Archive for December 2017

Prioritizing Tax Benefits

Two kinds of clients scare me most. The first ask me as they pick up their tax return what they can do to lower their tax bill. The other requires a pry bar to get complete information out of them during the year.

Each of these clients scares me because I can’t give them a good answer. The first client is really asking what they could have done better last year when the answer makes no difference and the second client gives me reasonably accurate information (if I’m lucky) meaning my advice is only “reasonably” accurate.

The worst part is some tax breaks aren’t gentle phase-outs, but cliffs. One additional dollar of income can cost $500 of tax savings! Clients receiving the healthcare credit face several cliffs as their income crosses mile markers of the federal poverty level (100%, 200%, 300% and 400%). A small amount of additional income can result is a significant reduction in the credit causing a seriously higher tax bill.

Compounding the problem is where you take a deduction. A good example here is Health Savings Account contributions. You can pay the money yourself and take a deduction on Page 1 of Form 1040 or have your employer withhold from your paycheck and deposit the funds. The second way is usually better.

HSA contributions are an adjustment to gross income when you make the contribution yourself. When handled through a payroll deduction it reduces the W-2 and hence, total income. The further up the page a deduction is taken, the better. As you move down Form 1040 options for certain credits and deductions are reduced.

Prioritizing Your Tax Planning

Money is limited so you have to pick and choose which tax benefits to focus on. We will use a hypothetical client named Fawn to illustrate how prioritizing tax options can yield massive results.

Fawn is a single mother with a son approaching the age of majority. She works full-time and earns in the low to mid 30’s with overtime.

Fawn has several issues to consider. We will assume healthcare is covered at work or she doesn’t have a health plan from the Healthcare.gov site. We do this to simplify our illustration and to focus on three potential tax planning options: Earned Income Credit, Saver’s Credit and the Student Loan Interest Deduction.

HSA contributions can affect different areas of the return.

The Earned Income Credit is on a sliding scale. It starts low, maxes out around $10,000 to $20,000 (depending on how many children you have), and hovers around this maximum plateau for a while before starting a slow decline as income climbs. Fawn’s EIC is slightly under $1,000.

Earning more money will reduce her credit. But, there is a way to earn more and still get a larger EIC. If Fawn has a retirement plan at work she can divert money to this fund so it never shows up on her personal tax return. An HSA run through payroll will have a similar effect.

EIC is generally calculated off Adjusted Gross Income (AGI) and earned income with some modifications. We will not go into all the possible issues affects Fawn’s return. What I want to make clear is the advantages of reducing income on certain areas of the tax return without giving up income. In short, I want you to have your cake and eat it too.

Choices are almost always available to reduce taxes and increase a refund if plan in advance. We can pick this apart deeper, but today’s point is concept. I want you to understand a simple concept. You don’t have to earn less to avoid the loss of credits.

When higher income increases taxes due and reduces or eliminates credits at a rate near or greater than your additional income it makes sense to stop earning unless you can break through to the next level where income goes up while taxes are muted. Or you follow my plan.

Bringing Together Disparate Pieces

Every action can have multiple effects! Diverting more money into a 401(k) can do more than just reduce your reported income on the W-2. Lower income means lower tax. It also means you might qualify for a Saver’s Credit! Think of that for a moment. The very act of saving might actually reduce your income enough to qualify you for a Saver’s Credit. Isn’t the tax code great!

There is still one more problem Fawn can’t figure out how to solve. She has student loans that just came out of deferment. The payments are small and will all go to interest for a while.

The new tax law working through Congress might eliminate the student loan interest deduction after this year so she wants to pay at least $2,500 to max out this year’s deduction. Unfortunately, all this retirement saving to maximize the EIC and Saver’s Credit has reduced her take-home pay to the minimum level she needs to cover basic bills.

The student loan interest deduction might also reduce state income taxes. This is an important deduction and since it might go away, Fawn wants to max out the benefit this year.

She can’t reduce her income more without keeping food on the table. Here is where tax planning leaves the comfort of Form 1040 and heads for the real world. Fawn needs $2,500 to pay at least the full amount of the interest deduction. (Remember, all payments will go to interest first and she has at least $2,500 of accumulated interest.)

Since Fawn started making token payments earlier in the year (let’s say $500) she has some of the deduction covered already. It would probably make sense to borrow money short-term to max out the student loan deduction. Her top dollar will probably be in the 15% tax bracket so the student loan deduction will benefit her $300 if she can come up with the remaining $2,000 to maximize the deduction.

Credit card is probably a bad idea here, but a car loan or help from family or a friend makes sense. Fawn could also approach her employer and ask him for a loan. If she explained her situation nicely, the employer might buy into the idea since it helps a valued member of his team and really costs him nothing more than a temporary loss of use of a small amount of money.

The Good Game

Gaming the system is one of America’s great pastimes. It can be very rewarding as long as you keep it legal.

The above example has plenty of holes and I took some liberty with the facts. I was careful not to get hung up on exact numbers. No matter what numbers I use, your situation will be somewhat different. I understand increasing her 401(k) investment helps the Saver’s Credit limits. It might also increase the credit from10% to 20% (or more) of the first $2,000. The student loan interest deduction could improve situations all around the tax return.

The point today is to look at your tax situation and examine it for un- or under-utilized deductions and credits and then start thinking outside the box.

