be an insurance company to do this and selling multiple interest in a person’s life sounds like it violates terms of most life insurance policies. 

To the matter at hand – how would you report this income?  I would say either it goes on Line 21 for the 1040 as Other Income or on a Schedule C, Income from a Sole Prop business.  I think putting it on a Schedule C though would also not really be correct despite what certain pundits are saying because you are trying to offset income with expenses on an insurance policy.  Unless you are a state or nationally approved insurance company authorized to sell life insurance it sounds fishy.

The approach I would take is that you should show the income in Line 21 for the Form 1040 and then take your unreimbursed business expenses subject to the 2% haircut rule on Schedule A, if you have enough other deductions to use the Schedule A.  It isn’t dollar for dollar but it should be acceptable by the Internal Revenue Service and any respective State taxing authorities that follow the Fed guidelines.

My suggestion for anybody thinking of selling their life on the other side of the deal is to note that these deals are still super grey area to illegal because most life insurance companies will not allow you to monetize your life multiple times (read the fine print of your policies).

The deals usually are also for people who are older (in their sixties or older) and have to have a clean health bill – no cancers, no heart problems, nothing that you are sick or dying of.

There is also the risk that the companies investing in you may decide not to wait  for their investment to pay off and decide to cash you out early.  Bottom line: Unless you want to be a human target you may not want to get one of these deals or invest in one.  Your mileage and life expectancy may vary…

 

booseye

As you can see from the post, it sounds fishy. 

Be well people and check something out once and twice before you decide to enter into it, especially if it is a business proposition that involves you dying!

October 12 2009

Kim Isaac Greenblatt

Viatical Settlements Again?

 

 

 

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Raw Materials

Sunday, October 11th, 2009

Continuing on with raw materials in our manufacturing introduction to starting your own business, it is important that you find good supply chains.  A good supply chain not only will have the materials you need, they can provide it regularly and with a degree of consistancy that you need to maintain a high standard for quality control.

Using shoes as our example, let us say that you got laces made from vinyl and the vinyl was a poor quality or if it were plastic it would start to wear down in weeks.  Do you think that people would want to continue to buy your shoes?  Of course not!  You need to make sure that the initial materials, the raw materials or goods, going into the process are of sufficiently high tolerances that they will make it through and then last in the shoe.

How the soles of the shoes?  Any person (including you) ever have shoes fall apart within months of buying them?  The glue wears off of the shoe sometimes, the material is of hopelessly poor quality and it disintegrates, you get the idea. For ladies, how about high heels that break?  As of this entry, there are new high heels on the market with a foot high heel (though the shoe looks like it has more support).  Can you imagine if the hit of the fashion world broke down in a week?  The designer and his line of shoes would be out of business in a no time at all.

In getting your supply line set, look for back ups in case the source materials dry up, laws in the countries change or the seller decides to jack up the price to the point that you can’t afford to pass it on to your customer anymore or absorb the cost yourself.

Keep your thinking caps on with this and remember to learn as much as you can with the process of getting the materials.  For example if you needed to use potash, you would need to learn how it is found, made, the materials for storing it, how it is shipped and the info that goes with it to make proper informed decisions as to the raw material costs.

Here is hoping that you come up with some great manufacturing ideas and get them implemented.  We are counting on each other to work our way as a nation out of the Depression!

Be safe and healthy, gang.

Oct 11 2009

Kim Isaac Greenblatt

Raw Materials

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Local Manufacturing

Saturday, October 10th, 2009

How do you go about making money in our current financial Depression here in the United States?  It is easy.  Manufacture something domestically that people want.  You need to research what kind of business that you want to enter and whether manufacturing is right for you but think of this:  In the current economic climate, there are cities and counties, even in California, the home of great red tape, where there are incentives to start up businesses. 

First decide whether it is something for you or not and then start researching what machinery you will need, what raw materials, can you make the item at a decent price and make a decent mark up on a quality product.  Take note of local rules and regulations and note for employment and see if you can get started.

I would love to get a shoe business going.  Something like shoes has no local health requirements like a restaurant where one would have to be inspected on a regular basis (you know, like getting a rating of “A” if the place is clean or a “C” if you have rats taking sponge baths in your soup).  There is plenty of red tape with organizations like OSHA etc but if you get some small manufacturing machines, get them loaned to start with or get old ones and have a knack for repairs you can give it a try.

Think about this – in Japan, people have small robotic manufacturing plants in their homes.  Mom, grandma, and the kids get to work in the development of the product.  In Chinese countries there is a lot of physical labor but there is manufacturing going on to keep people working.  We need to do something similar here to get goods made that we can buy here instead of having them imported and in some cases having them dangerous.

Making something that you can sell and take pride in is a wonderful thing.  Consider all the great and popular products that are now foreign owned that were originated here in the United States.  Things like Levi jeans or Miller beer.  The parent companies are international ones and the brilliant goods started out here in America.  It is true in every country there is innovation but America is famous for it.  There is also the satisfaction of contributing to the economic recovery something tangible versus intangible.  Sure, intangibles like advice are good for lawyers, tax people and others but that isn’t quite the same as a tangible shoe, motorcycle or can of alcohol.  Remember how we use to make things out of paper, clay or shoe boxes?  We still can do that with that spirit of innovation and fun at a higher level if we are willing to work at it.

Sure, the shape of the world may be changing but there is time and room to make money in it even in small, impoverished nations like the United States of America.

Have a great weekend gang.

Oct 10 2009

Kim Isaac Greenblatt

Local Manufacturing

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What Is A Business Entity

Friday, October 9th, 2009

I get asked this question a lot in terms of what a person should do for the best tax break and the answer is that it depends on your business.

