Debt Free

Generally there should be a written communication from the mortgage holder to the lender expressing a desire for such a proceeding. This prevents the mortgage holder from later experiencing buyers (sellers?) remorse, deciding they didn’t get such a good deal after all, and making a claim against the lender.

Typically the lender will require every avenue toward sales of the property be exhausted before they’ll consider a deed in lieu of foreclosure alternative, so don’t get your hopes up yet. These types of transactions are becoming more difficult to get approval for with many lenders in the last year. The lenders feel they are too one sided and there are too many problems they may have to deal with.

How does giving up your deed in lieu of foreclosure affect you for tax purposes? As usual the IRS has a say in the matter, and you could have some tax liability associated with the transaction; once again, the boys and girls over at revenue giving you a bit of kick when you’re down, so to speak. From their side of the coin, it looks like the cancellation of debt that occurs is the same as income, and that must be declared. In many cases, there ways to eliminate some or all of the tax liability associated with giving up your deed in lieu of having your home foreclosed upon.

If you have debt forgiven in a DIL, you will receive a form 1099a from your pals at the IRS. The actual title of the form is “Acquisition or Abandonment of Secured Property”. As the title implies it deals with the tax consequences of what amounts to abandoning your property.

Note that the 1099a for a debt in lieu is not the same as if you actually had your debt forgiven through the foreclosure process. In that case you’d receive a Form 1099c “cancellation of debt”. With a 1099a for the DIL, if, for example, you had a property that you owed $250,000 on and you traded the deed to avoid foreclosure, you would owe the difference between the fair market value and the outstanding debt. According to the IRS, this applies if the amount in box 4 (fair market value) is less than the amount in box 2 (debt owed to the lender(principal only)).

Here’s the explanation according to the IRS:
“When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven or the property is abandoned or foreclosed, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender and/or you may be unable to pay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-A, Acquisition or Abandonment of Secured Property, or Form 1099-C, Cancellation of Debt.”

In the eyes of the IRS you receive proceeds through this process, as you no longer have a liability (the outstanding balance on your mortgage) on your personal balance sheet. The value of this cancellation is viewed as compensation, so you are taxed at the income tax rate. To add insult to injury, this income could very well push you into a higher tax bracket, making you have a greater tax liability than you would have otherwise.

This is definitely an area where you want the advice of a qualified tax attorney or accountant. The professional you choose should have expertise in this particular area of tax and real estate. The last thing you want is to trade a foreclosure on your house for a tax problem with the IRS.

How to eliminate some or all of your tax liability when proceeding with a deed in lieu of foreclosure –
One way you may be able to get around owing more tax is if you can prove that you’re insolvent, or you can declare bankruptcy. To prove insolvency or bankruptcy to the IRS’s satisfaction you have to fill out IRS form 982 (yes, another IRS form).  As pursuant to the terms of the Mortgage Forgiveness Debt Relief Act of 2007 that went into effect in December, the first $2 million of the primary mortgage amount is immune from tax liability should it be forgiven. Note that the Mortgage Forgiveness Debt Relief Act only applies to your primary residence, as defined in IRS section 121.

Once again, this is definitely an area where you want the advice of a qualified tax attorney or accountant (I’m neither) before deciding on your best course of action.

Hopefully none of this applies to you and you’re (more or less) happily making your mortgage payments on time; foreclosure is not in your future. Let’s just hope the price of gas doesn’t keep going up and you have to decide between your mortgage or filling your gas tank.

Posted by debtblog at 12:44 PM | Permalink | Comments (0) | TrackBacks (0)

Tax Return Question 1–
What should I do if I think I made a mistake when I filled out my return?

Mistakes on returns happen all the time. The IRS has provisions for just such an event. You’ll have to spend 6 months in jail, do 150 hours of community service, and pay a 50% penalty on any taxes owed. Just kidding. Actually the IRS recommends that you fix the mistake by filing a form 1040X. This is an amended return that you’ll use of you forgot to report all your income or claim a credit. You have up to 3 years after you filed your return to file this form, so there’s no rush.

The IRS reports that most math mistakes are caught when processing the return. If the processors have more questions or something is missing, don’t worry, they’ll contact you.

Tax Return Question 2 -
What if I made a mistake on my return, I’m getting more money back than I should be, and I’ve already sent me the check? I don’t want to be visiting Wesley in jail for a few years. What should I do? Fear not, tax payer. The IRS has you covered. If it was a math mistake, see answer number 1, above. If it was a mistake in the amount of reported income, you simply use the same form 1040X and send it back with the un-cashed check.

What? You say it’s too late, you already cashed the check and bought a new Ducati to ride for the summer? Well, in that case, you have to file the 1040X ASAP. Include a check or money order payable to the Internal Revenue Service for the amount you borrowed due to your error, and pray repeatedly that that settles the whole matter.

Tax Return Question 3 -
What do I do if I received a 1099 form, but I’m not self employed and I don’t have a business license? What do I do about this? Unless you can prove you actually were an actual employee of whoever sent you the 1099, you’ll have to fill out a 1040 schedule C and report your income from the 1099. In addition, you will need to fill out a form 1040, schedule SE to report your self employment tax. Self employment tax is basically the matching part of your Social Security that your employer usually pays.

One thing to know about fixing mistakes with the ‘1040 X’ form is that these forms can’t be filed electronically. You have to actually fill them out with a pen, put them in an envelope and use the old fashioned mail, if you remember how.

Tax Return Question 4 -
How do I find out what has changed from last year? IRS forms have a “what’s new” section in their instruction books. They will have a list of all changes from the previous year.

Tax Return Question 5 -
I can’t pay the taxes I owe. What do I do now? You might try calling Wesley’s legal team. After all, they got him off on most of the charges. Seriously, you have alternatives if you just can’t come up with the money the Feds are looking for. They will allow you to pay with a credit card. You can also make payment arrangements with the IRS. I went over this in my post on what to do if you can’t pay your taxes.