There are many opportunities to manipulate your tax results legally! Adjusting your 401(k) contributions higher doesn’t reduce your take-home pay as much as the additional contribution due to lower taxes and potentially higher credits.

Normal people can do this; not just the self-employed or rich! HSA and 401(k) contributions are not a drain on the budget; they are necessary parts of a vibrant financial plan.

I focused on lower income earners this post. I get plenty of complaints I spend too much time on ideas reducing taxes for the self-employed and high incomers. Every income category has opportunities.

Whether you are a good client or one who wants to know how the past could have been better or only coughs up all the information needed during tax season, you can plan with purpose.

Fawn is not a hypothetical client (though her name was changed to protect the guilty); she is a living, breathing human being I’ve helped for a few years now. I modified her factset slightly for this post and because she reads this blog and is sure to remind me when she gets around to reading this post.

We ran the numbers and it paid to borrow money to take advantage of the student loan interest deduction. She can pay the loan in full (which her awesome employer did lend to her) by April 1st. Her increased refund will kill most of the loan.

The best part is she keeps the money, the added tax savings, no matter what happens in the future.

And if we get a new tax code we get to play the game with a few different rules. So hand me the dice; it’s my turn to roll.

Personal Solutions to the Healthcare Crisis

In the United States healthcare has gone from crisis to tragedy. Double digit increases in insurance premiums for many years on one hand and a tax code that forces you to pay up on the other is a painful experience for many family budgets.

The current tax code contains a health insurance mandate; have health insurance or pay a tax penalty. Congress has unsuccessfully tried to end the mandate, but the current tax bill might contain language ending required health insurance coverage.

Even if the health insurance mandate ends there is the problem of affordable insurance. If you are fortunate enough to have an employer paying most or all of your health insurance premiums you are lucky. Small employers are far and few between who can shoulder the cost of healthcare. And large corporations are scaling back the employer paid portion of healthcare benefits.

An anomaly of the current economic expansion is the lack of wage increases. For employers covering health insurance the cost of each employee is exploding due to rapidly rising health insurance premiums even when they offer modest wage increases at best. It might be a good idea to have a Plan B.

Then we come to you, dear readers. Many of you are either running your own small business/side gig or are planning on early retirement. The FIRE (financial independence/retire early) community has one vital flaw! Saving and investing a large portion of your income creates a large net worth fast. Unfortunately, healthcare is probably your single biggest expense, even more than housing if you retire early before you qualify for Medicare!

The Right Man in the Right Place

A few months ago I was in Dallas at FinCon 17. I was busy with demands from readers and other bloggers keeping me from the sessions (now available on YouTube). That doesn’t mean I didn’t learn anything. No matter where I go I always pick up several tidbits of information I can use personally or for clients.

On Day 2 I decided to walk the vendors. Before long I was interrupted by adoring fans. I asked Mrs. Accountant to run the obstacle course of vendors and clue me into the ones I might be most interested in. It was a good strategy.

Mrs. Accountant knows the dire straights my clients are in (not to mention our own escalating health insurance issues). She had a list ready for me when I had a break.

I formulated a plan with my research. I was aware of most of the companies involved. What I needed to do was connect the dots. No one company provided a comprehensive solution. Like a jigsaw puzzle, I assembled the pieces into what is a working program to cut health insurance costs in half while reducing out-of-pocket expenses at the same time.

Connecting the Dots

My strategy uses a three legged chair. Each leg provides benefits, but if you are lucky enough to be able to use all three legs you are golden.

Medi-Share was the first stop. Medi-Share is NOT insurance, but satisfies the tax mandate requiring insurance. If the mandate is lifted Medi-Share is a powerful consideration for handling your healthcare needs regardless.

There is one very serious drawback to Medi-Share. Medi-Share is faith based and therefore is only available to Christians. Many readers will have no problem with this requirement; however, people of other faiths or no faith will probably not be accepted into the program.

Medi-Share looks and feels a lot like health insurance. You pay a monthly Share amount similar to a premium. The money is deposited into YOUR separate bank account which is completely different from insurance. There is an annual amount you pay first which feels like a deductible.

But it is different. As other members have medical bills come in the medical bill are matched to other members with excess funds in their account. The bills are matched until all medical bills of members are paid. Medi-Share uses technology to handle the management of member accounts.

The best part of Medi-Share is the dedication to wellness. Insurance companies have an incentive to keep costs high! Health insurance carriers can only have a certain percentage of premiums as profit so they are incentivized to waste as much as possible to keep premiums as high as possible as 20% of two billion dollars is more than 20% of one billion dollars. The more expenses the more profit the insurance company can keep.

Medi-Share is focused on quality of life and provides support to keep medical costs down while providing maximum health and wellness. Medi-Share is non-profit so they are service based versus profit driven.

The Second Leg

Medi-Share’s program cuts medical costs be half or more for most people. The U.S. has outrageous medical costs, but when common sense is added the cost become more reasonable.

If you don’t qualify for Medi-Share due to faith issues you can still use Leg 2 of The Wealthy Accountant program.

The way Medi-Share keeps medical costs down is by utilizing technology and preventative care. You can use the same tools to reduce your medical bills.

Leg 2 is a company called amino (they don’t capitalize their name).

