Dennis' Blog

1. Maximize your retirement savings. If you can, contribute the maximum allowable amount to tax-deferred retirement plans, such as a 401(k) or traditional IRA. The pre-tax money you contribute can reduce your taxable income and overall tax bill as a result. Any contribution to tax-deferred retirement plans can reduce taxable income and lower your tax bill.

2. Make charitable contributions. Consider making donations to charity by December 31st so you can deduct the contributions on this year’s tax return.. But remember, a bank record or receipt is needed for all cash donations and written confirmation from the charitable organization is required for all cash donations over $250. If you make an online contribution before year-end using your credit card, you can deduct the contribution even though you haven’t paid the credit card bill. For noncash contributions, you must have a receipt from the charitable organization showing the name and address of the organization, the date and location of the contribution, and a reasonably detailed description of the donated property.

3. Investigate before buying mutual funds. If you’re planning to invest a substantial amount in a mutual fund, check the fund company’s website to make sure they won’t be declaring a large amount of dividends before year-end. If you buy shares before the dividend is declared, you’ll pay tax on any dividends or capital gains distributions even if you reinvest them in new shares.

4. Manage your investments wisely. Selling investments that have lost value can actually be a smart tax strategy. The loss can help you offset capital gains you may have in other securities you own. If you have a net capital loss, you can offset your ordinary taxable income by up to $3,000.If your loss is more than $3,000 you can carry the excess forward to future tax years.

5. Take advantage of energy tax credits for home improvements. Adding extra insulation or installing energy-efficient windows, furnaces or air conditioning units to your home before 2012 could qualify you for a tax credit. However, the credit has been reduced to a lifetime maximum of $500 per taxpayer, so if you took advantage of the credit in previous years, you may not qualify for the credit in 2011.

6. Make last-minute business purchases. If you are a small business owner and know that you have upcoming business expenses—including travel, supplies, and more—it could be wise to pay for them before the end of the year. The expenses can help offset some of your business income, lowering your tax liability. Additionally, there are some special depreciation rules in effect for 2011 that may allow you to deduct more, or maybe all, of the purchase price of large items upfront.

7. If you have a home mortgage, pre-pay your mortgage due in January in December, so you can take the interest deduction this year.

8. Check credit card statements on balances due, and if any of them offer tax benefits, pay them off before the end of the year.

9. Consider College 529 plans as a form of investment. Most states offer tax benefits. And, if like me, youhave to file in multiple states, you may get benefits from both states. Here is a good place to get more information: http://www.savingforcollege.com/

THE PROBLEM
The biggest problem with the US economy today is the US job market, where millions of people are unemployed, and even more are underemployed. A troubled job market alone can severely damage an economy. However combined with a weak housing market, makes the situation much worse, especially for millions of people who lose their jobs, and then their homes. For many Americans, job loss, medical expenses, loss of home, are a few major causes of thousands of people getting their credit damaged, and going into bankruptcy. Millions more watch their credit scores go down, as banks cut lending. Even people with good credit get their credit cards cancelled, and credit lines cut. This snow-ball effect means that it could take years for the US population to start spending the way they did before. Median Household Income in the US has dropped sharply since 2007, to the lowest level since 1996. However the Consumer Price Index going steadily up. The Consumer Price Index (CPI) is one of the best signs of Inflation. In a developed and developing economy, the CPI goes up, along with Median Household Income. However if the household income remains flat, purchasing power goes down because of the higher CPI. With income remaining flat, and cost of education and CPI going up, it obvious why so many businesses suffer – people are more careful where they spend their money.

THE SOLUTION
On a recent visit to India in July, I was amazed by the way the country has developed (socially and economically). People were spending money on products made from all over the world. As a handful of major US companies (good examples are Nike, Coca Cola, Pepsi, Intel, GM, Levis, Apple, and Wrangler) realize, people from India, and for that matter, most other parts of the world, like and want products made by US companies. For an Indian consumer, there is a huge difference between Power vs Nike, and there is a difference between HP Computers and HCL Computers. That’s the power of US brand marketing. If only smaller US companies also thought globally and rode the US brand marketing wave. The market is there, it’s just having the right entry strategy to enter those markets.