Tax Return Question 6 -
If you’re a student, do you have to file a tax return? It depends on how much money you earned, and if you can be claimed as dependent by another tax payer. You’ll be a‘filin’ if you are a dependent and:

1.      Your unearned income was more than $850.

2.      Your earned income was more than $5,350.

3.      Your gross income was more than the larger of —

a.       $850, or

b.      You earned income (up to $5,050) plus $300.

Students, you should note that many fellowship grants and scholarships are considered taxable income by the IRS, so they’re not as free as you first thought.

It’s pretty common to have questions when you’re filing out or filing your tax return. That’s why we in the U.S. have an entire industry dedicated to helping you out in this endeavor. It helps explain why franchises such as Liberty Tax Services (started by Jackson Hewitt alum John Hewitt) have grown to over 1,700 locations in only 7 years, and H&R Block had revenues of $4 billion in FY 2007.

So, if you have tax return questions, don’t feel bad. If you can’t find answers here, check the FAQs at the IRS website

Posted by debtblog at 06:37 AM | Permalink | Comments (0) | TrackBacks (0)

What happens to most of us with regard to how much we'll pay in Federal income taxes if Bush and his tax cuts go sailing off into the pages of history?

First a side note: Government spending is out of control, and has been for some time. Lest you think I'm just a (to use an expression usually reserved for those on the far left) Cool Aid drinker, government spending under the Bush administration has been totally out of control, to the tune of 19.6% in 2006, with a 2.1% budget deficit. In 2000 it was 18.4% of GDP and we had a 2.4% budget surplus. Even more frightening is that according to a CBO report, it's projected to swell to 23.8% of GDP by 2040 and even higher after that. Interest expense will grow to chilling (to our economy) numbers in the future if current trends aren't reversed. Eventually the CBO predicts that interest on federal spending alone will consume a greater amount of the budget in percentage of GDP than our entire budget does now!

Why don't we just surrender all our salaries, wages, and bonuses to the Federal Government and allow them to dole out to us what they feel we “need” to exist on. Oh wait, that's been tried. It was the dismal economic and social failure known as Communism. Hopefully most of you that read personal finance blogs at least aspire to some upward mobility, and aren't satisfied with remaining where you are. Why would you be so fired up to be penalized for working hard and bettering yourselves?

Taxes are a necessity of civilized society. After all, roads, bridges and other infrastructure need to built, and we must defend ourselves, but why should those that actually get up early create the wealth, jobs and technological wonders that allow us to have this level of prosperity be forced to pay for nearly all of it?

When the Bush tax cuts expire in 2010 as they're scheduled to:
Well, the Center on Budget and Policy Priorities reports that extending the Bush tax cuts and AMT relief would cost $4.4 billion. Cost who? Certainly not the tax payer. Sounds like the tax spenders are getting a bit testy, because from where I'm sitting that sound like it would save you and I money. It's all a matter of perspective on whose money it really is, anyway. I guess some feel that because they print the money it's really theirs and they're just loaning it to us. I'll bet that not all of the projected 33 million American taxpayers projected to be snared by the AMT in 2010 feel like they're wealthy. But why reform it? After all, it would contribute to the $4.4 billion that they feel we're not really entitled to anyway.

On the expiration of the “Bush” tax cuts, the tax brackets will change as follows:
Brackets 10, 25, 28, 33 and 35 percent will be increased by 50%, 12%, 10.7%, 9.1% and 13.1% percent, respectively, to 15, 28, 31, 36 and 39.6 percent. Those of you at the bottom of the tax barrel will see a 50% tax increase. Still think that those tax cuts are strictly for the wealthy?? Well, have a nice day then. The child tax credit will be cut in half (damn those wealthy families with children) so in reality, the upper and lower classes benefited the most from the tax changes, with the lower class receiving far and away the largest benefit. Yet, we seldom hear this in our daily news osmosis. The phrase “tax cuts for the rich” has been repeated so many times that the majority of the sheeple simply believe it.

The funny thing is that many of the truly wealthy will be little affected by income tax hikes, because their income is derived from investments (taxed at the capital gains rate), and their property is in trusts, or actually owned by their businesses. The psuedo-wealthy that make $250,000 and up actually pay the vast majority of the taxes, so if you're going to cut taxes, that range offers the largest opportunity to do so. For those of you that think only the rich own stocks, you're wrong. 91 million Americans own shares of stock, thanks largely to 401k plans and IRAs, so boosting the market helps their retirement picture. In fact 90% more people in the bottom 20% of income earners own stocks now than they did 15 years ago.

Finally, do any among you think that as they economy slows it would be prudent to raise taxes? Why exactly would raising taxes (and it's scheduled to be a large raise) help get the economy back on track? Are you sure about that?

The reality is that you can't cut taxes forever and have total tax revenue rise, just as you can't raise them forever and have total tax revenue rise. To low and the reduction in tax revenue will overtake the rise in the economy; too high and the decline in the economy will overtake the rise in revenue. There's a sweet spot in the middle where nearly everyone pays, the economy is suitably stimulated and things get done. Lets find it, without spending so much damn money on bridges in Alaska.

Posted by debtblog at 02:38 PM | Permalink | Comments (0) | TrackBacks (0)

Don't worry. Just ignore it and it'll go away. Really, just keep quiet, and watch American Idol tonight like you do every Tuesday. There's no need to run to the post office before midnight like all those other suckers. It's an effective strategy used by thousands of American taxpayers every year. The problem for these folks is that it's only effective for so long. The IRS wants their (our) tax revenue, and if you owe some and haven't paid it, they'll eventually come knocking at your door for their cut.

So, that begs the question; “What if I owe the IRS and can't afford to pay?” The number one thing you shouldn't do is ignore the problem. Much like cancer or syphilis, ignoring unpaid taxes will only get you in big trouble. Just ask Al Capone, he ignored both his taxes and syphilis, and look where it got him!

