Taxation Without Representation is Alive and Well

Taxation Without Representation is Alive and WellOur forefathers launched the Revolutionary War with the claim “taxation without representation.” What few of us realize is that taxing the other guy who has no say in the matter is now a prevalent technique. Here are some examples.

 Bullet Item 1 Hotel taxes to fund sports stadiums. New professional sports stadiums across the country are using hotel taxes to fund their construction. This tax is added to every visitors’ bill without input on whether they agree to the tax or not. In perhaps the most brazen example, supporters of a potential new NFL stadium referendum in San Diego are promoting getting fans from competing football teams to pay for their new stadium through hotel taxes.
Bullet Item 2 High property tax on vacation property. Own a cabin or other vacation property? The property tax you pay for this property is set by local officials. Temporary residents do not have a vote in electing these people. So out-of-town cabin owners end up footing the bill for local initiatives without a vote.

Bullet Item 3

Small business taxes. While the legal system treats corporations as legal entities, they have no voting rights. In addition, millions of small businesses are taxed on individual tax returns as flow-through entities, but the owners have no voting authority to represent their business if they do not live in the same community as their business. This means things like property taxes and sales taxes are set without representation.
Bullet Item 4 Out-of-state taxes despite no physical presence. Many states are taxing non-resident individuals and businesses with new legislation. For example, a consultant working for a California company may be subject to California income tax, even if residing and working in another state. Out-of-state businesses are challenged with newly defined “nexus” rules. As non-residents, these new taxpayers have no voice in the matter.

What’s the big deal?

Unfortunately, the pace of targeting taxes towards people and businesses with no voting rights is increasing. This is often due to legislatures taking the path of least resistance. Why not place the tax burden on someone who does not vote? Here are some suggestions on what you can do to manage this problem for you.

Bullet Item 1 Manage your stay. Know which cities have hotel taxes to support construction projects. Vote with your wallet by selecting your location for business and vacation stays. Sometimes the tax only applies to select counties around a stadium. This is the case with the tax to fund the construction of the Minnesota Twins baseball stadium. So select a nearby county that does not collect the tax.
Bullet Item 2 Shop wisely. When looking for a new vacation home or cottage, pay attention to the property tax. There are cases where two similarly valued properties on the same lake have different property taxes because the lake is in two different communities.
Bullet Item 3 Squeak. While you have no vote, you can still try to apply influence. If a community is not business-friendly in their tax proposals, getting the word out is often your only approach. Visit city council meetings and voice your concerns. Support local candidates that understand your plight. Consider challenging property valuations to minimize the impact of tax increases.

Every state, county, and community is different. Know the tax climate before you buy, move, or work in a community that is not your primary residence. It is often your only defense when you are subject to taxation without representation.

 

 

Small Business Tax Review May be in Order

Setting up your business accounting system

The recent tax legislation addresses a number of tax credits and other provisions that impact small business. Planning your business’ tax bill is now more important than ever. Here are some of the key changes:

Point First year bonus depreciation is now available through 2019.
Point Section 179 capital expensing is now $500,000 per year and will be indexed to inflation.
Point The Research and Development Credit is now permanent.
Point The Affordable Care Act requires many small businesses to carry qualified health insurance or face potential penalties.
 Point Other General Business Credits have been extended or made permanent.
Point The flow-through nature of the tax code may now be exposing shareholder income to additional surtax as part of the Affordable Care Act.

Tips to Make School Expenses Deductible

Apple and pencils

It seems like summer has just begun and the Back-to-School advertising blitz has already started. Are there tax savings opportunities within this nightmare for our kids? Certainly, if you are tax smart about your spending. While the amounts may be small, they can add up in a hurry. Here are some ideas:

 

 

 

Check mark Purchasing the class supply list could have deductions in it. Often schools send a list of requested supplies for the school year. Some of the items on the list are clearly for personal use (such as an eraser or a ruler) while other items on the list are often for school use and classroom use (such as 24 pencils or paper towels). This classroom supply technique effectively transfers the school expenses to our children. Keep track of these non-cash classroom/school donations for possible non-cash charitable deductions.
Check mark Donate funds versus buying the supplies. Instead of buying the classroom supplies yourself, consider providing a check written to the school as a donation. This helps in two ways: First, it becomes a clear cash donation with a canceled check as a receipt. Second, if your school has a good supply agreement, the purchasing power of your donation will go further.

