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With the year-end quickly approaching, it’s a good time to start planning your charitable donations. Donating not only allows you the opportunity to help others in need, it can also provide you with tax benefits.
The following are guidelines to help you maximize your tax benefits:
Donations of $250 or less require either a bank record, written receipt, or letter from the qualified organization.
Donations of $250 or more require a bank record or written receipt, AND an acknowledgement from the organization stating the amount of cash contributed, if any benefits were received, and a description of these benefits.
The Mortgage Forgiveness Debt Relief Act is set to expire on December 31, 2012 and has large implications for Nevadans. Nevada is perennially in the lead, or in the top five in the U.S., in mortgage foreclosures. When a house is foreclosed upon, the difference in debt owed less the value of the house sold at auction, is considered cancellation of debt income to the IRS. 
This is taxed at the taxpayer’s ordinary income rates with the cancellation of debt income putting the taxpayer in a higher income tax rate bracket. With the proliferation of foreclosures and short sales starting in 2007, Congress passed The Mortgage Forgiveness Act which allowed this cancellation of debt to be excludable from income if it is from your personal residence.
But with this law expiring at the end of this year, Nevadans better be careful. If you stop paying your mortgage now and don’t enter into a short sale, it is likely that the actual foreclosure will be put off into 2013 and that means the debts cancelled will be income. If you are $100,000 underwater this could create a tax liability of at least $25,000!
If you currently own one of the 67% of homes in Nevada that is underwater, according to the website Zillow, and are assessing your options be careful. Make sure that your home is sold at auction before December 31 or enter into a short sale to get the cancellation of debt into 2012. Another possible exclusion of cancellation of debt could also be of help to you beyond 2012. If you are insolvent immediately before the cancellation of debt, this will still be excluded from income.
So you think you have financial issues? Just listen to what Nina Olson, National Taxpayer Advocate, has to say about the IRS. In her annual report to Congress she suggested that the IRS’s increasing workload and declining resources are the most serious problems facing taxpayers. So how does she connect the dots to conclude that this is a “taxpayer” problem?
She reasons that the resulting inadequate taxpayer service, erosion of taxpayer rights and reduced taxpayer compliance are causing harm to the taxpayers. That’s how! I don’t know. Seems to me like an IRS problem rather than a taxpayer problem. But, then again, doesn’t the taxpayer always get stuck with the tab?
But wait. Maybe there is a solution that doesn’t stick the taxpayer with the bill. It turns out that increasing funding for the IRS might actually be a good investment. Current inadequate funding contributes to many of the problems facing today’s IRS. When the federal individual income tax was first enacted in 1913, it applied only to high-income taxpayers, which totaled about 358,000 people. That total today stands at 141.2 million with one tax return for about every two people in the United States. And believe me, the returns are a lot more complicated now than they were almost 100 years ago.
It seems that as the collection agency for the U.S. government, the IRS does a pretty good job. On a budget of $12.1 billion, the IRS collected $2.42 trillion in fiscal year 2011. That is to say that for every $1 that Congress appropriated for the IRS, it collected about $200. Now with the current “tax gap” at about 15%, every household is paying an annual “noncompliance surtax” of about $2,700 to enable the federal government to raise the same amount of money it would have collected if all taxpayers had reported their income and paid their taxes in full.
While I doubt that appropriating an extra $1 would produce the same collection rate when applied to the last 15% of noncompliance, I’ll bet it would provide an attractive return on the investment.
Have you ever wondered just how much you pay in taxes over a year? Not just big tax items like income and property taxes, but even the taxes on the gas you pump into your car to the taxes on your utility bill?
Maybe you haven’t because you’re not obsessed with taxes like us CPAs, but if you are curious, the American Institute of CPAs has come out with a nifty tax calculator that is designed to give U.S. taxpayers a complete picture of their estimated total federal, state, and local tax obligation.
To give you fair warning, you will not be able to just plug in a few numbers and get your calculation. For the calculation to be accurate, you will need your prior year’s tax return, your estimated income, and a good idea of what you spend a 
month on expenses like gasoline, cable, cell phone, electric and gas, alcohol, clothing, etc. With just a click of the button you will be provided with a total estimated annual tax liability and exactly what percentage of your income is paid over to the taxing authorities. If you have a moment – check it out; the results just might shock you! http://www.totaltaxinsights.org/Calculator
The calculator is also available on our website – bvcocpas.com, in the resources/links section.
It’s spring time in the Truckee Meadows. The river is running high, the trees are green, and students of all ages are getting spring fever.
With graduation on the horizon, it’s hard not to think about what is coming next. Whether your student is finishing kindergarten, graduating high school, or currently in college, it’s always a wise idea to be thinking about a plan for higher education.
It’s never too late to start saving, but just like planning for retirement, the earlier the better. These days there are a lot of options available for consideration including Section 529 plans, education savings bonds, Coverdell education savings accounts, and education loans. As the cost of college continues to increase it is important to be prepared. According to the Project on Student Debt, two-thirds of college seniors in the class of 2010 graduated with loans, and the average debt carried was $25,250.
The cost of college continues to be on the rise. Make sure you look into all your options for investing in your child’s future as well as for deducting your current costs.