If you genuinely can't afford to pay the entire amount you owe you must contact the IRS. Ignoring them means two things: 1 – You won't get your economic stimulus check this year, and 2, You'll begin to accrue penalties and interest at a frightening rate. Yes, you'll accrue penalties and interest on unpaid taxes even if you do file your return, but at much lower rate. The penalty rate for failure to file is 5% a month of the unpaid balance, up to a maximum of 25%. That's in addition to the interest of 1.5% per month (compounded, and you know the power of compounding. If you don't, just ask Wesley Snipes). Hey, the IRS takes VISA. This is one instance where using a credit card may actually be the more responsible thing to do. The penalty for failure to pay is 10 times lower; 1/2 of 1 percent per month. You do the math on this one.

The IRS wants your money, but they will work out things out for taxpayers who genuinely can't afford to pay. If you have a legitimate excuse, they will be happy to set up a tax payment installment plan, for a small fee, of course! Actually that fee is a one time $105, not a trivial amount, but better than the alternative. You can lower the installment set up fee to $52 by agreeing to have the funds debited from you checking account. To find out more about IRS installment plans and other tax payment options, just check IRS tax topic 202 here.

Posted by debtblog at 01:41 PM | Permalink | Comments (0) | TrackBacks (0)

1. Dead - Yes, it's true, the IRS will let you take you funds from your 401k or other qualified retirement vehicle if you're dead. Of course it will be kind of tough to nail that hole in one on the 11^th at Estancia if you're dead, so maybe you'll have to look for other ways of avoiding the 10% early withdrawal penalty, such as ....

2. You're over age 55 and have retired or quit your job. There, that's more like it! You can be alive, 56 years old and enjoying some sun out on the course while spending the fruits of your old employer's 401k matching contribution.

3. You got a divorce and the judge declared that you have to split the 401k as part of the divorce decree. In that case, avoiding the 10% penalty is probably the last of your worries, financial and otherwise.

4. The cost of that expensive hip replacement you had to get so you could keep golfing was greater than 7.5% of your adjusted gross income and you withdrew 401k funds to pay for it. Seriously, if you withdrew funds to pay for medical expenses that were greater than 7.5% of your adjusted gross income, and you itemized your deductions, you can avoid the IRS early withdrawal penalty.

5. The withdrawals meet the "substantially equal payments" criteria. The substantially equal payments criteria means that the payments must be “part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee “ The section of the Internal Revenue code that deals specifically with this topic is section 72(t)(2)(A)(iv). According to the IRS, other qualifying methods of avoiding the 10% penalty according to the SEP criteria are:

   A) “the amount to be distributed annually is determined by dividing the taxpayer's account balance by an annuity factor (the present value of an annuity of $1 per year beginning at the taxpayer's age attained in the first distribution year and continuing for the life of the taxpayer) with such annuity factor derived using a reasonable mortality table and using an interest rate that does not exceed a reasonable interest rate on the date payments commence. “

   -or-

   B) “if the amount to be distributed annually is determined by amortizing the taxpayer's account balance over a number of years equal to the life expectancy of the account owner or the joint life and last survivor expectancy of the account owner and beneficiary (with life expectancies determined in accordance with proposed section 1.401(a)(9)-1 of the regulations) at an interest rate that does not exceed a reasonable interest rate on the date payments commence.” Got that?? It basically means that you can guess how long you're going to live according to a generally accepted life expectancies table and then treat your 401k as an annuity that pays out at a reasonable interest rate.

The IRS (and I) recommends that if you are attempting to qualify for the substantially equal payments criteria, you hire a professional financial planner, attorney, or accountant that is well versed in this particular area. Failure to qualify could result in the obligatory IRS fees and penalties levied at those who would make tax mistakes, willful or accidental.

So, you can get an early withdrawal from your 401k plan if you play by the IRS rules. The other option is to throw caution to the wind, say “What the hell, you only live once” and generously contribute the extra 10% to the American people (Where of course it can be frittered away in the bureaucratic morass that is our Federal Government).

Posted by debtblog at 01:22 PM | Permalink | Comments (0) | TrackBacks (0)

IRS Tax Deduction You Can’t Take #1 –
Mileage or vehicle related expenses incurred while driving to and from work. If you use the vehicle in the course of doing business, you can deduct expenses or mileage resulting from this, but it’s a no-no to deduct mileage accrued while getting to and from your office.

If you run a home based business you can deduct the portion of use that your family car is used for the business, but not for your vacation to Aunt Nellie’s. If, however, you happen to vacation in Las Vegas or Tampa and swing by a trade show or convention at the same time, that’s a whole different story. You can deduct travel expenses for expenses incurred, weather you own a business or not, if you must travel to a location that is not your usual place of work, but not for trips to and from the office or job site. Employees should use IRS form 2016 to claim these deductions. You should be aware that you must itemize to take advantage of these, and they cannot exceed 2% of your adjusted gross income.

IRS Tax Deduction You Can’t Take #2 –
Un-reimbursed medical expenses lower than 7.5% of your adjusted gross income. This has worked for me in the past. A few years ago I had a year that my post insurance medical and prescription drug expenses were around 10% of my AGI . The deduction  really helped out, but very detailed record keeping is essential to make this (or any other) tax deduction really work for you.

You’ll have numerous small receipts for things such as co-pays that may be only $10 or $20. At the beginning of the year, you may neglect to save these in your tax file. If something should crop up, heaven forbid, that pushes your medical expenditures beyond the 7.5% threshold, you’ll need every single one of those receipts to document that fact. So, make sure you save them all, beginning January 1^st.

IRS Tax Deduction You Can’t Take #3 –
Expenses incurred as a result of fines or criminal penalties, even those incurred through your regular course of business. It makes sense, but every year people try to deduct things such as the speeding ticket they received while driving the company van. Some think it is allowed under Section 162 of the Internal Revenue Code, but some would be mistaken. The IRS doesn’t like such claims, so it’s better not to make them in the first place. For that matter, deducting any expenses incurred during the commission or as a result of, an illegal act are forbidden.

