Rethinking My Decision to Prepare My Own Tax Return

I have always considered my ability to prepare my own taxes a side benefit of my CPA license. I work in industry, so I don’t prepare anyone’s taxes other than my own, but felt I was proficient enough to prepare my own return. This year was different than prior years in that my husband had pension and social security income for the first time, we sold investments and I was hoping to use the personal energy credit for the water heater and gas furnace we had purchased in 2015. I spent three weekends preparing our returns and in hindsight think perhaps I should have used a professional preparer. Here are a few things I learned:

Only 85% of social security benefits are included in taxable income.

My husband started receiving social security last year, since I work full-time I knew we would pay tax on this income, but was surprised TurboTax included only 85% of this benefit as taxable income. According to the SSA website: 

No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules.

Pensions are taxable, but not according to my husband’s 1099-R.

On the form 1099-R my husband received for his pension, the taxable amount box was blank and the taxable amount not determined box was checked. When I entered the 1099-R exactly as provided, TurboTax concluded the pension wasn’t taxable. After reading TurboTax guidelines concerning pension income, I decided the pension income had to be taxable and entered it accordingly.

Remember the personal energy credit I was so excited to take advantage of:

From my post Appliances Don't Qualify for Energy Credit:

The $500 lifetime credit (10% of cost up to $500) for energy efficient improvements has been extended until 12/31/16. I am excited about this one since we installed a new furnace and water heater in 2015 – although $500 doesn’t come anywhere close to covering 10% of what we spent.

It turns out:

The energy credit for natural gas, propane, or oil furnace or hot water boiler with an annual fuel utilization rate of 95 or greater is capped at $150.

TurboTax did not ask for any information on water heaters, so we did not receive a credit for the new heater. Today I found the following on the Energy.gov website:

Natural gas, propane, or oil water heater which has either an energy factor of at least 0.82 or a thermal efficiency of at least 90 percent: $300.

Perhaps I missed something for the water heater, but at the time I determined we were only eligible for the $150 credit. 

Establishing cash basis for our sold investments was kind of nightmarish:

The 1099-B I received for our sold securities included basis for only a portion of our sold investments – there was a section for transactions for which basis is reported to the IRS and another section titled transactions for which basis is not reported to the IRS.

My boss, who prepares taxes on the side, informed me there was a law change about four years ago requiring brokerage firms to provide basis information for mutual funds purchased after January 1st, 2012. Since the assets we sold included mutual funds purchased both before and after January 1st 2012, the 1099-B provided basis only for the assets purchased after this date.

I called our brokerage firm who was able to provide the original cash basis for all our sold investments. I then had to reconcile the basis by each individual asset by date (there were several pages of these). The final cash loss I calculated did not equal what was on the 1099-R. In the end, my husband pushed me to file with the information I had. The loss wasn’t off by a lot only about a hundred dollars and I did use the lessor loss. If we are ever audited and I was wrong at least the IRS will owe us money.

Taxable losses can be deducted up to $3000 and the excess can be carried over to future returns:

According to the IRS website:

Generally, realized capital losses are first offset against realized capital gains. Any excess losses can be deducted against ordinary income up to $3,000 ($1,500 if married filing separately) on line 13 of Form 1040.

Losses in excess of this limit can be carried forward to later years to reduce capital gains or ordinary income until the balance of these losses is used up.

Okay I am sure I knew this when I took the CPA exam, but didn’t make the correlation when we sold the assets. I deducted the loss and am not questioning this one further.

Our taxes are filed – I paid $92 for the federal and state TurboTax Premier. I know of a tax preparer who sets her fee based on the number of forms she prepares, so I imagine I would have paid $250 or more if I’d have hired someone to prepare this return. My co-workers tell me my boss’s fees are reasonable, but I didn't want him to know my entire financial situation. I think I will be okay preparing my return next year, but if we ever sell securities again I will strongly consider seeking professional help.

Do you prepare your own tax return? Are you sure you took advantage of all the incentives available?

Financial Considerations in a Collaborative Divorce

 
Last week I ran into an acquaintance who is in the process of getting a divorce. She tells me things are going smoothly; it is a collaborative divorce with no attorneys involved.  Both she and her spouse are going out of their way to be civil towards each other for their children – a 12 and 14 year old.  They are also amicably splitting their assets and will have joint custody.

The accountant in me had to say, “Don’t forget to discuss which parent gets to deduct the children on future income tax returns.”

She responded with “I never thought of that.” and “How do you know that?”

I’ve worked in some aspect of accounting for almost 30 years and have my CPA license, but to be honest, most of what I’ve learned about the financial pitfalls of divorce comes from co-workers and friends complaining after things have gone badly.

Here are a few tips:

Claiming your children as dependents:

Usually the parent who has custody of the children for the greater part of the year will claim them as dependent exemptions on their income tax return. This is an important designation because most often the parent who can claim their children as deductions is also the parent who receives other tax related benefits and credits.

Head of Household

This filing status is only available to the custodial parent. It provides a bigger standard deduction and looser tax tables than single taxpayer status.

Higher education costs:

The spouse that claims the children as a dependent is the parent allowed to claim the American Opportunity Lifetime Learning Credit (this can be worth up to $2,400 during the first four years of a child’s education). If you do not claim your children as dependents you can’t claim this credit even if you were the parent paying their college bills.

Get it in writing:

In joint custody situations parents can take turns claiming the children, but this has to be in writing. Make sure it is part of the divorce agreement.  If the non-custodial parent wishes to claim the child, the custodial parent must waive their right to claim the child on IRS form 8332.

Don’t assume you are entitled to the exemption because you pay child-support:

A newly married co-worker filed a joint tax return with her new husband claiming his daughter from a previous relationship as a dependent. (She thought the first parent to file gets the exemption).  The child’s mother also claimed the child despite being told my-coworker had claimed her.  His return was audited, the IRS deemed the mother as the custodial parent and eligible for the deduction.  My co-worker and her new husband had to pay back taxes were fined and required to pay interest on their return.

Alimony:

Alimony is considered taxable income for the recipient.  If you receive alimony make sure you make estimated payments or set aside a portion of each check so you are prepared for your tax bill the following year.

Alimony payments are deductible by the person paying them, but only if made on account of a divorce decree or written agreement. An oral agreement will not suffice and payment must be in the form of check, cash or money order.   

Retirement savings:

401(k) distributions are taxable.  If you want your spouse to be responsible for taxes on distributions they receive from your retirement account make sure your divorce papers include a (QDRO) qualified domestic relations order. Without a QDRO, you may end up paying the tax bill.

