Most People OverPay Their Taxes

I have always taken issue with the underlying sentiment around the country that everyone is a tax cheater and we need a bigger and stronger IRS to catch them. That has never been my experience with the thousands of people I work with every year. Quite the opposite. What I have always seen is that for various reasons, people pay too much in taxes.

These reasons include:
Ignorance of the tax laws and what legitimate deductions are allowed to them. The tax code is a monstrosity and anyone who tries to tackle it themselves is almost guaranteed to miss big tax saving opportunities.

Fear of IRS. People are so petrified of offending IRS, that they frequently intentionally don't claim legitimate deductions in order to stay in the "safe zone." This self styled protection insurance often costs these people several thousand dollars in extra taxes each year.

Laziness and sloppy bookkeeping are also big reasons people miss legal tax deductions. Rather than keep track of their itemized deductions, people just take the easy (lazy) route and claim the standard deduction without even trying to see if their actual Schedule A deductions can beat that. I have always believed that you should keep track of every single expenditure and see which is higher, the actual itemized deductions or the standard one. This can change from year to year. It's an expensive assumption to conclude that just because the standard deduction was higher last year, it will be this year.

This isn't just my opinion. According to this report, IRS is estimating that people are paying a billion dollars too much in income taxes each year just because they are using the standard deductions when itemized would be higher. As with any IRS estimation, this is probably far too low.

Most people think that I'm such a stickler for good bookkeeping just because of my typical CPA anal personality. While that may be partly true, it's really for the best interest of the clients. Far too many just don't do a good job keeping track of what they receive and spend. Whether someone has a business or not, a good bookkeeping system, such as my favorite, QuickBooks, is essential. Every transaction in every account must be entered.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/30/2002 12:49:00 PM Send this post:

 
Giving To Charity

Here is a good summary of the benefits of donating appreciated property to charity.

This is definitely the kind of thing that should be reviewed with your tax pro before doing it. Many charities have become very aggressive in soliciting stocks, real estate and other appreciated assets under the assumption that the ability to avoid the capital gain taxes will always leave you ahead. However, I have done several analyses where the client comes out ahead cash-wise by selling the asset and donating cash. It is very much a case by case scenario.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/29/2002 11:44:00 AM Send this post:

 
State Of Freedom

You can see the state by state schedule of when the average taxpayers finish their annual slavery duties and are allowed to work for themselves instead of their masters in government.

What is important is to look at the overall tax burden, and not just the income taxes, which too many people fixate on. It's no surprise that Connecticut has the highest tax burden, and latest Tax Freedom Day. However, Washington State, which has no income tax of its own, is ranked with the second highest tax burden because of its high sales and property taxes. That's why I tell people who ask which states have the lowest taxes that it's impossible to give a one size fits all answer. It depends on individual circumstances.

However, based on this chart, Alaska has the lowest overall tax burden. In fact, Alaska residents actually receive money from the government as part of the oil revenues. This should be even more generous if the ANWR oil reserves are ever allowed to be utilized.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/26/2002 05:43:00 PM Send this post:

 
Arkansas Priorities

It says a lot about what our masters in government consider to be important by what things are taxed and what are allowed to be exempt from taxation. Here in Arkansas, there is a brave group of Libertarians striving to do the unthinkable; allow humans to be given the same respect as chickens, cattle and catfish. Human foods are subject to sales tax, while animal feed is not. Who is more important in the eyes of our rulers in Little Rock?

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/25/2002 09:41:00 PM Send this post:

 
Dumbing Down the Sheeple

The government controlled education establishment has been hard at work for the past few decades at ensuring a steady supply of brain dead morons who will easily take their marching orders from their superiors in the media and the government. As this story about the financial knowledge of high school seniors shows, their dumbing down agenda is right on schedule. The fact that financial ignoramuses are already rampant throughout all areas of our society should come as no surprise to anyone. Here's another summary.

I was going to say that these students shouldn't look for careers in the accounting profession; but realized that some of them just might become CPAs. My understanding is that the CPA exam, which was two and a half days of essays, calculations and multiple choice questions when those of my generation took the test, is also being dumbed down. Adapting to the poorer writing and communication skills of the current crop of college students, the test is being converted to all multiple choice. The Enron - Arthur Andersen debacle will look like nothing in a few years as the new breed of CPAs permeate the financial world.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/24/2002 03:38:00 PM Send this post:

 
Setting the Stage

Any time you see a news story about the inequality of income or wealth, you can be sure they are priming you for another money grab. The cliched "the rich get richer and the poor get poorer" is just an excuse for income and wealth redistribution in the name of fairness.

Before you feel safe that only the very upper crust will be under attack, you should understand that if you have one dollar more than anyone else, you will be in the cross-hairs of these modern day Robin Hoods.

To show you how widespread and organized these communists are, I stumbled upon this site dedicated to that noble goal of "income & wealth equality."