IRS Tax Deduction You Can’t Take #4 –
Meals that you eat while at work are not deductible. If you take a client to a meal, you can deduct a portion of the meal related expense, but you can’t deduct that $4.00 for the burrito you had at Chico’s lunch wagon yesterday.

IRS Tax Deduction You Can’t Take #5 –
Home repair expenses can’t be deducted in most cases. Too bad for me, because I just spent $1,300 to get a new water heater installed. That would have been nice to include in the deduction total for 2007. The IRS does not allow deductions for the repair of a home that you use as your primary residence. Repairs are defined as something that “…keeps your property in good operating condition. It does not materially add to the value of your property, or substantially prolong its life.” Certain disasters have been granted exclusions by the IRS. For example, certain losses experienced because of Hurricane Katrina are covered under Internal Revenue Bulletin 2006-28.

If you have rental properties, you can deduct repair expenses as a business expense that you could not deduct were you to them for your primary residence. As a landlord, you can claim such deductions such as interest, repair expenses, insurance, and even travel to visit or inspect your properties, weather it is local or long distance.

IRS Tax Deduction You Can’t Take #6 –
Work clothes. You may not take a tax deduction for clothing you purchase for work, unless it is not an article of clothing that you could usually wear while outside of your job. Just because you got a new job and had to by new, nicer clothed than you would usually wear does not mean you can deduct the cost of the new clothes. The only way you can deduct the cost of work clothes is if they would not be worn in the course of everyday activities. Things such as hard hats, uniforms, logo shirts, and the like can be deducted if you are required to purchase them specifically for your job. Sorry, that new Armani you bought to impress the boss doesn’t qualify.

IRS Tax Deduction You Can’t Take #7 –
Some deductions that you could claim were they to be spent on a rental property cannot be claimed when they apply to your personal residence. These include the cost of home owners insurance, closing costs, contractors and domestic help, utility expenses and depreciation.

Although it would be great if the IRS would allow these deductions, they would likely raise our taxes to compensate. Have a great, Debt Free weekend.

Posted by debtblog at 02:47 PM | Permalink | Comments (0) | TrackBacks (0)

1 - Shelter and associated expenses $15,167 (32.7%)
2 – Transportation $ 8,344 (18.0%)
3 – Food $ 5,931 (12.8%)
4 – Pensions and Social Security $ 4,823 (10.4%)
5 – Health care $ 2,664 ( 5.7%)
6 – Entertainment $ 2,388 ( 5.1%)
7 – Clothing $ 1,886 ( 4.1%)

Something's missing. What is it? Give up. Well for many people it is the largest expense category, for most of the rest, its in the top 3, yet for many people it gets completely overlooked much of the time. What is this major expense? Well, of course, it is taxes. You may just look at you paycheck to see what is taken out every month, but you'd be woefully underestimating how much the “Average American” pays in taxes every year.

Many taxes are hidden. Think about how much is really paid. There is employer matching of Social Security. You think the employer just takes that straight out of their bottom line? Guess again; they pass it on to their customers (you and me). There are gas, fuel and utility taxes, at the local, state and federal levels. Property taxes, which are borne by both renter and property owners. Sales taxes, B&O taxes on businesses, state income taxes, and capital gains taxes; it boggles the mind! There are just so many taxes. All the taxes paid by business are passed on to the consumer in some way or another, so don't be fooled into thinking that this tax or that doesn't, in some way, affect you. They affect all of us to some extent.

The upshot of all this is that there a about a million different tax reform organization, foundations and groups out there. Together they give some kind of picture about how much is paid by the “Average American” in taxes every year. The Tax Foundation has their Tax Freedom Day, the day when you stop working for the government and begin to line your own pocket. In 2007, it was April 30^th. That works out to 32.8%. Hey, that's expense number1! Even if you give our taxing authorities the benefit of the doubt and this number is 20% too high, it would still come in at 26%, and fall neatly into slot number 2.

That's why I tend to rail a bit about taxes. The other expenses you can do something about. You can control taxes too, albeit to a lesser extent. but it requires much more effort and planning, in addition to a trip to your local polling place (or post office for a growing number of communities, where absentee is the new voting method of choice). I wouldn't care so much. After all the government provides many essential services that we desperately need, and should pay for. The problem is that they also provide many that we don't and shouldn't, in addition to being the model of inefficiency in many of the things they do.

Have a great, Debt Free weekend.

Posted by debtblog at 03:18 PM | Permalink | Comments (0) | TrackBacks (0)

 Saying of the Day: A good government should seek not to maximize government revenue, but instead to maximize citizen revenue.

Posted by debtblog at 03:11 PM | Permalink | Comments (0) | TrackBacks (0)

The very lowest income earners fall into the lowest federal tax bracket. If that describes you, you can temper your disillusion with your low income with the fact that at least you'll probably be paying no federal income taxes for 2007. You may even be getting more money back than you paid in. A pretty nice deal, that. So much for those “Tax cuts for the wealthiest Americans”, not that they didn't see one.

For the rest of us, stuck somewhere in the middle, between the wealthiest Americans, and those that get back more than they paid in taxes, we will have to look at how much the IRS will demand from us in this yearly rite of homage to government finance. Where it gets really important is for those who fall right on the brink of jumping up to the next higher bracket. If this is you, you will have to pay the higher rate for all marginal income over the bracket cutoff. You do not have to pay the increased rate on your entire income for the year.

For example, a few years ago I got caught in this exact situation. I earned a hair over $59,000 that year, putting me in the 28% tax bracket. That does not mean that I had to pay 28% on all my income for federal tax purposes. I had to pay the 28% only on the income that was above the cut off for the lower bracket. That is why the IRS publishes tax tables, otherwise you could just apply the bracket percentage across the board. It would be a fairly simple calculation. I'd bet Turbo Tax, Quicken, and H&R Block would probably find far fewer customers if taxes were simplified.

The fact is that everything does get pretty complicated by the time you add in your deductions (which of my deductions are valid, anyway?), investment income, capital gains, and depreciated assets. If you are the sole proprietor of, or partner in a business, all bets are off. You best either find a good tax preparrer or get some tax software. You don't have the time to accurately do your taxes to ensure you are paying as little as possible.