Spouses do hide money:

This is probably the biggest lesson I can give you.  During my 30 years of working in accounting departments I have been asked more than once to not pay a commission, bonus or to withhold a raise until after an employee’s divorce is final.  I’ve seen this at more than one company and the request is always granted – it is the employee’s money.

I’m not familiar with how collaborative divorces work, if lawyers are not involved I recommend consulting with one anyway to make sure all interests are covered.  Consulting with a tax accountant can’t hurt either.

Are you aware of financial pitfalls in a collaborative divorce?

Appliances Don’t Qualify for the Energy Credit & Other Tax Tips

To stay informed of changes to the tax code, I attend an annual tax update seminar every January. Here are a few tips I learned from this year’s event:

The personal energy credit has been extended:

The $500 lifetime credit (10% of cost up to $500) for energy efficient improvements has been extended until 12/31/16.  I am excited about this one since we installed a new furnace and water heater in 2015 – although $500 doesn’t come anywhere close to covering 10% of what we spent. 

It is important to note appliances do not qualify as an energy efficient improvement despite the sales rep at your local appliance store* insisting they do.  According to Energy Star, upgrades to biomass stoves, air source heat pumps, central air conditioning, gas, propane, or oil hot water boilers, gas propane or oil furnaces and fans, insulation, roofs, water-heaters (non-solar) windows, doors and skylights do qualify if they are upgraded in an existing home that is your principal residence. New Construction and rentals do not apply.

Audits of charitable donations are on the rise:

Our speaker, who works as a tax preparer, has seen an increase in client audits of charitable donations in recent years. To make sure your donations are not disallowed make sure you have proper documentation.

For Cash donations under $250 you will need a cancelled check, credit card receipt or written communication from the charity.

Cash gifts over $250 must be substantiated by the charity. 

Noncash donations under $250 must be supported by receipt, written communication from the charity or written records.

$250 or over must be substantiated by the charity.

$500 or over must include acquisition detail.

$5000 or over requires written appraisal.

Documentation requirements:

Written support must include the name and location of organization, date of donation, description, value and condition.

Those coupons you receive with only a date stamp when you drop your donations off at a goodwill or charity drop boxes are not considered adequate substantiation. Our speaker has seen these types of donations disallowed.  With those coupons the IRS cannot verify you actually donated ten sweaters, they were worth $25 and were in excellent condition. Instead she recommends dropping items off at the charity’s main location the requesting applicable documentation.  If that isn’t possible she suggests taking photos of your donations.

You can stack these childcare deductions:

Child and dependent care credit

The child and dependent care credit is allowed for children under age 13 and other qualifying dependents.  Eligible expenses are limited to $3000 for one dependent, $6000 for two or more. Income limits do reduce the credit, but don’t phase it out completely.

Flexible spending FSA deductions

Take advantage of employer sponsored flexible spending FSA deductions.           You can contribute up to $5000 in employer sponsored FSA account.  The FSA plan then reimburses your dependent care expenses using pre-tax dollars.

You can’t use the same child care expenses for both the credit and the FSA deduction, but you can stack them.  Meaning if you have $8000 of annual expenses you can deduct $3000 as a tax credit and be reimbursed $5000 from an FSA plan.  Just remember a portion of the dependent care credit could be phased out due to income limits.

*According to an auditor I know who used to audit appliance stores the mark-up on appliances is 300%.

Do you have any tax saving tips to share?

Should You Hire a CPA To Do Your Taxes?

I was more amused than annoyed with Harry Campbell's statement, “I don’t think it takes much to be a CPA” in his article why the average CPA isn't worth the money on PFMoney blog.  

I hold a CPA license and have to say passing the certified public accountant exam was one of the hardest things I’ve ever done. Back when I took it, it was a 16-hour exam covering business law, auditing, financial accounting and tax. In order to pass, I needed a strong knowledge in all four areas since you never knew what specific scenario or obscure topic they would test on.

Passing the exam was one of the best things I’ve done for my career. It opened doors that never would have been available to me without it, increased my annual salary $10,000 the first year I became certified and boosted the amount of respect I receive from colleagues and business associates. I still notice a distinct change in attitude when I hand a vendor, banker or auditor my business card and they read the CPA designation listed after my name.

Campbell goes on to say:

Like in any profession, I’m sure there are some really good ones out there but I think it’s a myth that only a CPA can do a great job. That doesn’t mean the average person is smarter than a CPA but if you can read and you have an interest in taxes you can do just as well as the average CPA.

The reason why I feel so strongly is that this year I actually met with two different CPA’s in person. Both were very highly rated by online reviews and I ended up explaining depreciation recapture tax to the first one and arguing with the second one about the passive loss exclusion. The only reason why I knew more than both these CPA’s was because I had just read NOLO'S Landlord's Guide. It wasn’t because I’m a genius, I just spent the time reading up on landlord deductions and clearly these guys weren’t specialists in real estate taxation.

I have never prepared taxes professionally nor do I ever intend too. My eyes glazed over when I read the words depreciation recapture tax and passive loss exclusion in Campbell’s example. I attend several tax-updates each year as part of my CPE requirements, but these classes are designed to keep me informed of tax law changes affecting my industry, company or personal life, not to become a tax expert - my company has an outside accounting firm for that. I can handle cocktail party tax questions, but anything more complicated I can't answer. (I was once asked how much of a capital gain someone would have if they were to sell their printing business.)

Many of the CPA’s I know do not work in tax or even for an accounting firm. Less than 15% of the members in my professional organization prepare taxes professionally. I am confident that those who do would be able to answer Campbell’s questions accurately and with enthusiasm. If they could not, I’m sure they would know where to find the answers.

He closes with:

I got the feeling from both of these CPA’s that they were going to just take my information and hand it to a secretary to enter into their tax software. I don’t need to pay $500 for that and neither do you. My advice is to do it yourself or hire a specialist and take an active role in your taxes.

Should Harry hire a CPA?
The tax-preparers I know who work for larger firms do have interns or assistants who enter client information into tax software, but an actual CPA always reviews and signs the return. Also, they specialize - some work with small businesses, others with not-for-profits or medical professionals. I would suggest Harry call some of the rental property owners in his area and ask for recommendations. One of my co-workers owns rental properties, his wife is a CPA working in industry and he tells me she spends days working on their taxes. Someone that specializes in rental property returns would be more knowledgeable about best-practices, but if Harry feels comfortable preparing his own tax return he can certainly do that too.

Here are some other considerations:

If your tax-prepared deductions seem too good to be true perhaps they are: 
Two salesmen at my company living in two different states are currently undergoing IRS audits for their 2010 returns. Both used an outside accountant to prepare their return. Both audits disallowed their business expense deductions. One received a bill in excess of $10,000. I’m not sure what he could have claimed for $10,000 because he receives a car-allowance, reimbursement for his gas, his entertainment expenses and mileage in excess of 35,000 from our company. 

