Doug Beecher's Tax & Money Blog

Sometimes Claiming All Your Legal Deductions Can Cost You More #Tax

noreply@blogger.com (Doug Beecher) — Sun, 17 Mar 2013 15:38:00 +0000

Most of us are awed by the complexity of even our own seemingly simple tax situations ... Yahoo Finance has an article that has some comfort along with good advice for you: http://finance.yahoo.com/news/6-tax-terrors-and-how-to-overcome-them-170130521.html

An additional thought: Try calculating it different ways before deciding on one. You can often save money, even on the simplest returns.

Here's a recent example I helped with:

A single person came to see me with just two W-2 forms and a donation receipt from a charitable organization. They were a renter ... so no mortgage interest or property tax, and had just a few medical expenses, and even less of anything else to claim.

Still, the state income tax withheld from paychecks along with the charitable contribution were enough to be larger than their standard deduction. Itemizing did increase their federal tax refund.compared with claiming that standard deduction.

Here's where it gets interesting.

They live in a state that requires you to itemize deductions for the state if you itemize on your federal tax return. Their state likewise requires you to claim the standard deduction if that is what you did on your federal return.

Because state income tax claimed on the federal return was added back to income on their state return, the result was a larger increase in state tax due than what itemizing saved them on the federal.

For them they had lower total tax by claiming the standard deduction on both the federal and state returns. It paid to look at it both ways before hitting the button to e-file their returns.

Yahoo's advice to ask questions and consider your various choices paid off. Your options are probably different than my example, the point here is to take a deep breath (or several) and carefully look at the options you have. Most of us do have more than one possible way to legally file our taxes. Don't wait to the last minute, so you have time to try it one way, then sleep on it and try another. Often this will save you money.

Sequestration: A Letter to Congress

noreply@blogger.com (Doug Beecher) — Fri, 01 Mar 2013 21:04:00 +0000

Dear Congressman Matheson:

Thank you for the opportunity to give you input for the federal budget process as we reach the sequestration deadline. I especially appreciate that you continue to reach out to those of us in the 2nd District that you represented for many years before beginning to serve the new 4th District beginning this year. You never know how district boundaries or other opportunities will change, you are wise to continue to be interested in those of us you might once again have reason to work with.

I have been very interested in this topic for a long time, for example, I wrote the following blog post on February 18, 2011 when Congress was considering the budget for what was then the upcoming year. (You can find it at http://dougbeecherstaxandmoneyblog.blogspot.com/2011/02/11892-item-in-your-budget-you-think-you.html if you would like to see it in its original context.)

It is given that there are a lot of hard choices here. Anything that is decided tends to put the interests of one person or group of people in preference to those of another, always a difficult decision to make.

Please particularly note the part of my blog post where I present the major budget categories as then proposed by the President in dollars per person. For me it helps put things in perspective.

It is also given there will be an impact to the overall economy if any cuts agreed to are too large. Because of that I especially appreciate your strong desire to reach across the aisle and work to get the leaders on both sides to make some carefully considered movement.

Specific (Simple) Recommendations:

1. Overall, I believe sequestration is a reasonable idea. Let's assume for the moment that each and every federal government program is essential. There is still efficiencies that could be realized in each program. I would hope that the labor portion of those efficiencies could be achieved through attrition rather than furloughs, and believe they can. It is sad that we could not agree on how to do this without sequestration, but believe that overall this is a way we can get started on what needs to be done year by year, in baby steps, for the next decade and beyond.

2. There are individual programs that should be completely eliminated, in addition to implementing efficiencies in all programs. How about trying for one a year, and starting with the Energy Department. At $74.67 per person (at February 2011 proposed levels) this isn't huge, but that's what we need. A little at a time. It is fair to say that the Energy Department has not met the objectives it was set up to accomplish when it was established over 30 years ago. Please work to cut that department by 50% by eliminating it as a separate department along with many of its agencies. The surviving 50% of its budget could be added to the budget of the Interior Department, which would likely absorb the programs that most need to remain.

Thank you for seriously considering my input. I know I am one voice out of many, and each of us do count. I know you personally recognize that and thank you for your service.

Kind regards,

Doug Beecher

La Verkin, Utah

#Tax Deductions for Meals/Incidentals on #Business #Travel ... Simplified!

noreply@blogger.com (Doug Beecher) — Tue, 03 Apr 2012 01:53:00 +0000

The IRS allows you to claim tax deductions for meals & incidental expenses on overnight business travel. To qualify you will be required to keep records that show:

That your trip required "substantial sleep" (usually overnight) before returning.
The trip's business purpose.
That over half of the working time of a majority of the days of the trip was used for business.

Please continue reading to get a quick summary of your options to calculate the amount of the deduction you can claim for 2011-12 if your travel meets these requirements ...

Actual or Per Diem Rates

Your first choice is whether to keep detailed records and receipts for every meal or incidental expense item, or use per diem (daily) rates. You need to make this decision for all the business travel in a tax year. Either way, you are generally allowed to deduct 50% of the cost, whether determined using the actual cost or the per diem rate method. (However, if you work in the transportation industry, you have a separate rule that is explained below)

Actual costs include the meals themselves (and tips), plus expenses the IRS considers incidental (quoted from IRS Publication 17, Section 26):

Fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and hotel servants in foreign countries,
Transportation between places of lodging or business and places where meals are taken, if suitable meals can be obtained at the temporary duty site, and
Mailing costs associated with filing travel vouchers and payment of employer-sponsored charge card billings.

Please note that the IRS also says that:

Incidental expenses do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, or the costs of telegrams or telephone calls

Accordingly, you can choose to claim the appropriate per diem rate, and separately claim actual costs for laundry, lodging taxes, and telephone calls.

Special Transportation Industry Rules

IRS rules define a transportation industry worker as one whose duties:

Directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and
Regularly requires you to travel away from home and, during any single trip, usually involves travel to areas eligible for different standard meal allowance rates.

Currently, the IRS allows those working in the transportation industry to deduct 80% of the cost of meals and incidentals. They can use the actual cost method, the same per diem rates available to other industries explained below, or a flat $59 per day within the continental United States (and $65 per day elsewhere). Because of the extensive additional record keeping that would be required, most transportation industry workers choose to use this flat rate for all their travel in a tax year.

Per Diem Rates

IRS Publication 1542 explains your choice of two methods to claim per diem rates:

You can use the High/Low method, which divides all locations in the United States into two categories. There is a list of specific locations there that qualify for the "high" rate of $65 per day for meals and incidental expenses. Travel to any other location qualifies for the "low" rate of $52 per day.

Or you can scroll through the rest of the publication to find each locality you spent the night in for business, and use the applicable rate for that place. Again, you have to be consistent for the entire year with your choice of the high/low method, or the specific location method.

You will note that IRS Publication 1542 also mentions per diem rates that include lodging, both using the high/low and specific location methods. You can use these in lieu of actual costs for lodging as well as meals and entertainment, but in general if you have ownership or control of your business you can only use the meal and incidental per diem rates and then claim actual lodging expenses.

Another source of allowable per diem rates is at www.gsa.com, which is the source the IRS uses when updating Publication 1542.

What Works For You?

Please let me know whether you prefer using one of the per diem rates or the actual cost method. How difficult is is for you to maintain the records required by the actual cost method? Which method gives you the higher deduction? Your answers will help all readers, thanks in advance for your comments and shared experiences!

#HealthCare #Tax Credit for #SmallBusiness and Non-Profits

noreply@blogger.com (Doug Beecher) — Fri, 30 Mar 2012 01:33:00 +0000

The IRS is asking,

"Are you a Small employer? Get the credit you deserve.

If you are a small employer. . .

              With fewer than 25 full-time equivalent employees?

              That pays an average wage of less than $50,000 a year?

               And pays at least half of employee health insurance premiums?

. . .then there is a tax credit that may put money in your pocket."

More information is available at: http://www.irs.gov/newsroom/article/0,,id=223666,00.html

It is useful to note that even if the lingering slow economy still has your business operating at a loss, this credit can be
carried back 1 year or forward up to 20 years. Go ahead and file Forms 8941 and 3800 to establish your claim to
this credit now so that it will be available when you need it in the future.

Also, if you have more than 25 employees, but some work part-time, you may still qualify for this credit.

In general, this credit is available for health insurance the business pays for employees who are not an owner of the business.
There are exceptions, so read the instructions for Form 8941 carefully.

What Donald Duck and a 2% Income #Tax Have in Common

noreply@blogger.com (Doug Beecher) — Sat, 24 Mar 2012 07:51:00 +0000

1 of 6

From Abe Lincoln To Donald Duck: History Of The Income Tax : NPR http://n.pr/GOCv3v

The story of how the U.S. wound up with the income tax is the story of two wars, a Supreme Court justice on his death bed, and Donald Duck.

This story posted yesterday by National Public Radio is interesting on several levels. The government needed everyone to pay income taxes to finance World War II, and used Donald Duck paying $13 tax on income of $2,501 as an example for all. I'm curious,

would you like to pay $201 of income tax (along with $465 in social security tax) on income of $38,734 today? (This is what the Bureau of Labor Statistics says is the equivalent amount of income in today's dollars) And would you like the amount of government that would pay for?

Do the math: This is a combined income and social security tax rate of less than 2%.

Please help me with my questions ...

If we were able to pay for World War II and social security with taxes of less than 2% on fairly average wages for the time, what are we getting for the higher tax rates the average income worker is paying today?
When the war ended, should the income tax for the average wage earner ended as well?
What was your reaction to watching Donald Duck enthusiastically respond to the radio announcer appealing to his sense of patriotism and duty?

I can't wait to read your answers and to repond to them!