Make sure that your income and your tax brackets line up such that you are not earning just enough to actually make less, after taxes. There are cases where a small increase in income can produce a smaller post tax income. That's why we have tax software and accountants. In the aforementioned case, you will want to see if you can find a few more deductions or defer any income to get your income down a bit.

To find out your federal tax bracket, download federal tax forms (or one of the myriad schedules the IRS delights in conjuring up), or e-file your tax forms, see the IRS web site here:
http://www.irs.gov/individuals/article/0,,id=118506,00.html

For the rest of us, we'll just take our grocery bag of forms, receipts and statements to our accountant and have them wade through it, in the hopes we won't have to write too large a check to Uncle Sam this year.

Posted by debtblog at 02:41 PM | Permalink | Comments (0) | TrackBacks (0)

It's sad that so much of our tax dollars are spent surreptitiously, with those little earmarks slipped into this bill and that, in response to the “I'll scratch your back if you scratch mine” way that business gets done inside the beltway. Known by the euphemism “pork”, these little bits of financial mischief give swine and one of my favorite foods, barbecue, a bad name. One of the favorite tactics of our enlightened porksters is to slip in their pet project into appropriations bills that are completely unrelated to the pork project, but are deemed vital enough that they will be voted through with little objection. The senator or congressional member gets federal money sent back to their district that they can point to during their reelection campaign as an example of their proficiency in helping Mr & Mrs Voter.

As an example of just how insidious this whole process is, I can point you to Citizens Against Government Waste, a non-partisian organization that tracks just such fiscally irresponsible nonsense as it applies to your hard earned (by you, not the your congressperson) tax dollars. They released their 2007 Indefensible Defense Pork list today that gives a glimpse into the inner workings of the used car lot that is the halls of our government on Capitol Hill. I'm not suggesting that some of these pork projects don't have merit. On the contrary, there are some very meritorious uses of our tax dollars contained therein, but they don't relate one wit to national defense or the military.

Here are some examples of your government at waste:

• $1,600,000 for the New York Structural Biology Center - Rep. Charlie Rangel (D-N.Y.), and Sens. Hillary Clinton (D-N.Y.) and Chuck Schumer (D-N.Y.)
  

• $3,000,000 for “The First Tee,” - House Majority Whip James Clyburn (D-S.C.) Aims to improve young people's lives by exposing them to the joys of Tiger's favorite sport.
  

• An astounding $25,000,000 of your tax dollars for the Hawaii Federal Health Care Network, added by Sen. Daniel Inouye (D-Hawaii). I'm definitely not against Hawaiians being healthy, but how exactly does this qualify as a defense appropriation?

• Inouye's other big earmark was $2,000,000 for brown tree snakes. Unlike some people, I actually like snakes, and wish no ill will toward the brown tree variety, but unless we can find some way to enlist them in special operations units for intelligence gathering or ambushing enemy troops, money for them does not belong in the defense appropriations bill.
  

• $5,000,000 for Project SOAR, added by House Speaker Nancy Pelosi (D-Calif.), Rep. Bruce Braley (D-Iowa), and Sens. Chuck Grassley (R-Iowa) and Tom Harkin (D-Iowa). According tho their website, project SOAR “...development of literacy among preschool children in Head Start programs, as well as supporting teens and parents serving as Teen Literacy Coaches and Parent Literacy Leaders as they develop their own literacy, leadership, and employability skills” A worthwhile cause to be sure, but why exactly does it belong in the defense appropriations bill? The whole subject of funding education at the federal, instead of the state and local level is a subject for another debate.
  

• $20,000,000 for historically black colleges and universities, added by Rep. Elijah Cummings (D-Md.) and Sen. Mary Landrieu (D-La.). Again, a worthwhile use of funds. Again, I'm a huge proponent of education. We need it to have the kind of employees that businesses need to compete in the world marketplace, and the innovative goods and services that America is known for. But again, how exactly does this relate to defense and the military? (unless the graduates of these colleges will all go to work on DARPA projects, developing new and innovative technologies to benefit our military)
  

These are just a small example of the (are you sitting down) over 2,000 such earmarks in this year's defense appropriations bill. Amazingly enough it actually represents a substantial drop over last year's version. Although this relates to the defense appropriations bill, your congressional members and senators play similar games with every other appropriations measure before them during the legislative session. Cannot our 535 members of the House and Senate stop this massive “Bridges to Nowhere” style of government that causes the waste of (many) billions of our tax dollars, that we have to dig to find out about? Citizens Against Government Waste are doing great work, stop by and check out the rest of the Pork. Hey, it's almost time for lunch!!

Posted by debtblog at 02:39 PM | Permalink | Comments (0) | TrackBacks (0)

From a tax perspective, there are three broad classes of retirement vehicles; taxable, tax deferred, and tax exempt. Why wouldn't you just stick to tax exempt vehicles and avoid the whole tax issue altogether? Well, you could, and some have, but that limits your choice, and your probable investment return, in the name of federal tax savings. Vehicles such as tax exempt municipal bonds (munis) can offer an attractive option for investors, but typically the level attractiveness rises with the investor's tax bracket. Investors in higher tax brackets will avoid comparatively higher levels of taxation than lower income investors. For these investors, the avoidance of federal taxes may swing the pendulum more in favor of tax exempt investments. In many cases though, tax exempt investments offer substantially lower yield than other choices, and the reduced yield is not sufficiently compensated for by their exempt status.

Many more retirement accounts consist of tax deferred retirement instruments. These include traditional IRAs, 401(k) plans, 403(b) plans (403b plans are for public employees and non-profit private organizations), and Roth IRAs. There are tax differences between these three. The Roth IRA is taxed when the money is earned, but not when it is withdrawn, assuming you withdraw the funds after you turn 59-1/2 years of age. Prior to that age, you'll incur the wrath of the IRS in the form of a 10% penalty, in addition to any taxes you may owe.

