Ask CPA Sam

As the end of 2009 quickly approaches, it’s important for all tax payers to begin preparing for the filing of their 2009 tax returns.

- Have you maxed out your HSA or IRA contributions?  People with these kinds of accounts can actually make contributions for 2009 through April 15.  Maximizing your contribution helps reduce your taxable income by the amount of the contribution.  For certain tax payers, contributions to specific retirement accounts provide a special credit.  This credit is based on income level.

- Have you tallied up all those miles?  If you drive a personal vehicle for company business, or have your own business, adding up the miles and summarizing them will make your tax preparer much happier.  Miles driven for charitable or medical purposes also can be useful. If you can do this in a spreadsheet program and provide it digitally, you may be able to save some money.  Check now to make sure you can find all of your logs.  It’s much easier to begin assembling your records now than the night before your appointment with the preparer.

- Make a list now of the documents your tax preparer might need.  You should be receiving an organizer from the preparer that can guide you as you dig for your documentation.

- Take a look at tax changes for 2010.  The website paycheckcity.com has free calculators available that can help you evaluate your paycheck based on 2010 tax tables.  Do you need to make some changes?  Did you have more or less withholding this year than you were expecting?  Now is the time to change it before the new year starts and you forget.

- Did you move in 2009?  If so, to get your W-2s from past or current employers in a timely fashion, you will need to notify them to update their records.  Also make sure you tell your tax preparer if you moved.  This can affect the types and amounts of taxes you pay.

- Did you claim exempt on your W-4 for 2009?  If you plan on remaining in that status, you must submit a new W-4 to your employer verifying that status by February 15.  Keep in mind that Form W-4 is used to notify your employer of address changes as well.

- Are there any last minute charitable contributions you can make?  Keep in mind the requirements for documentation for non-cash contributions.   Independent appraisals are often required if the value of the non-cash donation exceeds $5,000.

We’ve all heard quotes from famous people about the U.S. tax system.  Here are a few more that may serve to lighten the mood on this Monday morning.

“No one understands the Income Tax Law except persons who have not sufficient intelligence to understand the questions that arise under it.”
New York State Senator Elihu Root in 1913

“No government can exist without taxation. This money must necessarily be levied on the people; and the grand art consists of levying so as not to oppress.”
Frederick the Great, 18th Century Prussian king

“Income tax has made more liars out of the American people than golf.”
Will Rogers

“Would it not be better to simplify the system of taxation rather than to spread it over such a variety of subjects and pass the money through so many new hands?” –Thomas Jefferson to James Madison, 1784. Papers 7:557

“Excessive taxation … will carry reason and reflection to every man’s door, and particularly in the hour of election.” –Thomas Jefferson to John Taylor, 1798. ME 10:64

I hope our elected officials remember as we creep ever closer to another tax filing season, that those who elect them do not have short memories when it comes to the use of their funds in government.  Large social engineering projects like tax credits for environmental issues or health care need to be well thought out and debated.  Rushing into something so big and path-altering will bring around yet another batch of unintended consequences and complexity.  Government at all levels should be focusing on simplification, transparency, increasing the tax base (not rates) and increasing efficiency.

I drive to work each morning past 3 sets of road warning signs.  These were installed as part of the national Amber Alert network. That is a great cause.  However, on both support posts of each set hangs an orange sign that says “Sign Not Active.”  I wonder how much was spent on purchasing and installing those signs to tell us something that is so obvious.  It’s not working!  That’s just one example of the thinking outside the private sector.

Perhaps one post per month in 2010 will be on something within government that shows how out of touch many elected officials truly are.  Maybe by banding together, we can create some extra focus on accountability in government in the coming election year.

Q. I borrowed $15,000 from my 401(k) in Feb, 09. In May, 09, I was laid off from my job. My only options for the loan were to pay it in full (not going to happen) or default. They would NOT allow me to continue making payments and would not transfer the loan to my new employer!  Anyway, can you tell me how to calculate the penalty that I will be charged when i file my taxes for 2009?

A. Generally, the fees charged for early withdrawal amount to a 10% penalty.  Sometimes the vendor of the company’s 401(k) plan will take the 10% penalty from the proceeds when someone cashes out a plan.  However, in your situation, there was no way to know this would eventually be considered a cash out.  Because the contribution to the plan is pre-tax for federal purposes, you will pay regular income tax on the withdrawal as well.  This means the calculation of total income on your tax return for 2009 will include the loan balance that was forgiven.  Your taxable income will be higher than it would have been without this dollar amount.  How much higher is to be calculated between you and your accountant or tax preparer. You can run a calculation for estimated annual liability using Publication 919 from the IRS. Beware!!! This process is like completing a simulated tax return.  If you miss one number in your calculation, the whole thing could be wrong.  This of course does not help you find your tax liability number.