There are small and medium scale manufacturing companies from China that sell their products to India and to the US. From a marketing perspective, the major difference between companies in China and their US small business counterparts is a global outlook. US small and medium companies focus on the US market, which as I explained above, is in serious trouble. However a company in China looks at the global market as a whole. The US is just one market, and India another. The world is their marketplace.
Countries like India and China are rapidly developing, and Median Household Incomes are on the rise. When I left India in 1999, Rs. 180,000 (approximately $4,000 per year) was considered middle class income – today people who earned $4,000 in 1999 are earning about 5 times that much now. It is the urban middle class that is rapidly developing, and it is that group’s median income that sees the most increase in percentage.

Products that were once too expensive to be sold in developing countries, today have a much better chance at success. Consider BMW – they have set up a manufacturing facility in India. The cost of a BMW 535i in India (as of Sep 23, 2011) – Rs. 5,852,633 (approximately $130,000!) That is more than double the price of a BMW 535i in the US – and people are buying them. The same is the case with Coca Cola, Pepsi, Levis, Wrangler, and Nike – they are all much more expensive in India compared to the US.
Small and medium businesses have to enter the global market. It is not a strategy, and it is not a solution. It is something that a company has to do to remain competitive, especially a manufacturing company. But how many small and medium businesses even hire an International Sales Person? What incentives does the US government give businesses to target overseas markets? When I was in India, I met with three companies, all wanting to distribute products made by the company I work for (I work for a hair & skin care manufacturing company). More interestingly, there were manufacturers that wanted to ship bulk product US, so they could be packaged in the US, and shipped back – so they are now ‘Made in the US’.

If more small and medium businesses in the US saw the world as their marketplace, and increased their exports, it would be a significant boost to the economy. There is still tremendous value in the label ‘Made in the USA’, and it is a tremendous advantage to any US business competing in the global marketplace.

IRS requires taxpayers to keep written records of mileage expenses claimed.  Taxpayers can claim miles for Business, Charitable, and Medical purposes.  Although you cannot deduct commuting miles (Miles from home to work/college and back), you are allowed to deduct miles from one workplace to another, miles from one job to another job, and miles from work to school or school to work. 

There are many mileage books available. But if you do not have one, you can use the one below.  I keep a copy in the glovebox of each vehicle, and note down any miles that I can possible deduct. Click the link below, and then select the link below Mileage Statement to download the spreadsheet.

MILEAGE STATEMENT

With the 2010 tax season entering its peak, and with the IRS ready to start accepting returns that were impacted by the new tax law changes implemented in late December, it is a good time to take a look at some of this year’s most commonly missed deductions. Here are some of the things that I noticed:

- AMERICAN OPPORTUNITY AND LIFETIME LEARNING CREDITS: The recent economic downturn has resulted in more people going back to school, especially for undergraduate education.  There are also many more first time filers, because a lot of kids start work to help pay for their education, and therefore have to file their own taxes, instead of being claimed on their parents return.  Most of these people are not aware of the education credits that are offered, and for the ones that claim them, the extra refund comes as a pleasant surprise when they file their taxes, because the American Opportunity Credit is up to $2,500 per eligible student and the lifetime learning credit is up to $2,000 per return. Your tax preparer will determine which offers the best benefit.

- MILEAGE: Because of the economic downturn, more people are now either working two jobs, or go to work and to school. However few of them keep track of their mileage, which is important especially if you are going to school from work, because the IRS allows you to take a deduction on mileage for that which is 50 cents per mile.  Most people also do not note mileage for medical, moving, and charitable expenses. Medical and moving expenses are 16.5 cents per mile, and charitable expenses are 14 cents per mile.

MARRIED FILING SINGLE VS MARRIED FILING JOINTLY: In the past, there have been only rare instances where there is a benefit of married filing single, therefore many couples automatically assume that married filing joint is the best way to go.  However this year, I am seeing more returns, where a couple that files as married filing separate, may have an overall bigger refund, because of certain circumstances.  Here are a few examples of why some couples may be better off filing as Married Filing Separate:

- They have medical expenses that do not meet the required 7.5% AGI when filling MFJ, and so are not able to claim, but may be able to do so when filing MFS.