Traditional IRAs and 401(k)s are similar in that they use pretax income to fund the plan, and then the retiree / investor is taxed when the money is withdrawn. If you are in lower tax bracket after retirement it is most advantageous to use a traditional IRA. Most people are in lower tax bracket after they retire, because the years immediately preceding retirement are usually the peak earning years. Most people will find that their situation warrants using a Roth IRA plan at the beginning, especially for the first 20 years or so of their contributions, when they are in comparatively lower tax bracket. If your federal income tax rate is the same at contribution and withdrawal, it does not matter when you are taxed. The results will be the same if pay taxes before you contribute, or when you withdraw. If you don't believe me, consider the following:
Traditional: Your 1^st year $7,500 pretax contribution, invested for 40 years at 8% yield = grows to $162,934. You pay taxes at your income tax rate, as dictated by your taxable income. If you are in the 28% tax bracket (for 2007 = 28% on marginal income between $64,250 - $97,925) and we assume your actual tax rate works out to 22%, you'll lose $36,505 in income taxes on this portion of your distribution, bringing your after-tax distribution amount to $127,088.

Make the same assumptions for a Roth plan and you'll get the following:
$7500 – 22% taxes paid before contribution = $5,850 net contribution. $5,850 invested for 40 years at 8% = $127,088. See, I told you so. When it gets murky is when your tax rates are not the same, as is usually the case as your life progresses. You'll want to see a very competent tax and retirement adviser to assist you with your retirement planning so you can maximize your retirement assets and minimize your tax consequences.

NOTE: If you control how much money you take as distributions you can control not only your income tax, but have a very significant effect on how much taxes you on your social security benefits as well.

Which of these is best for you depends upon your specific situation.401(k) plans are company sponsored, while IRAs are private. The big advantages of a 401(k) is that the funding is automatic and comes right out of your paycheck. This can be a huge advantage for discipline challenged savers. The biggest advantage from an investment perspective is that many companies offer to match all, or portion of the employee's contribution. The power of this almost cannot be underestimated. It's really quite powerful, and can contribute substantially to a comfortable retirement. A traditional IRA is similar to a 401(k) for most practical purposes, except that the investor self funds the account and their employer has nothing to do with it.

Traditional IRAs and company sponsored retirement plans have another age requirement. You must begin to take minimum withdrawals (distributions) when you reach 70-1/2 years of age. Roth plans do not have this age restriction, so if you plan on bequeathing one of these to someone, this may be the way to go, as it can sit there, growing, after you're deceased. When the lucky recipient does begin withdrawing the money when the so desire, and pay income taxes on it with no additional penalties.

Traditional and on-line brokerage accounts are examples of non-tax deferred investment accounts. There also are some automatic pans such as Dividend ReInvestment Plans (DRIPs) where the dividends form a company's stock are automatically reinvested in purchasing more stock. With a DRIP, you will pay income tax on the dividends you receive in the year they are received, even if they are immediately reinvested. That is something to keep in mind when considering dividend paying investments that aren't tax deferred.

Posted by debtblog at 02:41 PM | Permalink | Comments (0) | TrackBacks (0)

Ostensibly Rep. Dingell is manufacturing this legalized robbery as an incentive for Americans to reduce that bane of human existence; carbon emissions. In reality it will burden the average taxpayer and the economy unnecessarily. A tax on fuel will hurt not only the driving public right in their wallet, but also every business that relys in any way on transportation. That covers just about every business. You know who will end up paying that increase in costs; again the average taxpayer, as businesses are forced to raise their prices.

Although many politicians are, on the surface about creating more jobs for their constituents, this increase will do quite the opposite. Every small business that will be forced to shoulder the burdensome gas tax will have to make a choice; where to cut back in order to pay the additional fuel cost. In many cases they will have to cut employment. Labor is the highest cost for almost every business, hence labor offers the largest potential for savings, as can be seen form the way many businesses rush to cut jobs at the first sign of an economic slowdown. This tax increase package will do it's best to create such a slowdown.

As many an environmentalist will attest to, economic activity invariably creates carbon emissions. What better way to decrease those emissions than to reduce economic activity? The problem is that the economic activity also creates the wealth required to develop technological solutions to environmental problems. In this case it will give the government a short term revenue increase. Long term, the huge gas tax increase will cause economic contraction, which in turn will cause reduced federal tax revenues. Fuel tax revenues will increase, even with the reduction in fuel use this tax will engender. Federal income tax revenues, both corporate and personal, will be hurt by this tax increase, however. If a rising tide raises all boats, the boats in this case will be doing their best Exxon Valdez impersonation.

I haven't even started in on that last tax refuge for the average American, the mortgage interest deduction. At a time when many Americans are finding it hard to meet rising mortgage payments, the esteemed Rep Dingell proposes to eliminate the deduction for the interest on those mortgages.Oh, those that can afford to will be able to buy their way out of it with that favorite refuge of wealthy environmentalists, the carbon offset credit.  Yes, he's proposing the phased reduction, to zero of tax deductions on mortgage interest, beginning on homes of 3,000 square feet. Of course Dingell is saying this is one way to reduce carbon emissions not only from the construction and operation of large homes, but also from the suburban sprawl that causes larger commute distances.

If he wants to reduce suburban sprawl, how long before he proposes a tax on large yards? After all, that contributes to sprawl and even causes increased carbon emissions due to greater mowing requirements. I'm legislation on that front won't be too far behind. Homes and yards, bad idea, stacks of condos with people living like chickens on a factory farm in the inner city, great idea in their view. Never mind that many small businesses, the source of most employment in this country, is located outside the inner city and never likely to relocate.