If you find after working through Publication 919 that you will be short on your tax liability payments, you can adjust your withholding with your new employer for the remaining periods in the year.  This is a good idea to ensure that you don’t have any underpayment penalties at tax time.  Also, you can estimate what your check would look like using any changes you might make to your withholding allowances using the free Paycheck Calculator at PaycheckCity.com.

Earlier this year, it seemed that all anyone talked about in the media was this great little tool called Twitter.  Predictably, I was very skeptical of what seemed to be “herd” mentality.  As a CPA, what good could this site do for my brand?  Could it bring me clients?  Could I connect better with my clients?  Colleagues at Symmetry Software seemed to think this was merely a fad and that it would pass with time.  So began my experiment.

What potential benefits are there?

• Recognition of financial expertise in an organized community
• Increased awareness of my brand, AskCPASam
• A chance to interact with other financial professionals
• A way to connect to people I would not normally find
• New way to discover trends in opinions towards the economy
• Through plug-ins, my website content is updated as often as I “tweet”

What I found was a place where spammers routinely “follow” me. The picture attached to the profile of these spammers is often explicit and very embarrassing if anyone decided to see who was following me.  This requires constant monitoring of this group to ensure that it stays professional.  Of course, this means even more work.

Many of my current clients who signed up for Twitter and followed me used the service for a couple weeks and then never came back.  I believe many of those accounts have been removed for inactivity.

While I have certainly connected with individuals outside my normal circles, they have been other financial professionals with whom I share ideas and opinions and new stories.  I post notices when there is a new blog topic and direct folks to my website.  Therein lies the biggest weakness of Twitter.  While it is a community of sorts, it is a community of small attention span.  I have but 140 characters to promote a message.  That message stays within the confines of that platform.  I want my clients, both current and prospective to come to my site and see articles that contain my complete thoughts on a subject.  This is simply not possible in the Twitter platform.

If I were to find a lead on a potential client, there is no good way to contact them and qualify whether or not the lead is legitimate.  This is the anonymous nature of Twitter.

Perhaps you can tell by now that I have become an “unfan”.  Through Facebook and LinkedIn, I can post the same information and reach an audience that I have built of friends and acquaintances who know me.  I can still have my blog articles summarized in posts on those platforms.  Twitter is simply too unprofessional and limiting at this point in its life for me to really see upside potential.  Perhaps future upgrades will help.

I invite your comments.  Perhaps this will be discussed again in the future from another perspective.  Who can tell what way the technology will go.

Q. We have an employee who is working on an extended assignment (1+ years) in another state.  This is not the state of his residence. My company is paying his apartment rent.  Is this taxable income to the employee?

A. That is a very good question.  In these turbulent economic times, employees are more apt to accept unique arrangements like this just so they can keep their job.  I see two issues at work here.  First, what amount of time is required before the employment state considers him a resident?  Second, is the employee living on-site at a business location.  Why do these questions matter?

Because I’m in Arizona and you did not mention which states are involved, I will use an Arizona example.  According to Arizona Income Tax Procedure (ITP) 92-1, if an employee is in the state for longer than 9 months, he is considered a resident.  Your employee is probably considered a resident of the state where he is working as well.  That means, he has technically relocated.  Unless he is residing on the premises of your business location (like a storage unit manager), any rent or mortgage that you pay on his behalf is taxable income to that employee and must be included in wages on the W-2.  He may also be subject to tax withholding in the state where he originally resided.  Check with a local tax advisor or CPA for details and guidance.  A good summary of this issue can be found in the Guide to Fringe Benefits, Publication 15-b from the IRS.

On a side note, if you read this page, you will see the minimum amount of time required to pass before an employee needs to have Arizona withholding. In your example, the employee is staying in the state much longer than the required 60 days.  Therefore, you would definitely have to withhold if this situation occurred in Arizona.  As you can see, withholding requirements normally begin much earlier than residency rules.  Check with the state that applies to your situation to see its requirements.

An IRS news release today reminds small employers of an alternate form available to reduce the burden of quarterly payroll tax filing.  It is called Form 944. If you have less than $1000 of annual employment tax liability, you can file this form.  For the rest of employers, Form 941 is required.  This is a newly updated and extended form that must be filed quarterly for companies that are too big for Form 944.  The record keeping requirements are much more onerous.