- When one spouse earns a much higher income than the other, the person that earns the lower amount will still be charged the same rate of the higher income earner when filing MFJ, but if filing as MFS, may be able to be in a lower tax bracket than the spouse.

- Sometimes no matter how many deduction you itemize, it still may not be enough to go to a lower tax bracket when filing MFJ, then possibly the person that earns the lower income may be able to when filing MFJ.

- Couples that have older children who they can no longer claim, and other couples effected by the Special Rules linked here, should at least ask their tax preparer to look at the difference between filing MFS vs MFJ before making a decision.

STATE VS INCOME TAXES: For people who itemize their deductions, they can choose to deduct either state sales or income taxes. Most people deduct state income taxes, but if you are a resident of a state that has no income taxes like FL and TX, or if you made a large purchase like a car, or boat and paid a significant amount of state sales taxes, then it may be worth taking a State Sales Tax deduction instead of Income Tax Deduction.

AD VALOREM TAXES: A lot of people  that itemize forget to take a deduction for ad valorem taxes paid, for example on their vehicles. 

NOT ASKING THE RIGHT QUESTIONS: Finally few filers ask their tax preparer the right questions. You are a paying a tax preparer not just to do your taxes, but to help you plan, as I have outlined in this article here.

Q1. What is my current tax bracket?

Q2. Is it possible for me to get into a lower tax bracket next year?

Q3. What would I need to do this year to get into a lower tax bracket?

Q4. What advice can you give me this year?

Q5. Can I call you or is there anyone in your firm that I can talk to, if there are any major changes later this year that could impact my tax situation next year?

One of my favorite credit cards is the Chase BP Visa card issued by Chase Bank, because it give me 5% cash back on gas purchases made at any BP Gas station (which happens to offer one lowest gas prices in my area).  I also use it for travel  and dining because I get 2% cash back there always (unless I get a special 5% promotion from some of the other credit cards I have). If you have good credit, and are looking for a credit card that has excellent rewards in gas and travel, I recommend that you take a look at this card.

Which is why I love this offer BP currently has till Mar 22, 2011 - and you don’t even need a BP card to make use of this offer – but if you have the BP card, you can save quite a bit of money on BP gas purchases. Consider this example:

EXAMPLE

Current Gas Price on 1/18/11 at the BP gas station in my area is $2.91.

I purchase 8 gallons of gas (minimun required to receive 1 card) – which will cost $23.28

By doing this 5 times, I would get 5 cards and have spent $116.40 for 40 gallons of gas (keeping the gas price the same for simplicity)

By using my Chase BP card, I save 5% or $5.82. I also get a $10 BP reward card.

I end up saving a total of $15.82 for 40 gallons or in this case $0.40 per gallon, so I am actually paying about $2.51 instead of $2.91.

Without the Chase BP card, you will still save $10 on 40 gallons or in this case $0.25 per gallon, paying $2.66 instead of $2.91.

We all could use some gas savings, and you can get multiple cards. Keep in mind that there are a few limitations, so please check the terms and conditions here.

It’s tax time, and with all the new tax laws, it will probably be the most testing tax year to date!  I have given numerous tax talks, and have talked to a lot of people that prepare their own taxes.  Doing your own taxes is often the cheapest way to prepare your own taxes, and there are some excellent software available in the market.  However there are a few drawbacks if you do your own taxes. I have highlighted them below.

PROBLEM 1:  The first major drawback is that using a software does not allow you to do any sort of effective tax planning or tax strategy. Their final versions are released only in 2011 when it is too late to make any major changes – you can do some planning yourself, but the problem is most people do it only when the software becomes available.

PROBLEM 2: You still have to pay out of pocket costs for printing, stationery, files and other material.  It may or may not be that much depending on how many forms you have to print, but few people actually calculate those costs. But think about how much it costs to print 15 to 20 pages of tax documents.

PROBLEM 3:  Few self preparers have an aggressive tax strategy, for fear of getting audited, or lack of knowledge - in the process missing deductions.  However get your preparer to provide you with an aggressive strategy, especially if the tax preparation company is backed by professionals that provide audit support.  Common missed deduction include depreciation, qualified home business expenses, the educator expense credit, and fear of being audited for showing (genuine) home business expenses.