This is another attempt to grab the mortgage interest deduction, a tax deduction that some Federal lawmakers are loathe to allow Americans the privilege of keeping (much like their money). These legislators have been after the deduction for years, this time they're using the environmental angle to go after it. 3,000 square feet is hardly a castle, and I'm sure if this bill ever makes it to law, we'll see a flood of 2,999 sq foot homes and creative ways to circumvent the tax increase. Never underestimate the creativity of Americans, after all. Some of these may very well have the exact opposite effect that Mr. Dingell is trying to achieve. For example, there will be appearing many more detached garages with home offices and mother in law apartments above the garage, thereby removing them from the square footage of the home. Ironically, this will require larger lots, force homes farther apart, and create larger suburbs. Just another example of the more lawmakers meddle, the more they screw things up.

If you'd like to keep your mortgage interest tax deduction, and avoid the economic problems created by such a huge gas tax increase, write your legislator at once. You can find your congressional representative's contact information here: http://www.house.gov/writerep/

Posted by debtblog at 01:26 PM | Permalink | Comments (0) | TrackBacks (0)

Total Federal Tax Revenues Collected 2003 - $1.783T
Total Federal Tax Revenues Collected 2006 - $2.407T
 

As a percentage of the U.S. GDP, 2003 – 16.5%
As a percentage of the U.S. GDP, 2006 – 18.4%

I rest my case - We don’t need to raise tax rates.

So, to all you Democrats in Congress and the Senate pandering to the voters by caterwauling about those infernal tax cuts and how they have gutted our Federal Budget, kindly shut up. That’s not why we have a federal budget deficit. The majority of it isn’t due to the war on terror or our little excursion to Iraq, either, so be quiet.

To all you Republicans in our esteemed halls of the Federal government -Why the hell do you insist on spending money like frat boys at $2 Tuesday? Why don’t you try buying votes with your own money for a change, instead of using ours? If you would stop spending money growing government size and expanding government programs, and try improving government efficiency (??) and reducing freebies for every group you can find, we could actually use that money to pay off some national debt for a change.

Posted by debtblog at 10:22 PM | Permalink | Comments (0) | TrackBacks (0)

Recently, to eliminate probate and its attendant hassles, Joe Average has begun to place their assets into a legal state of being known as an irrevocable trust. This removes their ownership from the assets. It’s is irrevocable, meaning whoever set up the trust (the grantor) cannot change it. In addition, they are supposed to lose control of the assets to a trustee, who is appointed to administer the trust’s assets. Because they no longer have ownership or control of the assets and they cannot amend or change the trust, they are not liable for taxes owed on any income earned by the trust from operations or the sale of trust owned property.

If one just wants to sidestep the whole probate mess, a revocable trust may be used. The revocable trust hasn’t the estate tax protections of an irrevocable trust, however. Correctly setting up one of these vehicles is extremely complicated. If one of these trusts would benefit you, your relatives, or heirs, it’s essential you visit a good tax attorney so the trust can be properly constructed.

The tax avoidance implications of trusts have led many people to make at best exaggerated, and at worst outright fraudulent, claims about how they can get you out of paying any taxes using trusts. While trusts are excellent for income and estate tax avoidance if done correctly, an irrevocable trust may not meet your other financial and lifestyle needs. In the last 5 years, as trusts have gained popularity, many people have perpetrated some outlandish trust based tax avoidance schemes on the public, and have ended up in jail for their troubles.

First of all, no matter what Art Porth and Bill Drexler have said, you do, in fact, have to pay income taxes to Uncle Sam. All those interstates and F-22s have to get paid for somehow. Leave aside for a minute how much taxpayer dollars are wasted through either inefficiency or government largesse programs, you do have to pay taxes. You can minimize the amount you legally owe, but you can’t just tell the government to F’ off. That’ll land you in a heap o’ trouble. So, if you know that going in, you’ll be better prepared to see through those tax shelter scams you may run into.

The problem with some of these scams is that they’re recommended by individuals or firms that you know and trust. What is unfortunate for you is that if you get led into such a scam, you could still be liable for not only the back taxes, but penalties, fees and other legal consequences. In January of this year the U.S. 9^th Circuit Court upheld an earlier decision by a tax court that taxpayers are responsible for investigating their own tax shelters, so look out.

Some large companies that have recently gotten busted for incorrect tax filings, shelters, or outright fraud include tax preparation firm Jackson Hewitt, law form Jenkins and Gilchrist, and accounting firm KPMG. Many celebrities have been busted for tax fraud or evasion too, such as (actor) Wesley Snipes, (comedian) Richard Pryor, (congressman and Vietnam War hero) Randall Cuningham, (congressman) James Traficant, and (Survivor #1 winner)Richard Hatch, so simply being famous is no defense either. Bottom line; if sounds like a shady way to avoid paying your taxes, it probably is.

Posted by debtblog at 12:31 AM | Permalink | Comments (0) | TrackBacks (0)

As the tax code stands now, it works like this; your home is foreclosed upon and you owe more than your home is currently worth. This situation is increasingly common in the current real estate marketplace. You have few options in this case. On some occasions the lender will actually forgive a portion of your mortgage and allow you to avoid repaying it, but still consider your loan closed. Say you owed $300,000 on your home, but it's now only worth $275,000. The lender could forgo receiving the $25,000 difference between the selling price of the home and your loan balance. That would obviously benefit you, as you have no money to repay them.

The IRS however, sees that benefit as traditional income and wants to tax you accordingly. So, not only have you lost your home, you now owe the IRS more income tax. For example, you are married and file jointly and earn $66,000 a year. That would put you in the 25% tax bracket ($63,701-$128,500)for 2007. In your case, the IRS would increase your tax liability by 25% of $25,000, or $6,250. It's up to you to come up with that money. Where would you get it? Who knows, but in most cases homeowners in this situation haven't the means to come up with the money.

HR3648 would eliminate the requirement in the tax code that enables the IRS to tax homeowners in that situation. We all know however, like the big corporation they've become, the Feds are loathe to actually give up a source of revenue. This case is no different. In a move that is sure to rise the ire of some, while preserving the “tax the rich, feed the poor” ethos that brings them votes in November, the house has determined that a suitable target to retain the aforementioned revenue is the existing ability of folks with second homes to live in them for 2 years out of 5 and get a capital gains tax break.