Not all tax-preparers are CPA’s or have the same training:
H&R Block has an in-house training program. When one of the CPA tax preparers from my professional organization was looking for an assistant at her law firm, she indicated she wanted someone with prior tax experience and working at H&R Block did not qualify as prior experience.

Also, not all accountants who prepare tax returns are CPA’s. If having a CPA prepare your return is important to you make sure you ask if they are licensed.

If utilizing a CPA, be organized:
The CPAs I know charge clients more if they are not organized. One has a client who drops off shoe boxes filled with receipts each year. It takes her at least eight hours to organize all the papers and receipts in these boxes. She charges him for every minute of her time.

Be careful with the home-office deduction:
The home office deduction is the most frequently audited item on a tax return. The rules are very specific about how this space is used. It must be used exclusively and regularly as your principal place of business. My boss, who prepares tax-returns on the side, refuses to use this deduction on his client’s returns.

There is a new simplified option for the home office deduction:
Starting in 2013, you can deduct a simplified safe harbor amount of $5 per square foot up to a maximum of $1,500 (300 square feet). This means you can itemize your full mortgage interest and real estate interest on Schedule A of your personal tax return rather than apportioning between Schedule A and business schedules C or F. In some parts of the country this simplified option may be as much as if you claimed actual home office expenses. If you live in a high expense area this simplified method will probably amount to just a fraction of your actual expenses.

Your tax-preparation fee may be listed as a deduction, but it may not actually be reducing your taxes:
I had a co-worker who didn’t mind paying someone to prepare her taxes because his fee was deducted as an itemized expense on her return. When I reviewed her return for her, the tax preparation fee was indeed listed as a miscellaneous itemized deduction, but the total miscellaneous deductions in excess of 2% of adjusted gross income was zero - meaning her tax preparation fee was not actually reducing her taxes.

The same can be said for medical expenses:
I currently have a co-worker who hires H&R Block to complete her taxes because they itemize her medical and dental expenses for her; something she doesn’t like doing. I told her to make sure she is actually receiving a deduction. In the past, you needed out-of-pocket expenses in excess of 7.5% of adjusted gross income. In 2013, that percentage has been increased to 10%. If you or your spouse is 65 or older the 10% increase does not go into effect until 2017.

Should You Hire a CPA To Do Your Taxes?
If you have a fairly uncomplicated tax return, nothing new or out of the ordinary occurred during the tax year and you are familiar with the various tax reporting forms you probably do not need to hire a CPA. For the past three years, I’ve used TurboTax answering all of their questions to make sure I didn’t miss anything. I was finished in less than two hours. If you do the same, you probably don't need to hire an accountant to do your taxes. If you have your own business you may want to hire a CPA - at least for the first year.

Do you prepare your own taxes?

*Part of Financially Savvy Saturdays on Femme Frugality and Stapler Confessions*

Unemployment doesn’t have to SUCK! Book Review and Giveaway

I recently had the pleasure of reading Sarah Powers book Unemployment Doesn't have to Suck!: Make it work for you! (I received a review copy). Sarah who was laid off last year wrote this book as a resource for others. At 119-pages it is a quick read, but don’t let the brevity fool you – this book is crammed with useful information.

Sarah describes her book as getting down to business quick, telling us she did not write the “bible for unemployment” or a novel.  What she did write was a useful guide packed with valuable information including tips she learned from interviewing Leila Winther a coordinator of a career center. The book really has something for everyone, especially if it has been awhile since you’ve had to search for a new job. There is a refresher on unemployment insurance (don’t forget it is taxable income), information for those returning to school, how to cut expenses, what to include on a resume and more. Most helpful though are the additional resources and website links she provides.

Here is a sampling of the information included in the book:

Did you know there is such a thing as a Lifelong Learning Credit?
This is an academic tax break for those of us who already have a bachelor’s degree. The credit reimburses 20% of qualified education expenses you’ve paid (up to $2000).

Did you know many local scholarship funds simply go untouched because students did not take the time to inquire of apply?
I can attest to this.  I serve on the board of a local charity that awards two scholarships a year.  It is sad to see how few scholarship applications we actually receive.  Leila recommends readers view scholarship opportunities at Fastweb.com.

To learn more about yourself and match your skills to careers, Leila suggests visiting:

mynextmove.org

iseek.org/careers/skillsassessment

Final Thoughts:
If you’ve recently lost your job, been out of work for a while or are searching for a new career you could benefit from this book. The book’s optimistic message – Unemployment doesn’t have to SUCK! - is one anyone who is out of work needs to hear.

Book Giveaway:
I have one extra copy of Unemployment Doesn't have to Suck!: Make it work for you! I’d like to give away.  To be eligible:

1. Leave a comment below telling me why you would like to receive a copy

2. Include your email address  

Drawing entry will close June 30, 2012

If you enjoyed this post, you may also like:

50 Best Books for the Unemployed

I've lost my job. Now What?

Discovering my Strengths

Determining my Myers-Briggs Score

How to save for retirement when you don’t make a lot of money?

Ever since I read the book Shortchanged: Why Women Have Less Wealth and What Can Be Done About It by Mariko Chang, I have been more cognizant of how difficult it is for low-wage earners to save money for retirement. When I heard about the Tax Savers Credit at a seminar this week I took notice.

What is the Tax Savers Credit?
The tax savers credit was designed to help low and moderate income workers save for retirement. Unlike a tax deduction, a tax credit reduces the tax you owe dollar for dollar. This credit is available to anyone who meets the income limitations and made contributions to qualified retirement plans including 401K, traditional or Roth IRAs, 457s, 501c, SEP and SIMPLE. The credit can be taken even if you don't make a contribution for the previous year until April 15 of the current year.

The tax savers credit provides a credit of between 10% and 50% of the amount contributed to an eligible plan up to $2,000. For someone filing as a single taxpayer who meets the income requirements would receive a maximum credit of $1,000 on contributions of $2,000. Taxpayers filing jointly would receive a maximum credit of $2,000 on contributions of $4,000.

The credit does not affect your eligibility to exclude your savings from your income, and does not impact your earned income credit or your child care tax credit.

The credit is non-refundable. It will reduce the taxes you owe, but will not help you generate a tax refund. For example, if you are eligible for a $1,000 credit, but owe taxes of $800 the tax savers credit will reduce your tax liability to zero, but will not provide you with a $200 refund.

The adjusted gross income limits to claim the savers credit in 2012 are as follows:

• For Married couples filing jointly : Maximum adjusted gross income (AGI) –$57,500
• For Heads of Household : Maximum adjusted gross income (AGI) – $43,125
• For Married individuals filing separately and $28,750 in 2012.

