Tax Guru-Ker$tetter Letter
Sunday, March 31, 2002
Misery Loves Company
Every time gas prices rise in the USA, some wise guy has to say how well off we are in comparison to the poor slobs in Europe who pay over $4.00 a gallon for their petrol. Same thing in response to any complaints about our income tax rates. Things could be worse. You could be paying 70% to 90% in some of the Socialist European countries.
The same argument is being used to defend the Postal Service's upcoming hike in rates. According to this piece in the Christian Science Monitor, we should all just shut up and be happy the rates aren't as high as in some other countries. The fact that the quality of service has become worse with each rate increase isn't relevant.
It seems that once again, my decision to avoid watching the Academy Awards show was the smart move. I'm glad to see that I'm not the only person who considers the show's designated host, Caryn Johnson, to be the most repulsive person in show business. Here's an entertaining recap of the show.
Saturday, March 30, 2002
I have long been very vocal in my criticisms of multi level marketing schemes and how they are often no better than pyramid scams. My low regard for them is nothing compared to this guy in Sacramento, who obviously has far too much time on his hands. He has a very lengthy expose of the HerbaLife MLM program that is just as applicable to any of the others, including the most pervasive one.
Another One Bites The Dust
Slowly but surely, the IRS has been taking out the promoters of illegal tax protest schemes. Here is a story of a Florida promoter who is being shut down by the Feds for advising his followers that they are not required to file tax returns or pay any income taxes because the 16th Amendment wasn't properly ratified. As I have explained on several occasions, this is a bogus argument that does nothing but make matters worse when used with IRS.
The followers of this promoter were paying him thousands of dollars for this idiotic advice. Now, they are out that money, plus all of the back taxes, penalties & interest that IRS will demand. Prison time is also a very real possibility for the promoter and his followers.
This is so typical of too many people who put tons of money & energy into trying to scam the system, when they would most likely end up in far better shape if they directed those resources into more productive endeavors. Maybe I have a twisted perspective on life; but whenever I watch a caper movie, where the planning takes years and millions of dollars, I can't help thinking that the masterminds could be even more successful if they channeled that into legitimate things. Of course, it wouldn't be as entertaining a movie. There aren't as many car chases and shoot-outs in starting a business or making a legal investment. As I have said repeatedly, there are so many very inexpensive legitimate methods of reducing one's taxes that I can't have any sympathy for those who are stupid enough to follow the lead of charlatan tax protestors.
Tuesday, March 26, 2002
IRS PR Campaign
There are several stories out today based on IRS press releases about their cracking down on people who use offshore credit cards. The presumption is that anyone who has an offshore account is by definition a tax cheater. As we all know, in tax matters, there is no presumption of innocent. Everyone is assumed to be guilty unless they can prove otherwise.
Some additional insight into this is needed. This is mainly an IRS effort to scare off anyone who may be considering opening an offshore account. What always amazes me is how IRS and their doting fans in the media can fabricate numbers out of thin air and then trumpet those figures as facts. They claim two million offshore credit card accounts, when in actuality they have no idea. This is just as bogus as the much hyped tax gap of uncollected taxes. That number is completed made up because by definition, unreported income is unmeasurable. There is no way IRS can ever know how many people have offshore accounts because if they set them up properly, they can't know this. There may only be a few thousand people doing this; but that wouldn't attract as much attention as two million; nor would it justify an increase in IRS's budget to visit the offshore locations.
Monday, March 25, 2002
Taxes Do Motivate Behavior
One of the underlying premises held by our liberal rulers and their cohorts in the media is that they can raise taxes all they want and people will just bend over and pay them. Those of us in the real world know that to be completely untrue. Even very small tax law changes will motivate people to make drastic changes in all aspects of their lives. In another earth-shattering discovery of the obvious, the Seattle P-I has this story of the fact that people migrate to areas with lower taxes. Next, they'll finally reveal that professional wrestling isn't real.
Pick The Right State To Die In
I have written extensively about how people choose their tax homes based on the state tax laws, often selecting states that have no tax on the income they earn while alive. Now, we need to consider where one will die because there could be large estate (aka inheritance or death) tax consequences. As has been well publicized, the Federal estate tax is being phased out, with a one year tax free opportunity to die in 2010.