Join Doug Beecher,MBA,CPA for Live #QuickBooks #Training 'Setting Up #Inventory' Mar 15 @4 pm in Hurricane

noreply@blogger.com (Doug Beecher) — Wed, 14 Mar 2012 03:02:00 +0000

Topics for this training include:

Setting preferences so your QuickBooks file can handle inventory
How to enter your individual products into inventory in QuickBooks
Using purchase orders in QuickBooks to monitor inventory
How to record inventory when it is received, whether or not you have been billed for it yet
Making manual inventory adjustments for shrinkage, damage, obsolescence, etc.
Choices for using QuickBooks to track finished goods you produce ... comparing the use of group items with inventory assemblies, and much more
Dealing with differences in units of measure, such as each, box, or case

This is one of thirteen QuickBooks training topics available live with Doug Beecher, a 30+ year veteran accountant experienced in setting up and using QuickBooks so that it will provide you the records and reports you need to manage your business for success. Click here for more information on these training topics.

We will start by evaluating which of these topics the attendees are most interested in, and learn a little bit from each other about how each of us is currently using, or hope to begin using, QuickBooks to monitor inventory. The one hour presentation will then be focused on these specific needs and uses, with plenty of practical examples. Hope you can join us there!

Potential Trap If You're Deciding Between Working With A Company As An Independent Contractor Or An Employee

noreply@blogger.com (Doug Beecher) — Thu, 23 Feb 2012 00:17:00 +0000

Many people are faced with an important decision when contemplating an opportunity to do services for a company. Should I accept the company's request to work as an independent contractor or should I insist on being an employee ... at the risk of losing the opportunity.

There are numerous pros and cons to each side of this question. The decision is very unique to your situation and your long-term objectives. I have helped many people navigate through this decision, helping them identify which option is best for them, and look forward to working with more.

Here's another aspect of this question you should absolutely consider: Business licensing rules in your local jurisdiction.

If you decide to be an independent contractor, you are choosing to operate a business, even if it is one out of your home office without any interaction with your clients there. Some jurisdictions either exempt such businesses from their licensing requirements, or have special provisions that make licensing very easy and inexpensive ... say $25 per year. Others, well ... consider this example:

A friend of mine just closed her business because of the home office rules in her city. She has full-time employment as a school teacher, where she is an employee. She also operated a very small part-time business where she graded papers for another educational institution on a free lance basis, and maybe 3 or 4 times a year also travelled to their location to proctor exams for students on a weekend. She worked with this institution as an independent contractor and received a 1099-MISC form for the payments she received from them for her services. They were the only client of her business.

Since she received a 1099 form, she filed Schedule C on her federal and state income tax returns each year, reporting the income and claiming business deductions for the few expenses she had related to this activity. This led her to be contacted by the business licensing department of her city, who wanted a $125 business license fee plus a $550 "engineering fee" to pay for someone to come out to her home and evaluate if her room, desk, computer, and files used to grade papers and keep her business records met the city's requirements.

There was no talking the city out of this on minimal size or general reasonableness grounds, so she determined this business was not worth that level of regulation and closed it down. Fortunately, they did agree to waive fees for the period she had already been operating. Others might not be so lucky.

This is just one more reminder that no matter how small your home business is, if you are an independent contractor you are indeed operating a business and need to learn what your local city, county, or other licensing requirements are as part of your decision making process.

Amazing, but true ...

Something I Like About #Tax Reform In President Obama's 2013 Budget Proposal

noreply@blogger.com (Doug Beecher) — Mon, 20 Feb 2012 22:43:00 +0000

Here is a good summary from The Journal of Accountancy on the 256 pages in President Obama's 2013 budget proposal devoted to tax reform: linkd.in/xkjhd1 There are some good ideas here, especially the elimination of the alternative minimum tax, which has gotten way out of hand since it was first introduced. And I could live with dividends being taxed as ordinary income if corporations were given the same tax treatment for paying them as they are for paying interest - thus eliminating double taxation and also the need for S corporations. But a lot of what is here is just another round of making things even more complicated than they already are. Seems like we could save a lot of tax dollars on administration and enforcement if tax reform included real tax simplification. Just sayin'!

Live #QuickBooks Training in Hurricane and St. George, UT, plus Mesquite, NV

noreply@blogger.com (Doug Beecher) — Wed, 08 Feb 2012 01:11:00 +0000

Doug Beecher, MBA, CPA, teaches one hour QuickBooks lessons on demand for small groups of 1 to 8. The discussion is personalized to your specific questions and needs. The fee is only $29.95 to schedule a lesson, or you can join a class that is already scheduled for just $14.95. The one hour format helps you retain more of what you learn. Doug has been a Certified QuickBooks Pro Advisor for over 12 years, and we have a lot of fun in these classes, so come join us!

Here's are some of the topics you can request for a lesson ...

Lesson 1 – Getting Started. “All the Accounting You Need to Know to Begin Using QuickBooks”

Lesson 2 – Setting up Your Company’s QuickBooks File

Lesson 3 – Working With Lists (Chart of Accounts, Customers, Vendors, etc.)

Lesson 4 – Working With Bank Accounts (Using registers, Printing Checks, Entering Handwritten Checks, Reconciling Checking Accounts)

Lesson 5 – Using Other Accounts in QuickBooks (Asset Accounts, Liability Accounts (Particularly Credit Card Accounts), Equity Accounts)

Lesson 6 – Entering Sales Information (Using Sales Forms and Invoices, Memorizing Recurring Sales, Using Multiple Price Levels, Tracking Backorders, and more)

Lesson 7– Receiving Customer Payments and Making Bank Deposits

Lesson 8 – Entering and Paying Bills (Using QuickBooks for Accounts Payable)

Lesson 9 – Analyzing Financial Data (Reports, Graphs, Exporting to Excel, Comparing Actual Results to Budgets)

Lesson 10 – Using QuickBooks to track Inventory

Lesson 11 – Tracking and Paying Sales Tax

Lesson 12 – Creating Jobs, Estimates, and Progress Invoicing

Lesson 13 – Tracking Time, Customizing Forms, Writing Form Letters

Balancing Protecting Consumers While Avoiding Strong Disincentives To Job Creation

noreply@blogger.com (Doug Beecher) — Fri, 27 Jan 2012 23:34:00 +0000

Today I received an e-mailed letter from a friend detailing his concerns about how new EPA regulations will severly impact his business and many others like his. They include potential penalties of up to $37,500 per day. To say they will be a serious disincentive to job creation is a huge understatement. Ironically, his business focuses on finding green energy strategies in construction projects that will also economically benefit his clients.

What he has to say is important enough that I asked for and received his permission to share it with you here:

From: Jeff Bay [mailto:jeffreybay@att.net]

Sent: Friday, January 27, 2012 11:11 AM
To: Jeff (MSD) Bay
Subject: Our Federal EPA hard at work - A new rule which effects us all....

From:

Jeffrey Bay
Morning Star Development, Inc.

Construction Management and General Building Contractors

--- On Fri, 1/27/12, Jeffrey Bay <jeff@greenbaygroup.net> wrote:

From: Jeffrey Bay <jeff@greenbaygroup.net>
Subject: Our Federal EPA hard at work - A new rule which effects us all....
To: "Jeffrey Bay" <jeff@greenbaygroup.net>, jeffreybay@att.net
Date: Friday, January 27, 2012, 9:40 AM

Dear Colleagues and Friends,

I received a letter last week from a contractor's "License Instruction School" offering to train contractors and building owners on the new Lead paint "RRP" requirements & laws. This new law effects any building originally constructed before 1978, and those who do not comply are subject to a fine of up to $37,500 per day by the Federal EPA.

Upon reading this, and after falling off my chair, I realized that our administration is truly standing true to their commitment to create massive new bureaucracies to manage and "protect" us, while causing massive cost increases for all work. I then made some calls to the EPA, and after 4 transfers (nobody knew anything about this, of course), I was finally referred to a supervision who I left a message for, as she is out for the day. In any event, I was able to locate the website which pertains to these new regulations, and which has numerous links to it's hundreds of pages of bureaucratic documents to back it up:

http://www.epa.gov/lead/pubs/renovation.htm

As you explore this you will quickly find out that, in addition to any private training which a contractor wishes to engage for his crew, that the initial certification fees will cost every contractor between $300 to $600 (I assume this is an annual fee). Next, the documentation process will surely become at least a part time effort for an administrator within that contracting company, as one mistake can qualify us for this ridiculous fine, that administration effort which most of us "contractors" cannot sustain in this building economy.

I have left a message for the EPA in order to get the answer to one simple question, that answer which I will request in writing. That question is this: Does this requirement apply to abatement, demolition, and painting contractors ONLY, or must ANY G.C. or building Owner comply whenever work is performed on any building built prior to 1978? The latter seems to be the implication, which is why I want to get clarification. If the latter applies, then I am sure that many contractors (like myself) will NOT engage contracts on any building which was originally constructed prior to 1978. However, that does not help those of us who will, nor does it help the owners of those buildings who need to have work done, as they will all be subject to fines and penalties if they do not engage a RRP certified contractor who meticulously follows all of their rules.

I realize that this is yet one more example of how our government is "helping us" by dictating how we are to protect the public and our environment, but this example of expansion of bureaucracy seems to be the agenda of this administration, as they have created many new government jobs in the process. However, if you disagree with this and other similar new bureaucracies which have been recently formed or enhanced over the past few years, then I STRONGLY suggest that you join me by remembering this when you go to the poles in November, so we can bring the "Change" which this country needs in order to survive.

Thanks for your ear, and God bless America.

Jeff

Jeffrey P. Bay
President / CEO
Green Bay Group, LLC.

1230 Madera Rd. suite #5-109
Simi Valley, CA 93065
805-584-3060 ext. #100

fax: 805-584-0984

Please consider the environment before printing this email.

Top 9 Ways Herb Kelleher Can Help You Be The Perfect Entrepreneur

noreply@blogger.com (Doug Beecher) — Thu, 10 Nov 2011 01:39:00 +0000

We have been discussing Stewart McGregor-Dennis's question, "What does the perfect entrepreneur look like?" My answer is: the perfect entrepreneur imagines a new niche that needs to be in such detail that they literally breathe it to life.