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/24/2002 03:12:00 PM Send this post:

 
Interesting Summary of US Taxes

Neal Boortz had an excellent summary of the history of the income tax system in this country on April 15. If his viewpoint sounds similar to mine, it's no coincidence. He's also a Libertarian.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/23/2002 03:50:00 PM Send this post:

 
In Their Own Words

Stephen Moore of the Club For Growth has an excellent analysis of the revealing communist message included in The Myth of Ownership. The fact that the New York Times agrees with the principles in the book shouldn't shock anyone who understands their status as mouthpiece for the JackAss Party.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/23/2002 01:18:00 PM Send this post:

 
We're All Slaves

Anyone who thinks I have been exaggerating the situation of our masters in DC treating us as a bunch of slaves should check out this NY Times review of The Myth of Ownership; a book that could have been written by Karl Marx himself. It claims that people have no moral right to claim ownership of the fruits of their own labors and are absolutely wrong to be upset when any of it is confiscated by our rulers in DC for the "common good." This attitude would be laughable if it weren't held in such high regard by so many of our superiors in the media and in government.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/22/2002 05:34:00 PM Send this post:

 
Fighting Back

One victim of the Clinton Organized Crime Family's use of the IRS as personal executioners is fighting back. Larry Klayman, of Judicial Watch, is planning to use his favorite arena, the coutroom, to take on the IRS. He isn't shy about his feelings for the top brass at IRS, calling Commissioner Rossotti a criminal

Battling IRS in this way is an extremely uphill battle because of its long standing exemption from all of the restrictions that the US Constitution is supposed to place on a too powerful government. However, we can hope that the publicity does some good in forcing our rulers to do something to control the obvious abuses of power on which IRS routinely relies.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/20/2002 02:18:00 PM Send this post:

 
Heading In The Right Direction

According to this analysis, the effective tax burden has come down slightly since the Bush administration took over, from 32.8% of income to 32.1%.

This pushes the symbolic Tax Freedom Day up by four days. Under this concept, every dime we earn from January 1 through April 27 is for the benefit of our masters in government. After that date, the money is ours to keep. There is still a very long way to go; but we need to prevent any backsliding, as Gephardt, Daschole, and the rest of the Dims are trying to achieve.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/20/2002 01:27:00 PM Send this post:

 
A Fool & His Money Are Soon Parted

As hard as I try, I just can't work up any sympathy for the idiots who lose money in the Nigerian bank scheme. This scam has been around for well over at least 15 years because I can remember receiving it in the mail back in my Fremont, CA office. It pops up in my email at least once a week nowadays and looks exactly the same.

There have been countless news stories, including a 60 Minutes piece, on this fraud over the past dozen plus years; so nobody can claim they weren't warned about it. People stupid enough to fall for this just shouldn't be trusted with money or with sharp objects.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/19/2002 03:39:00 PM Send this post:

 
Who Are the Evil Rich?

Larry Elder has a good commentary about the recent articles detailing how much of the tax burden is paid by the evil rich portion of the USA populace. He does a good job contrasting this recent disclosure with the normally anti-taxpayer pro-big government media.

As he mentions, it always fries me when I hear or read a news story that implies that something is free because the Federal government is paying for it. That's very common with local road work. In my mind, I can't help translating that to mean, "the IRS will be taking more money form the achievers and redistributing it."

Elder also makes a good point of how out of touch people are with the economics of our society. When asked how much income it takes to be among the top one percent in this country, most people guess in the million dollar range, missing the actual figure of $293,415 by a long ways.

The commonly held stereotype of the evil rich being those like Donald Trump needs to be debunked. Those in the cross-hairs of the spendaholic rulers in DC are more average than the high profile rich folk. An annual income of $120,846 puts you in the top five percent, and $74,981 ranks a person in the top ten percent. I'd bet that Trump's maid earns more than that.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/19/2002 02:17:00 PM Send this post:

 
Are You Willing To Sacrifice Your Privacy?

One of the things that keeps many people out of public office is the tradition of having candidates reveal their personal finances. In some states, it's mandatory, while in others, it's more of a voluntary action to prove that you have nothing to hide. It looks like the GOP candidate for governor in the PRC, Bill Simon, is now coming face to face with that reality and is resisting the invasion of his privacy.

My guess is that, even though he is not legally required to make his income tax returns public, he will be forced to do so by public and media pressure. He will then be pilloried for taking advantage of the laws to minimize his taxes.

My advice for Mr. Simon? He should do what loan applicants do, when they need to show a substantial income in order to qualify. He can send IRS & FTB tax returns where he goes light on the deductions. Then, after the election, he can file an amended tax return and get his tax money back, plus six percent interest. Filing tax returns is a legally private matter; so nobody will know if an amended tax return is filed, unless the taxpayer voluntarily discloses that fact. Those of you who know Mr. Simon personally, please pass this on to him.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/18/2002 06:42:00 PM Send this post:

 
Taxes More Important Than Rights

For decades, I have been trying to convince as many people as possible, including our rulers in DC, that meaningful tax reform could be accomplished quite easily. All that needs to be done is have the President issue an Executive Order that the rights specified in the US Constitution shall apply to everyone in matters related to taxes.