Check mark

Whenever you donate, get a written confirmation from the school or your child’s teacher representing the school. Most teachers do not have the form, so bring one with you that the teacher can sign. You can get the directions on www.irs.gov or simply use a respected charitable group like Goodwill, or the Red Cross for a format to copy.
Check mark Leverage the school’s PTA. This non-profit parent group, if a qualified charitable organization, is a great resource to help your school AND help you get deductible donations for funds you would otherwise provide to your child’s school.
Check mark Use checks not cash. If you usually provide donations to the school in the form of cash (like providing additional money to help other kids go on field trips) make those donations in the form of a check. Cash donations without receipts are not deductible.
Check mark Donate funds versus taking the raffle ticket. Raffles, subscription drives, and silent auctions are fun ways schools raise funds. To maximize your ability to deduct your donations, forego the possible prize. Then the entire donation is clearly deductible.
Check mark Don’t forget your out-of-pocket expenses for your volunteer activities. Perhaps you donate your time at school functions, donate books to the school library, or help assist the teaching staff. Your out-of-pocket expenses and your mileage should be tracked for charitable deduction purposes.
Check mark Teachers, save your out-of-pocket expenses. The $250 deduction for qualified educators out-of-pocket classroom expenses is a popular tax provision in Congress that is now a permanent part of the tax code.

Finally, don’t forget to review state rules for educational expenses. There are often credits available for out-of-pocket school and other educational expenses.

What to Do With Your Social Security Statement

Social Security Statement

The Social Security Administration is now doing a better job in sending out earnings reports by mailing paper statements to workers every five years beginning at age 25. The reports are also available online. These reports recap historic earnings and contain an estimate of potential benefits. When you receive your report, spend a few minutes reviewing the statement. Here are some suggestions on how to do this.

Bullet Item 1 Review your earnings history. Towards the back of the report is a recap of your earnings record. This should accurately reflect reported earnings on your tax return. This number is a summary of all your earnings subject to Social Security as reported by your employer on your W-2 forms. But if you are self-employed or have many employers, you must make sure that the income properly reflects what you earned.<

Action:

Employees: Pull out your W-2s and make sure the totals match
Self-employed: Pull out your tax return and confirm totals match
Review history: Review historic figures as well. Your Social Security benefits use your full work history to calculate future benefits.

Action: Consider these monthly benefit amounts in terms of your retirement plan to help create a realistic picture of what you will have available to you when you retire.

Bullet Item 2 Review your potential retirement benefits. The Social Security statement will provide you with an estimate of your benefit amount using current dollars and current work history. The value of your benefit will show three benefit amounts. One for the minimum retirement age of 62, one for the maximum amount if you start your benefits at age 70, and one for your full retirement age between the ages of 65 and 67.
Bullet Item 3 Note other benefits. Remember, Social Security is not just about your retirement benefits. There are also estimates presented for disability and surviving family benefits. Please review these estimates to understand the potential benefits these programs may provide.
Bullet Item 4 Remember current benefits are just estimates. The benefits noted on this statement are estimates. Actual benefit amounts rise with inflation, change with tax laws, and adjust with your future earnings. Your benefit statement will show you the assumptions used in creating your estimated amounts.

Action: Review the assumptions used by the Social Security Administration. Pay special attention to the future earnings used by them to create the benefit amounts. If you do not think they are accurate, you may need to create revised estimates with more accurate assumptions.

Should you find any errors in the statement correct them immediately. The last page of the statement provides a means for doing this.

 

 

Charitable Donations from Your IRA

Charitable Donations from Your IRA

Can you take advantage?

One of the temporary tax provisions made permanent as part of the tax code in late 2015 is qualified charitable distributions from IRAs for those who have reached age 70½. Unfortunately in 2014 and 2015, the law was extended too late during the calendar year to reasonably use this tax law. In 2016 you have the ability to make a planned decision to use this tax benefit. Here is what you need to know.

The rule. For those age 70½ or older, you can have up to $100,000 of your IRA paid directly to qualified tax-exempt charities each year. These pre-tax funds are not subject to income tax by the federal government. This makes the contribution income tax free. No itemized deduction for your contributions is available on these direct transfers.

The benefits

Bullet Item Taxpayers do not have the contributions from their retirement accounts added to their Adjusted Gross Income. So as a planning tool, this donation strategy can keep Adjusted Gross Income low. This can help avoid things that come with higher income levels like different Medicare premiums.
Bullet Item The contribution counts towards a taxpayer’s annual Required Minimum Distribution. If a taxpayer does not need the income and does not want to be subject to required minimum distribution penalties, this can be a great alternative.
Bullet Item The contribution is a straight write off. Remember, these funds are sitting in your IRA in pre-tax status. When they are normally withdrawn, the funds are subject to income tax. This tax feature allows you the charitable deduction without the hassle of itemizing your deductions.

Some cautions

As with all tax laws, you must be aware of the rules. Foremost among them are;

Bullet Item The contribution must be made directly between your account and the charity.
Bullet Item This benefit is on the federal level. The tax treatment in your home state will vary.
Bullet Item Since the donation does not go through the taxpayer’s income, the donation is not subject to the percentage of income limits on charitable giving by type of organization.
Bullet Item Don’t wait. Since it usually takes time to initiate and complete this transfer, do not wait until the end of the year to make your direct contribution. The money must be at the charity prior to January 1st.

While this tax opportunity is not right for everyone, it is a new tool to use when creating your annual tax plan.