PROBLEM 4: Most people who prepare their own taxes start their preparation for the 2010 tax year only in 2011 after they get all their documents.  Therefore they are not able to do much about changing their situation (with the exception to contributing to a traditional IRA) which I will illustrate later.  However to get the maximum refund, you have to start your tax planning for 2010 in the same year, and make any changes before December 31, 2010.

PROBLEM 5:   Most people know what tax bracket they fall under. However very few are actually aggressive about doing whatever they can to fall under a lower tax bracket.  This is because taxes/tax brackets are calculated from your Taxable Income, not your Gross or Net Income – to get there you have to pre-plan your entire tax return. Consider this basic example:

EXAMPLE 1: John is single and his taxable income is $35,000.  In 2010 he is in the 25% tax bracket and will have to pay about $8,750 in taxes. Jim is single, and earns the same salary. However his taxable income is $34,000 since he opened a traditional IRA and put $1,000 into it (for simplicity I am not including IRA interest earned).  Therefore his taxes is only $5,100 since he is in the 15% tax bracket. Jim saves $3,650 in taxes and puts $1,000 into a retirement in the process.  John still has the option of doing this if he contributes to a traditional IRA before April 18, 2011. However I do not know of a software that actually suggests this.

There are so many adjustments to income, not just an IRA, that give the opportunity to lower your taxable income.  Most people know these adjustments, but few have a strategy to actually implement them.

WHICH IS WHY YOU MAY NEED A TAX PLANNER

Most people I talk to are under the impression that in 2011, you need a tax preparer to help you with your 2010 return. Which is partly true.

However it is not about WHO you use as your tax preparer, but HOW you use the tax preparer – because you can tell the tax preparer (who is now your tax planner) to develop a strategy for your 2012 tax year.  A software will not let you do that.  An offseason tax preparer/planner can and will do that. In 2011 the offseason tax preparer can also look at your past returns, going back 3 years and even make amendments to those returns.  (If you are currently unemployed, need money, and have time, I encourage you to do this – you never know what may have been missed on previous years).

How many of you know your tax bracket, and have explored ALL the possibilities you have to possibly get yourself into a lower tax bracket? If you have not, please do.  You can do it yourself if you have plenty of time, and like challenges. Or hire a tax professional/planner, and let that person know what you expect, because now you know!

The IRS just announced that the deadline to file taxes has been extended to April 18th!  However what initially seemed to be good news was dampened by the additional news that filers who itemize would have to wait till mid to late February to file their taxes! Although a lot of those filers wait till Feburary, March, or April to file, there are still many that file early, and they will be impacted by this. Also impacted are tax professionals/tax preparation companies  – They could have an additional premature peak season towards the end of February! Below is the link to the complete IRS release!

http://www.irs.gov/newsroom/article/0,,id=233910,00.html

Keeping my fingers crossed! If this law passes, Social Security Taxes will be lowered by 2% from 6.2% to 4.2%. This means that all workers get a 2% raise – just what this economy needs. A person/family that earns $50,000 gets an extra $83.33 per month, and a person/family that earns 100,000 gets $166.66 per month. Here is the full article:

WASHINGTON – A massive bipartisan tax package preventing a big New Year’s Day tax hike for millions of Americans is on its way to President Barack Obama for his signature Friday.

The measure would extend tax cuts for families at every income level, renew jobless benefits for the long-term unemployed and enact a new one-year cut in Social Security taxes that would benefit nearly every worker who earns a wage.

The president is expected to sign the bill Friday afternoon.

In a remarkable show of bipartisanship, the House gave final approval to the measure just before midnight Thursday, overcoming an attempt by rebellious Democrats who wanted to impose a higher estate tax than the one Obama agreed to. The vote was 277-148, with each party contributing an almost identical number of votes in favor (the Democrats, 139 and the Republicans, 138).

In a rare reach across party lines, Obama negotiated the $858 billion package with Senate Republicans. The White House then spent the past 10 days persuading congressional Democrats to go along, providing a possible blueprint for the next two years, when Republicans will control the House and hold more seats in the Senate.