For decades, because money for the imperial Federal government has been ruled time and gain more important than anything, all of the civil rights and protections that are supposed to be afforded to us are null and void. It is not an exaggeration to say that a mass murderer has more rights than someone who is accused of underpaying his taxes. Here is a good summary of the violations of our rights in the name of money for government from the Cato Institute. I encourage everyone during this election season to force the incumbents and candidates to address this serious violation of the sprit of our founding fathers.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/17/2002 11:42:00 AM Send this post:

 
Any Question What the JackAss Party Stands For?

Little Tommy Daschole has done a great service for everyone by explicitly coming out and demanding that taxes be raised and the temporary tax cut plan not be made permanent. This kind of blunt statement should make the decision in November much easier. If you want higher taxes, vote for a candidate from the party symbolized by the JackAss. If you want lower taxes, vote for a member of either the party symbolized by the Statue of Liberty or the Elephant. If you vote for the JackAss, you have no right to complain about your taxes.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/16/2002 05:51:00 PM Send this post:

 
More IRS Propaganda

Now the Washington Post does its duty to help rile the public up to give the IRS more money to hire more auditors to catch those evil rich people who are cheating on their taxes. This claim that poorer people are being audited more often than rich people is fraudulent reporting. They are including so-called "correspondence audits" in the mix. Getting a letter from IRS stating that you forgot to report interest from a bank account is not the same thing as a face to face audit.

I don't mean to be condescending; but poorer people are generally more likely to be less sophisticated about their finances and more likely to make mistakes when preparing their tax returns, such as accidentally forgetting to report a small amount of interest income. To equate receiving a letter from IRS about that with someone who has to assemble boxes and boxes of records and hire expensive CPAs and/or attorneys to fight IRS is completely bogus.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/15/2002 03:08:00 AM Send this post:

 
Dave Barry's Tax News

According to Dave Barry, we will soon have to also file a shadow tax return in order to finance the new shadow Federal government.

Another big change: Taxpayers who do not itemize their deductions may now file their tax returns via Etch A Sketch. This is part of the IRS's new modernization program.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/14/2002 08:15:00 PM Send this post:

 
That's Why We Have Rulers In DC

Wouldn't it be wonderful if we were all given a chance to keep our tax dollars and spend them the way in which we felt best instead of allowing the elected geniuses in DC to make those decisions? That's just not how it works. These anti-war activists are playing with fire in refusing to send in their taxes. I'm sure we could all think of several programs that we don't want supported by our tax dollars. We can't just refuse to pay our taxes. We have to select rulers who will spend according to our wishes.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/14/2002 06:41:00 PM Send this post:

 
Tax Simplification - Not

If anyone needs a reminder of what a mess our rulers in DC have created, here's an interesting summary.

It includes a point I was making with a client yesterday. If anyone gripes about how long it takes their tax pro to prepare their tax return, just take a look at the official time that IRS itself says a tax return should take, as shown in their instruction booklets. For a 1040, IRS claims the average person should expect to spend 28 hours. Paying a CPA for two or three hours of time doesn't look so bad now, does it?

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/14/2002 01:09:00 PM Send this post:

 
Do It Right Or Else!

As the normal Tax Day approaches, IRS is releasing a slew of stories such as this one, indicating that they are ratcheting up their audit & investigation efforts. How subtle.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/14/2002 12:56:00 PM Send this post:

 
A Taste of Their Own Medicine

It has been widely documented that the Clinton Organized Crime Family used the IRS as its personal Hit Team to attack anyone who was critical of them. At the same time, IRS was instructed to turn a blind eye while leftist organizations blatantly violated the rules for tax exempt entities that prohibit political activities.

Now that there is someone in the White House who has more respect for the law, there are attempts to hold the leftist groups to the law. As this story explains, some outside groups are filing official complaints for IRS to investigate these long running violations of the law.

I wish them luck; but can't be very optimistic about the outcome. The IRS is obviously still not doing its job on its own without outside prodding. This is an illustration of a point I made several months ago about the Clinton cronies still working in IRS. The skunks may be out of the White House, but their stench lingers on through all of their Fellow Travelers who have infiltrated various levels of our government.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/14/2002 12:06:00 PM Send this post:

 
Complicating Things Even More

Many of the States piggyback their income tax forms & calculations on the Federal forms and numbers. Some times, the link to the Federal rules is automatic, while other times, it requires a specific act by the State's Rulers. With so many changes in the Federal tax laws in the past several months, the States are still trying to catch up. This makes for an even more complicated tax return process. As described in this story about the PRC's attempt's to enact conforming legislation, they may eventually do it.

If and when the various States do enact such legislation, I know one result; a lot of work preparing amended State income tax returns. There is no more secure career than tax practitioner.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/14/2002 11:30:00 AM Send this post:

 
Life Imitating Art

In the Beatles' TaxMan song (part of which has been used by H&R Block recently in commercials), they sang about the government taxing everything possible. It was intended as an extreme parody. However, sooner or later, such things come true.

In its normal status as trend setter for the rest of the country, the People's Republic of California (my former home) is currently working on new taxes on several things, including bullets, soda cans, alcohol and cigarettes. Other States learn from the Left Coast; so don't feel safe just because you don't live there.