Here are the top 9 ways that Herb Kelleher, founder and long-time CEO of Southwest Airlines, looks like the perfect entrepreneur...and how applying these 9 points can help you breathe your new business to life!

There is much that an entrepreneur can learn by studying other entrepreneurs. I hope to discuss several exceptional examples here with you in the months to come, starting with nine of the core business truths that Mr. Kelleher used to breathe his new venture to life in the early 1970s. (And breathe it to life he absolutely did. An excellent read on his literal crusade to do so is Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success by Kevin and Jackie Freiberg.)

The 40th anniversary issue of Spirit magazine, Southwest's on-board publication, published in June 2011, had an article entitled "40 Lessons to Learn from Southwest". I have chosen to highlight nine of these lessons I believe are particularly beneficial to most entrepreneurs. The numbers are those under which they appeared in the article.

1. Set and renew noble expectations (#32). Dare to dream big! Imagine your product or service solving real challenges many people face regularly. Make this a core principle in your mission statement. Get your team to individually buy into making it happen. Make it part of your company culture. Meet with your team often to candidly evaluate how you can continually improve how you deliver on your noble expectations.

2. Put the worker first (#28). The most important thing in your workers lives is not your business. At the end of the day, they are part of your team because working with you helps them accomplish their priorities. Truly care about your workers. This applies to both your employees and your vendors. Learn what they really care about. Help them realize their personal goals by doing things that help both them and your business. Be fiercely loyal to your team. Your customers are always right. And you rely on your workers to deliver for your customers. Be loyal to your workers and the good ones will be loyal to you. This works at Southwest and it will work for you (be patient, it is in the long term that it will work for you).

3. Target the overcharged and underserved (#7). I didn't say give your product or service away. Study your market. Focus on the segment that will pay a market price for good quality and service, so that you can pay your team well and have a return on investment that excites you. Figure out how to give your customer more than you promise for less than you asked for. And don't nickle and dime them to death. Your customers will then become your cheerleaders. (See #6 below)

4. Raise more money than you think you need. Now double it. (#4). It is going to take time to make your business self-sustaining. That time will cost money, over and above the hard costs you paid for equipment, fixtures, advertising, deposits, regulatory fees, and more ad infinitum, to be ready for opening day. It is much easier to ask for enough money when you first seek it than it is to try to find it when you find you need "just a little more" to turn the corner and make it. I cannot overemphasize this one, I have seen not raising enough start-up money kill more exciting new businesses than anything else.

5. Two strikes is one hit away from a home run (#9). In spite of all your planning and preparation, and even if you do raise more money than you think you need, you will face days when it absolutely looks like you are done. If Southwest is not example enough for you, talk to Tony La Russa or any of the 2011 St. Louis Cardinals. Not once, but twice they were a single strike away from losing the World Series in game 6. First they then tied the game to force another inning. Then the Texas Rangers scored and the Cardinals once again got two outs and then two strikes in their half of the next inning. The rest is history. The Cardinals found a way to come back, win game 6, force a deciding game 7 that they also found a way to win. Take a deep breath. Several if you need them. Get up your courage, think outside the box, and keep trying. Sometimes that's what it takes to finally get luck on your side. Or just remember Winston Churchill in the darkest hours of the endless bombing of London in World War II ... "Never, never, never give up!"

6. Gain talk equity. (that means free advertising - get people to talk about you) (#12) Yes, you are going to have to pay for some marketing. Maybe it will be traditional advertising, maybe it will be a good website or blog, probably it will be all of that and more. If you really want your marketing to work, add the free stuff to it. Make your customers/clients so happy with you (see #3 above) that they talk about you, recommend you, refer you. Think of reasons to encourage them to do this. Genuinely participate in causes and events that your customers care about for reasons that have nothing to do with business. (Turns out what goes around really does come around.) Have fun with your business, and include your workers and your customers in the fun. That'll get 'em talking!

7. Lack of money makes you frugal (#11). Do you really need new equipment or will used at a fraction of the cost do just as well? (This works particularly well for a two year old lightly used vehicle as a substitute for brand new). Think of ways to do two or more things for the cost of one. Make a game of it, you'll be amazed with the ideas your team comes up with!

8. Sweat the small stuff, but try not to lawyer it (#29). Lawyers are much more useful when used to anticipate and prevent issues than when you have to call one to fix a problem. Actually hold your board of directors meetings (or managers' meetings if you are a limited liability company), at the very least yearly, and ask your lawyer to participate in the review process. Yes it will cost something. About 1% of what litigation will cost if you don't catch an issue early. If you are the only member of the board of directors, then your yearly meeting may be just the two of you by Skype or GoToMeeting. Do it.

9. It's about Customer Service (#35). This one is number 9 on my list for a good reason. I want you to never, never, never forget it! Or take customer service for granted. Monitor it as closely as you do your bank balance, make sure you always deliver exemplary customer service. Period.

A Final Thought

You will want and need help. You wouldn't build a house without detailed blueprints. You would probably get quite lost on a cross-country road trip without some kind of map and an idea of where you want to go and what you would like to see along the way. You also need to think through your business, in detail, before opening your doors (regardless of whether they are physical doors or the URL address of your new internet store).

I believe in you. I would like to help you do this. I have helped others like you as a business coach and as a chief financial officer for both businesses and for individuals on a consulting basis for over 25 years. The first visit is free and without obligation, so that we can get acquainted before proceeding. Send me an e-mail at dougbeecher@gmail.com. I look forward to hearing from you!

------------------------------

Suggest a question or topic to be discussed here ... if yours is chosen for a future blog post, you become eligible for our quarterly drawing for a $100 Apple gift card!

What Does The Perfect Entrepreneur Look Like?

noreply@blogger.com (Doug Beecher) — Thu, 03 Nov 2011 04:37:00 +0000

The perfect entrepreneur imagines a new niche, that needs to be, in such detail that they literally breathe it to life.

This was my answer to Stewart Macgregor-Dennis's October 27 Twitter question (http://twitter.com/#!/macgregordennis). When he was kind enough to retweet it, I got to thinking it would make a good follow-up to my last blogpost in which I suggest entrepreneuring as one of several worthwhile options when one is faced with long term unemployment or underemployment.

If being an entrepreneur intrigues you, here are three key elements to keep in mind:

A New Niche That Needs To Be

You are looking for a fresh viewpoint on something that has probably been done before. If you have worked in a restaurant, and all you could think about the whole time you were there was how you would do it better if it was your restaurant -- here's your chance. Imagine a particular person you would like to please with the taste, smell, and size of your hamburger (or whatever your key menu item will be). Would they eat it in your restaurant, or grab it and run? If they are eating in, what dining experience are they looking for that they aren't getting anywhere else? If they are going through the drive through, what specific idea do you have to make that experience better than anyone else does it?

Or we could consider just one of Steve Jobs's many innovative ideas, the iPad. At first glance, how different is it from a laptop computer? Naysayers said it wouldn't sell. We clearly know differently now. It is easier to carry than a laptop, yet the screen is a similar size. It turns on instantly. The touch screen is useful in so many ways. There are a few things you can still do better on a traditional computer, but there is a definite niche of people and applications the iPad perfectly satisfies. It was a fresh viewpoint on something that has been done before ... very well thought out.

You do not want to be all things to all people. For your niche to need to be, you just need to identify a specific person's desires, identify how those desires can be met in ways nobody else is doing, figure out how to deliver it to them, identify the group of people like your specific target person, and how to do it profitably enough to make it worth your while.

Which brings us to our second key element ...

Imagined in Detail

I will forever be in Mrs. McKenna's debt for teaching me the five W's in high school journalism class. Who. What. When. Where. Why. (and let's not forget How.) They are just as important to the entrepreneur as to the writer.

Who. Who is your target customer. Yes, you will need more than one customer, so you will want to identify the specific demographics of the group of people you hope become your customers. You also need to get even more specific, and picture a single individual member of this group as you go through the rest of the 5 W's (and one H)

What. What is your product or service going to be? How will it meet the needs of your target customer in ways that are not being fulfilled now? Are you going to compete on price because you know how to deliver the same service at a lower cost? (Definitely easier said than done, but that is the subject for a discussion of its own) What unique additional item will you add to what others do to make the product more useful? Or are you going to match the product, but offer better service to accompany it and that becomes your niche? Think all of this through very carefully. Write it down in great detail, and keep referring back to your notes repeatedly as you work on making your entrepreneurial dream become reality.

When. When is the best time for you to introduce your new concept to the market? Do you need to hurry before someone else beats you to it, and then improve later? Or are you better served to think everything through as perfectly as you can because you are only going to get one chance to do it right? The answers to those questions are critical, and they are not the same every time ... so again, think all of this through very carefully. When also applies to when are you open for business. What hours. What days. What seasons. This can actually be what defines your niche. Three Day Blinds and Four Day Tire Stores come to mind as examples of businesses whose main competitive difference was to have a catchy name and who cut costs by only being open the hours they believed their customers needed them most.

Where. Real estate agents love to talk about location, location, location. Location is even more important to the entrepreneur. Where do you need to be located to most effectively meet the needs of your customers? Is it one place, multiple places, or simply the Internet? Notice I said "most effectively". This covers several aspects of the question. Where can you best produce your goods or your service? Is this the best place for your customers to buy it? If not, where is that? Is your location how you are counting on your customers learning about your existence, or will you use other marketing techniques to take care of that? What are the comparative costs of your location choices, and how does that factor into your decisions? Again, think all of this through very carefully, and keep referring back to your notes and revising as you learn more through the creation process.

Why. The fifth W is the most important of all. Why are you doing this? Make sure you answer that question well, and that you never lose sight of it. The saying "When you're up to your neck in alligators, it's easy to forget you came to drain the swamp." has many variations, but is especially meaningful to the entrepreneur. Do not let more than three months pass without pausing to ask yourself "Why?" again ... while evaluating how what is actually happening compares with your "Why?" Then take whatever corrective action is necessary, however painful. If you wait, the pain will only increase.