If your student is already in college or will be starting this year, make sure your CPA is making the most of education deductions and credits. For those that meet the requirements, student loan interest can be deductible on a qualified education loan. Taxpayers may also be able to claim a deduction for qualified tuition and fees. Education credits include the American Opportunity Tax Credit and the Lifetime Learning Credit . These deductions and credits should be coordinated to maximize the tax benefit. While taking this all into account, it is also important to review the dependency exemption and determine when it is the optimum time for your child to no longer be claimed as a dependent.
It’s always interesting to get a look into somebody’s finances, and who better to snoop at than President Obama. He released his 2011 tax return, which can be viewed at: http://s3.documentcloud.org/documents/336093/bidens-and-obamas-release-2011-income-tax-returns.pdf.
It’s a very simple return: Wages from being the President of $394,821, $10,694 in interest income and $441,369 from selling his books, for total income of $789,674.
I always like to deduce how much somebody has in the bank, and by using Obama’s $10,694 in interest income, assuming he is getting a 1.5% return, that implies he has $713,000 in the bank. This is somebody who has made $1.8 million in 2010, $5.5 million in 2009, $2.7 million in 2008, $4.1 million in 2007, $983,826 in 2006 and $1.7 million in 2005 for a total of $18 million over 7 years. With this much income, I find Obama’s saving rate atrocious.
But what is the sense of saving when you can expect hundreds of millions of dollars in income after you leave the presidency? For example, Bill and Hilary Clinton have made over $109,000,000 from 2000-2007 after his two terms were up as President for activities such as speeches and book sales. So I’m sure Obama will be making boatloads of cash after he has left the Presidency, and there is always the few hundred thousand he has contributed to self-employed retirement plans that are tax deferred.
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Next, looking at Obama’s itemized deductions shows he paid over $47,000 in mortgage interest. Assuming he refinanced recently and is getting a 4% interest rate, this means his principal balance is over $950,000 thousand. He has more in mortgage debt than he has in the bank and has made $18 million just in the last 7 years. But at least he isn’t underwater. According to Zillow, the value of his Chicago home is $1,052,100. But, since he purchased it for $1,650,000 in 2005 it appears he’s hurting like the rest of us.
Gold is one of the hot new investments today. 
People invest in this asset by purchasing gold bars, gold company stocks or gold electronic trading funds. These electronic trading funds, commonly called ETFs, have proliferated as evidenced by the ETF with the symbol GLD. This is a fund that started in 2005 and now has over 64 billion dollars of investors money under management. This ETF, as all precious metal ETFs do, purchase the metal for the investor so the investor doesn’t have to worry about storing or purchasing it. These ETFs can allow the investor to have a position in metals like gold, silver, copper or platinum.
But there’s a catch when investing in these, and many people don’t realize this until after their positions are sold or maybe even have calculated wrong on their tax returns. Capital gains on these precious metal ETFs, and also physical holdings of gold, silver or any other precious metal, are taxed at a rate of 28%, significantly higher than most other capital assets, including most stocks which are taxed at a rate of 15%. So assuming that you have a $1,000 gain on the sale of GLD you will have a tax of $280. In contrast, if you have a $1,000 gain from the sale of Newmont Mining Corp., a company that primarily mines gold, your tax will be $150. This is a significant tax burden that can come unexpectedly from investing in precious metal ETFs like GLD. When deciding whether to invest in precious metals or precious metal ETFs this higher tax rate should come into consideration.
This year could be the last year before the Bush tax cuts expire and the tax rates increase. If these cuts expire, single people and married people alike will have higher taxes. A single person with taxable income making $100,000 will have a tax bill of $23,805 and an average tax rate of 23.8% come 2013 when these changes go into effect.
Giving the federal government 23.8% of your income, or over 30% when combined with FICA may seem like a lot, so let’s go back in time to compare:
Take a look at a decade (the 1970’s) when Stairway to Heaven was blasting on the radio and Don Vito Corleone was the most popular Halloween costume. Adjusting for inflation, $100,000 today equals about $41,800 in 1972. In 1972, the tax bill for a single person making $41,800 would have been $8,261 or 20%. We’ve all heard about the exorbitant tax rates of the past so this is a little surprising that the tax, adjusted for inflation, is actually lower. In analyzing the tax rates, adjusted for inflation, tax rates for single people don’t top out at 40% until $118,095 in income. Then rates start to skyrocket. At $171,774 the tax rate jumps to 50%, at $236,189 to 60%, and above $536,793 to 70%!
High taxes of the past were brought to my attention by the television series Mad Men, about an advertising agency company based in the 1960’s. There is an opening scene where the Head of Television is talking about getting a raise. He ends up saying he never wants to make more than $36,000 because then your just working for “them”. “Them” is the IRS and back in 1961 if you made between $36,000-$40,000, you were paying 53% in taxes. Adjusting for inflation that is equivalent to someone making a little over $270,000 in todays dollars. If the Head of Television was talking about a raise today, that conversation never would have happened, as he would be paying 33% in taxes and max out at 35%.
In 2013 when the Bush cuts expire that maximum is still only 39.6%. Can you imagine what the partners of the agency were paying in 1961? The maximum tax bracket in 1961 was 91%. For every dollar in income above $200,000 (in 1961 dollars) they would only be taking home 9 cents! So if taxes go up in 2013, just remember that taxes could be worse.