“There probably is nobody on this floor who likes this bill,” said House Majority Leader Steny Hoyer, D-Md. “The judgment is, is it better than doing nothing? Some of the business groups believe it will help. I hope they’re right.”

Rep. Dave Camp, R-Mich., said that with unemployment hovering just under 10 percent and the deadline for avoiding a big tax hike fast approaching, lawmakers had little choice but to support the bill.

“This is just no time to be playing games with our economy,” said Camp, who will become chairman of the tax-writing House Ways and Means Committee in January. “The failure to block these tax increases would be a direct hit to families and small businesses.”

Sweeping tax cuts enacted when George W. Bush was president are scheduled to expire Jan. 1 — a little more than two weeks away. The bill extends them for two years, placing the issue squarely in the middle of the next presidential election, in 2012.

The extended tax cuts include lower rates for the rich, the middle class and the working poor, a $1,000-per-child tax credit, tax breaks for college students and lower taxes on capital gains and dividends. The bill also extends through 2011, a series of business tax breaks designed to encourage investment that expired at the end of 2009.

Workers’ Social Security taxes would be cut by nearly a third, going from 6.2 percent to 4.2 percent, for 2011. A worker making $50,000 in wages would save $1,000; one making $100,000 would save $2,000.

“This legislation is good for growth, good for jobs, good for working and middle class families, and good for businesses looking to invest and expand their work force,” said Treasury Secretary Timothy Geithner.

Some Democrats complained that the package is too generous to the wealthy; Republicans complained that it doesn’t make all the tax cuts permanent.

Rep. Ginny Brown-Waite, R-Fla., called it “a bipartisan moment of clarity.”

The bill’s cost, $858 billion, would be added to the deficit, a sore spot among budget hawks in both parties.

“I know that we are going to borrow every nickel in this bill,” Hoyer lamented.

An opponent of the legislation, Rep. Anthony Weiner, D-N.Y., said Obama and lawmakers will face enormous election-year pressure in 2012 to extend the cuts again or make them permanent. Weiner said the Republicans turned out to be “better poker players” than Obama.

At the insistence of Republicans, the plan includes an estate tax that would allow the first $10 million of a couple’s estate to pass to heirs without taxation. The balance would be subject to a 35 percent tax rate.

Many House Democrats wanted a higher estate tax, one that would allow couples to pass only $7 million tax-free, taxing anything above that amount at a 45 percent rate. They argued that the higher estate tax would affect only 6,600 of the wealthiest estates in 2011 and would save $23 billion over two years.

House Speaker Nancy Pelosi, D-Calif., called the estate tax the “most egregious provision” in the bill and held a vote that would have imposed the higher estate tax. It failed, 194-233.

Rep. Elijah Cummings, D-Md., said he thought the White House could have gotten a better deal.

“When I talk to the Republicans they are giddy about this bill,” he said.

With many great websites and weblinks, booking a hotel can actually be a fun and money saving experience, as I discovered last weekend while searching for a room in Atlanta. Here are some tips, let me know what you think and feel free to add any suggestions.

1. I have consistantly found the lowest price using Priceline’s “Name Your Own Price” – www.priceline.com. There are other sites that offer occasional specials, but priceline is far more consistant.

2. Instead of going to www.priceline.com directly, I use weblinking through another web portal, in this case the Chase Rewards Network. This will get me an additional 1% discount.

3. I want to stay someplace nice, so I select 3.5, and 4 star hotels – thats where the best deals are to be found.

4. Started by bidding at $30 – not accepted. Changed location criteria, and increased bid by $1. My offer of $32 was accepted – with taxes it would bring my total to $43.81 – not bad for a 3.5 star hotel in Atlanta!

5. Complete the booking using my Chase BP card which always gives me 2% cash back on travel.

6. Priceline informs me that it is the Marriott at Norcross – I was hoping I would get that hotel – it is excellent for the price, nice rooms, and great location. Last time I stayed there, I got a room right outside the pool!

Final Price of Room = $43.81 – $0.44 – $0.88 = $42.49!

Note: Citibank has a great weblinking offer through Priceline, but I would have to stay 3 nights, but would get $20 back. In this case it would have cost $131.43 – $20 – $1.11 = $110.32 or just $36.77 per night!