How. This gets into all the details of the five W's. The most important of the How questions involves people. How are you going to recruit the help you need. (After you define what help that is, starting with an organization chart that defines each function that needs to be done, then the people who will do it). What portions will you contract out, and what portions will you hire employees to do? (Keep asking ... and answering ... Why? as you do this). Of course, to answer the people questions means you have to answer the how of production, the how of marketing, the how of delivery, the how of dealing with government rules and regulations, the how of technology, etc., etc. And if How? begins with people, it ends with money. You need to find someone who understands enough accounting to help you project a balance sheet and a profit/loss statement for several operating periods going forward. Then you need to find someone who understands financing well enough to tell you how much money you need to make this fly ... how you are going to get that money, and what you have to give to get it. You can have the best idea in the world, and have every other idea worked out ... and then watch it starve to death for the want of cash flow.

Breathe it to Life.

After you have done everything else, you will be left with a tiny bonfire, ready to be snuffed out by the smallest interference. You will have to constantly watch it, feed it, guard it ... love it. You will still have a family, and friends. They are a big part of your Why. But this new creation of yours will be your baby in a very real way. Breathe it to life. You are creating something that doesn't now exist, but will become vibrant and alive with energy!

And that, my budding entrepreneurial friend, will fill you with a special kind of joy you didn't know existed. Enjoy the ride!

A Final Thought

I believe in you. I would like to help you do this. I have helped others like you for over 25 years now. The first visit is free and without obligation, so that we can get acquainted before proceeding. Send me an e-mail at dougbeecher@gmail.com. I look forward to hearing from you.

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Suggest a question to be answered here ... if yours is chosen for a future blog post, you become eligible for our quarterly drawing for a $100 gift certificate!

Unemployment. Over 14 Million People. For 3 Years. One Idea You Can Use To Do Something About It.

noreply@blogger.com (Doug Beecher) — Thu, 27 Oct 2011 00:54:00 +0000

There are 14,000,000 people in the United States who are unemployed. Stop for a moment to think about that number. Then consider that unemployment has been consistently that high throughout 2009, 2010, and 2011.

For a time each of these 14,000,000 can collect unemployment benefits while they are trying to find a new job. While the benefits are a help, they are rarely enough. Too many people slowly sink financially until they find new work. In these economic times, that often takes a very long time.

Bad as that is, underemployment is worse for millions more when it lasts for many years. Underemployment occurs when you can only find work at jobs that do not utilize all of your education and training, like the scientist who can only find work as a taxi driver. It also occurs when your working hours are reduced long-term and you can't find equivalent full-time work anywhere else.

We can blame the economy. But many jobs were in industries that no longer exist, or have been replaced by machines. We can also try blaming large corporations or governments that seem too large to care.

This might be you now. If not, it is likely to happen to you at some point in the future. Playing the blame game won't put food on your table or keep the electricity on.

So really ... what are you going to do about it?

My answer in my own life was to create my own job. There are many ways to do it.

Franchising: Entrepreneur magazine puts out annual rankings of what they consider to be the top 500 franchise opportunities. Get a copy and study it carefully. There are franchises available in a wide variety of industries and locations. Many are more affordable than you may think. You can start a new location for the franchise, or you can buy an existing location from someone looking to retire. What you can get if you choose wisely is a name already trusted by your customers and a lot of support to train you to be successful.

Distributorships: You can google an endless list of possibilities here, ranging from exclusive territories for a recognized brand name that cost millions to enter to one-person operations that can be run out of your car and begun for just a few hundred dollars. A subset of this is some of the network marketing industry. All I will say about that here is that in evaluating any distributorship possibility you want to confirm that the product or service is purchased by many people on an ongoing basis at the full asking price and who have no interest in the business other than to use the product or service. Otherwise you will spend at least a lot of time, possibly money as well, chasing a dream.

Business Brokers: Visit with a well established firm whose business it is to sell businesses. There are many similarities between these firms and real estate agents. The good ones have a long track record, help protect buyers and sellers through the whole process, and have a wide variety of businesses for you to choose from. As in franchising, there are a surprising number of pretty affordable options, so it is worth your time to look.

Entrepreneuring: A fancy word for creating your own business from the ground up. You can try to do something that is already being done, and you have an idea how to do it a little better. You might also have a unique new idea. You can start this part time while you are working at your current job, or while you are trying to find a new job. Here's a thought to get you started: Any idea that you can think through well enough can be designed into a well-run business that people will want to buy from. But just because you are good at doing a particular thing does not mean that you will be good at managing a business that does that thing. Michael Gerber has written several great books on this subject, including The E Myth Revisited:Why Most Small Businesses Don't Work and What To Do About It. Be sure to read this book as part of your preparation to create your own business.

What I'm here to say is that wherever you find yourself in life today, you can succeed in your own business. You will want and need help. You wouldn't build a house without detailed blueprints. You would probably get quite lost on a cross-country road trip without some kind of map and an idea of where you want to go and what you would like to see along the way. You also need to think through your business, in detail, before opening your doors (regardless of whether they are physical doors or the URL address of your new internet store).

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Suggest a question to be answered here ... if yours is chosen for a future blog post, you become eligible for our quarterly drawing for a $100 gift certificate!

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Sources and additional information:

1.http://data.bls.gov/timeseries/LNU0300000years_option=all_years&periods_option=specific_periods&periods=Annual+Data

2. http://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-grow

3.http://www.cnbc.com/id/45015714

4.http://www.entrepreneur.com/franchise500/index.html

5.http://www.amazon.com/Myth-Revisited-Small-Businesses-About/dp/0887307280/ref=pd_sim_b_1

Should My IRA Make Charitable Contributions?

noreply@blogger.com (Doug Beecher) — Thu, 20 Oct 2011 01:20:00 +0000

An important benefit of an individual retirement account (IRA) is that you can accumulate earnings on your savings dollars without paying taxes on them until you start withdrawing from the account. This can go on for many years, but at age 70 1/2 you are required to start taking yearly minimum distributions from the account. The amount of these distributions depends on your life expectancy according to tables published by the IRS. Gradually as you get older, your yearly minimum distributions will get larger as your life expectancy shortens.

You are fully taxed on these distributions. In addition, your IRA distributions may cause more of the social security payments you receive to be taxed.

Some kind people choose to donate their IRA distribution to their favorite charity. They want to benefit the charity, obviously, but they also hope to offset the IRA income with a charitable contribution deduction.

In some recent years, and again in 2011, the law allows for people to instruct their IRA administrator to make a contribution from their IRA directly to the charity rather than to take the money personally and then donate it.

The question is: Should I have my IRA make my charitable contributions for me?

If you required to make a minimum distribution the answer is yes. Here are some of the reasons:

1. If you are claiming the standard deduction, you won't get to deduct the charitable contribution. By making the contribution directly from your IRA you benefit from not paying tax on the required distribution.

2. If you are itemizing deductions, you avoid a reduction in medical and your "miscellaneous" itemized deductions by having your IRA make a contribution.

3. Many tax deductions and credits have adjusted gross income limits. You can qualify for more of them by having your IRA make a contribution in place of all or part of your required minimum distribution.

So how much difference will it make? A single person with a $75,000 income is likely in the 25% federal and 5% state bracket (for a total of 30%). If that person is required to take a $20,000 IRA distribution, they can save $6,000 in taxes. Someone who really wants to make a difference for their favorite cause can make a $20,000 donation for a net cost of $14,000.

But what if that person is living more modestly on a $2,000 monthly fire department pension plus a $1,000 monthly social security check, is required to take a $3,000 IRA distribution and have pledged $100 per month to their favorite charity. Can this help them? Because the IRA distribution changes the tax on the social security, both people are in the same 30% tax bracket. If the contribution pledge is met by a direct payment from the IRA, $360 in tax is saved compared with sending in monthly donations personally. (30% of 12 months of $100 donations)

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Suggest a question to be answered here ... if yours is chosen for a future blog post, you become eligible for our quarterly drawing for a $100 gift certificate!

Collecting Social Security While Continuing To Work - What Are The Rules?

noreply@blogger.com (Doug Beecher) — Sat, 26 Feb 2011 00:29:00 +0000

"Isn't there an age that I don't have to worry about it anymore ... when I can work as much as I want without losing my social security? In fact, I thought at age 65 I didn't have to pay tax on it anymore either!

I have been asked these questions enough times that I realize there are many misconceptions about them. Please continue reading to get some of the answers ...

Explaining "Normal Retirement Age"

Normal Retirement Age is the age at which you can receive your full monthly Social Security payment without reductions for "early retirement" or for working. It has nothing to do with income tax, this is a common misconception that I will discuss a little later in this article.

Normal Retirement Age is determined by when you were born, and has changed since Social Security was started -- for people retiring today it is older than age 65. It is subject to further review and change by Congress, but as of now here is a table showing normal retirement age based on birth year:

Birth Year Normal Retirement Age

before 1938 65

1938 65 years 2 months

1939 65 years 4 months

1940 65 years 6 months

1941 65 years 8 months

1942 65 years 10 months

1943 to 1954 66

1955 66 years 2 months

1956 66 years 4 months

1957 66 years 6 months

1958 66 years 8 months

1959 66 years 10 months

after 1959 67

Source: http://www.socialsecurity.gov/pubs/ageincrease.htm

You should receive a statement from the Social Security Administration each year about three months before your birthday that provides your earnings history and their estimate of your future Social Security payments based on that earnings history. You can also get their estimate at any time by going online to: http://www.ssa.gov/estimator/ I suggest that you check this at least once a year, both to make sure that you agree with the earnings history they show (and get their help to correct any errors) and so that you have a realistic idea of what to expect given changes in cost of living adjustments, your earnings, Social Security law, etc.

What Happens When You Collect Social Security "Early" And Continue Working

Your starting point for determining Social Security payments is your earnings history and normal retirment age, as just described this is used to compute what the Social Security Administration calls your "Primary Insurance Amount" (PIA). If you start collecting before your normal retirement age, the amount you actually receive will be reduced from your PIA in two ways.