Since most states piggy-back their estate tax laws on the Federal rules, many of them are scared at the thought of losing this easy money and are passing their own stand-alone estate taxes as described here in the Washington Post.
Sunday, March 24, 2002
Let Them Put Their Money Where Their Mouth Is
It's bad enough when big-mouthed empty-headed American celebrities try to tell the rest of us how to spend our money. It's doubly insulting when foreigners try to make us feel guilty for not paying taxes in the 90% range of their beloved Socialist European countries, as U-2's Bono is currently doing. That's why I like this idea for a new 100% tax just on income earned in the USA by liberal foreign rock stars.
Friday, March 22, 2002
Coordinating QuickBooks With Tax Returns
As I have been saying for decades, the key to the most effective tax returns is good bookkeeping. This is the weakest link in the chain of events. As I have long advised, the best tools for bookkeeping have been Quicken and QuickBooks. Over the past few years, as Intuit has modified the programs, I have become less fond of Quicken and more appreciative of the capabilities of QuickBooks, which I will explain in more detail when I have more time.
As with any tool, QuickBooks is only as effective as the operator. One of the biggest mistakes I have been seeing far too often is using the wrong number of QuickBooks company files. It happens in both directions; either too few or too many. I have been spending huge amounts of my very limited time unraveling Quicken & QuickBooks data where people have combined too many accounts. As I have written for years in my Quicken Tips, each company file should coincide with a tax return; 1040, 1120, 1065, etc. For tax returns that include multiple business schedules, such as 1040s, the best way to keep their activity straight is to include all of them in one Company file and set up a Class for each business schedule (C, E, F, etc.). At tax time, it makes things so much cleaner. The worst thing to do is combine corporate (1120) activity in the same company file as for personal (1040).
Naming the QuickBooks data files should be done with this in mind as well. The best way I have found is to name it for the underlying tax return, such as Smith1040 and Smith1120. Having been on computers for over 30 years, I understand the benefits of short concise file names with no spaces.
I will be posting other tips for the most effective use of QuickBooks.
Thursday, March 21, 2002
Neal Boortz has been kind enough to post the JackAss Party's secret plans for implementing their agenda for America, many of which involve changes to the tax laws. It may sound like a parody, but it's eerily accurate.
Anyone Else Would Be Audited
This is a good recap of how Roger Clinton was used to launder bribes for the Clinton organized crime family and was paid considerable sums of hush money. If this were anyone else but a member of the Clinton gang, IRS would be auditing him so fast that it would make your head spin. Having worked on hundreds of IRS audits, I know what a dogged fixation the agents have on deposits into bank accounts. They start with the assumption that every dollar is taxable income and the taxpayer has the burden of proving otherwise. I am not a gambling person; but this is an easy bet that Roger didn't report any of this money on his tax returns. Why should he? Bill & Hillary perfected the use of the IRS as their personal hit squad to attack their enemies and assist their friends.
For those who consider any talk of these kinds of Clinton crimes & scandals as old news, a few reminders. Hillary is still very serious about winning another term as President, this time under her name. It is also a fact that the IRS is still filled with Clinton cronies who are continuing their attacks on Clinton critics and harboring Clinton pals from normal scrutiny.
Wednesday, March 20, 2002
One of the most insidious taxes the geniuses in DC ever created is the Alternative Minimum Tax (AMT). As with almost everything our rulers in DC do, this monstrosity accomplishes the exact opposite of its intended goal. Rather than nail the evil rich fat cats, it more often hits lower income people. Here is an excellent article on it from the current Forbes magazine.
For those who want to see the AMT fixed, please check out this group. They have my full support and admiration for tackling this beast.
Taking Undue Credit
Is it just me or is the current commercial for the United States Postal Service the stupidest thing they have done in a long time? It shows a high school student opening a college acceptance letter and then claims that the next four years are courtesy of the United States Postal Service. Come on! The postman delivered the letter. That's it. I'm sure that makes all the difference in the world whether or not someone is accepted to college. It's not as if the mailman took the SAT or is paying for the tuition.
If the geniuses at the USPS want to claim credit for all of the good news they deliver, why shouldn't they receive the blame for all of the bad news and bills that are put into our mailboxes? That makes just as much sense as their idiotic commercial.