Have you ever tried to get a hospital or doctor’s office to give you a firm number on the cost prior to a procedure? It’s impossible. You get every excuse and runaround imaginable! They act like they have no idea what it costs and have no way of finding out until they got you by the throat! Amino fixes that.

Amino tracks virtually every medical service provider in the country for cost and quality. Doctors and hospitals are not allowed to advertise or buy their way to the top of the list. You get an unbiased view of your medical choices based on price.

With amino you can track you insurance deductible (or Medi-Share share amounts) and even set medical appointments right through their portal. Finally, they analyze your bill.

Anyone with high deductible insurance (that should be all of us), paying their own medical costs and those using Medi-Share and other similar faith based healthcare management systems can’t afford not to include amino in their health management mix.

The Final Leg

Now that you have Medi-Share to manage medical bills and amino to get the best price on medical care, you need a tax deduction!

What I’m about to share is a down and dirty outline of an incredible tax advantage. As time permits I’ll roll up the sleeves and give this one topic an entire post. From the providers of this third leg it seems even accountants have a lot of questions on this. I’ll give you the details to get started so you can maximize your tax benefits.

The third leg is a Qualified Small Employer Health Reimbursement Account (QSEHRA). This only works if you have your own business or side gig. If you have an employer you will need them to engage this leg of my program as a traditional HRA or QSEHRA.

The first thing to remember is QSEHRAs only arrives recently (December 2016) with what is known as the CURES Act. There are still some issues needing clarification. I will share generally accepted interpretations.

QSEHRAs are only for small employers WITHOUT a group medical plan and with fewer than 50 full-time equivalent (FTE) employees. A FTE is defined as an employee working 30 or more hours per week or 130 hours per month for 120 consecutive days.

Section 213(d) of the Internal Revenue Code (IRC) states a QSEHRA can cover any DOCUMENTED healthcare expense, including health insurance premiums. As I understand it, Medi-Share payments would qualify. If I discover different I will update this post so check back if you plan on using this tax strategy in the future.

The employer funds 100% of the QSEHRA! There is a limit to how much an employer can fund: $4,950 for an individual and $10,000 for a family annually.

Caution: If employees receive a subsidy from a Healthcare.gov policy the subsidy is reduced by the amount of the QSEHRA provided by the employer. Talk to your tax professional on your specific situation and the tax consequences if you receive a federal subsidy.

The most important part of this leg is DOCUMENTED. You will need someone to manage your QSEHRA. Your accountant isn’t the person to do it!

I recommend Take Command Health. I was impressed by the depth of their knowledge when I met them at FinCon and through follow-up encounters. If you are planning on a tax break you may as well make sure it sticks.

The Triune Healthcare Solution

Healthcare and medical insurance are causing more gray hair than old age. No one solution solves the problem for everyone. Many readers should find value in all three legs. Others can benefit from only one or two legs. Regardless, containing and managing medical costs is a primary concern in most households.

To recap, there are three steps to taking control of your healthcare needs and costs:

  • Use this link to review and join Medi-Share.
  • Review amino and determine if their service will save you time, money and hassle. (I was reminded amino is only available for groups and not individual plans.)
  • Have the government give you a juicy tax break with a QSEHRS managed by Take Command Health.

You will have lots of questions, I know. Leave your questions in the comments section below versus sending me an email. Many questions are repeats and it helps me manage time better. Some questions might take some research as the CURES Act is still being interpreted. Check back often to see if I found an answer for you.

Here is to clean living.

Travel the World from Your Doorstep

Wisconsin’s first public school teacher, Electa Quinney.

Traveling is a real pain in the tail. Even people who love traveling don’t like the moving part. Planes, trains and automobiles are a necessary part of traveling. Without transportation you can’t get from here to there.

People claiming to enjoy travel really are saying they like to experience other places and new people. Not me. I hate the moving part and I’m always a bit uncomfortable in strange surroundings. Believe it or not, people make me nervous!

All this said, I travel waaaaaay more than I care to. I travel for business mostly. In the last five years every trip from home had a business purpose except for the eclipse this summer. That’s it. This blog has increased my travel to record levels! And as soon as I was given an excuse I cut loose and ran.

Now I’m planning Camp Accountant. Yes, it means I’ll be traveling again. But at least I have control over the flow. And when it overwhelms I’ll find an excuse to crawl back into the hole from whence I crawled from.

When I do travel I am a keen observer. While people make me uncomfortable, I find the creatures entertaining as they scramble through their lives searching for something they’ll never find.

I AM a social animal, however. It never takes long for me to roll up my sleeves and start a conversation. My work requires I know my client. My habit is to know people. I ask lots of questions and tell lots of stories. Thank god you guys reading this are only a computer screen where I can talk without the nervousness of an alien environment.

And when I talk (and sometimes listen) I notice something strange. It’s clear to me the people talking to me don’t even know what they are saying! When visiting a new area Mrs. Accountant and I check out zoos and museums. Sometimes we hike the outback or some other mentally stimulating activity. When I mention our plans the most common response is, “We’ve never been there.”

Say what!

It seems locals rarely enjoy the advantages of their own community. Travelers visit and enjoy all the good stuff a community has to offer. Yet the locals are aware of the institutions and entertainment venues, but rarely imbibe.

Call Me a Crazy Local

My ideal vacation is a twenty minute drive from my home or office. When I’m done vacationing at the end of the day I want to sit on my own couch, read a book and sleep in my own bed.