Time reduction. You can start collecting Social Security at age 62. If your normal retirement age is 66, your monthly payment will be 25% less than your PIA if you do start collecting at age 62. If your normal retirment age is 67, the reduction to age 62 is 30%. For normal retirement ages between 66 and 67, the reduction percentage is prorated between 25% and 30%. If you wait later than age 62, but start collecting before your normal retirement age, the reduction percentage is also prorated at 0.5 to 0.6% per month. For example, if you retire 27 months before your normal retirement age, you can expect a monthly Social Security payment that is 15% below your PIA.
Work reduction. There is an earnings limit that applies when you collect Social Security before your normal retirement age. In 2011, this earnings limit is $14,160 (it is adjusted yearly for changes in the cost of living index). If you are not going to reach your normal retirement age at any time in a given year, for each $2 you earn above the earnings limit, you lose $1 of your annual Social Security benefits. This reduction is taken after already lowering your benefit for the number of months you started collecting before normal retirement age. In the year you reach normal retirement age, you can earn up to a higher limit in the months of that year prior to reaching normal retirement age. In 2011, this limit is $37,680. You lose $1 in benefits for each $3 that you earn above the limit in that year. In all future years after reaching normal retirement age, there is no longer an earnings limit that affects how much social security you will receive. As I mentioned earlier, some people confuse this with earning as much as you want without having to pay income tax on your social security. This is not true, which leads me to the next question I would like to address...

How Is Income Tax On The Social Security I Receive Taxed?

The simple rule of thumb is to add half of your gross social security income to your other gross income. If the sum is less than $25,000 for most taxpayers ($32,000 if you are married filing a joint return), you probably don't have to pay tax on your social security income. To be safe, fill in the worksheet on page 16 of IRS Publication 915 (available at http://www.irs.gov/pub/irs-pdf/p915.pdf). This worksheet will tell you how much, if any, of your social security income is taxable. The short answer is that if you earn more than $44,000, 85% of your social security income will be added to your other income and taxed at the resulting tax bracket. If you need help with this worksheet, be sure to get it.

You will notice I said gross social security income. What does that mean? It usually not the amount you received, but rather is the amount before any Medicare premium or income tax was withheld. Be sure to get the right number before proceeding -- it is not enough to simply add the monthly payments you received for the year.

I would welcome you to comment below on your experiences with deciding when to start collecting Social Security and the impact of whether you continued to work. If you had it to do over again, would you make the same decision. Why or why not? Thank you for your participation and for sharing this blog with your friends.

Photo credit: Wise Senior by Vera Kratochvil

How To Increase Your Take-Home Pay By Asking Your Boss For A Pay Cut

noreply@blogger.com (Doug Beecher) — Wed, 23 Feb 2011 22:02:00 +0000

If you work at a job where you have out of pocket expenses, this article is for you. This could include driving your personal car to visit customers (or prospects, vendors, etc.), paying for your company uniform by payroll deduction, using some of your own tools or supplies on the job -- just to give a few examples.

Please read on to see how much both you and your employer could save on taxes by agreeing to work for less pay in exchange for having your employer pay for these items.

To keep things simple, lets suppose these expenses average $100 per month and you are in the 15% federal and 5% state tax bracket. If you agree to lower your paycheck by $100 per month, your net pay will decrease by $73.35 because ...

Your federal withholding will be $15.00 less
Your state withholding will be $5.00 less
Your withheld social security will be $6.20 less, and
Your withheld medicare tax will be $1.45 less

Overall, your tax decreases by $27.65 per month, which leaves you $331.80 better off for the year than if you were paying those business expenses out of your after tax paycheck. Your employer should be willing to agree to this, because they will save a minimum of $91.80 yearly in matching social security and medicare taxes. They will also save on unemployment and workers compensation costs.

If you drive a lot for business, or use a lot of tools, or you are in a higher tax bracket -- the savings will be even more!

You may be wanting to point out to me that you are one of the lucky few who gets to claim an itemized deduction for these expenses, and you don't want to give that up. You would still be better off having your employer pay it for one or more of these reasons:

The deduction is reduced by 2% of your income, so you lose part of the benefit
The itemized deduction only reduces income tax, not social security or medicare tax
Most people are better off with lower income because it reduces the impact of alternate minimum tax and phaseout of a variety of tax deductions/credits such as the child tax credit, education credit, earned income credit, savers credit, and IRA deduction, just to name a few.

So why wouldn't you want to do this? If you need a higher income to qualify for a loan, you will have to decide what is more valuable to you - the loan or tax savings. If your income is at the low end of the earned income credit scale, you may get a larger credit by having more income. If you think this may apply to you, get some help and double check it. But for most people who have to pay these types of expenses, agreeing to have your employer pay them instead is a real benefit. Run the numbers for your own situation and see if it will help you.

Do you have an experience with paying business expenses for your job? Please share it with the rest of us in the comment section below. I'd be interested to discuss it with you here, and thanks!

Photo Credit: Painting Wall by Petr Kratochvil

Don't Miss The Beautiful "Ugly Trailor"!

noreply@blogger.com (Doug Beecher) — Mon, 21 Feb 2011 22:00:00 +0000

I'd like to share a blog post with you that I read and enjoyed from CraftoManiac about my friends at Ugly Trailor Antiques (click here to read it: http://craftomaniac.blogspot.com/2010/11/do-you-have-store-love.html) The Ugly Trailor is a very distinctive store owned and operated by Fred and Sue Thomas. Their love of art and all things nostalgic is evident as you walk through their store. It's located a few blocks up State Street from my office in Hurricane, Utah, which makes it very convenient for me when I want to find just the right unique gift -- which has already happened more than once! If you're headed to Zion National Park it's convenient for you too, as you can't miss their trademark Ugly Trailor (pictured here) in the parking lot as you are driving there on Utah state highway 9.

If you take a moment to read on, I'll share some nice pictures of typical items you can find there and also what you can learn about business success from this store.

One of the reasons I like to discuss "sales" and "business" with my clients ... even though for most people those seem to be scary words ... is that every one of us sells and every one of us is in business. Once I can show you this is true, then it becomes easier to explore how learning successful "sales" and "business" techniques can help you in your daily work. In a sentence, you have to sell your experience, skills, ideas, work ethic and more to get and then to keep a job -- and it today's economy this is more important than ever.

Your business is to maximize your income and economic security from the daily sale of your work. If you are fortunate enough to have had the same job for 30 years, this is still true. I have too many friends who lost their jobs in year 31 and beyond for a variety of reasons, most beyond their control. Please. Think of your career as your business, as something you must nourish and develop throughout your life.

A basic and important business principle is that technical skill does not guarantee financial success. You can be the best scientist, artist, cook, or whatever it is you do. That does not mean you will be able to find or to keep a job in your chosen field, or to successfully operate a business in that industry. Some quick and obvious examples of additional skills you need beyond technical excellence ... include communicating with others, prioritizing tasks, teamwork, ... and I'm just getting warmed up.

I love reading biographies of a wide variety of people. Even if I disagree with everything they stand for, I can still learn by reading about them. If I find myself agreeing, that just makes it all the more enjoyable. Observing businesses, both successes and failures, provides the same benefit.

Here's a few things I learned from the Ugly Trailor, as I compared it with a variety of other antique stores I have visited. They take the time to make the presentation nice -- to make sure you don't feel crowded, to make sure items are clean and bright (old doesn't have to mean dingy), to make sure colors stand out and blend well together.

Variety is important too. Every time I visit the store, there is enough change in merchandise that I feel like it is a new experience. It's worth my time to go back, because there is probably something new that I would like that wasn't there last time.

Location is as vital as ever. At first blush, you might have tried to convince Fred and Sue to open their store somewhere else. There is another antique store next door, as well as one a mile down the same highway across the bridge in La Verkin. The two towns aren't big ... you might wonder if there is really room for all these stores in the same area.

Many times, having several similar establishments near each other helps all of them. It gives passers by more reasons to stop, and once they do, the additional choices increase the likelihood they will find something that catches their eye enough to buy. In talking with Fred and Sue, I found this was true for The Ugly Trailor.

Attracting attention is another key element. Just try driving by and not noticing the namesake Ugly Trailor out front. The unique lettering on the signs at the store and on the highway catch your eye as well.

Presentation. Variety. Location. Attracting good attention. Whether you are in business for yourself or in business providing your services to an employer, these are important principles. Take a moment regularly to try to identify a single thing you could do to improve just one aspect of these in your own life.

And when you next visit Las Vegas, consider a one day side trip to Zion National Park, a true wonder of the world. When you do, check out the Ugly Trailor. You'll enjoy your visit to this unique store!

Our Federal Budget: How It Impacts You (In Plain English)

noreply@blogger.com (Doug Beecher) — Fri, 18 Feb 2011 22:00:00 +0000

You've heard that our President has submitted his budget proposal for the coming year. $3,728,686,000,000. That number is so big, who could comprehend it? Try this: Your share is $11,892. Get enough money out of one of your board games to represent your yearly gross income and put it on a table. Then divide it into two stacks: (1) Your share (or your family's -- multiply $11,892 by your family size) of federal government spending and (2) what's left. Your job with each stack:

Stack 1: Decide how much each government department or function should get from you.

Stack 2: Decide how you will personally pay rent, eat, etc. on what is left after the federal government gets its share of your income in stack 1. Oh, and don't forget, you also have to pay your share of state and local government expenses out of that second stack -- they aren't included in stack 1.

Perhaps this will illustrate on a personal level how massive our government has become, and its impact on you.