As a side note, I was using Google to track down the lyrics of TaxMan, and came across this site that has the lyrics to every Beatles song. It's a very comprehensive list. There is even an alternative take of TaxMan.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/14/2002 10:59:00 AM Send this post:

 
What Our Rulers Giveth, They Can Taketh Away

A popular trick by our rulers in DC is to take credit for things that will never happen or are temporary. The "huge" tax cut that was passed last year is the perfect example. It phases in over ten years and then disappears. It's like invisible ink.

I was glad to see that President Bush reminded everyone in his radio speech this morning that the law is only temporary. I agree that everyone should put pressure on their elected officials to make the law permanent ASAP. This is an election year; so the opportunity to hold their feet to the fire will never get better.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/13/2002 01:36:00 PM Send this post:

 
Understanding Capitalism

Ever since the Soviet Union collapsed, I have never been very confident that Russia was sincere about converting to capitalism. I was always certain that the communist forces were lurking right below the surface, ready to take over again.

I may have been overly paranoid, if this story about recent changes in the Russian income tax code is true. Last year, President Vladimir Putin introduced a flat tax on income of 13 percent -- the lowest rate in Europe -- designed to draw more Russians out of the "shadow economy" and make them honest taxpayers.

This means that Putin has a better understanding of the basic supply & demand foundation of capitalism than most of the USA rulers have. The result of the Putin tax cuts has been the same as it was in the USA after the Reagan tax cuts. Tax revenues jumped dramatically.

Although the leftists in power and in the media in the US love to denigrate tax rate cuts as windfalls for the evil rich, the truth is that when tax rates are lower, people have less incentive to use tax shelters and more motivation to earn as much money as possible. It's plain common sense, which is too rare in DC. Somebody is much more willing to accept $1,000 of taxable income if he only has to fork over $130 to the government than if he had to pay out $900 and was left with the short end of the stick.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/13/2002 12:50:00 PM Send this post:

 
Multiple Extensions Not Risky

As I have discussed ad infinitum, there are several benefits to filing extensions and sending in the tax returns later than April 15. I just learned last night that there is someone claming that if you do this too many years in a row, IRS will take notice and target you for an audit.

I can state unequivocally that this just isn't true. I have scores of clients for whom we have been filing extensions every year for well over 20 years running. We have never experienced any IRS problems with any of these people. Likewise, I have never heard of this being a problem from anyone else. That sounds like one of those urban legends, such as the one that claims using the IRS provided label triggers audits. Not true.

Because of my heavy work schedule this time of year, there have only been a few times in the past 25 years that I have filed my own tax return by April 15. I have only been selected for audit by IRS twice, and neither had anything to do with the extensions. The first time was due to a vengeful ex-wife who was trying to extort money from me. The second one was a few years ago because of some hard hitting articles I wrote about the Clinton organized crime family in my newsletter.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/12/2002 05:20:00 PM Send this post:

 
New IRA Limits Are For 2002 Tax Returns

A very common question I have been receiving deals with the new higher limits of $3,000 per person for traditional and Roth IRA contributions. Many people are under the assumption that they are effective for the 2001 tax returns which we are currently working on. That is not the case. The $3,000 limit is effective for 2002, 2003 and 2004 tax returns.

However, while you may not be able to deduct the new higher amount until next filing season, you can still take advantage of the new higher limit now. 2002 IRA money can be deposited any time between January 1, 2002 and April 15, 2003. The sooner you can afford to put that money in, the sooner it will start earning tax deferred or tax free income.

Under the existing law, which we all know is subject to change at the whim of our rulers in DC, the limits for traditional and Roth IRAs will rise to $4,000 for the 2005 through 2007 tax years. It will be $5,000 for 2008. After 2008, the annual limit will be adjusted for inflation. Again, this all depends on our masters in DC not messing with the tax law between now and 2008, which is about as likely as little green men from Mars joining the starting lineup of the New York Yankees.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/12/2002 04:55:00 PM Send this post:

 
PDF Is Very Handy

Anyone who has been surfing the net for very long soon realizes that the PDF file format by Adobe has become the standard method of passing on forms and documents. IRS uses it for the forms and publications that you can find on its site. For the first time, the tax prep software that I have been using since 1985, Lacerte, finally allows forms to be prepared in pdf format for 2001. This has been extremely handy in the past few weeks, as I prepare extensions and email them to clients as attachments. As I tell them, we are doing everything possible to keep the Postal Service out of the loop because they have proven themselves over and over again to be the Weakest Link.

If you don't already have the free program from Adobe that allows you to open and read pdf files, you can download it from here. It's something everyone should have on their computers. In fact, as you realize how handy pdf files are, you may want to upgrade to the full Adobe Acrobat program that allows you to produce pdf files from many programs. When installed, the pdf appears as another printer on your system. When printing a form or report, you just select the pdf printer instead of your regular one and give a name for the file. I use it quite often for preparing financial statements and reports from QuickBooks that I can then email to clients.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/11/2002 03:07:00 PM Send this post:

 
Fringe Benefits

Back when I was in college for my Bachelor's in Accounting (1973-77), there were three main types of employers recruiting among the Senior class.

Private Industry Companies offered by far the highest starting pay and benefit packages for those willing to work in their finance and accounting departments.