Here is the best part. There are so many things to see within striking distance of my home I couldn’t see it all if I took a five year sabbatical! And I live out in the boondocks! I can only imagine what’s available for you, kind readers.

Here is a short list of things twenty minutes or less from my home or office (and I only scratched the surface):

High Cliff State Park, Brillion Wildlife Area, and the Killsnake Wildlife Area for the outdoor lovers. My office is next to Heckrodt Wetland Reserve; I hike there several days per week; it’s an awesome park. The Gordon Bubolz Nature Reserve is about a half hour drive from the office. If I want a day trip (an hour drive) I can enjoy the massive Horicon National Wildlife Refuge and the Kettle Moraine State Forest. Both have plenty of hiking trails. Kettle Moraine contains a large section of the Ice Age National Scenic Trail.

There is a historical society in many of the small towns of the area with plenty of interesting stuff to examine.

Appleton is loaded with museums. Several are a part of or next to Lawrence University or the UW extension. The History Museum at the Castle, Hearthstone House (the first central hydroelectric power station to operate in the U.S. invented by Edison operated here), The Trout Museum of Art (my oldest daughter’s favorite) and the Barlow Planetarium are among my favorites. The Weis Earth Science Museum is next to the planetarium; both are worth the price of admission. Weis is free to students and once upon a time to everyone. I still swing the admission fee because it is so worth it.

Zoos are less prevalent. Menominee Park Zoo in Oshkosh is a 40 minute drive and the New Zoo north of Green Bay is awesome. It’s like living in a big city without big city problems. Mulberry Lane Farm is one of many petting farms in the area where the kids (and mom and dad) can experience farm animals up close. They also have a pumpkin patch for family picking each autumn. We live less than five miles from Mulberry.

Heckrodt Wetland Reserve next to my office. I haunt the grounds often.

Then, if you search hard enough, you’ll find the downright strange facts about your community. Cemeteries are a wealth of information, history and pride. Two miles from my home is Portland Cemetery where Civil War veterans are buried. Portland is an old graveyard next to an old currently unused church. The land to the west of the cemetery belongs to my family. I grew up working the land next to Portland. It’s always held a special spot in my heart. I am humbled when I walk past faded gravestones of children who died after only a few days or years of life. At those moments I reflect on how lucky I am and how easy life is today.

Talking of cemeteries, Wisconsin’s first public school teacher, Electa Quinney, is buried in an Indian graveyard a few miles from my home. I find these facts intellectually stimulating as it connects me to my roots.

You Don’t Have to Travel far

Immanuel Kant is one of history’s greatest philosophers. My Stoic and minimalist nature is drawn to his strict daily routines. Kant was born in Konigsberg, East Prussia and never traveled beyond the city limits during his 79 years on this earth.

Electa Quinney is buried here. Notice you have to drive through a farmers yard to get to the cemetery.

You don’t need to travel the world to be worldly wise. Kant proved that. While I have a toxic reaction to traveling, even I am willing to travel beyond the city limits! But not by far. Maybe ten, perhaps twenty, feet or so if the weather is right.

You can see the world right in your own backyard! You can sit on a plane all day and experience less history than you could if you opened your eyes where you stand.

When Jim Collins visited Wisconsin earlier this year I was willing to travel an hour and a half for Conclave. Carl from 1500 Days and his friend, Brandon, joined us on that wet and cold weekend. On the way in they found a cemetery deep in the woods a short walk from Jim’s place. It was an interesting afternoon of learning local history of the Lake Michigan shore community of Oostburg. It seems I’m not alone in these local adventures.

We close with my favorite travel of all; the kind of traveling I can’t get enough of. Best of all there are no airports or highways.  I enjoy this kind of travel nearly every day with a warm beverage. I travel thousands of miles and more and even through time to speak with the greatest minds the human race has ever known.

Books.

Side Gig: Tax Preparation

A common request the last few months involves starting a tax preparation side gig. A seasonal tax prep business can be rewarding if you follow a few simple rules. And if it spirals out of control you might find yourself working a full-fledged business 30 years later like a certain tax professional we will not name.

To run a real tax prep side gig you will need some background tax knowledge, an e-filing account with the IRS, commercial grade tax software, workflow management and clients. We will touch on each issue.

Education/Experience: Experience comes with time; there is no shortcut. I started on day one like everyone else. In the beginning it’s best to stick with simpler returns to avoid getting in over your head.

Continuing professional education is widely available in the tax industry due to the requirements for CPAs and enrolled agents. This makes it easy to learn while you gain experience.

The IRS’ Registered Tax Return Preparer program ended in 2013, but you can still be a part of the Volunteer Annual Filing Season Program (AFSP). Without involvement in the AFSP it’s hard to work with the IRS on a client’s account. CPAs, enrolled agents and attorneys have unlimited representation rights before the IRS. A participant of the AFSP has limited representation rights. As you begin your side gig journey this is a great place to start.

It’s relatively easy to be an AFSP. You need 18 hours of continuing education from IRS-Approved CE Providers: 10 hours of federal tax law topics, 2 hours of ethics and a 6 hour Annual Federal Tax Refresher (AFTR) every year. (Note: The links are to  products used in my office with newer preparers.)