Here's a summary of what our government wants to do with your $11,892. I would be very interested to hear what your priorities with your money are, by all means share your comments below:

National Defense........................................................................ $ 2,352.35 per person
International Affairs....................................................................   $    200.94
General Science, Space & Technology.......................................   $    102.97
Energy.....................................................................................   $    74.67
National Resources & Environment.............................................   $   136.20
Agriculture................................................................................   $     60.37
Commerce & Housing Credit......................................................   $     75.34
Transportation...........................................................................  $   334.43
Community & Regional Development........................................... $     81.97
Education, Training, Employment, & Social Services....................   $   338.63
Health.......................................................................................  $1,192.14 Medicare.................................................................................   $ 1,570.23
Income Security (Unemployment, Housing & Food Assistance,
          Federal Employee Retirement Costs)..............................   $ 1,768.02
Social Security........................................................................   $ 2,446.38
Veterans Benefits & Services....................................................    $   397.60
Administration of Justice..........................................................    $    187.21
General Government...............................................................     $     99.35
Net Interest (Amount paid on debt less amount collected)..........     $   770.57
Allowances............................................................................     $     20.94
Undistributed Offsetting Receipts.......................................... (minus) 317.79

Total......................................................................................   $11,892.52 per person

A note about net interest.  The $770.57 per person figure is equivalent to a little less than 2% yearly interest on our official national debt. As government bonds and debts mature in the future and are in essence refinanced, every 1% increase in interest will cost every person over $400 per year additional -- assuming no further increases in the amount of debt. Since debt is going up, the actual increase will be larger.  Perhaps you would like to voluntarily pay more than your $11,892 share, with the extra earmarked to help pay off this debt so that future interest expense can be reduced. If you choose to do this, the Treasury Department will graciously allow you to claim a charitable contribution deduction on your income tax return.

It is claimed that there are $1 trillion in cuts over the next 10 years in this budget proposal. That would average $100 billion per year, or less than 3% of the budget.  It turns out to only be a cut from an even higher budget desire, not in the budget itself. Yes, the 2012 proposal is $90 billion less than the 2011 proposal.  And the 2013 proposal is $48 billion less. In those two years the decreases totals $138 billion. But that's where any decreases end, no where close to $1 trillion.

Starting in 2014 there are proposed increases not decreases, beginning with $159 billion that year, $371 billion in 2015, and it grows more rapidly after that. It is more than you, me, or any of us can afford now. So how are we going to pay for these proposed increases (that are called decreases)?

I respectfully suggest to you that you look this over carefully and decide if you're in favor of this budget proposal as is, or if there are changes you would like to propose to your President, Senators, and House Representative. If you are silent, others will decide for you and you will still pick up your share of the tab. Of course, you will not pay it all in taxes, at least not right away. None of us will. We will borrow a substantial portion of it, and pay for it later plus interest. Perhaps some of it will be paid with newly created money. Sooner or later, that will cause inflation, which has its own set of costs.

Even if you don't think you'll have to pay, one way or another you will. So I encourage you to get involved in the process and let your elected representatives know what you want them to include in the budget, and what you don't. Thank you for reading this, for sharing it with others, and for your comments.  I appreciate it!

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Photo Credit: Picture 21, captioned "Not too much info here. A woman posed with stack of packages of $1 silver certificates at the Bureau of Engraving and Printing, Washington, D.C. [between ca. 1950 and ca. 1969]", from http://www.delraycc.com/InterestingMoney/AmazingPicturesOfMoney/tabid/210/Default.aspx

This website states that this picture was taken from the public domain.

Source Data: "Total Outlays" listed on line 2883 of Table 32-1, a spreadsheet in Microsoft Excel format found at the bottom of the list at http://www.whitehouse.gov/omb/budget/Analytical_Perspectives. The other figures quoted above come from department/function subtotals within this same Table 32-1. Per person figures are derived by dividing total amounts by population.

Total U.S. Population as of February 15, 2011, at 9:55 am "universal" time was 310,823,190 (see http://www.census.gov/main/www/popclock.html) and growing at the rate of 23 people every 5 minutes. This projects out to about 313,532,000 on April 1, 2012, the midpoint of the fiscal year covered by this budget.

You Wouldn't Leave Dollar Coins On The Ground ... Why Do It On Your Tax Return?

noreply@blogger.com (Doug Beecher) — Wed, 16 Feb 2011 22:00:00 +0000

Chances are you do little things here and there for charitable causes that you forget about. It's one of the few tax deductions that isn't limited by income or AMT. Here's an easy way to make sure you don't forget some of what you're entitled to claim ...

Keep a clasp envelope labelled "Charitable Contributions" in a handy place you can access easily all year. Whenever you donate $5, $10, $20 or whatever to a charity during the year, put the receipt you get in this envelope. Then write the date, the charity name, and the amount on the outside of the envelope. At the end of the year, simply total the amount on the envelope and you'll be ready with that deduction for your tax return. If you get audited, you're ready with the receipts proving your deduction inside the envelope.

While you're at it, make sure you include the "other" charitable deductions you do. If you donate clothing or household items to a charity, make sure you get a receipt and record it right away in this same envelope.

If you volunteer to help a recognized charity, whether it's a one time project or done often, you can't deduct the value of your time but you can deduct any out-of-pocket expense you have such as supplies or car mileage to drive to and from the charitable project. So be sure to record those in this envelope as well.

Even if there is only $50 recorded in this envelope at the end of the year, that is worth a minimum of $5 in your pocket in tax savings on your return. It's probably worth more. It only takes a moment each time you do something ... once you start the envelope.

You wouldn't leave dollar coins on the ground if you saw them ... why leave these legitimate deductions off your tax return?

Early Withdrawals From Your IRA/401k - Might As Well Gift Wrap It And Give it to IRS

noreply@blogger.com (Doug Beecher) — Mon, 14 Feb 2011 22:00:00 +0000

Here's another huge tax misconception: When you take money out of your IRA or 401(k) before age 59 1/2, you think the 20% they withhold from taxes right off the top hurts, but at least that's all it will cost. Wrong! Too often someone withdraws $40,000 so they will have $32,000 left after taxes to "save their house" only to find they owe another $8,000 when they file their tax return! Why is that and what can you do about it?
Well, whatever you withdraw is (of course) on top of all the other income you receive. Often it will put you in the next tax bracket. What I see most often is that someone in the 15% bracket winds up in the 25% bracket, and what is it that gets taxed at 25%? The IRA/401(k) withdrawal. Next there is the 10% penalty for early withdrawal, which has only a very few, very hard to qualify for exceptions. So now we're up to 35%. Then you have state tax, generally at least 5%, and in many states the withdrawal pushes you into a bracket nearer to 10% -- so now you're at 40 to 45% tax.

Then there is the sneakier ways it gets even worse. You may very well get caught by AMT (the dreaded alternate minimum tax) that you wouldn't have otherwise, so that some of your itemized deductions are denied. Or the higher income may mean you don't qualify for earned income credit, child tax credit, education credits, or any number of other programs you may have been counting on and would have qualified for had it not been for this withdrawal. All of these have the same impact as if the tax rate were raised even higher.

To add insult to injury, if you are unfortunate enough to live in California, they have a 2.5% early withdrawal penalty on top of the 10% federal penalty.

Bottom line: If you escape with anything less than 50% tax on an early retirement plan withdrawal, you are lucky in a really sadly ironic way. In my initial example, "just" a 40% total tax rate would have given the result I mentioned -- 50% would be even $4,000 worse.

Please! Retirement money is for retirement. Find another source. Any other source. I hate to say it, but this is a time even maxing out your credit cards is preferable to withdrawing from a retirement plan without qualifying for one of the penalty exceptions.

If you do it anyway, you might as well gift wrap it when you give it to the government. Too many times, I see people doing "serial withdrawals". They make a second (and third and ...) withdrawal because it's the only way they can pay the taxes they didn't see coming on the first withdrawal.

If you're even thinking about this, at the very least talk to someone first so you know what you are getting in to in your specific circumstances. If you have a personal experience with this, please share it with us in the comment section below. If you have a private concern, my e-mail is dougbeecher@yahoo.com and I'd be happy to hear from you. Thanks for reading!

Photo credit: Roll Of Money by Anna Cervova

No Child Tax Credit For 17 Year Olds? What's The Deal?

noreply@blogger.com (Doug Beecher) — Fri, 11 Feb 2011 22:00:00 +0000

If you're confused because you thought you could claim your child as a dependent later than age 16, you're not alone. This is definitely a common tax misconception. You CAN still claim your child as a dependent after their 17th birthday ... but the child tax credit is something separate from the child dependency exemption. In many cases you can qualify for both of these programs!

Here's some additional information that might help you understand this better ...

Claiming Your Child As A Dependent

Most people understand the basic rules, but let's review them just to be sure.

You must provide over half of your child's support, or file a form indicating multiple people shared the support obligation, none of whom provided over half of support and all whom relinquish their dependency claim to you (as one of this group of people helping to provide financial support to the child).
With few exceptions, the child must have lived with you over half the year (temporary absence from your home to attend school is one of the exceptions)
You can't claim someone as your dependent if someone else (your parents, for example) can claim you as their dependent.
If your child is married and they file a joint return with their spouse, the only way you can claim that child as your dependent is if neither your child nor their spouse has any tax liability (meaning the only reason they are filing a tax return is to make a claim for refund of everything that was withheld from them at a job or elsewhere)
If your child is over 19 (or over 24 if a full-time student), their income must be $3,650 or less for you to claim them as a dependent.
If divorced parents both try to claim their child on their return, and their divorce decree specifically gives the dependency exemption to one of the parents, it is extremely difficult for the other parent to qualify with the IRS to claim it.
There are also rules about citizenship, residency, and relationship to you. Check out IRS Publication 501. Here is a link to the specific part of that publication that covers the various dependency exemption rules: http://www.irs.gov/publications/p501/ar02.html#en_US_2010_publink1000220868
If in doubt, this is another reason to get qualified help. Not only do dependency exemptions depend on these rules, but generally the child tax credit, earned income credit, and head of household filing status do as well. And the IRS is getting much more detailed in questioning doubtful dependent claims, so it is imperative that you get it right from the beginning!