The Big 8 CPA Firms were offering about two-thirds the starting pay of the private industry companies plus extra long hours and almost no benefits. They were able to do this because of the potential high pay for those who could stick it out and make Partner within 10 years. They also had (& still have) a captive employee pool because in order to qualify to become a CPA in California, you were required to work for at least two years with a CPA firm, with a certain number of hours spent performing certified audits. It's a mandatory paid intern program that many other states don't require for their licensed CPAs.

Government Agencies, State and Federal, including IRS and FBI. Starting pay was about a third of that offered by private companies, with an upper range much lower than with either of the other two types of employers. This meant that most people who accepted government jobs did so because they were passionate about the cause they were working for, or because nobody else would hire them.

Because of the relatively low pay that most government workers receive, some of them make up for it in other ways. For many, it's a power trip, where they can intimidate other people and get their jollies that way. For others, it's more direct extortion for financial gain. This IRS auditor in Denver probably had worked out deals all around the area where his position enabled him to obtain freebies and discounts. He was busted when he got too greedy with his car mechanic.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/11/2002 12:59:00 PM Send this post:

 
Fox News

I was quite honored to have this blog selected as this week's featured guest blog for the Fox News website. The comments it has generated have been very interesting. The last time I checked, it's no longer showing up on the opening page, so here's a direct link to it.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/10/2002 07:54:00 PM Send this post:

 
Half Right

This piece by Pete Du Pont has it half right. Lowering tax rates does stimulate the economy and increase overall tax revenues for the government. In fact, one of my biggest pet peeves with the politicians in DC, of both parties, is their unwillingness to tell the truth about the Reagan tax cuts of the early 1980s. Whenever I hear anyone say that lower tax rates caused the deficit, I automatically know that that person is a liar and cannot be trusted for anything. Revenues to the Feds doubled because of the lower tax rates; but the deficit grew because the level of spending tripled.

Back to the incorrect part of Mr. Du Pont's article; that a flat tax would simplify the hassles we have to go through this time of year. It is a widely held misconception that a flat tax rate will simplify the tax return process. That's not even close to being accurate. There is still a need to calculate the taxable income, which is where all the fun & games are. What kinds of income are subject to tax. What kinds of things are deductible. If anyone thinks Congress can refrain from complicating these issues, you should let Bill Clinton babysit your teenage daughter.

I agree that the income tax system is beyond repair, and I make a very good living working with it. Only something radically different, such as a sales tax, will simplify anything.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/10/2002 03:07:00 PM Send this post:

 
Are You Filthy Rich?

As I have explained on numerous occasions, the tax code is rife with secret taxes on those people who our rulers in DC consider to be undeserving by phasing out or eliminating tax breaks for people over certain income levels. I sarcastically refer to these people as the evil rich. In this article from Fox News, Radley Balko finds that he is among the filthy rich because his income is so high that he loses the deduction for interest on student loans.

The way in which our rulers in DC define who is too wealthy to receive tax breaks is just another example of their twisted logic. A similar one is their definition of what constitutes a luxury car for tax purposes. Any vehicle that costs more than $15,300 is a luxury auto and deductions for vehicles weighing less than 6,000 pounds are limited based on that amount, which anyone who has priced new vehicles knows, bears little resemblance to reality. That's as valid as calling retired couples earning over $32,000 a year filthy rich.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/10/2002 11:15:00 AM Send this post:

 
Black Tax Scam

I am really tired of debunking the story that blacks are entitled to a special tax credit. However, it is still floating around like a lot of Internet supported urban legends. So, let Thomas Sowell try to get make the point, in his so eloquent way, that anyone stupid enough to fall for this will be hit with serious fines from IRS.

This is as good a time as any to remind everyone to check out stories with Snopes.com before passing them on. A friend of Sherry's sent her the Bonsai Kitten spoof yesterday as if it were real and they were all upset. It's just a joke.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/09/2002 11:34:00 PM Send this post:

 
Due Dates For 2000 Tax Returns

There is a lot of confusion regarding the later allowable due dates for 2000 tax returns because of the disruption caused by the 9/11/01 terrorist attacks and the resulting aftermath. I admit that I added somewhat to the confusion; so I want to clear things up...at least until the law changes again.

Shortly after the 9/11 attacks, with the normal extension due date of October 15 approaching, IRS announced that it was extending that due date for 120 more days, the longest it had authority to do at that time. This moved the due date to February 12, 2002. Having been through literally thousands of messy IRS confrontations over the past 26+ years, I understand the value of official documentation of as much as possible. For that reason, before 10/15/01, I sent IRS extension forms for several clients documenting the new due date of 2/12/02 for their 2000 tax returns. As I mentioned earlier, this caused a lot of confusion with IRS personnel, and for some of my clients.

Then, there was another change. On January 23, 2002 the President signed into law H.R. 2884, the Victims of Terrorism Tax Relief Act of 2001 (Public Law Number 107-134). The new law provides income and estate tax relief for victims of the terrorist attacks in Oklahoma City in 1995, the September 11, 2001 attacks on New York City and Washington D.C., and those affected by the anthrax attacks between September 11 and the end of 2001.