I have never been a minimum education type of guy. Generally CPAs need 40 Continuing Professional Education (CPE) credit hours per year; enrolled agents an average of 24. In a typical year I approach 100 hours of qualified CPE! If I’m going to do something I may as well do it at a high level of competence. I recommend you complete at least 40 CPE credits per year. The cost is a business deduction.

As you grow your practice you will want to add some letters after your name. I suggest the enrolled agent designation. EAs are a tax authority and have full representation rights before the IRS. EAs can also represent clients of returns someone else prepared, unlike AFSPs.

The EA exam is tough, but worth the effort. Here is the study guide I recommend. Take your time when working for your EA. Use the study guide and study and study and study. About a third pass the first time through. Success is in direct proportion to dedication of studies.

Here are some IRS-approved continuing education programs I approve:

Surgent CPE: It’s been a few years since I attended a Jack Surgent program, but they were always packed with solid information. Highly recommended.

Tax Insight: I attend Tax Insight’s Annual Tax Course every year. They are located in Wisconsin, but they also have a few classes in Mississippi, plus they are starting an online version this month.

National Association of Tax Professionals (NATP): I was a member of NATP for years, but they were a bit pricey for what they provided. Recommended if no other options available in your area. NATP also has EA exam preparation classes and an AFTR refresher. NATP members also have a tax research help line.

Gleim and WebCE: If you need something fast, cheap and easy you can use these two options. They are not recommended because the courses are very basic. Remember, we want more than minimum effort.

Once you start your side gig the educational programs will find you. Each state has its own list of providers. Feel free to experiment. The only way to find good programs is to try them out.

Become an Authorized IRS e-file Provider: Rather than list the details I will send you to the IRS page to complete the process. It takes about a month and a half to complete the process so start ASAP. Back in my day it took four months so things have improved a bit.

Commercial Tax Software:  My office uses Drake Software and has since 1988. Drake has always been as easy to use program with commercial grade power. I’ve been with Drake so long my account number with them is 197!

I’ve found new preparers find Drake easier to navigate than other commercial tax software. I’ve played with other software over the years, but never was tempted to leave Drake. Their support is second to none. They answer fast with a dedicated team ready to help preparers get the job done right.

Drake is a powerful tax software package at a reasonable price. You can license the full package or pay by the return. Review Drake’s pricing to determine which package fits your side gig needs.

Workflow: I started my tax practice out of my home and prepared around 2,000 returns annually (with the help of employees) for five or six years before moving to my retail storefront. When I ran my practice as a side gig it was always out of the home. From 1982 to 1989 I treated tax preparation as a side gig. I ran a full-time seasonal tax practice from 1990 to 1995 out of my home. Then I lost my mind, bought an office building and watched my practice explode. I tried, and mostly succeeded, in cutting back ten years ago. Then this blog and a push from Mr. Money Mustache happened.

Workflow issues are a constant challenge in a tax office. Even as a side gig you want to utilize technology to improve performance, reduce errors and remain profitable. I can’t tell you everything my office does because it’s always in flux. I do want to share one thing we do to keep the paper moving.

Tax preparation is largely data processing. The real value for the client is the conversation with the accountant. A simple, short dialog can save the client serious money! The problem is the workload of paper to process.

Plugging every number starts to affect the carpal tunnel. It’s also mind numbing. My office uses a tax organization program called GruntWorx. GruntWorx is integrated into six commercial tax software programs: All Tax Software, Lacerte, Go SystemTax RS, CCH ProSytem Fx, UltraTax CS, and of course, Drake Software.

A compact research book.

You want a paperless office so you’ll be scanning everything in for your record. From inside Drake Software you attach a file with scanned documents GruntWorx handles and send securely. The next day GruntWorx returns a file you import into your Drake software. Several items will need attention, but a large part of the grunt work is processed, saving you time and money. Review GruntWorx pricing to see how much it helps your side gig workflow.

Technology is your friend even with a seasonal side gig tax practice. You want a good computer, Drake Software, laser printer, scanner and security. Contact an IT professional to secure your data!

Tax preparers are a prime target of identity thieves! When Equifax was hacked most of the data stolen was already on the dark net! It came from small tax offices. You read that right, small tax offices. My office IT contract is north of $50,000 per cycle. As a side gig you will have few if any employees so your IT needs will be smaller. My guess is security will cost under $1,000 for most side gig firms.

Technology reduces stress and errors. The computer can read small type on W-2s better than you after hours in a chair. Note, even when using GruntWorx or other productivity enhancements, you must still review each return in its entirety!

Clients: I’ve talked about acquiring clients plenty in the past. Here is a short review.

As a side gig you want basic returns to start until you get your sea legs and gain experience. Decide which type of returns you want to prepare.

Once you’ve decided the focus of your tax side gig you need to study. Maybe a few study courses listed earlier are a good starting point. Take classes on your area of interest.

Clients outside your area of expertise will come knocking. It’s hard, but necessary, to turn some clients away rather than get in over your head.

In your area of practice you need to find where these people congregate. If you want to help elderly people I recommend speaking at churches on Sunday. You might even offer to prepare returns right at the church service. Portable printers and a laptop (with adequate security in place) make it easy to travel. One day a week at a church might satisfy your side gig lusts.

The Chamber of Commerce is a great place to meet business owners; one speaking engagement at the local apartment association will keep you busier than you want. There are so many places where you can grow your client list.