The problem has been a lack of education on the part of the IRS regarding who can actually file Form 944.  Even more confusion surrounds anyone who wishes instead to stick with the 941.  To have less than $1000 of annual liability, you would need to have taxable payroll of less than $6535.94.  This is an extremely small business who is likely not going to be keeping up with the latest IRS rules.  The IRS must notify the employer that they are eligible for the annual form.  Unless notification occurs, they again are stuck with the 941 anyway.  Why confuse the issue?

I propose completely doing away with the 944 and keeping everyone on the same reporting form.  It is really no easier to complete the 944. It is simply completed once per year instead of 4 times per year.  If there are questions from small businesses relating to payroll procedures, they need to seek out assistance to stay in compliance with employment tax rules.  By adding another form and relying on the IRS to notify employers in a timely manner that they qualify for the annual form, the government is nearly keeping anyone from using it anyway.

Form 944 is yet another reason why employers should be utilizing the services of a professional company for processing of payroll.  Whether this be a small local/regional provider, or the employer’s CPA, it is much too difficult to keep track of regulation changes and obscure tax nuances.  After all, unless you are in the payroll business, it is much more important to stay current with issues and customer needs surrounding your own business.

Recently, when my laptop started growling like a hungry bear, it became obvious that it was time for a new laptop.  Not only does this mean I have to research all the different available features, and compare prices from different vendors, I must transfer all my programs over to this new machine.  Unfortunately, many of the programs I used on the old computer with Windows XP, no longer work under Windows Vista.  This is so very frustrating.  Earlier this year, I wrote on the topic of Cloud Computing.  My New Year’s Resolution (which may carry into next year) is to find cloud-based or internet based alternatives for as much as possible. I am a bit of a computer geek anyway and over the years have developed quite a stash of tools for working on various types of projects.

• personal finance – Microsoft Money
• web page creation – Dreamweaver
• tax preparation software – TaxAct
• photo editing – PhotoImpact
• text editing – EditPad Lite
• office programs – OpenOffice
• desktop publishers – PrintMaster
• music slow down software – Transkriber
• password manager – AccessManager
• backups – local external hard drive

For personal finance, I found Buxfer.com to be the easiest.  It allows direct import of all Quicken and Microsoft money files as well as .csv formats if needed.  Using a cloud based solution lets me access my financial data anywhere.

For web page creation, free programs like Drupal and Joomla allow more than enough flexibility for most people.  My blog is created using WordPress which is more free software that allows me to write and post with no software requirement other than a web browser.

Tax preparation, desktop publishing and text editing are a challenge that I don’t know if I can overcome.

Office programs can be replaced by Google docs for simple items.  However, more complex documents simply need a full computer-based editor to work properly.  I imagine this is the next level of innovation coming soon.

My password manager was a big problem.  Whenever I travel, I either need to keep a 2nd copy of my passwords within that program, or be completely out of touch.  The solution is clipperz.com which is a free online password manager.  You can always download a read-only version of your data as a backup in case you have no internet access.

For backups, I use mozy.com.  While not free, it is cloud-based and stores your data (encrypted) offsite in case of a calamity.

Photos can be stored on Flickr.com, picasa.com, smugmug.com or shutterfly.com for free and allow you to share with whomever you choose.  Photos can be edited and fixed using Picnik.com.

The point of this post? If you can find ways to move applications into the cloud, you will find that you don’t need as much computer and it’s much easier to switch between them.  You even have access to your data wherever there is internet access.

When an employee is hired in the United States, in most cases, the employer is required to pay a minimum amount per hour for the services of that employee.  As of 7/24/09, that amount is $7.25 per hour.  If that employee works 40 hours per week and 52 weeks per year, the total gross wages of a full-time minimum wage worker will be $15,080.

The IRS actually collected about $2.74 trillion in 2008 (the latest year for which data exists).  For 2008 the governments minimum wage equates to$1,317,307,692.31 per hour.  With a US workforce of 150 million, we pay on average $8.78 per worker, per hour to the government, the government minimum wage.

On October 16, 2009, the US Treasury Department released official figures of the national budget deficit.  Keep in mind that the deficit is the amount the US Government spends beyond what it takes in.  That number was an astounding $1.42 trillion.  Written out that is $1,420,000,000,000.  Actual spending is somewhere in the range of  $4.16 trillion dollars.  If we divide that by the 2080 hours that the average worker actually spends at his/her job, we see that our government spends about $2 billion per hour. If we divide that by 365 days in a typical year, we see spending of  almost $12.4 billion per day.

I read a book about a year ago called “Secrets of the Temple: How the Federal Reserve Runs the Country.” This book contains a very good discussion of the economic conditions surrounding the Carter and Reagan administrations.  According to the author, the Federal Reserve and Congress worked against each other as they both attempted to fix the economic crisis of the day.  Because the situation was so dire with runaway inflation and economic recession, the two really needed to work together to fix the problem.