If you would like to see a table that provides the percentage of credit allowed by income for 2011, please see this article. I can't locate a similar table for 2012.

Adjusted gross income is your taxable income after you have subtracted personal exemptions and itemized deductions.

Other rules that apply to the saver’s credit:

• Taxpayers must be at least 18 years of age.
• Anyone claimed as a dependent on someone else’s return cannot take the credit.
• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student

In the Los Angeles Times article Retirement Saver's credit could significantly reduce tax bill Kathy M. Kristof wrote:

"Hardly any of the people who qualify for the credit are aware of it," said Catherine Collinson, president of the Transamerica Center for Retirement Research. Collinson's organization surveyed thousands of individuals and found that only 12% of the respondents who earned less than $50,000 — those most likely to qualify for the credit — had heard of it. And just 17% of those who were aware of the credit had claimed it.

I am a CPA (working in industry not tax) and only became aware of this credit, which has been around since 2002, last week. If I hadn't heard of the credit, how are those who are not as financially savvy supposed to be aware of it. Let’s get the word out:

Have you checked to see if you are eligible for the TAX SAVERS CREDIT?

If you enjoyed this post you may also like:

Gender Wealth Gap is the Greater Problem

Be informed about Social Security

How to find work when you don’t have experience?

Kelly writes:

I am a college student working towards an accounting degree. Without job experience in accounting, how do I get ahead in this field? Where do I look for entry-level positions? Don’t recommend that I check into internships. I’ve already done so and all of the ones I’ve seen are for students in traditional schools. I am a non-traditional student and I don't have many contacts. I also have children, so I need to work to live. If you know of any alternatives or how to network being a non-traditional student please let me know. Any advice would be appreciated.

Your question is such a catch-22; no one will hire you because you don't have experience, but how are you supposed to gain experience if no one will hire you? Years ago when I was starting out, the only work I could find was typing. After I typed checks I added accounts payable to my resume. After typing invoices I added accounts receivable. My first real job was working in an accounting department entering work order data into an accounts receivable database. From there I was hired as a staff accountant at a brokerage firm. Unless you are lucky or have contacts you usually have to start at the bottom.

I recommend:
Apply for any type of administrative job at an accounting firm or in accounting department to get your foot in the door. I know someone who spent a summer scanning client work papers into an accounting firm’s computer system when the firm went paperless. She now works at the same firm as a full-time tax accountant.

Apply for jobs working with accounts payable and accounts receivable.

Don’t discount jobs with low pay:
You will most likely have to take very low pay for at least 6 months or until you prove yourself.

Sign up with every temporary job search firm in your area:
Go through their registration/interview process. Some firms will offer free on-line training. Take advantage of these programs especially if they provide training in Excel. Also, many firms offer benefits after you have worked a certain number of billable hours. Working for temporary firms is an excellent way to build your resume while gaining experience and discovering what type of work/industry you enjoy.

Work hard, be likable and have a positive attitude:
If a company likes you they will request your services when they have future work and may offer you a permanent position when one becomes available.

Join one or two of the professional organizations in your area:
Most professional organizations will offer reduced annual dues and subsidized meal costs for students. Some may even sponsor student dues and/or cover the cost of a dinner or two. Really network with these people. Let them know you are looking for entry level work. Dress professionally; a nice pair of dress pants and a sweater or blouse would be perfect. Act interested and engaged. Ask questions. (At a recent professional organization meeting, I witnessed a student looking extremely bored as a member discussed the death of her father. Two other students rolled their eyes as we discussed the qualifications of an upcoming speaker.) We do notice this behavior and will not recommend someone we think has a bad attitude. Our reputation is more important than helping you find a job.

Do volunteer for tax preparation work:
Seek out local tax preparers. Offer to complete basic returns and to help keep the tax preparer organized during tax season for free. Next year offer to help again, only this time ask if you could be paid.

Do not lie or exaggerate on your resume or during an interview:
Your reputation is on the line. Nothing will get your new job off on a worse note than asking your employer how to make a basic change to an excel spreadsheet after you've told them you were an excel expert during the interview. To read more on this topic see Anita Bruzzese's post Is it okay to fudge the truth on a resume?

Good luck to you.  If you are persistent, I am confident you will eventually get the job experience you are looking for. Do keep working towards your degree though.  I was a non-traditional student myself and I know how hard it is to work full-time while taking classes. Once you've earned your degree, you will have more opportunities available to you.

Readers - How did you get that first job in your field? Do you have any additional advice for Kelly?

If you liked this post, you may also like:  Do you type? where I wrote about my career as a typist.

Gender Wealth Gap is the Greater Problem

I read Mariko Chang's Shortchanged: Why Women Have Less Wealth and What Can Be Done About It for a personal finance book club.

Chang begins the book by informing us the gender wage gap appears to be closing. Women now earn 77.8 cents for every dollar men earn (an all time high) and women under 25 working full-time earn 95% of what their male peers earn. Women also make up 47% of the work force.

While I still can’t get excited about a 78% pay gap, compare that to this - women own 36% as much wealth; for every dollar a man owns a woman own 36 cents. Chang calls this the wealth gap. In the long run it is wealth, the value of assets minus debts, not earnings that is more important. Wealth is what sends your children to college, allows you to start your own business, and helps you make ends meet when you lose your job or your hours are slashed. Also consider with everything else being equal, women will need to support themselves an average of six years longer than men.

What factors contribute to the wealth gap?
Chang attributes the wealth gap to women’s inability to tap into the wealth escalator:

The variety of legal, institutional, and societal mechanisms that help some convert income into wealth at a much faster pace than is possible by savings alone. (Pg. 38)

The wealth escalator includes:
Work fringe benefits such as life and health insurance, paid vacation and sick days, and retirement contributions. Women are more likely to work in part-time jobs or in industries that do not offer fringe benefits such as the service sector.

The tax code has provisions more beneficial to those with higher earnings – capital gain tax rates and mortgage interest deductions.

Government benefits such as unemployment benefits which have minimum earnings thresholds. Women generally receive less of a benefit because they have lower earnings to begin with.

Also interesting to note, some government programs discourage asset accumulation. For example with the Temporary Assistance to Needy Families (TANF) people lose benefits if they have managed to save or if they own an automobile whose value surpasses the vehicle asset limit.

The Debt Anchor:
Women tend to have more debt than men, higher interest rates on their debts and are more likely to fall victim to predatory lending practices.

Motherhood:
Women are more likely to be single parents and in divorce most likely to have custody of the children. Even those who receive child support have less money to save and invest. Also mothers face stereotypes in the workplace, whereas men experience a wage increase with fatherhood. Mothers receive a 4% wage penalty for the first child and a 12% penalty for each additional child.