The technical assistance for QuickBooks from Intuit can get fairly expensive. A very handy free resource for answering all kinds of QuickBooks questions is this free users group. It is populated by users, as well as QuickBooks experts who are willing to answer questions, for free.
While browsing through the question boards, I came across someone who has addressed a very big shortcoming in the QuickBooks program, how to transfer data between QuickBooks files. This program does it by running a QuickBooks journal through Excel and converting it into the format that can be imported into another QuickBooks file. Why Intuit didn't do this on their own escapes me; but I'm glad to see that an outside programmer has filled the gap. I can already see it as saving us a ton of time in merging company files for clients who set up separate QuickBooks files for different businesses instead of just using one file and using the Class function to separate the businesses.
Oscar Dodges A Bullet
As a life-long movie buff, I will again be avoiding the annual Hollywood circle jerk this Sunday. The only part of these telecasts worth watching was the first five minutes of the Billy Crystal shows, when he had his hilarious movie spoofs. I literally can't stomach the sight of Caryn Johnson; so I won't even be checking any part of this year's show. I don't know what to say about someone so out of touch with reality on this planet that she still claims that her idol, Bill Clinton, never did the nasty with Monica.
I couldn't help wondering how different the entire Academy Awards would be if 68 years ago, they had chosen Arthur Andersen to count their ballots instead of Price Waterhouse. With AA's current reputation for creative accounting, it would sure make all of the winners & losers very suspect.
Tuesday, March 19, 2002
IRS Encouraging Extensions
As I have repeated for decades, filing 1040s by April 15 is not the wisest move, for several reasons. I have actually done such a good job explaining that to my clients that I have only prepared a few 2001 tax returns so far and am still working on several 1999 & 2000 tax returns.
This year, there are some more reasons why filing your tax return later is a wise move, including one encouraged by IRS.
A new tax law giving more generous tax breaks for small businesses was passed by Congress on March 8, 2002 and signed into law the next day by President Bush. Rather than make it effective for 2002, it is retroactive to 2001. This is requiring IRS to revise many of its 2001 tax forms during the most hectic part of its tax filing season. In complete agreement with my policy, IRS has actually announced that it would prefer that taxpayers file for an extension until the new forms are available rather than file tax returns now that will need to be amended.
The other new reason for filing tax returns later is the IRS's announced plans to select 50,000 early filed returns for its extensive line by line audit. I will have more on this later.
As we all know, incompetence is no reason for someone to be fired from a cushy government job. INS announced that the employees responsible for sending the visas to the dead murderers are being reassigned to positions more suited to their talents. My guess is that means they will turn up at the IRS, where that kind of screw-up is normal every day practice.
Monday, March 18, 2002
Investing In Death
For several years now, there have been investors who have earned very good rates of return by purchasing the rights to life insurance policies from AIDS sufferers. It is actually a good idea in concept, because what good is a big windfall of money after you are gone? Since most AIDS victims don't have large families to leave their estates to, the money is much more needed in their final months & years. This started a fairly good sized viatical settlement industry, where investors reviewed T-cell counts and other indicators of declining health. The returns for investors could be quite lucrative. Say you paid an AIDS sufferer $250,000 for the rights to his $500,000 life insurance policy. If he dies shortly thereafter, you've doubled your money.
What brought this up was this article in today's Wall Street Journal on the next evolution of this kind of investment, which they have called Death Bonds. Basically, the number of AIDS sufferers with investment grade life insurance is dwindling, so other persons with limited life spans are becoming more attractive. They are being marketed with expected deaths within 10 years. This makes me wonder what investors will do if their insured parties outlive the 10 year or other predicted lifespan. Will there be a motive to help nature along?
Saturday, March 09, 2002
With the depressed stock market dropping values of many IRA accounts, I have noticed several people tempted to want to convert them from traditional IRAs to the newer Roth IRAs. While in theory, this looks like a good move - pay tax on today's lower value, and receive much more years later fully tax free - I'm still not a big fan of this idea.
I understand the temptation to want to capitalize on the down stock market in terms of IRA accounts. However, my initial warnings about converting normal IRAs to Roths still apply today; so I can't say that is a good idea.
To convert an IRA, you have to actually roll the money or stock over from a traditional IRA account into a new Roth IRA account. The taxation will be in the year that the rollover actually happens.