A business entity is the legal and tax form of business separate from the taxpayer or taxpayers involved. For example, Amazon, Inc. is a business entity made up of thousands of shareholders and employees. Amazon, or Google or British Petroleum, the business entities, could continue to exist for the next several hundred years. Just like an individual, the companies may own and operate more than one business. Ownership may change hands. The business may take on debt and pay taxes. Millions of small business owners dream that their business will someday grow into such a business that will live on past their own lifetime. However, in order to do this, the business will have to separate itself from the taxpayer and become its own “living” entity.

The IRS recognizes only four types of business entities:
• Sole proprietorships
• Partnerships
• C corporations
• S corporations

Limited liability companies are another business entity, but they are an entity for legal purposes. As you will learn, limited liability companies (LLCs) can be sole proprietorships, partnerships, or corporations for tax purposes.

The Sole Proprietorship
You are already familiar with a sole proprietorship. A sole proprietor is an individual operating a business as a self-employed person. The owner is liable for all business debts and actions and receives all the profits and losses from the business. The sole proprietor’s income is reported on Form 1040, Schedule C; the maximum tax rate on this income is 35% for 2008. If the proprietor’s net self-employment income is $400 or more, he or she also pays self-employment tax.

What is a Partnership?
Not every business consists of just a single taxpayer. A partnership is an association of two or more persons to carry on a business for profit as co-owners. This relationship can be formed whether or not the partners intend to form a partnership. Merely sharing expenses does not necessarily constitute a partnership. Each person may contribute money, property, labor, or skill to the partnership. The business can be in any trade, occupation, or profession and includes financial operations
or ventures. Individuals, estates, trusts, corporations, or other partnerships may be partners in a partnership. For the purpose of this course, all partners discussed are assumed to be individuals. A partnership can be a general or a limited partnership. Joint ventures, pools, syndicates, or other unincorporated organizations that carry on business are also classified as partnerships. Limited liability companies (LLCs) may be classified as partnerships for federal tax purposes (this will be discussed later in this chapter).

What is a Corporation?
Amazon, Google, Marvel Comics, Disney are examples of corporations. In general, a corporation is an entity that has been formed under a federal or state law that refers to the business as a corporation, body corporate, or body politic.
Other organizations taxed as corporations include associations, jointstock companies, insurance companies, certain banks, and government-owned businesses. Other entities that are not corporations by definition can elect to be taxed as corporations. For legal purposes, a corporation is formed by requesting and receiving a corporate charter from the appropriate state authority (often the Secretary of State).

The corporation can then issue capital stock in exchange for money or property (capital) that its prospective owners (shareholders) contribute. Each shareholder receives a stock certificate that shows how many shares he or she owns, and the corporation receives the capital it needs to begin business operations.

What is an S Corporation?
In the legal sense, an S corporation is no different from any other corporation. It is incorporated under the laws of a particular state and has the attributes and legal benefits of a corporation. The election to be an S corporation is merely a tax decision.

What is a Limited Liability Company?
Limited liability companies (LLC) are created and governed by state laws. Most states allow one-owner LLCs. One-owner LLCs can file their federal tax returns as sole proprietors, or if authorized by the state, as C corporations or as S corporations. LLCs with more than one owner can file their federal tax returns as partnerships, or if  authorized by the state, as C corporations, or as S corporations
.
Owners of LLCs are called members.

A good rule of thumb is to go with the easiest business entity that you can to get started with a business.  It is always easier to go up than go down.

Oct 09 2009

Kim Isaac Greenblatt

What Is A Business Entity

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Fixed Income In Budgeting

Thursday, October 8th, 2009

Continuing on in our mini-series about budgeting, we have talked about fixed expenses and variable expenses.  Now we add to our budget talk with fixed income. 

Fixed income can consist of any of the following items:

Net income from salary – that is your income after all your deductions have been taken out for taxes, medical, social security, etc.

Dividends and interest – these are the proceeds paid as a repayment for an investment you have made in a savings account or other investment vehicle.

Bonuses that can be reasonably relied on.  Most of the time these days bonuses are not reliable because of the economic times and we already talked about them in the previous entries that they are generally one shot sums of money.

Pensions – these are retirement plans that you may have by virtue of working for a long period of time with an employer.

Social Security – the payments that you receive after contributing the Federal program throughout your life.  Social security kicks in when you hit retirement age and the amount that you receive varies based on your age and income.  That is a separate book in itself and the tax implications have to be taken into account as well.

Alimony or child support received – these are the amounts court ordered that you receive for keeping the lifestyle that you had while married and/or to take care of your children.

Income from sources outside of your salary- these are income streams such as distributions from businesses, freelance work, royalties, and any self-employment income that you are receiving.

 

The way that the formula for budgeting works is that you take your fixed income that we have talked about, subtract out your fixed expenses.  Anything left in fixed income can be used to pay for your variable expenses.  Anything left in cash you save or apply for something else – like extra bill payments.

If there is no cash leftover or you are short, you need to make changes to your budget and make the income that you receive fit.

That means that you need to cut back on expenses and see where you can trim wherever you can.  Remember that you are still living in a decent country where you are not in the streets (hopefully not yet) and that you should have some wiggle room in terms of adjusting what your outgoing costs are.

If things are in very dire straits, you are not alone and you need to talk to your creditors and set up some adjustments to your payment plans.  You also may have to make more of a concerted effort to cutting out expenses and expenditures.  That is very hard to do but all bad things don’t last forever just as all the good things didn’t last forever.

Everything in one way or another has a price in this world and if your budget is askew, you need to get things back in balance for your sake, your family sake and for your sanity.  Once you are on a path to keeping and getting things squared away you should be feeling a little bit more in control of your life (as best as any of us can) as well.

Oct 08 2009

Kim Isaac Greenblatt

Fixed Income In Budgeting

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