You May Claim Your Child As A Dependent Even If They File A Tax Return

Of course, you still need to qualify to claim them under the rules we just discussed.
They need to not claim themselves as a dependent. This is very important. I have seen countless situations where there was no question that a parent provided over half of a child's support and in every other way qualified to claim them as a dependent, yet the child filed a return claiming themselves thinking they would get a bigger refund this way. Often the child would have gotten a refund of everything withheld from them anyway. This action causes the parent's return to be rejected when e-filing, and a long process ensues to correct the situation and get the parent their legitimate refund. It is so important for parents and children to communicate with each other regarding taxes before anyone files a return.!

What Is The Dependency Exemption Worth?

Each exemption generally reduces taxable income by $3,650. You multiply this by your tax bracket to determine value, for example in the 15% tax bracket, tax is reduced by $3,650 times 15% or $547.50 times the number of exemptions claimed. In the 25% bracket, it is $912.50 times the number of exemptions claimed, and similar calculations are made for all the other tax brackets.
In most cases, each exemption has the further benefit of reducing state tax.
If the dependency exemption also qualifies you to file as head of household, this can generate additional tax savings in addition to those already noted.

How Does The Child Tax Credit Work?

In general, if the child is your dependent, and did not have their 17th birthday during the year, you will get a child tax credit of $1,000 for that child in addition to the benefit of the dependency exemption already noted.
The child must be a US citizen or resident
The credit begins to be phased out if your income is higher that $55,000 (married filing separately), $75,000 (single, head of household, or qualfying widow(er)), or $110,000 (married filing jointly)
In some cases this credit is refundable, meaning you will receive it even if your tax liability is zero.

Photo credit: Girl Jumping by Anna Cervova

Gambling: Since I Lost More Than I Won, Why Is The IRS Dunning Me?

noreply@blogger.com (Doug Beecher) — Wed, 09 Feb 2011 22:00:00 +0000

I believe the fastest way to get a "love letter" from the IRS is to ignore your gambling "winnings" when you file your tax return. I know what you're thinking. It's either "they already withheld taxes at the casino, so that took care of it" or "I lost more than I won, so that means I don't have to report it". Wrong and wrong.

The saddest example of this that I've seen was a fellow who came in my office one day to see if he needed to file a tax return. He was single, 72 years old, and living on a $800 monthly pension and his social security. I asked him all the usual questions, and all I could get out of him was a statement from his bank showing he had earned $0.37 in interest on his savings account for the year. He specifically said he had no gambling winnings. So I told him his pension was below the limit for needing to file a tax return, and at his income level his social security wasn't taxable.

Several months passed before I saw him again, this time red faced, beyond angry, and clutching an IRS letter saying he owed them over $3,100 because he didn't file his tax return. Of course, I was guilty until proven innocent.

I sat him down in my conference room. If you've been there, you know I have a couple of large, nicely framed Carl Frederic Aagaard prints of the Amalfi coast ... the whole point of which is to be calming. If there is something that stresses people more than taxes in general, I can't think of it, unless of course you just got a collection letter from the IRS. I thank my son Jacob, who has far more design skills than I ever will, for picking those prints out for me, and also my wife Willyne for arranging just the right frames for them.

But I digress. I sat there with him and read his letter, then asked in the softest, calmest voice I could muster, "I thought you said you didn't have any gambling winnings. Did I misunderstand what you said?" He stuck by his story with an emphatic "NO! I didn't have any gambling winnings!"

Then I explained that there can be errors in the IRS letters, and since he didn't have gambling winnings I would be happy to go to bat for him to respond to this letter. I continued with "Let me show you what the IRS claims you received so we can get started on the response." I then showed him the page that listed the names of four casinos with dates and amounts won at each. They totalled a little over $17,000. I asked him if those were mistakes. He was more subdued in his no this time. "But I lost more than those winnings at each casino. I thought they were only considered winnings if they were larger than my losses."

I miss Paul Harvey's cheerful, quirky take on life. As he would say, here's the rest of the story: The casinos had each issued 1099 forms, which my friend undoubtedly had received but didn't understand. The IRS received them too, but didn't know anything about gambling losses because no tax return was filed. So they added $17,000 to his income, which in turn made $3,800 of his social security taxable. The result was the IRS claim of $30,400 of adjusted gross income, $2,533 in tax, $50 in penalty for not paying that tax during the year, and over $500 in penalty and interest for not filing the return reporting all this. They wanted a little over $3,100 by a week from Tuesday, or more drastic measures were threatened.

I asked him if he was a member of the "frequent gambler's club" at any of those casinos. He was, at each of them. I suggested that he contact each casino and ask them to send him a letter showing his losses for the year. In the meantime, I contacted the IRS on his behalf, told them what we were doing, and arranged for a delay in collection activity for 45 days while we prepared a response.

About three weeks later, he returned with the letters from the casinos. They showed losses totalling about $21,000. I then prepared a tax return for him. I couldn't do anything about the $30,400 in adjusted gross income, not even the fact that the gambling winnings made $3,800 of his social security payments taxable. Gambling losses don't offset those. This is a nasty little fact that isn't talked about much.

I was able to claim itemized deductions for him that totalled about $20,400. In addition to the $17,000 deductible portion of gambling losses he had $589 of sales tax, $832 of property tax on his house, some medical expenses and receipts for $200 in household items donated to charity.

Those itemized deductions reduced his tax to $628, a whole lot better than what the letter wanted, but still a lot of money to this gentleman. His state wanted $44 in addition to that. Even though he had no net gambling winnings and wouldn't have even been required to file a federal or a state income tax return if he didn't have those gambling winnings.

You may have thought the casinos would have withheld tax on the winnings and that would have taken care of it. It's true that they usually do. Sometimes that withholding is enough, but often it isn't because the gambling income triggers other income such as social security to be taxable. Also, you have to claim itemized deductions to deduct gambling losses, so if you don't have enough deductions to itemize you will pay taxes on the gambling winnings without being able to deduct any of the gambling losses.

I'm sad to say that I try to ask all my clients whether they had any gambling winnings when I'm reviewing what needs to be included in their tax returns. I now follow it up with a question asking if they received any 1099s from gambling activity. I wish I had a crystal ball that could tell me who does and who doesn't gamble (even "just once") so I wouldn't have to ask. I also wish the story of my 72 year old retired friend was the only time I encountered this problem.

Truth is, I see this multiple times every year. I think that's more than sad.

Photo credit: Angry Man - Free Clip Art at FunDraw.com

Am I Better Off With A Big Tax Refund ... Or More Money In Each Paycheck?

noreply@blogger.com (Doug Beecher) — Tue, 08 Feb 2011 03:48:00 +0000

No question about it - take the money in each paycheck! I can't tell you how many people have told me they purposely have too much tax withheld from each paycheck, because it's the only way they can save. So they pay banks $200-$400, or more, each year so they can save with Uncle Sam at zero interest. These same people then either tell me they can't afford to pay down their credit card balances, or can't afford to save up for an emergency fund so they wouldn't need to use their credit cards so often.

This blog post continues to tell you how easy it is to put this extra $200-$400 (plus your tax refund itself) back in your pocket throughout the year!

Thanks for reading on with me! It's not just my clients that has this challenge. USA Today (http://tinyurl.com/ydrewb9) reported that the average tax refund paid by the IRS in 2010 was over $3,000. Meanwhile, the average American adult carries credit card debt of over $10,300 at an average interest rate of 13.44%. (This is based on Federal Reserve data shows that there was just over $2.4 trillion in total credit card debt in November 2010 (http://tinyurl.com/4cr4hsc) and U. S. Census Bureau statistics that show there were 232.4 million adults over 18 in the country as of July 2009 (http://tinyurl.com/ejt26)).

You and every employee in America fills out Form W-4, which determines how much federal income tax is withheld from every paycheck. It is a three page form, but most people never make it past page one. They just fill in their name, address, social security number, marital status, and how many withholding exemptions they think they are entitled to. Many purposely put in a low number of exemptions to make sure their refund is higher.

The other two pages of Form W-4 provides a worksheet and instructions designed to make your withholding as close to your actual tax liability as possible. You should take a little time to read through this and try to complete the worksheet so that you still get a refund ... but usually only in the zero to $500 range. I don't want you to owe with your return, and for sure I don't want you to have to pay a penalty because you didn't have enough tax withheld during the year. But it is possible to work through Form W-4 to get your refund in the zero to $500 range.

If you are one of those that has been getting the average yearly tax refund, you will now have $200 or more extra in your paychecks each month. Be disciplined. Purposely pay this additional net pay towards the credit card you have with the highest interest rate. If that is one with an average 13.44% rate, you'll save about $200 in interest over a year ... and the balance you owe will be about $2,600 lower after doing this consistently every month for a year. If you have a card at 29.99%, and many people do, then your savings will probably be more than $400!

If Form W-4 confuses you, your tax pro will probably be happy to meet with you, look at your prior year tax return and your current pay stubs, and help you fill out this form for a fee that is much less than the interest you will save. If you don't have a tax pro, or they aren't interested in dealing with Form W-4, sent me an e-mail at dougbeecher@yahoo.com. I'd be happy to help you, and I think you'll be pleasantly surprised with how easy it is to do this in a few e-mails back and forth!

Photo Credit: Winning Money by Petr Kratochvil

Vehicle Expense - Should I Take Depreciation and Actual Costs ... or Mileage?

noreply@blogger.com (Doug Beecher) — Sat, 05 Feb 2011 05:42:00 +0000

Answer ... it depends! What are you using the vehicle for? How many miles are you driving for a tax deductible purpose each year? How much will your miles driven vary from one year to the next? How many years do you plan to keep the vehicle? What is the time value of money to you ... specifically how much more valuable is a tax deduction today than a tax deduction 1, 2, or maybe more years in the future?

Your tax software will give you an answer for this year. If that answer will also work best for you for the remaining years you use the car, you're in good shape. Otherwise, you will want to visit with your tax pro... one that you have picked that will take the time to explore each of these options with you. Be sure to remember that whether you choose to take claim depreciation and actual operating costs, or you choose to use the IRS mileage rate, you are required to continue using that choice for as long as you own and operate that vehicle.