Chang proposes suggestions to address the unequal burdens and consequences of care-giving, so that women who work just as hard as men and can be given equal wealth building opportunities. She points out we are only one of two industrialized countries without a national paid maternity (Australia is the other country).

My thoughts:
Shortchanged: Why Women Have Less Wealth and What Can Be Done About It is a slim book packed with important information that deserves more recognition than it has received. Every woman should be aware of the facts in this book. I had a difficult time finding a copy of this book and from the comments of my fellow book club participants others did as well. Let’s get the word out and on a final note let’s make sure our daughter’s have the tools and knowledge they need to navigate the financial world.

I want to close with the quote Marika Chang included at the beginning of chapter two:

My Aunt… died by a fall from her horse when she was riding out to take the air in Bombay. The news of my legacy reached me one night about the same time that the act was passed that gave votes to women. A solicitor’s letter fell into the post-box and when I opened it I found that she had left me five hundred pounds a year for ever.

Of the two-the vote and the money, I own, seemed infinitely the more important.

- Virginia Woolf, A Room of One’s Own

What is the future of the Roth IRA?

At the conference I recently attended, one of the speakers brought up an interesting point about Roth IRA’s.

As you may know, Roth IRA contributions are made with after-tax dollars and are allowed to grow income-tax free as long as you, or possibly your children or grandchildren, own the account. With that in mind, many Traditional IRA holders are taking advantage of the current low income tax rates, paying income tax and converting their pre-tax IRA’s to Roth IRAs.

So what is the problem?
According to the speaker, government has mortgaged their future. With Traditional IRA accounts, they are guaranteed a steady stream of revenue. When a pre-tax IRA account holder turns 70 ½ they are required to begin taking taxable distributions, thus making income tax payments. In the future, with the majority of Traditional IRAs converted to Roth’s and new money invested in Roth’s (many company 401(k) plans now offer Roth IRA options as well) the government will no longer receive steady income from retirement accounts.

So what will happen to the Roth IRA?
The government, needing money, will change the rules. At the very least, earnings on Roth IRA contributions will become taxable.

For now Roth IRA’s remain a good deal, so take advantage while you can.

How much can I deduct for donating blood?

Q. Several times this year, I donate blood at the Red Cross. How much can I deduct on my tax return?


Unfortunately, there is no tax break for giving blood. However, a donation that you make to the Red Cross by cash, check or credit card can be written off as a charitable contribution.

Mom worried about son's startup business

Margo writes:
My 23 year old son has been running a small computer consulting business out of my home for the past two years. He’s recently decided he needs a store front and has rented office space (at a good rate) with a grand opening scheduled for January 3rd. He doesn't have a business plan, a seller's permit, hasn't checked into sales tax laws, doesn't have a business checking account and pays his one employee with cash. I am not sure if his business is an LLC. When I ask him about these items he says don’t worry mom I’ve got it covered or it doesn’t apply to me. I'm so stressed out about this I’m not sleeping. How critical is it to have these items in place by January 3rd? The accountant at my place of employment says he probably has a year before the IRS catches up with him.

First this is exciting. Most new businesses are started by young people in their mid-20’s to mid-30’s. Also, starting a business during an economic downturn can be cost effective. Your son is getting a good deal on rent and most likely other items he needs to open his store.

Your question does however remind me of a Zen proverb:

In the beginner's mind there are many possibilities. In the expert's mind there are few.

It is illegal for your son to provide services that are subject to sales tax without having a sales tax permit. Computer services are a taxable service. The cost for a sales tax permit is $25 in Wisconsin and he can apply online.

It is also illegal to pay an employee or independent contractor without completing the proper tax filings. Your son needs to pay payroll taxes and workers compensation, etc if his worker is truly an employee. If his worker is an independent contractor he needs to issue a 1099 at the end of the year. He should make an appointment with an expert to discuss these items.

A business plan is helpful, but not critical or a business breaker.

His company doesn't need to be an LLC; he can operate as a sole proprietor which doesn't require any registration. If he decides to become an LLC at a later date he can do so.

Without a business checking account he may have difficulty depositing checks written out to his business name into his personal account OR people may be uneasy about writing a check to him personally at his business store front for business services. Plus if he doesn't keep his business transactions separate from his personal transactions right from the beginning, he's asking for a huge headache/mess at the end of the year when he needs to prepare his taxes.

I asked one of my tax preparing colleagues if she has seen small businesses that were not set up properly in the beginning and what the repercussions were. Yes, she's seen this before and these companies end up paying more in the end when it all catches up to them. Like four times as much because of penalties, errors, accounting fees, interest, etc.

So my advice:
You need to encourage your son to sit down with an expert NOW to discuss the above items. He should strive to run his new store as professionally as possible; his reputation is at stake as well as his pocket book. He can get free online and in-person business counseling, mentoring, training and advice at SCORE a nonprofit association made up of over 13,000 volunteer mentors dedicated to educating entrepreneurs.  He can find an office in his area here.

One more thing, I recommend that you don't co-sign any rental agreements or business loans.

Should I pay off my mortgage with 401(k) monies?

Jack a co-worker asks:

I turn 59 1/2 this month and plan on retiring when I’m 62. You’ve told me in the past I can access my 401(k) monies without incurring an IRS penalty at age 59 1/2. I would like to withdraw my money now and use it to pay off my mortgage. I want to be 100% debt free; I hate paying interest plus, I’ve always heard you should be mortgage free when you retire. Once retired, I plan on deeding my home to my children, so it doesn’t go to the nursing home. Is this a good plan?

You are correct at age 59 1/2 our 401(k) plan does allow employees to access their monies without incurring an IRS penalty.

Is it a good idea?
It is if you plan on rolling your money into another qualified IRA. Our company’s 401(k) plan offers a limited selection of investment choices plus, our plan fees are excessive. Please see my post 401(k) fees rant. I recommend you consult with an independent fee-only financial planner for advice on setting up a self-directed IRA consisting of low-cost investments.

If you choose not roll your money into another qualified IRA, and use this money to pay off your mortgage any money you withdraw will be added to your 2010 income for tax purposes. This will push you into a higher tax bracket resulting in a hefty Federal and State tax bill. Also, you will lose any future interest payment tax deductions. If you really want to use this money to pay off your mortgage I’d wait until after you are retired and no longer collecting a paycheck. Instead, make extra payments against your mortgage now while you are still working. You'll also still benefit from tax deductions on the mortgage interest you pay.