You can see the full explanation of this law here.

The provision that applies to the due dates is as follows:

IRS Authority to Postpone Tax-related Deadlines:
IRC �7508A was amended to allow the IRS to postpone certain tax-related deadlines due to a Presidentially declared disaster or terroristic or military action. Under the old rules, the IRS could postpone deadlines for up to 120 days. Under the new rules, the IRS can postpone deadlines for up to 1 year. In addition to Presidentially declared disasters, the IRS can also postpone deadlines due to terroristic or military action as defined in section 692(c)(2).

This new authority moves the deadline for 2000 income tax returns to October 15, 2002, one year after their original extended due dates. I am still working on a number of 2000 tax returns; but I have no intention of waiting until 10/15/02 to finish them because we can't work on the 2001 returns until the 2000 ones are completed.

That is how things stand now. If the MidEast conflict goes nuclear, as some people are predicting, it will most likely change yet again. It is an almost certainty, given the legendary (lack of) efficiency among IRS personnel, that many of them are unaware of this new law and will have to have it pointed out to them, as is so often the case.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/09/2002 11:23:00 PM Send this post:

 
Not the Cheapest

For my entire 26+ year career in the tax business, H&R Block has always been considered the bargain basement low end provider of tax prep services; always with the proviso that you get what you pay for. They cater to a very different clientele than I have and I have never considered them to be competition, especially in regard to the fees. I have always charged based on time and not on a per schedule basis as Block does.

The other day, I clicked on one of their ad banners to see how their new online prep service functions. Before you start giving them actual data, they provide you with a rough idea of what the fee will be. You click on the types of forms you will have. At $29.95 each, with just a few basic forms, I was up to almost a $600 projected fee in no time. Considering that the software automatically prepares the forms with very little effort for most of them, this is quite a racket. Since the average return I prepare costs costs around $500, I'm not sure how to take this, being less expensive than H&R Block. It's a little embarrassing and may require a review of my fee structure before next year's tax season.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/09/2002 05:04:00 PM Send this post:

 
Chill Out

It never ceases to amaze me how panicky people get this time of year. They feel that if they don't get their tax returns finished and in the mail by April 15, they will be hauled off to prison on April 16. I have been preaching the benefits of extensions for decades.

Give yourself another four months to ensure that you do everything properly. Here is the Federal extension form, 4868. It is the easiest form IRS has and doesn't even require a signature.

Most states piggy back on the Federal extensions and only require their own extension forms if there is a payment accompanying it. You can reach all of the State tax websites via SisterStates.com.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/09/2002 02:18:00 PM Send this post:

 
Bragging About Spending

Last night, I saw the first TV commercial for our US Senator Tim Hutchinson's re-election campaign. I have met him on a number of occasions since moving here to the Ozarks and have always considered him to be a very nice guy. That's why I was so surprised by the tone of his commercial. From the accomplishments he was touting, it's impossible to tell which party he is affiliated with. His very first topic was to brag about helping to increase Federal spending on education by $20 billion. I know I have a twisted view of the world, but I couldn't help translating that statement in my mind to say "I took $20 billion more money from the taxpayers to give to the incompetent schools." Here's my question to believers in the GOP. How would that campaign commercial be different if Tim Hutchinson were a Democrat?

Where is the political party that brags about spending less money and stealing less money from the people? The only one I am aware of is the Libertarian Party, but unfortunately there is no LP candidate for US Senate here in Arkansas.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/09/2002 01:39:00 PM Send this post:

 
Robbing Peter To Pay Paul

George Bernard Shaw had it so right when he said "A government which robs Peter to pay Paul can always count on Paul's support." One of the sneaky strategies our rulers in DC have been doing over the past several years is shifting the tax burden off of the lower income masses and onto the back of the few evil rich. This capitalizes on the widespread envy and hatred of successful people in this country.

I was glad to see the fairly widespread coverage of this AP story showing that the evil rich pay most of the taxes in this country. The "progressive" tax rate structure in this country confiscates a much higher percentage of the income form the top producers than of the lower income people.

When it comes to sheer voter power, the Pauls (lower income) vastly outnumber the Peters (evil rich). Is it any wonder who the politicians pander to?

For newcomers who don't understand my use of the term "evil rich," please check out this explanation.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/09/2002 01:02:00 PM Send this post:

 
Let the Squabbling Begin

For obvious reasons, estate planning has become a larger part of my practice each year. People think I am exaggerating when I tell them some of the horror stories of poor planning I have seen. I explain that even Hollywood, with all of its imagination and stereotypes, has yet to adequately capture the greed and hatred that comes out when heirs and wannabe heirs fight over an estate. It is truly vicious.

Some people hope to avoid any bickering over their estates by leaving everything to charity. That's probably what Vermont resident Edna Louise Holt thought when she was anticipating her demise, which came in 1998. She left her entire $25 million estate to her home town of Grafton, VT. And, as could be expected, there has been nonstop fighting among the 600 residents over how to use that money ever since. It may be a cliche; but it is true that money brings out the worst in people.