Back to the present, news reports say the Fed is looking at drafting the policy going forward of slowly removing the money used to prop up the financial system.  Other news reports talk of increased Congressional spending. It sounds like these two groups are getting ready to repeat the same errors.  Job growth has always lagged economic recovery.  Let’s hope the policies put in place do not discourage job growth in the next recovery.

How does this apply to you?  By keeping your financial house in order and spending less than you take in, you are able to better withstand the storms of economic change the those who spend everything they make plus accumulate extra debt.  You never know when a health, repair or job crisis will hit.  It’s best to be prepared for those events when you can.

During my lunch break, I usually read news articles and opinions from various news sites.  One thing that is always fascinating is the paradox of how many people want to be like the various celebrities in the news, yet how out of touch those same celebrities are with real people’s lives.  So many magazines at the checkout stand in the grocery store offer “new” ways to attract men or make yourself more attractive, or drop pounds and even change your body in a few easy steps.  Unfortunately, nothing in life is that easy whether it be finances, dieting or your career.

As part of a successful personal financial plan, it is important to keep your focus on your ultimate goal, getting out of debt and planning for both unforeseen problems and retirement.  It is also important to ignore the temptations around you that try to get you back into your old ways of overspending.  I think the current economic climate has taught many Americans that buying on credit is simply not the smart way to go regardless what everyone else is doing.  What happens if you lose your job or your income is reduced?  A good budget will help you work your way out of debt while still affording a few small “rewards” along the way to keep you motivated.  It also provides a bit of accountability

To get started in a budget, the first thing that needs to happen is to stop reading about celebrities and fashion.  They make “crazy money” as Angelina Jolie once said for doing very little.  They have essentially unlimited resources that the rest of us don’t!  Book after book has been written on how stuff and money simply does not bring happiness.  I invite you to spend more time with friends and family.  Getting to know people and making an impact in someone else’s life is a pursuit that brings lasting rewards.  Soon the stuff you bought will be broken or obsolete anyway. Why bother with more of it?

Fashion houses and designers will tell us that our wardrobes all need to be refreshed each season with the latest styles.  Why?  Is that pair of pants any less useful now that someone else has declared it “out of style?”  I know, coming from a CPA (traditionally fashion-challenged people), it’s hard to take fashion advice.  Think how much extra money you could put toward paying off debt if your closet didn’t look like a department store!  Wearing clothes for more than one year and dressing in classic styles can save hundreds of dollars.  Think how much less stress you can have sitting on your couch watching a movie from RedBox ($1) in last year’s jeans and t-shirt with a cup of hot cocoa (6 pack from grocery store for $4). You have created a relaxing quiet evening in without worrying about how you will pay for all the new stuff you just bought.

Cloud computing is all the rage these days in many different industries.  What is it?  Essentially, it is moving applications and data off the local network or computer and storing it remotely on someone else’s server real estate.  Why is this a big deal?  There are competing schools of thought on this subject.  Truly it is not a new concept.  There has always been the in-house vs. out-source debate.  Cloud computing is just a fancy name for outsourcing.  When a company outsources a portion of their business, a certain level of control goes with it.  Is it safe to do this?

How about some examples?  In a post earlier this year, I gave a list of computer and web-based checkbook/budgeting software packages.  If you install locally, you have control over access to the programs.  However, if you are not at your computer, you have no way to know what is in the program.  If you used a web-based package, you could simply find a computer with internet access and log into your account to see how you are doing.  You can be at a friend’s house, at a conference, or at work and still access it. Someone else takes care of backing up the data so you are not stuck in the case of a hardware failure.

Other examples of outsourced data include:

• Content Management Systems (CMS) for web development rather than an html editor
• Google Docs for spreadsheet and word processing tasks rather than Office
• Gmail/Hotmail/Yahoo for email rather than a local client that downloads all your mail (Outlook)
• Photo storage like Flickr, Shutterfly rather than local storage
• PaycheckCity.com for paycheck calculations rather than PayBreeze
• Mozy for backups rather than tapes and external drives that are not always stored offsite
• Picnik.com for photo editing rather than Photoshop or Paint Shop

There are many other programs that exist.  Feel free to post comments with your examples.

However, as I experienced the other day, what happens if the host or remote computer holding your data goes down?  What happens if your internet access goes down?  There is certainly a risk to the hosted idea, but I think the greater availability of access to the data outweighs these risks.  It’s also much easier to switch computers if you don’t really have anything of value stored locally.  It’s also safer to discard the old hard drives if you know there is nothing personally identifiable on them.