In order to qualify for a conversion, your AGI (not including the IRA income) must be under $100,000. The IRA income will be taxed as ordinary income; but there will be no early withdrawal penalty, as there would be if you didn't roll the funds over. Depending on the size of the rollover, it could push you into a very high tax bracket. It would also increase the AGI figure that is used to limit other tax breaks, such as deductions and exemptions.
You may have heard of the four-year payment option. This was only available for people who converted their IRAs in 1998. They had the option of picking up one-quarter of the amount on their 1998, 1999, 2000 & 2001 1040s. Any conversion after 1998 has to include the full amount in income in the same year.
Now for my biggest concern, the promise of our rulers in DC to leave Roth IRAs as fully tax free if you leave the money in for at least five years and don't start withdrawing it until you are 59.5 years old. From the very beginning of Roth IRAs, I distrusted this promise. People doing conversions must pay real tax dollars out now in exchange for a promise of tax free status several years down the road.
My prediction then, and even more strongly now, is that the promise will be broken for those people who our rulers consider to be among the evil rich. Means Testing, which allows tax breaks only for lower income people, is still very popular and will continue to be the gauge used. Just in the past week, none other than Rush Limbaugh, a person I agree with on most issues, was advocating Means Testing to freeze "wealthier" people out of Medicare and Social Security benefits. When he is on that side of the argument, that leaves very few of us to handle the fight for fairness.
I'm not saying that you shouldn't put new money into Roths, and hope that it will be tax free. I am just very very nervous about having you pay several thousand dollars in taxes on a conversion and then having to pay tax again on the same money when you draw it out. It isn't in the least bit fair; but it is what I fear our rulers will be doing. I may be overly pessimistic and paranoid about this; but I think it is perfectly justified. Future tax breaks are routinely erased by our rulers in DC who have no qualms about breaking their promises.
On a more trivial note, I have heard some people claim that to say "IRA Account" is being redundant, in the same way as it is to say "PIN Number" or "ATM Machine." That is not true. IRA stands for Individual Retirement Arrangement.
Friday, March 08, 2002
Keep A Low Profile
I have discussed on several occasions ways in which to avoid paying State taxes. Most of them require establishing a tax free state as your tax home. However, as with all tax related matters, the burden of proof lies with the taxpayer to prove s/he is not subject to a specific State's taxes. The State merely has to claim that you are subject to its jurisdiction and then you have to make the case that you aren't.
Besides the normal steps for establishing a tax home in tax free States, it would be smart to maintain a low profile in the taxable States. Here is a story of some pilots who live in Minnesota who were pretending to live in tax free States, while being far too active in their MN communities. I'm sure they were also flaunting their ability to avoid MN taxes. More tax breaks have been lost over the past decades by big-mouthed beneficiaries who can't resist the temptation to brag about it. Envy is widely prevalent in this country. It is just a matter of time before people who don't receive the same tax breaks are going to try to get yours taken away.
Tuesday, March 05, 2002
Anyone who has worked with computers is familiar with the phrase "Garbage In, Garbage Out." It means that the quality of the end product is directly based on the quality of what you put in. Nowhere is this more relevant than with tax software. There are dozens of free and inexpensive programs that will prepare tax returns both on one's own computer and via the web. Most people think that these can replace the services of a tax professional, saving them the fees they pay.
My attitude regarding these programs hasn't changed one bit since the first version of Turbo-Tax was introduced to consumers over a dozen years ago. Contrary to other tax professionals who felt threatened by this perceived competition, I have no problem with them and do not consider them to be any competition to true tax professionals. They are competition to the type of tax preparers called "Form Fillers," who just fill in forms without using any brain power as to the consequences. In fact, I have long had several clients who use Turbo-Tax as their organizers instead of the ones I give them. They send me their printouts and I then use them as the basis for entries into my tax software, Lacerte. The figures I come up with are almost always very different from the ones the client had.
It has nothing to do with the fact that Lacerte is the most expensive tax software on the market. It is completely a result of knowing what to put where. An amateur working with Lacerte would still do no better because it takes knowledge to know how & where to enter data. Contrary to popular belief, tax return preparation is more of a creative art than an exact science. That is why the same set of facts given to a dozen different tax preparers can result in a dozen completely different tax returns, all of which could be legally correct.
Which brings me to my persistent reminder of how important it is to select the proper tax professional to work with. GIGO applies here as well.