Get some business cards from Vistaprint and carry them with you. You never know when a future client crosses your path on August 4th.

Final Thoughts: Tax preparation is an enjoyable side gig with plenty of profit potential. If you start with smaller returns you can do a lot in an hour. Three hundred simple returns at $100 each is a nice side gig. After expenses you should net over $20,000 in this scenario. Not bad for two and a half months during winter.

Most of the questions I receive are repeats. Please leave questions in the comments below so everyone can benefit from the answers. I’ll answer as many as I can.

2017 Tax Bill Review, Part 1

I have some good news and some bad news. The good news is a certain unnamed accountant will do rather well over the next several years with the new tax code. The bad news is you will not.

The current tax bill on the verge of becoming law will make an experienced tax professional more important than ever. Worse, you’ll have no choice. You’ll either pay an increasingly overworked experienced tax professional or overpay your taxes. Either way you pay.

As for me, I was busy enough. I didn’t need more busy work. The tax bill is 500 pages with handwritten notes in the margins because it is being pushed so quickly toward passage. You know what they say? Fast is better than good.

The ink hasn’t dried and new ink is still being added as I write, but the tax bill is almost certain to become law now. There are plenty of surprises to discuss. A few issues are still up in the air; I’ll cover those in a future post.

For now I want to provide a guide as we head into the last month of the year. Some issues in this tax bill are effective (if passed and signed by the President) on varying dates in 2017. Since planning is not possible I will skip those items for now.

The Craziest Tax Bill Ever

Over three decades of experience and I had to live long enough to see this. We can debate the merits of the economic benefits of this bill, but the truth is brutally painful.

Pass-through businesses (partnerships and S-corporations) will see tax relief. More than ever small business owners will need to organize as a pass-through. Even taxpayers will smaller amounts of side gig income will need to have a serious conversation with their tax professional to determine if an entity is right for them.

I’ve seen (and heard) a few different versions of the pass-though deduction. Since the hand written notes were not available to me before publishing I refrain from giving exact numbers. Last week Tuesday and Wednesday I was in training and plenty of time was used to discuss the potential tax changes. As crazy as it sounds, one short week later and part of my training (and two days of my life) are obsolete.

The wealthy will benefit the most from this bill. Tax brackets are coming down for individuals at the upper end of the scale while the lowest tax bracket goes up from 10% to 12%.

The standard deduction is going up and exemptions are going away. When you’re done playing the end result is nil. Families with children will see a higher Child Tax Credit. I ran several illustrations on the Senate proposals late last week and many typical situations will result in a tax increase!

Bad for Business and Bad for the Economy

Small business owners might be jumping for joy at their tax reduction. However, it might be wise to delay the celebration.

Yes, pass-through entities will see a tax reduction, but if customers pay higher taxes who will drive sales? That is the catch-22 of this tax bill. High income/net worth individuals will keep more of their income while the middle class and poor are gutted.

The argument goes back to the old “trickle-down” theory of thirty years ago. It didn’t work then and it’s doubtful it’ll work now.

Wealthy people don’t spend more just because they get a tax cut! They’re rich. They wouldn’t be rich if they spent every penny they made.

The middle class and poor spend a larger percentage of their income just to meet necessities. A tax increase for the middle class and poor means an immediate decline in spending!

Your favorite accountant will enjoy more income and lower taxes from this bill. However, I will NOT pay higher wages based on my tax rate! (Sorry to any employee reading this.) I pay higher wages for higher profits! Wages are deductible so profits, not tax rates, drive wages! Congress is wrong, lower tax rates will not increase wages. It’ll just add to the deficit and probably cause higher interest rates.

Most small businesses will have it worse since they are not in the tax services business. In fact, I predict the only two groups of small businesses who will win with this tax bill are tax professionals and businesses who cater to the very wealthy. How can it be any other way?

Don’t be fooled by the news reports. The economy might have a minor upward blip, but it will be short-lived as spending from a serious percentage of the population is pressured by higher taxes. As for me, don’t expect me to spend more based on a tax cut. I don’t spend all I earn already and encourage you to undertake the same habit.

More than ever, a frugal mindset will be needed to navigate the course of the next many years.

Stock Market

The last I saw the corporate tax rate will be reduced to 20%. I also heard there could be an upward adjustment to this.

Investors will benefit from a lower tax rate for corporations in some industries. Tech will not do as well as first thought. My largest investment, Altria, will probably do very well. Pharma will also have mixed results.

The reason the lower corporate tax rate will not lift all large corporate boats equally is because of the lie the American people have been sold for years. We have been told time and again that the U.S. has the highest corporate tax rate in the world.

There is a kernel of truth to the statement. What the lie involves is the “real” tax rate after all deductions and credits. Then the U.S. is decidedly in the middle to slightly below the centerline.

The lower tax rate and bonus depreciation brings back the Alternative Minimum Tax for corporations last I saw, but it looks like an accidental effect and could be resolved in committee before the law is passed.

Some companies, like cigarette company, Altria, will do well under the new tax scheme. Altria pays at the top 35% tax bracket under the old law. If the 20% top corporate bracket holds Altria and other major corporations paying a larger portion of their profits in taxes will see benefits. However, many large corporations already pay a lower rate.