Longevity risk is the biggest financial risk facing retirees today.
If you use your 401(k) monies to pay off your mortgage are you sure you will have enough other monies (savings, social security, pensions, etc.) to sustain your lifestyle for your entire retirement? Paying less interest is a good thing, but not if you can put your money to a more productive use. You tell me your fixed interest expense is 5.4%. Look at the relative rate of return on your 401(k) vs. your interest rate especially now when the stock market is on the upswing. I’d hate to see you miss out on this up tick.

Once you are retired and are sure you have enough money to sustain your retirement, go ahead and use your 401(k) savings to pay off your mortgage. I've heard Clark Howard recommend callers pay off their mortgage even if the numbers don’t make complete sense.  He says it is best for risk adverse investors like you Jack to own their home free and clear than lose sleep worrying about future market losses.

As to deeding your home to your children, check with a lawyer; legislation has been passed closing this loophole. There is now a “penalty period” (a period of disqualification from Medicaid). Simply defined if you transfer your home to your children, you will be disqualified from receiving Medicare benefits when needed until the penalty period has been met.

Don't panic over 2011 tax hikes

Have you received the tax hike email that has been making the rounds? My in-box both at work and at home has been flooded with it. It is a good example of the type of propaganda I am trying to expose in my “Getting a Clue series” where I attempt to keep others from being manipulated by politicians, the media and marketing scams. I am providing the email in its entirety below, so you can read what I’m talking about.*

My friend and colleague Sue, who is a tax professional, also received the email and sent a cautionary rebuttal to all of the recipients. She feels there is value in reading it, but encourages us to look further into things. She says,

“Although some of the issues discussed are fact already, the vast majority are misinterpretations of proposals being made within Congress (and not yet law) and exaggerations coupled with only half-truths.”

The purpose of the email is to get our attention so we vote accordingly in the elections in November. After reading the email in its entirety, I don’t have the energy to dissect it line by line. All I can say is, “Don’t Panic.” Or as Sue said:

Wait until the bozos in Washington get their act together and decide what exactly is going to be our fate for 2011, because from all indications, they have decided practically nothing at this time.

“There is no terror in the bang, only in the anticipation of it.”
- Alfred Hitchcock

One of the emails I received began with:

Starting in 2011… yes tax hikes starting when:
- unemployment is still 10%
- very low GDP growth
- interest rates at 0 (feds out of bullets)
- real estate still down
- market still down
Great time to raise taxes??? I think not... and don’t tell me you don’t have time to read this. =0)

-Here is the email:
In just six months, the largest tax hikes in the history of America will take effect. They will hit families and small businesses in three great waves on January 1, 2011:
First Wave:
Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families.

These will all expire on January 1, 2011:
Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed).
The lowest rate will rise from 10 to 15 percent.
All the rates in between will also rise.
Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:

- The 10% bracket rises to an expanded 15%
- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%

Higher taxes on marriage and family. The“marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income.
The child tax credit will be cut in half from $1000 to $500 per child.
The standard deduction will no longer be doubled for married couples relative to the single level.
The dependent care and adoption tax credits will be cut.

The return of the Death Tax.
This year, there is no death tax. For those dying on or after January 1 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

Higher tax rates on savers and investors.
The capital gains tax will rise from 15 percent this year to 20 percent in 2011.
The dividends tax will rise from 15 percent this year to 39.6 percent in 2011.
These rates will rise another 3.8 percent in 2013.

Second Wave:
Obamacare
There are over twenty new or higher taxes in Obamacare. Several will first go into effect on January 1, 2011.
They include:
The “Medicine Cabinet Tax”
Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin).

The “Special Needs Kids Tax”
This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently, there is no federal government limit). There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. There are thousands of families with special needs children in the United States , and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C. (National Child Research Center) can easily exceed $14,000 per year. Under tax rules, FSA dollars can not be used to pay for this type of special needs education.

The HSA Withdrawal Tax Hike.
This provision of Obamacare increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.

Third Wave:
The Alternative Minimum Tax and Employer Tax Hikes
When Americans prepare to file their tax returns in January of 2011, they’ll be in for a nasty surprise—the AMT won’t be held harmless, and many tax relief provisions will have expired.

The major items include:
The AMT will ensnare over 28 million families, up from 4 million last year.
According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families—rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers.

Small business expensing will be slashed and 50% expensing will disappear.
Small businesses can normally expense (rather than slowly-deduct, or “depreciate”) equipment purchases up to $250,000. This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be “depreciated.”

Taxes will be raised on all types of businesses.
There are literally scores of tax hikes on business that will take place. The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.

Tax Benefits for Education and Teaching Reduced.
The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families.

Charitable Contributions from IRAs no longer allowed.
Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there.

PDF Version Read more: http://www.atr.org/six-months-untilbr-largest-tax-hikes-a5171#%23ixzz0sY8waPq1

Now your insurance is INCOME on your W2's......
One of the surprises we'll find come next year, is what follows - - a little "surprise" that 99% of us had no idea was included in the "new and improved" healthcare legislation . . . the dupes, er, dopes, who backed this administration will be astonished!

Starting in 2011, (next year folks), your W-2 tax form sent by your employer will be increased to show the value of whatever health insurance you are given by the company. It does not matter if that's a private concern or governmental body of some sort. If you're retired? So what; your gross will go up by the amount of insurance you get. You will be required to pay taxes on a large sum of money that you have never seen. Take your tax form you just finished and see what $15,000 or $20,000 additional gross does to your tax debt. That's what you'll pay next year. For many, it also puts you into a new higher bracket so it's even worse.

This is how the government is going to buy insurance for the15% that don't have insurance and it's only part of the tax increases. Not believing this??? Here is a research of the summaries.....

On page 25 of 29: TITLE IX REVENUE

PROVISIONS- SUBTITLE A: REVENUE OFFSET PROVISIONS-(sec. 9001, as modified by sec. 10901) Sec.9002 "requires employers to include in the W-2 form of each employee the aggregate cost of applicable employer sponsored group health coverage that is excludable from the employees gross income."

Joan Pryde is the senior tax editor for the Kiplinger letters.

Go to Kiplingers and read about 13 tax changes that could affect you. Number 3 is what is above.

Why am I sending you this? The same reason I hope you forward this to every single person in your address book. People have the right to know the truth because an election is coming in November.

What ramifications will debt write-off have on credit score?

George heard a debt settlement advertisement on his way to work claiming he could,

“Pay just 50% of what he owed."

Currently he owes $16,000 in credit card debt most of which was charged by his wife who he says is terrible with money.* He is tired of paying her debt and would love to have half of it written off. George called the debt settlement company and was told for an upfront fee plus 18% of the balance written off they would negotiate a settlement. His question for me was what effects if any would the debt written-off have on his credit score?