You will want to meet with your tax pro before you buy the vehicle to discuss whether you should lease or buy, what special tax credits are available for the type of vehicle you are considering to see if that will sway your final decision on which vehicle you will choose, and to get started on the questions posed in the last paragraph.

You will want to meet again at or near the time you file your next income tax return after acquiring the vehicle. This is when many of the tax decisions become final, meaning you have to live with them for as long as you have the vehicle. So, it's worth going through everything one more time to make sure none of the assumptions you have made changed since you acquired the vehicle. Remember, most tax software will only help you with the current year, so check with your tax pro to see if later years are an important consideration for you.

Let me give you an example. You buy a delivery truck for your business for $30,000, including all taxes and other dealer fees, on December 1. Your plan is to have one of your reps drive it on an 80 mile daily route 5 days a week. You have another vehicle for personal use and you don't allow the rep to use it personally either. We'll also assume that this delivery truck wouldn't be well suited for personal use, so it will truly be 100% business use, just to keep the illustration simpler. You expect to get 12 miles per gallon of fuel at an average of $3.50 per gallon. Insurance will be $1,200 per year. You hate maintenance, so you plan to trade it in 3 years from now at about 60,000 miles so that all you need to do in the meantime is basic oil changes and similar routine maintenance that you think will cost $600 per year. Similar 3 year old trade-ins right now are going for $18,000, and you don't see that changing much in the next time you own the truck.

Your question: How should I choose to report this vehicle on my tax return?

The easy way to claim this vehicle on your taxes is to use the mileage rate, currently 51 cents per mile for business use. You don't have to keep records of your vehicle expenses if you don't want to, just document the mileage in a daily log or similar record. If this rate stays the same while you own the truck, you will have a tax deduction of $816 for 1,600 miles in year 1, $10,608 for 20,800 miles in each of years 2 and 3, and $9,792 for 19,200 miles in year 4. This adds up to $31,824 in tax deductions for the life of the vehicle.

If you use the actual cost method, you will probably qualify to write the entire $30,000 cost of the truck off in year 1 since it is being used 100% for business and it likely weighs more than 6,000 pounds. If the expenses come in even intervals (unlikely, of course, but close enough for this illustration), your tax deductions will be $30,605 in year 1, $7,862 in each of years 2 and 3, followed by net taxable income of $10,742 in year 4 (the $18,000 you will get from selling it, less $7,258 for fuel, insurance, and repairs). This adds up to $35,587 in tax deductions for the life of the vehicle, plus you have the added benefit that most of the deductions come in the beginning.

The difference from the mileage rate becomes larger if you replace the truck with another one and are able to write it off in the same way, thus avoiding the net taxable income possibility in the final year. An alternative would be to trade in the truck on a new one, in that case you don't claim the value of the trade in as income on your tax return, but instead reduce the amount you claim depreciation for on the new vehicle you traded for.

What Factors Could Make The Mileage Rate The Better Choice?

In this example, depreciation works out to 19.2 cents per mile ($30,000 original cost less $18,000 residual value divided by 62,400 miles driven). I have seen cases where depreciation was as low as 10 cents per mile and others where it was 50 cents per mile.

Fuel use is another huge factor to consider. In this example, it was high at 29.2 cents per mile ($3.50 per gallon divided by 12 miles per gallon). If the vehicle in question gets 25 miles per gallon, fuel use is cut in half to 14.0 cents per mile.

Maintenance can also make a difference and can offset reductions in per mile depreciation achieved by keeping vehicles longer. Even though the mileage rate may be best in a given situation, I still suggest keeping records of actual costs to help with your decision of how long to keep your vehicles in service.

Bottom line here: You should estimate total cost per mile to drive your new vehicle and compare it to the IRS mileage rate as one of the key factors in choosing which method to report your business use vehicle on your tax return. I have seen cases where actual cost, including depreciation, is as low as 30 cents and others as high as $1.00 per mile. At even 10,000 business miles per year, that relates to a benefit of $2,100 to $4,900 per year in additional tax deductions from making the best choice for you. If more business miles are driven, obviously the decision becomes even more important.

Should I Take Depreciation Now or Later? Generally people take the IRS up on their offer to let them deduct in full now. If you have a start up business with little or no profit now, and especially if you have contracts coming on line that will push you into a higher tax bracket in the future, I have seen cases where taking depreciation over 5 years has been worth several thousand extra dollars. It is worth the time to do the math both ways.

Does This Change If I Have Business Use Of A Vehicle As An Employee?

The same choices are usually available to you, including claiming depreciation in the year the vehicle is purchased. Where it is different is that you have to file Schedule A to itemize deductions to claim this expense, you have to reduce the deduction by 2% of adjusted gross income, and the deduction is eliminated if you are subject to alternate minimum tax (AMT). Keep these factors in mind before making a decision to buy a business vehicle that is based on tax savings you are hoping for.

Summary. This example was designed to illustrate how various factors that play out over the full life of the vehicle can change whether the mileage or actual cost method yields the best result in a given situation, as well as which depreciation choice is best. Clearly, all of this will vary by the specifics of each individual situation, but I hope I have shown how getting planning help is worthwhile at the time the vehicle is purchased and at least one more time when the first tax return is filed after the purchased.

Please share your questions, comments, or experiences hauling watermelons in the space provided! I also offer a free 30-minute initial consultation and would welcome your e-mail at dougbeecher@yahoo.com to arrange that.

Picture credit for funny delivery vehicle: Melon Delivery by Fran Hogan (We now have proof that it was Colonel Mustard in the conservatory with a watermelon to the head!)

Higher Education Expenses and Your Taxes - Which Choice is Best for Me?

noreply@blogger.com (Doug Beecher) — Fri, 04 Feb 2011 00:26:00 +0000

Exciting New Build by Caryl Sumner,
picturing Walsall College (U.K.)

If you, your spouse, or your qualifying child attend an eligible post-secondary school, you could be eligible for up to $2,500 per student in tax savings this year. There are three main options, with complex questionnaires to determine what you qualify for. Your tax software will guide you through these questions and generally will pick the best option -- but you need a human to see if state tax makes a difference.

The options for 2010 tax returns are the American Opportunity Tax Credit, the Lifetime Learning Credit, and the Tuition and Fees Deduction. We'll discuss each of them, and also give an example of how state tax can change which choice will save you the most money.

The American Opportunity Tax Credit

This credit is an expansion of the old Hope Credit, which it replaces for 2010. It is the most generous of the three options but has the most restrictive requirements. You claim it by completing IRS Form 8863 and attaching it to your tax return. On this form, you report your payments for tuition and fees, course-related books, supplies, and equipment needed by a student. You are not required to buy the books, supplies, or equipment from the school. You need to be an undergraduate student meeting the following criteria:

Attend a post-secondary school that is eligible to participate in a U. S. Department of Education student aid program.
Pursue a degree or a training program that prepares students "for gainful employment in a recognized occupation".
Be enrolled for at least a half-time course of study, as determined by the school.
Have no felony drug convictions.

The American Opportunity Tax Credit can be claimed a maximum of 4 times in a student's lifetime. If the previous Hope Credit was claimed in past years, that counts towards the 4 time maximum. The credit is a dollar for dollar reduction in taxes for the first $2,000 in qualifying expenses, and a 25% reduction on the next $2,000 -- making the maximum credit $2,500 on out-of-pocket expenses of $4,000 or more.

Another unique feature is that 40% of the credit is refundable, meaning you can receive up to $1,000 even if no tax is owed. The other two options do not allow this.

Payments for room, board, medical (including student health fees billed by the school), transportation, and other personal living expenses do not qualify, even if they are required by the school as a condition of enrollment.

Not only is this credit the largest of the three options, but it also is available at the highest income levels: phase-out begins at $80,000 of modified adjusted gross income ($160,000 for married taxpayers filing a joint return).

The Lifetime Learning Credit

This credit has the advantage of applying to more people. It is available for an unlimited number of years. Graduate school and continuing professional education both qualify. The student does not have to be working on a degree or other certificate. Felony drug convictions do not matter for this credit. You claim it by filing IRS Form 8863 with your tax return. (This is the same form used for the American Opportunity credit)

It is a 20% credit on the first $10,000 of tuition, fees, and course-related materials purchased from the school as a condition of enrollment -- only. This makes the maximum credit $2,000. Phase-out begins at a modified adjusted gross income of $50,000 (or $100,000 for married taxpayers filing a joint return)

The Tuition and Fees Deduction

This is a deduction rather than a credit, and is limited to the first $4,000 of qualifying expenses. It was slated to end with the 2009 tax year, but was reinstated in the tax law passed December 17, 2010. Because of this, the IRS is reprogramming its computers to allow for it and you will have to wait until February 14, 2011 to file your 2010 tax return if you want to claim it.

The income phase-out begins at $65,000 ($130,000 for married filing a joint return). For taxpayers in the 25% tax bracket, this is a better option than the lifetime learning credit. You claim it by attaching IRS Form 8917 to your tax return.

Where Human Intervention Is Needed On Tax Software for Education Credits/Deductions

Most software will only "optimize" between these options for federal tax. The credits only help the federal tax anyway, so for them it doesn't matter. However, there are some states that allow the education deduction, and others that do not. This means you need to know if your state allows it, and what your state tax bracket is. If you are in the 15% federal tax bracket and your state bracket is higher than 5%, you will do better with the deduction than with the lifetime learning credit when state tax is also considered, but the computer will tell you to go with the credit. Be sure to figure it both ways in this case to be sure. (If you qualify for the American Opportunity credit, go for it and don't worry about this calculation)

If you are not confident doing this, this is one of the reasons you would want to consult with a tax pro and not rely solely on tax software.

If you have questions or comments, I'd love to hear from you -- either in the comment box bleow or through e-mail at dougbeecher@yahoo.com if you have a personal question or would like to set up a free 30 minute initial consultation. I also thank you in advance for sharing this with your friends!