Note: I do NOT buy a stock based on tax rates! This is not a recommendation to buy stocks of companies paying near the highest tax rate under the old law. Any tax benefit will be short-lived. Once the reduced tax cost is digested profits from continuing operations and cash flow will determine a corporation’s value.

The bill also requires first in, first out accounting on sales of stocks and mutual funds. This will make tax-loss harvesting more difficult.

Republicans Hate Jesus!

Never mind the provision allowing 529 plan funds up to $10,000 for private and religious schools. Tapping into a 529 sooner means there is less tax-free gain to accumulate! Since 529 plans are only deductible on state tax returns in a limited way, the only real benefit on a federal return is the tax-free growth. Unfortunately, if you allow withdrawals earlier for primary and secondary education, there is less benefit. It might not even be worth the effort. And the money earmarked for higher education will be diminished.

What surprises me the most in all the proposed bills is the damage non-profit organizations will face. When the standard deduction is increased to offset the elimination of exemptions there will be consequences. Limits will be (likely) placed on the amount of mortgage interest deductible. The same for state and local taxes.

This means Schedule A will be used a lot less in the future and contributions to charity are claimed on Schedule A. Though charitable giving shouldn’t be predicated on tax implications, it frequently is.

Small businesses can promote their favorite charity through sponsorships, but individuals will see less, or no, benefit from their charitable contributions. I expect churches will feel the squeeze as more people discover their tithing translates into a tax increase!

Donor advised funds may allow for a larger charitable gift deduction in a particular year, but the higher standard deduction will always diminish its true value. The same applies to charitable remainder trusts (CRT). There could still be estate tax reasons to use CRTs. But, the estate tax is virtually eliminated.

It will be interesting to see how this plays out when politicians meet angry parishioners at church on Sunday. I don’t think many people have a clue how non-profits will be affected by the tax law changes.

More Good and Bad News

The Child Tax Credit is expanded to age 17. Buuuut. . . it expires in 2024. That is a recurrent theme in this bill. Corporate tax cuts are permanent while individual cuts are temporary.

Kind employers (like me) can’t even be nice to our employees anymore. Employers in the past could have incentive rewards. Small gift card rewards were tax-free. Not after the end of 2017. Corporations with billions in profits see their taxes decline nearly half while employees can’t avoid tax on a $25 or $50 gift card! If you had a warm and fuzzy feeling I bet by now it’s gone.

A Family Leave Credit was added at the last minute. Buuuut, it only counts for certain states. Talk about insane! It seems the family leave provision is only allowed on the federal return if the state doesn’t have a similar provision. My guess is states will adjust so the federal credit applies in their state, too.

This brings up another interesting topic. It seems the Republicans have built a tax code to punish blue states. California, New York, New Jersey and Massachusetts will suffer greatly under the new tax proposals. The problem is these states contain the largest percent of our national economy! California is ~13.7% of the U.S economy alone.

And these states have the highest populations. The tax bill is designed to hurt a large portion of the national economy. What could go wrong? I predict the next recession starts and spreads from these economic growth centers.

SMH

I wish I could offer better news. This tax bill is the biggest mess I’ve seen in my career.

There are plenty of solutions. I’ll wait until the ink dries from the President’s pen before giving advice so I know it’ll stick.

I’m an optimist. I think this tax bill is so riddled with holes I’ll be able to drive a Mack truck through it. My guess is the law will not last long as the deficit balloons out of control and the economy stutters. In the mean time I’ll do everything in my power to help you maximize your results.

Stay tuned.

When you’re born you get a ticket to the freak show; when you’re born in America you get a front row seat. —George Carlin

Walking the Less Traveled Road

There are no signs showing how to make the loop onto the bridge. If you miss the loop you take the long way.

Earlier this week I had the opportunity to extend my Thanksgiving holiday by attending a few days of continuing education training. Northeast Wisconsin isn’t a bad place to get an education as long as you can get to Green Bay or the Fox Cities. But when you live in the middle of nowhere it takes planning and strategy to git er done.

Well, the plan was fine; the strategy could have used a bit more work. It’s been a while since I weaseled my way to Green Bay where the training classes were. The fastest way there was to take side roads the whole way.

My memory has started to slip these past years as the birthdays add up. Not having to visit Green Bay in a bit, I knew the trip was a straight forward drive with one exception; at Wrightstown I had to make a loop to get on the bridge to cross the river.

The first day I started early and relied on memory — you know, the thing starting to go with age. It was a good thing I started early.

If you don’t cross the bridge at Wrightstown you have to take a longer, slower route deeper into Green Bay before swinging hard west to head out to the casino where the class was held. Confident as only an American can be, I went off memory. It was a gamble I was willing to take.

Sitting in a classroom all day listening to tax law is grueling. As soon as class was over I wanted to get home. Now less willing to trust my normally reliable brain, I decided to use the phone’s GPS. The last thing I needed was to miss the turn at Wrightstown. Then I’d end up going all the way to the Fox Cites to get home and that would add twenty minutes or so to the ride.

The GPS worked swimmingly at Wrightstown. GPS loves highways and it loved the route turning off at Wrightstown. But it didn’t want to take the side roads the way I wanted!

I followed the GPS directions and knew I was going off course. The darn thing wanted me to take highways as much as possible so I ended up on Highway 32/57. It wasn’t a terrible distance out of the way, but added ten to fifteen minutes to the drive.