Let start with ~ How does a debt settlement company work?
George has been making his monthly credit card payments on time and is current on all his other debts. As a rule, creditors won't negotiate with consumers who are current on their bills, often refusing to discuss settlements with anyone who is not at least three to six months behind. Knowing this the debt settlement company will instruct George to stop making payments to his creditors. Instead he will make payments to the debt settlement company, after taking the first couple of payments as their fee; the debt settlement company will make offers to his creditors to settle his debt for a lump sum payment. This lump sum payment will come from the amounts he has paid to the debt settlement company.

What this company didn’t tell George is that debt settlement only works for a few of the consumers who attempt it; not all credit card companies will settle. Consumers who enter the process may endure months of creditors' angry phone calls, plus a growing debt load as fees, penalties and interest are tacked on to their original balance due. Plus, there's the possibility creditors will sue.

If George is successful in obtaining a debt settlement how will it be reported on his credit report?
Debts paid off as part of a negotiated settlement will generally show “Paid by Settlement” on a consumer’s credit report. If he were to apply for a new loan, the prospective lender will understand that a debt paid by settlement means that his repayment did not cover the total debt that he had accumulated, and that his creditor accepted a lesser amount.

How will a debt write-off affect his actual credit score?
His credit score is based on information contained in his credit report, with the highest consideration given to how he repaid his debts. As stated above, the first thing the debt settlement company will instruct George to do is to stop paying his debts.

According to Liz Pulliam Weston's article 5 ways to kill your credit scores:

The 680 scorer would lose 45 to 65 points with this maneuver, while the 780 scorer would shed 105 to 125 points.

Our scenario assumed that borrowers would miss one payment before settling the debt with their credit card companies. In reality, debt settlement negotiations can drag on much longer, with each missed payment taking another chunk out of your score.

Settling a debt with a collection agency would hurt less, probably much less, because the FICO formula is set up to weigh more heavily what the original creditor says about you than what a collection agency reports. But if our borrowers were settling with a collection agency instead, their scores would be lower to begin with, because they would have collection accounts on their records.

Long-term effects:
The long default on payments, followed by the settlement for less than you owed, is going to stay on your credit report for seven years and look just as bad, or worse, than a bankruptcy (particularly a chapter 13 bankruptcy.)

Other considerations:
George will receive a 1099 form from each of the credit card companies he settles with. The amount of debt forgiven is considered income and is taxable.

This is the hidden cost of higher insurance rates (insurance companies now check credit reports when renewing auto policies) and higher interest rates on any debts he might incur in the future.

What to do instead:
Before George goes the settlement route, he should visit a consumer-credit counseling agency for advice. The first visit is free.

The National Foundation for Credit Counseling (http://www.nfcc.org/) has a tool for locating counselors nationwide. Credit counselors offer debt-management plans. Under these, creditors agree to accept reduced monthly payments or lower interest rates in return for the consumer agreeing to pay the full debt on a set schedule. But consumers who can't afford the monthly payment won't qualify.

Next, he should talk to an attorney to assess whether bankruptcy makes sense. Debt settlement "is not a decision you make without talking to a bankruptcy attorney, because you could be sued" by going the settlement route.

He should try to negotiate with the credit card companies himself:
George did call two of the credit card companies. One said their company did not negotiate debt settlements. The other would not consider debt settlement at this time because he is current with his payments. As a courtesy, they checked his credit report finding only one bad mark; a late student loan payment from several years ago. The only relief they could offer currently was to restructure his debt over a five year period. During this time he could no longer use his credit card to make purchases, but his total outstanding credit would show on his credit report. They could not reduce his interest rate; he already had the lowest rate they offered. He did not accept the restructure.

Realizing debt settlement was not an answer to his problems George is now looking for other methods to get out of debt.

*I recommended George and his wife take one of Dave Ramsey's money management classes offered at many churches in our area. I know several couples who have taken this class and have found it to be helpful.

My career as a Tax Accountant and Weekend Assignment #256

Since I am one of the members of the ABA (Association of Blogging Accountants) which Florinda recently made up, I decided to participate in Karen’s weekend assignment #256.

Weekend Assignment #256:
Tax time for individuals in this country starts in late January when the tax forms arrive, and runs through April 15th or so when the tax return is due. Do you file your taxes as soon as possible, at the last minute, or somewhere in between? Is there a particular reason for this?

Before I start I am going to give a little background on my career as a tax accountant.

Corporate Tax Accountant –
In the early 90’s, I worked full-time as an accountant for a small engineering firm while taking accounting courses at the local university in the evenings. The semester I was enrolled in Corporate Income Tax my boss came up with the brilliant idea he could recoup his investment in my education (he was paying half my tuition) if I prepared our company’s corporate income tax return; thus saving the company money on accounting fees. Our outside accounting firm would still review and sign the return. The first year, I propped up my accounting text book next to my computer to use as a reference and created the schedules for the return in excel. It was a lot of work and even though I felt like a fish out of water, the schedules balanced and life was good. The second year, I again prepared the schedules in this manner and again felt I was unqualified to do so, but it went okay. The third year, which was an incredibly stressful time in my life; I was taking the Becker CPA review course in preparation for the exam, I was unable to get those darned schedules to balance. Finally one of the accountants from the accounting firm in attempt to help my out me said, “You know Savvy, why don’t you just let us finish them, we enter the data from your financials into our tax prep software anyway and the returns including the schedules are completed in about 15 minutes.” I couldn’t believe it; after all that work they didn't need or even use my schedules; they were just placating my boss. After this experience, I vowed to never again work with corporate income tax.

Personal Income Tax Accountant -
After I passed the CPA exam, a family member asked if I’d prepare their income tax returns. Because of my inexperience (the only returns I had ever prepared other than in the classroom were my own); I decided to help them out for a nominal fee. I used TurboTax; the return was simple and went well. The second year, I went with TaxCutbecause it was cheaper. From the get go this return didn’t go well. First, it was more complicated; they had purchased mutual funds in their kids names which had incurred huge capital gains that year plus one of them had worked as a consultant on the side (of course they didn't track their mileage or save their business expense receipts). The extra income disallowed credits they were used to receiving, in an attempt to minimize their taxes I played around with separate returns for their kids and ended up losing half their data in TaxCut and had to reenter it. Then while printing the returns my old ink jet printer which literally printed the forms all afternoon ran out of ink. Concluding, I was upside down in both time and money on this return I advised the couple to consult a professional tax preparer in the future thus ending my career as a personal income tax accountant.

My current exposure to personal income tax-
In my current position, working as a Finance Manager in industry; the only exposure I have to income tax is the "Income Tax Update" I take each year as part of my continuing education. This doesn't stop me from being asked personal income tax questions on a regular basis. I used to attempt to look up answers to these questions, but now my standard line is I don’t work with tax, I work in private industry. If I can answer their question I do so, but usually I cannot.