As the tax code stands currently you can purchase a home as a second home, as for vacations or retirement, live in it for only 2 years of 5, and get the full $500,000 (filing jointly) or $250,000 (filing singly) exclusion on capital gains taxes. That tax exclusion will be amended to only allow the exclusion for the tie you actually live in the home as a primary residence. If for example, you live in a home now, but purchase a second, smaller home as a rental, planning to sell your current home and move into it upon retirement, you currently can by the home, rent it for 3 years, move into it for 2 years, and in the 5^th year you'll be able to, for tax purposes, ignore up to $500,000 of capital gains.

So, if you bought the new home for $400,000, and 5 years later it was worth $650,000, weather you were filing singly or jointly, you'd not have to worry about paying any capital gains taxes (because the gain was only $250,000) if you had lived in the home as your primary residence for any 2 of those 5 years. If the code is amended you'd only be able to ignore the appreciation occurring over the last 2 years, when you actually lived in the home. So if the home appreciated from $400,000 to $550,000 in the first 3 years, you'd owe Uncle Sam a tax bill for the applicable capital gains taxes on $150,000.

If the bill passes into law (very likely), the committee estimates the Federal Government will reap about $2 billion in revenue per year from the changes. This is more than enough to offset the losses produced by the elimination of the mortgage forgiveness. Considering the increase in foreclosures is temporary, but people will have second homes for the foreseeable future, The Congress has done a nice job at securing additional tax revenue for the government. Goodness of their hearts? Possibly. Sucking more money out of the economy, and your pocket? Definitely.

Posted by debtblog at 01:28 PM | Permalink | Comments (0) | TrackBacks (0)

In many cases tax payers are either (blissfully) unaware of or have been outright lied to about the massive nature of the cost containment problems (nice euphemism, that) experienced by these transit projects. Too many of these projects are supported by those who deem themselves “progressive” in nature and feel that the “progress” they support justifies their vision of the future, cost overruns and misuse of the people's money be damned.

In Washington State's Sound Transit, the people approved a light rail transit project in 1996 that was projected to deliver to the voters about 25 miles of light rail and 25 stations at a cost of just under $2 billion. The completion date was claimed, at the time of the vote, to be 2006. Shame on the bamboozled voters for believing such nonsense. 2006 was actually closer to the start date of the project. To make matters worse, the scope of the project had shrunk substantially. Now the light rail project will only extend about 15 miles and have just over half the original number of stations in the plan originally sold to the voters. Oh, and the price has risen to over $4 billion.

If you approved a contract to have your next new home built and the project was supposed to provide you with 3,000 sq feet, 4 bedrooms and 2-1/2 baths at a cost of $250,000, and finished in 1 year, you'd be kind of pissed off when the contractor delivered you an abode of 1,800 sq feet with 3 bedrooms and 1-1/2 baths at twice the price in 3 years, no? That's the same way Puget Sound voters should feel now. But wait, it gets worse, much worse. According to the latest plan foisted upon beleaguered taxpayers in the region, to get something like the original plan will require, imagine this, more taxes.

How much of a tax increase you may ask? Well, in a Bostonian like stroke of tax dollar inflation, Sound Transit will ask voters in November to approve a plan that they claim will total over $28 billion in the coming 20 years. About 60% of that will be for transit projects, with the remaining 40% to be for roads. That sounds bad enough, yet opponents claim the actual cost of the projects is actually about $157 billion through 2057. Think about the magnitude of that number for just a second. $157 billion. That is the claimed cost of the project after all interest and inflation related costs have been paid. Proponents deride the number, claiming that it's just not fair to include interest and fees. They claim that the transit authority has the ability to reduce taxes after construction has been completed in 2027.

Give me a break, please. For one thing, why would you not include the entire cost of the project, including the interest and fees to be paid by the taxpayers for the life of the bond issue, in your cost projections? There's only one reason, to try and slip this boondoggle past the voters, just like they did in 1996. When you buy your next house, you're not really concerned about the interest on your mortgage, are you? The Sound Transit proponents are using a well worn tactic practiced by car salesmen the world over. Don't get them to look at the total cost. Forget the interest and just look at the shiny new car parked outside the showroom. Don't buy it!

Even if the the $157 billion estimate is too high by half, Washington taxpayers will still pay $60,000 per household to finish the project. For that kind of money, they could hire a car and driver to take them to work. The thing is, I suspect it's not too high by half. Looking at the problems that plagued the projects in Boston and LA, in addition to the problems facing the Puget Sound project to date, it's probably too low, if anything. Seattle's King 5 News had a program by Investigative Reporter Robert Mak describing the potential consequences of the latest rapid transit project to be put before the voters (taxpayers). See his blog about the program Up Front with Robert Mak, here. At this rate Washing State taxpayers will soon be paying a 10% sales tax.

In Chicago the city has been plagued with cost overruns and delays on the area's CTA projects for years. The latest involve the $150 million overrun of the originally $213 million Block 37 station. It';s only the latest in Chi town's transit overruns.

On a percentage basis, the king of transit related cost overruns is Boston's “Big Dig”. This massive project swelled from the originally projected $2 billion to over $14 billion at the time of the project's completion. The astounding omission of the Fleet Center in the preliminary design drawings (Cost to rectify, $1 million) to other design related overruns and scheduling problems alone directly accounted for, according to a Boston Globe investigation, of over $1 billion in excess costs.

When will voters wake up and realize that they are being lied to on a daily basis about the scope, costs and completion dates of almost every major transit project. If you're a Washington State resident, and your retirement account is too low, wouldn't an extra $60,000 be nice?

Posted by debtblog at 02:28 PM | Permalink | Comments (0) | TrackBacks (0)

How the hell are you supposed to pull that off, minus some creative ballot box stuffing or other election shenanigans? It’s pretty easy, really. Just cast a vote in the oft-neglected primary elections. In many primaries the voter turnout is downright abysmal; on the order of 15 – 20%, sometimes even lower, especially in an off year contest. That means your vote will count for 3 times as m