It really is impossible to anticipate everything that could go wrong. I wish I had the magic formula for how to avoid this kind of thing; but at least think long & hard about what could be the consequences of your estate decisions. Of course, there may be those who would relish the idea of everyone fighting over their things, sort of like tossing a stink bomb into a party.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/08/2002 07:29:00 PM Send this post:

 
Replacing the Income Tax?

For obvious reasons, stories about replacing the income tax system with a consumption or sales tax are prevalent this time of year. Here's a good one from Bruce Bartlett.

It may surprise some newcomers that I, who have made a very lucrative career out of playing the tax game, believe that it is far beyond repair and should be completely killed. A national sales tax would be the least repulsive alternative.

A flat tax, the other main alternative being promoted, would make almost no difference because there would still be millions of pages of code describing how to arrive at the taxable income amounts.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/08/2002 06:30:00 PM Send this post:

 
Big Surprise - Not

Is it news to anyone that Queen Hillary sets new records for high taxes and support of bigger government? Thanks again to the voters of New York for allowing her to have this opportunity. Please remember this as she continues her run for a third term in the White House.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/08/2002 05:49:00 PM Send this post:

 
What Would You Do For Money?

Like one of the reality TV shows that push the limits on what disgusting things people will do for money, this lady actually dug through her dog's turds to recover enough pieces of two $100 bills to be provided with two new ones. I'm not sure if I ever want to be that desperate.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/08/2002 05:43:00 PM Send this post:

 
Can't Afford to Be Fair

There are literally dozens of issues in the US tax system that are completely indefensible when viewed through the prism of fairness. The Marriage Penalty is one of the worst. Following closely behind is the Alternative Minimum Tax (AMT). As always when our rulers tinker with the tax system, they end up hurting people other than their intended targets.

Whenever they are asked about fixing monstrosities such as this, or at least modifying them to more closely resemble fairness, they fall back on the logic that "they wish they could, but the Federal government just can't afford it." Money for Washington is more important than anything, especially the antiquated concept of fairness.

Here's a short summary of the current AMT fiasco from Fox News. What they forgot to mention was the most active organization that I am aware of fighting to correct this totally screwed up tax, ReformAMT. While you may a have false sense of security that this a tax on "other people," that is a very short-sighted attitude. The AMT is designed so ineptly, such as with no inflation adjustment, that millions more innocent people become subject to it each year. Soon it may be eating up your life savings and forcing you into bankruptcy if you don't start exerting some pressure on our rulers in DC to fix it.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/07/2002 09:15:00 PM Send this post:

 
Don't Count Your Chickens Before They Hatch

As I have always warned, it is extremely dangerous to make any plans based on tax laws that take effect years down the road. Our rulers in DC are notorious for changing or repealing tax breaks before they can even kick in. They rationalize it by claiming that nobody will miss something that wasn't' even real.

Last year's "big" tax cut that takes ten years to be fully phased in was as large an invitation to tinkering by our rulers as any I can ever recall. The discussion of repealing those tax breaks has begun. What a surprise - not.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/07/2002 04:03:00 PM Send this post:

 
Retiring To Save Taxes

Would people actually select where to live in their retirement years based on the tax burden in different locations? Of course the would. Iowa isn't very happy that it's taxing seniors out of its borders.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/07/2002 03:55:00 PM Send this post:

 
Helping Seniors

Supposedly, the GOP is trying to think of ways to make itself more popular with senior citizens. I have had the answer to that problem for a very long time.

One giant step forward for the GOP would be to honor the original agreement with Social Security participants. It was originally set up that all benefits would be free of income tax. This was supposed to balance out the fact that payments in to the SS system are not deductible, resulting in a double taxation.

Currently, because our masters in DC have no qualms about breaking promises, many people have to pay taxes on 85% of their benefits if they are considered to be "evil rich." For this issue, evil rich has been defined as AGI over $25,000 for a single person or $32,000 for a married couple. This was an outright fraudulent violation of the public trust and we have long been waiting for someone in DC to have the guts to repeal the tax on SS benefits.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/07/2002 03:35:00 PM Send this post:

 
More IRS Propaganda

It is well known that the New York Times is nothing more than the propaganda arm of the JackAss Party and a very strong advocate of bigger government, which requires more money. This means that the IRS needs more power to squeeze more dollars out of the public. In their classic tactic of exploiting envy and class warfare, the Times has this article claiming that IRS only audits the working poor and doesn't ever check up on the evil rich in our society. As someone who has been intimately involved with these very issues for over 26 years, I can state that this is an outright lie. The examples that the Times gives of things that IRS is incapable of checking, such as partnership K-1s and rental activity, are absolutely false. IRS checks those things all the time.

This is nothing more than an attempt to rally the "little guys" to push our rulers in DC to expand the IRS to go after those evil tax evaders. It's nothing but donkey crap.

Another mention of the antidote for the NY Times seems appropriate here. SmarterTimes.com devotes its efforts to debunking the lies promulgated by what many people refer to as the New York Slimes. Needless to say, they never run out of material.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/07/2002 01:45:00 PM Send this post:

 
Losing An Hour

Besides being a nuisance to have to switch our clocks back & forth every six months, I especially resent having to lose one hour during the time of year in which time is the most precious commodity; in the last few days before April 15.