Such was Day 1.

I passed! Honest.

I was ready for Day 2! I used the GPS to get to the casino for class in record time. I was even able to use side roads, too.

Day 2 is always brutal. Day 1 wears you out and Day 2 grinds you into putty. Sixteen hours of intense tax law review has that effect on normal humans.

I wanted the fastest way home and hoped the GPS would be as kind on the return trip as the morning drive. Once again things went swimmingly at the Wrightstown turnoff. Then the GPS wanted me to keep going east until I hit 32/57.

I was ready.

Suspecting the ruse from the GPS I took note of how the squirrely turn at Wrightstown fed to the side road I wanted to take. When the GPS said to go straight I made the loop I made that morning and found my true heading home.

Rather than turn the GPS off now that I knew the way home I decided to leave it on and focus on my driving. There are a lot of deer roaming and it gets dark early this time of time. I wanted to get home and was in no mood to tenderize some venison.

The GPS kept telling me to hang a left at every cross road until I was only a few miles from home. The GPS didn’t care the side roads were a faster route; it wanted to get to a highway, any highway, as quickly as possible.

The Day the Sun Went Out

This past August we had a total eclipse of the sun. A new friend from this blog, Bernie, invited the Accountant family to stay at his place only a few miles from totality in Kentucky.

It was an awesome experience and included a new friend. But that isn’t the interesting part of today’s story.

When the eclipse was over our plan was to head to the Interstate and back to Bernie’s. Except seven quadrillion other people had the same idea.

The GPS loaded where we watched the eclipse, but once we got on the interstate coverage died. And so did the traffic.

The highway was wall-to-wall cars and weren’t moving. It took an hour to move a mile! I don’t see stuff like that in the backwoods of Wisconsin. Where I live a car coming down the road is an event. Either one of the few neighbors I have is up to something, we have visitors or someone is lost. Now I saw cars as far as the eye could see!

The Accountant family moments before the sun went out.

After a few hours some people were getting in trouble as their gas got low. Good thing I was smart enough to fill up after the eclipse before we headed back. Okay, maybe luck had more to do with it.

Cars were pulling to the side and some were stranded. If emergency services were needed you were SOL.

I’d had enough. Mrs. Accountant wanted to drive back so I studied the map. Without GPS the map was incomplete. Sick of the traffic and with evening fast approaching I wanted an alternative before it got dark and our gas started getting low.

I told Mrs. Accountant to take the next turnoff a half mile ahead.

“Are you sure?”

“No.”

Mrs. Accountant trusted my instinct. It took another hour to travel that half mile to the turnoff, but we eventually made it.

Some people had the same idea, but it was a serious minority.

Traffic on the side roads we light. We still had one problem. We needed to cross the interstate to get home. And like the crazy loop in Wrightstown, it wasn’t going to be easy.

Cell service was spotty but did click long enough to expand the map in the phone. As we traveled toward home we noticed every approach to the interstate was backed up for miles. Crossing the interstate could take half the night!

I searched the map for a side road crossing under the interstate without on-ramps. It was a gravel road, but there was only one other car on the road and we were moving just fine.

Once on the other side of the interstate we drove at the speed limit all the way back to Bernie’s place. It was dark by the time we got there.

Mrs. Accountant and I still think there are people out there on that interstate in Kentucky still waiting to move a few more feet.

The Best Choice Isn’t Obvious

The two stories above reveal the same lesson: the obvious choice isn’t always the best one. The GPS in Kentucky showed massive traffic issues and still demanded we stay on the interstate! I think people were staying on the interstate because they were preprogrammed to take the most obvious course home and their presupposed assumptions were affirmed by a piece of technology. If my GPS was giving bad advice; the same must be said for the rest of the crowd.

The interstate is frequently the right choice. Unfortunately it’s also the crowded choice. The side roads and lesser highways might be slower, but the traffic is generally lighter and the scenery better. The interstate doesn’t allow much opportunity to meet locals. State highways wind through small towns where you can get out and chat with folks. In my opinion it’s the only way to travel.

Other areas of life face the same dilemma. Technology wants us to always run for the nearest highway when that is the worst possible choice! People, unfortunately, react the same way the technology does.

Wealth experiences the same issues. Everyone is a genius right about now. The stock market has been straight up for nine years. Virtually every other asset class has also enjoyed heady gains. Bonds have been higher as interest rates declined. And now we get cryptocurrencies to add to the growing list of assets turning everyone into Einstein.

History is an important guide. Following the crowd doesn’t lead to riches. At best the crowd leads to mediocrity; at worst it leads to the poorhouse.

I don’t trust what technology always tells me. Right now technology (and the experts) tells us to pile into bitcoin and the stock market. Weeeeeeeee!

What could possibly go wrong?

Like the interstate in Kentucky after the eclipse, we might find it hard to move anywhere or even get off the crowded road. Before long we end up with real problems as night approaches and gas is running low with the kids in the back seat.

Heading for the highway sounds like the smart move. Sometimes it’s not! It can extend the drive a few minutes like my trip to Green Bay for a class or create serious problems like it did after the total eclipse in Kentucky.

The side roads are seldom crowded. Sometimes you get behind a tractor for a short distance or have to navigate twisting roads and frequent stop signs.

But at least you have the road to yourself and a whole lot less stress.