Now for the assignment:
When do you file your return?
I work a lot of hours each year in January and early February; afterwards I give myself a couple of weeks to regroup before filing our taxes. This year I filed both our Federal and State returns yesterday. We are getting a small refund back on both, which is typical.

Who actually does your taxes, and with what software or other resources, if any?
I always prepare our taxes and do so manually. As I mentioned above, I have experience with both TurboTax and TaxCut, for me it is just easier and cheaper to file manually. It took me an hour and twenty minutes to complete both returns. I did use the amt calculator on the irs.gov web site to make sure I didn’t owe AMT. Wisconsin is offering free electronic tax filing this year, but I didn't take advantage of it. Adobe Reader 9.0 was required which I don't have. Also, I needed to include my federal income tax return in an electronic format which I also didn’t have. They do offer a couple of options for submitting the form electronically, but I decided to keep it simple and just file manually.

Consequences of Roth IRA Early Withdrawal

Dan asks:
My daughter, Lynn invested $2,000 (a gift from me) into a Roth IRA account in 2003. She now wants to use this money to purchase a car. What are the consequences of an early withdrawal?

Lynn was able to use your gift to open a Roth IRA because she also had $2,000 of her own earned income during 2003. Roth IRA contributions are made with after- tax dollars; once these monies are invested, earnings accumulate tax-free. If she keeps the money in her account until age 59½, she will then be able to withdraw money without incurring taxes or paying a penalty. If she withdraws money now, she can only withdraw money up to her original contribution tax and penalty free. She will owe income tax plus a 10% penalty on any withdrawal of account earnings. These earnings will be taxed at her marginal tax rate. The good news is with the recent market downturn she probably his little if any earnings in her account at this time.

Are there any possible scenarios in which Lynn could withdraw all her money, including earnings, without incurring a penalty?

Yes, Qualified Distributions are made both tax and penalty free. To be considered a qualified distribution, a Roth IRA distribution cannot be made before the end of the five-tax-year period beginning with the first tax year for which the individual (or the individual's spouse) made a contribution to the Roth IRA. This means even if you are age 59½ you must have held the money in the IRA at least five years for the withdrawal to be considered qualified.

In addition to the five-year holding period, there are several exceptions to the 10% federal early withdrawal penalty that generally applies to taxable IRA distributions taken prior to age 59½. These penalty exceptions generally apply to distributions taken for one of the following reasons:

· death of the IRA holder
· qualifying disability of the IRA holder
· certain medical expenses exceeding 7.5 percent of adjusted gross income
· health insurance if an individual has been receiving unemployment compensation for more than 12 weeks
· qualified higher education expenses
· qualified first-time homebuyer expenses
· conversion of Traditional IRA assets to a Roth IRA

Thus, if Lynn were to withdraw money to purchase her first home, her distribution could be considered a qualified distribution.

Also note Roth IRAs are different than Traditional IRAs in that they do not require minimum distributions. That is because Traditional IRA contributions are made with before-tax dollars. The IRS wants its money at some point, so they require you to start taking distributions by age 70 ½. There are no such requirements for Roth IRAs. You can keep the money in there until you die if you wish.

Creative College Financing Triggers AMT

With the increasing cost of college tuition, more families are being forced to get creative with their finances in order to pay their children’s college tuition. In doing so, they may be in for a big surprise at tax time. Two years ago, a couple I know, struggling to educate their three daughters, sold a piece of property to help pay tuition costs. They knew at tax time they would owe a capital gain tax, but were shocked when the additional income also triggered an AMT tax. This past year, this same couple began drawing from a pension, in addition to earning their full time salaries, to help subsidize tuition costs. At tax time, they again found themselves subject to the AMT tax. As more middle class Americans are being hit with the Alternative Minimum Tax, I think there needs to be a better understanding of what this tax is and the impact certain financial decisions have on AMT tax liability.

What is AMT?
The Alternative Minimum Tax or AMT was designed in 1969. Its original purpose was to keep wealthy tax payers from using loopholes (many of which have since been closed) to avoid paying their fair share of income tax. Under AMT, once certain levels of income and deductions are reached; taxpayers are required to add back specific deductions, and pay an additional tax. This is to ensure all taxpayers pay at least a minimum tax.

What are some of the deductions that are required to be added back (disallowed)?
-State and local taxes.
-Medical costs are still allowed, but the AMT requires they exceed at least 10 percent of your adjusted gross income, rather than the 7.5 percent threshold of the regular tax system.
-Miscellaneous itemized deductions, although limited under the regular tax system, are disallowed under the AMT. This prevents the taxpayer from deducting large unreimbursed business expenses.
-Home ownership is not quite so desirable under AMT, while you are still allowed to deduct mortgage interest on both your main and second home, home equity loan interest is restricted. It can only be deducted if the money is used solely to pay for home improvements.
- Your home’s property taxes
- Personal exemptions. The more exemptions you claim the more likely it is you will have AMT liability.
- The Standard Deduction.

Why are more people subject to this tax?
Unlike regular income tax, the AMT tax was not indexed for inflation; AMT brackets have remained relatively constant at 26% and 28% while yearly wage increases have moved taxpayer income uncomfortably close or even into the AMT income bracket realm. To put this into context, AMT was originally created to target 155 filers with income of $200,000 who avoided paying any federal taxes, compare this with the nearly 4 million taxpayers subject to AMT in 2007, 80% of which had incomes between $100,000 and $200,000.

At what income levels are taxpayers affected?
Once you add back the AMT disallowances and run the numbers, AMT may be owed if your taxable income in 2007 was more than:
· $66,250 and you are married filing a joint return.
· $44,350 and you are filing as single or head of household.
· $33,125 and you are a married taxpayer filing a separate return

If the above income levels are met, how are you to determine whether you’re subject to the AMT?
IRS Form 1040 instructions includes a worksheet that may help you determine whether you're subject to the AMT, an electronic version of this worksheet is also available on the IRS website found here, but you may need to complete IRS Form 6251 to know for sure. Personally, I found Form 6251 to be confusing and relied on the IRS website results.

What are the more common AMT “triggers”?
Common AMT "triggers" include claiming a high number of personal exemptions, miscellaneous itemized deductions, and state and local tax deductions. In the example I sited above, the couple's increase in income along with their five personal exemptions and high state and property tax deductions (Wisconsin is a high-tax state) triggered AMT.

Bottom Line: As parents strategize to pay their children’s college tuition, it may me wise for them to meet with a good tax accountant or financial planner before making financial decisions that may seriously impact not only their income tax payments but their long term financial goals.