I have long been a fan of the idea of just leaving the clocks alone. Ideally, I would prefer leaving everything in Daylight Saving Time mode year-round would be best, as we did a few decades ago during one of our energy crises. However, if we wouldn't have to ever change our clocks again, I would be almost as happy with leaving everything at Standard Time.

I'm glad to see more people taking up this cause. Here is a group that explains how the old rationale for the entire concept of clock-switching is now irrelevant and is trying to petition our rulers in DC to stick with one time system year round. They also have an interesting idea to merge the USA's four time zones into two. Instead of changing by one hour in each zone, there would be a two hour change when crossing what is now the dividing line between Central and Mountain time.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/07/2002 01:23:00 PM Send this post:

 
Leaving Everything To Your Pets

It seems that there are a large number of people in the same positions as Sherry & I are, with only non-human dependents. Estate planning for such heirs is a little trickier than the standard "leave everything to the kids" scenario that parents of human offspring have available. According to this informative article from the Wall Street Journal on how to structure things for the benefit of pets who outlive their owners, there are already 17 states that have laws that specifically allow people to create trusts for their pets. You can always tell a growing trend by the areas in which attorneys specialize. More of them are concentrating on pet estate planning, for $200 to $300 per hour.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/07/2002 01:15:00 AM Send this post:

 
For Every Action, There's A Reaction

I was skimming over the dead tree version of the AARP's April Bulletin, and there is a picture of an Oklahoma couple who are whining that they can't afford to replace their (what appears to be relatively new) pickup because the interest rate on their CDs is only 2.6% instead of the 8% they had been previously earning.

This is just one example of how what is great for most people (low interest rates), isn't as well received by others. Life isn't always a zero sum game; but it often resembles one. Take low oil prices. Great for users; but bad for producers. You just can't please all of the people all of the time.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/06/2002 02:52:00 PM Send this post:

 
Deducting Diet Costs

I could literally spend all of my time pointing out errors in how the media report tax and financial stories. I have already seen & heard numerous mistakes involving today's "big news" about IRS allowing a deduction for diet costs by overweight people. I was listening to a radio newscast and the airhead newsreader actually went through the entire story calling them the "International Revenue Service." I kept waiting for her or anyone else to catch her mistake; but no such luck.

The headline for this story on FoxNews.com actually says "Slim Down, Fatten Wallets." The article itself is quite accurate. My problem is with the completely misleading headline, which is all that most people will read, as they browse the stories. It implies that you can actually earn money by spending money on diet programs. This is so wrong, on at least two counts.

First, no tax deduction of any kind actually makes anyone money. A deduction only reduces taxes by the person's tax rate. For example, a normal $1,000 deduction for someone in the 30% tax bracket will reduce that person's income tax by $300. That means s/he will still be out of pocket $700.

However, medical deductions are not normal and in fact aren't even available to most people. For decades, our rulers in DC have rigged the tax code so that very few people qualify to deduct any medical costs. In order to claim any medical costs on an individual income tax return, s/he must itemize on Schedule A. Even then, only the medical expenses that exceed 7.5% of AGI (adjusted gross income) are counted. As I tell my clients who moan about not being able to receive any actual medical expense deduction: "you really don't want to be that sick."

One way to enable a deduction for 100% of all medical costs is to set up a C corporation and establish a full medical expense plan for all employees. This doesn't work for S corporations because tax law does not allow such lucrative tax free benefits for anyone who owns 2% or more of the corporate stock. This is just one of many pitfalls to using an S instead of a C.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/03/2002 06:16:00 PM Send this post:

 
LLP Protection

I'm frequently asked why my firm isn't set up as an LLP or LLC, as are all of the Big 5 (soon to be 4) CPA firms. If they are doing that, it must be the way to go. It's a simple apples & oranges scenario. A world-wide organization with literally thousands of partners is a completely different entity than a small local practice. Without a special form of liability protection, the actions of one partner could actually cause every partner to lose their life savings and everything they own. This happened in the early 1980s, when lawsuits from crumbling savings & loans and real estate projects destroyed several CPA firms and the personal finances of their partners. LLPs and LLCs were created and became popular after that.

With Arthur Andersen imploding, the partners are going to lose their capital in the firm. However, they will also get the chance to see if the LLP structure will be able to do its job and protect their other assets from seizure. Today's Wall Street Journal has a good explanation of this situation.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/02/2002 04:45:00 PM Send this post:

 
Politics of Resentment

If this survey is accurate (which I seriously doubt), in which 80% of people say they aren't happy with the recent tax cuts because other people benefited more than they do, it's just another of many indicators of how effective and pervasive the politics of envy and resentment are in this country. People are literally trained to hate successful people because they are taught that every dime a rich person has is a dime out of their pocket. Our socialist rulers in DC and their Fellow Travelers in the media have done an excellent job brainwashing America to consider it horrible for Washington to be deprived of a single cent that otherwise ends up in the pocket of the evil rich. It's sickening.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/02/2002 12:51:00 PM Send this post: