Smart Money Mag: Student Loans for K-12

It isn't new news that Orthodox parents have been financing private K-12 education (usually via home equity lines of credit), but this Smart Money article, sent to me by another wonderful reader, outlines the newest loan industry, K-12 loans.

Personally, I'm just not that committed to private schooling to take out pre-college loans. I'm not convinced that college loans are an "investment" worth making in many cases. It goes without saying that I'm not going to favor student loans for the K-12 set.

The article states that most of the demand is coming from high-income parents (i.e. $150,000).

Much of this demand is coming from high-income families. Roughly 20% of families that applied for aid to pay for their children's kindergarten through 12th grade private school education had incomes of $150,000 or more, according to 2010-11 data, the latest from the National Association of Independent Schools. That's up from just 6% in 2002-03. Those who don't get approved for free aid, like grants, increasingly turn to loans, experts say.

This does not surprise me a bit. Being that it is tax season, I'm once again reminded that when you hit the $110,000 mark, some valuable credits like the child tax credit start being reduced and by $150,000 (!), these credits are other valuable losses that can reduce taxable income are long gone or limited in their entirety.

At $150,000 there is a large tax burden, a full tuition bill, and not a chance at aid, grants, scholarships. So, to loans such parents turn.

Besides the risk that loans entail, the entire idea of taking a K-12 loan in order to increase the chances of getting into a better college is upside down. What happens if the parents can't take on anymore debt? The kids will end up with less college opportunity.

Something interesting which I've pointed out on my blog before, paying private school tuition over 10 months, which is default in Orthodox Jewish schools, is NOT standard in private schools. Some schools, as you can see below, claim a 10 month plan is a "financing" plan and they charge a hefty sum of money to help you finance over 10 months. We'd run into ribbit issues, but it is still good to remember that paying over 10 months is a gift of sorts.

Schools are offering their own financing options as well. The Blake School in Hopkins, Minn. says 132 of its families signed up for its 10-month payment plan this year -- which charges an 8.5% fixed rate -- and that's up 19% from the previous academic year. The Hawken School says it provides a small number of loans with a 6% rate. "These loans aren't as taboo as they once were -- there are a lot more schools that are much more willing now to present a loan program as an affordability option," says Kristen Power, northeast regional director for the NAIS' School and Student Services, which processes families' financial aid applications to private schools.

Student Loans for K-12 in book equal a lot of risk and little benefit. . . . . .you can't even deduct the interest repayments to reduce your taxes, making the other financing "solution" of a HELOC look like a smart idea, although none of the above is smart in my book.

Spending What on What?!?!

Hat Tip: Haemtza

From the 5 Towns Jewish Times: File this under Money Ain't A Thing/Baal Tashichit/Obscene

I thought this was Purim Torah and I was enjoying a chuckle until I realized the article was dead serious. The Agudah is spending a quarter of a mil on a stadium mechitza to be used for a single night. Read on [emphasis mine]:

Fresh off the exciting Super Bowl win of one of its tenants, MetLife Stadium in East Rutherford, NJ, can expect increased revenue next year. However, in this challenging economy, no opportunity to develop a new source of revenue should be overlooked. The stadium found just the source it was looking for: Orthodox Jews.

Our community has unique cultural and religious requirements, so MetLife Stadium worked hand-in-hand with Agudath Israel of America to accommodate religious fans. A major breakthrough has been announced: MetLife Stadium will build a mechitzah across the entire stadium to accommodate separate seating for men and women. The mechitzah will run through all seating levels. The result: over 20,000 seats available for a women’s section.

This will mark the first time in United States history that a mechitzah of this magnitude will be built. Negotiations to build this mechitzah could not have been easy. Flimsy movable partitions are not an option when public safety is involved. This will be a solidly installed mechitzah which will be supported by beams that are drilled into the stadium’s new concrete walls. The mechitzah construction carries a price tag of no less than a quarter of a million dollars.
Will women now be able to perform “the wave” at sports events with complete privacy? Unfortunately, current plans call for the mechitzah to be dismantled after the Siyum HaShas in August. Currently, the plans are to return the stadium to the same condition it was in before the mechitzah was installed. (But maybe MetLife Stadium will alter its plans after witnessing the tremendous kiddush Hashem.) Repairing the holes in the concrete is one reason why the mechitzah carries such a high price tag.

One can debate whether a mechitzah is actually necessary at this event. Yet, to encourage all segments of the Orthodox population to attend, there is no question that having a mechitzah is important.

If I wasn't convinced before, I am now that "we" have lost our minds. And the irony can't be missed re: the dedication. “This siyum, like others before it, will honor the memory of the six million kedoshim who perished in the fires of Churban Europe. It will be a powerful testament to the eternity of Torah and the idea that it alone can preserve our past and ensure our future.”

I'd suggest organizations stop flushing money down the toilet or there won't be any kemach to preserve Torah. This is the definition of spending like a drunken solider.

(Oh, as per the Agudah's psak your ticket, priced from $18 to $1000 is tax deductible: "Regarding a tax deduction for attending the siyum, the tax experts at Agudath Israel have advised the community that purchasing seats to attend a religious siyum ceremony is no different than purchasing a High Holy Day seat in a synagogue. You may take the ticket price as a tax deduction, but not the food purchased at concession stands." I won't comment, but consult your own tax advisor.)

Not Much on the Tax Front, but some interesting EITC Changes

(More regular blogging after I take care of a few mega projects)

I much prefer a sleepy season when it comes to changes in tax regulations. And this year isn't delivering a ton of complicated changes on the individual front. There are some changes, but nothing that inspires a lengthy column. Gone is the 2009 and 2010 "Making Work Pay" credit which reduced taxes up to $400 singles/$800 married filing joint. Some tax payers are going to be surprised by a lower refund. The credit was replaced in 2011 with the Payroll Tax cut applicable to the employee and was far more generous. Hopefully no one spent their paycheck and more counting on a similar size refund. But I'm sure there will be a few people screaming as the Making Work Pay Credit was "refundable", adding gravy to other refundable credits.

Speaking on refundable credits, the United States-Korea Free Trade Implementation Act amended the IRS code sections re: penalties on preparers who don't exercise due diligence (asking the right questions, conducting a mini-investigation of sorts). The penalty for failure to exercise due diligence moves from $100 to $500 (per return). Additionally, the prepare's checklist must be filed along with the return, not just kept on file. One has to wonder if a client is worth taking with this sort of penalty. The $100 penalty is a good reminder to exercise due diligence. A $500 penalty is big. Certain clients require a lot of extra effort to validate the validity of their claim, from the status of the children they are claiming to the accuracy of the self-employment income they present.

There is so much commentary to offer on the penalty as well as welfare credits flowing through the 1040, but I will leave my post at that and with a plea to taxpayers to act with complete yashrut because anything less puts not just the taxpayer at risk b'olam hazeh, but the preparer and his/her livelihood too.

Keeping a White Collar Clean (Full Text Article)

With thanks to Mishpacha Magazine and staff, I am able to bring my readers the entire article from Mishpacha.

Keeping a White Collar Clean

Investigations, prosecutions, and prison sentences for white-collar crimes in America have spiked significantly in recent years, leaving many members of the Orthodox community with the feeling that they are being singled out. Mishpacha questions financial experts to determine if this is fact or fantasy.

By Shimmy Blum

Last May, Assistant US Attorney General Lanny Breuer issued a not-so-veiled warning when he labeled our times “a new era of heightened white-collar crime enforcement — an era marked by increased resources, increased information sharing, increased cooperation and coordination, and tough penalties for corporations and individuals alike.”

Since the 1990s, when white-collar crimes took a backseat to violent crime, the former’s prominence in the eyes of law enforcement officials has risen dramatically.

Early in the last decade, after the passage of the Sarbanes-Oxley Act, federal sentencing guidelines were changed to increase jail terms for white-collar criminals. Statistics show that between 1995 and 2008, the average sentence for a federal white-collar crime rose from 18 to 28 months.

“Judges are no longer handing down six-month sentences for these crimes; they’re far harsher that they were even five years ago,” says Chaim H. Leshkowitz, senior partner in the Leshkowitz and Company accounting firm, as well as an attorney specializing in tax and other financial matters. “The criminal justice system is sick and tired of what it sees as white-collar criminals gaining an unfair advantage over law-abiding citizens.”

The frum community’s awareness of the serious consequences of white-collar crime has been significantly heightened in recent years, due in part to several high-profile investigations and even convictions of frum individuals. “I recently visited the prison in Otisville, New York [where there are a number of frum inmates] and the situation is very sad,” says Mr. Leshkowitz. “I saw several people incarcerated there for relatively minor fraud convictions.”

Despite the attention that the investigations and the resulting media coverage have brought to our communities , Mr. Leshkowitz states his unequivocal belief that the law-enforcement officials don’t profile or discriminate against particular communities, and do treat his clients of all ethnicities equally.

Prominent defense attorney and former prosecutor Jacob Laufer concurs, but notes that even the fact that frum Jews attract equal suspicion and treatment under the law represents a stark decline in their image in the eyes of the law-enforcement community. “Years back,” he relates, “if an agent felt the need to question a Yid with a beard and peyos, he’d almost apologetically ask, ‘Rabbi, can you please explain to us this transaction? We’re having some difficulty understanding it.’ This sense of deference no longer exists.”

Legal experts warn that although our community is treated fairly, its members should be especially vigilant in their financial transactions because there are several factors that can unwittingly draw greater scrutiny to frum individuals and institutions.

No More Secrets

Mr. Leshkowitz observes that some actions common within frum communities can raise red flags for the IRS and other agencies, despite the absence of criminal intent or actual illegality.

One major issue is overseas bank accounts in cases where the account holders failed to report their existence to the IRS and pay the necessary taxes.

The IRS has aggressively pursued information from foreign banks in recent years and has offered two amnesty programs for taxpayers who divulge the existence of such assets and pay the necessary back taxes and any penalties owed. Criminal charges could be potentially filed against those who do not, and the eventual fines could even exceed the value of the account. “Some Jews, particularly Holocaust survivors, sought to keep secret money overseas for reasons completely unrelated to taxes,” says Mr. Leshkowitz. “They saw that out-of-the-country money saved some Yidden during the Holocaust, and wanted to have some funds to rely on in case of another Holocaust, chas v’shalom.”

Another IRS enforcement tactic that can impact the frum community harder than others is the periodic targeting of certain types of entities for additional review. After being made aware of cases of abuse by nonprofit organizations, similar institutions may be targeted. With its high concentration of such entities, the frum community often bears a disproportionate brunt of this scrutiny.

Additionally, government officials often randomly scrutinize certain industries that are rife with fraud. These can include cash businesses and mortgage companies — two areas in which frum Jews work in large numbers. In light of the subprime mortgage crisis and the ensuing collapse of the financial system, Mr. Leshkowitz noted that mortgage brokers and homeowners are being closely examined for potential mortgage application fraud, even in cases where the homeowners are keeping up their monthly payments. High tax deductions for charity or other expenses will also be seen as “deviations” by IRS computers and agents, triggering enhanced scrutiny.

Parental support for couples is another phenomenon common in the frum community. An IRS agent would likely be suspicious when encountering a midsize family that owns a home and cars and reports little or no income. Similarly, legitimate, large — and interest-free — gemach (free-loan society) loans to individuals with paltry income, assets, and credit may seem dubious to those not fully familiar with the inner workings and culture of frum communities, where trust between its members often trumps the traditional documentation and collateral used to secure loans in society at large.

In contrast, HSBC Bank subsidiaries HFC and Beneficial loans, the decades-old stalwarts who lent to those with poor credit and collateral, have been the targets of many lawsuits alleging that they charged exorbitant interest.

Tattletale Gray

In addition to the risk of random scrutiny of businesses and individuals, scrutiny of particular individuals, businesses, or nonprofit entities typically result from specific information that government officials have received from other sources.

“Many people are unaware of what information gets passed on to the government, and some have gotten jail time as a result,” Mr. Leshkowitz says.

Under the terms of the Bank Secrecy Act of 1970, banks and other financial institutions are expected to report potentially illegal transactions to the authorities, including the filing of suspicious activity reports (SAR). In most cases, the law forbids the institution to inform the customer that a report has been filed.

Deposits, cash withdrawals, and cashing of checks of $10,000 or more are usually reported by banks, including when large sums appear to be “structured” in multiple smaller transactions to mask their true scope. Bank employees are also trained to report smaller transactions that they consider to be suspicious.

Money services such as check cashers are required to record and report all transactions over $10,000, as well as transactions of $2,000 and up, which they suspect are being done to evade taxes or facilitate another illegal activity. The cashing of business checks at these venues, in particular, is commonly reported to government agencies.

Likewise, individuals, banks, brokerage firms, and all other businesses are required to file W2s or 1099 forms with the IRS, informing them of monies dispensed to an individual that may cause the recipient a tax liability, including for random freelance work. Though the recipient typically receives a copy of the forms sent to the IRS before he files his tax return, he is held liable if he doesn’t report this income, even if the issuer had only sent a copy to the IRS and not to him. Mr. Leshkowitz relates that it is relatively common for those involved in real estate transactions, for instance, not to be aware that the IRS was informed of the proceeds of the sale. Sellers should always ensure that they have clarity from their lawyers as to when a property sale may trigger a taxable event.

Additionally, information regarding questionable activities can also be relayed to government officials by people under investigation who are seeking to plea-bargain, or by spiteful spouses or bitter business partners. These phenomena are more common within our communities than many of us would like to believe.

Government investigations also frequently ensue as a direct result of investigations into other, unrelated parties. For instance, if agents audit one business, they can review all the payments that the business made to individuals and other businesses and match the information with the recipients’ tax returns.

This “domino effect,” says Mr. Laufer, can have an overwhelming effect on frum communities. “Members of frum communities tend to be interconnected,” he explains. “When one person is being investigated for illegal activities, it puts everyone who had any financial interactions with him, or even once deposited a check in the same account, on the radar screen. In most cases, the other individuals now being investigated hail from the same community.”

A Pound of Prevention

Legal experts stress the importance of avoiding even the slightest breach of the law as the surest means of protecting oneself from investigations and potentially devastating consequences. There is no better protection than having nothing to hide if the authorities do, for whatever reason, ring you up. “When you’re the unlucky one who is caught and you’re standing before a sentencing judge, the ‘Everybody does it’ defense gets you nowhere,” says Mr. Leshkowitz. His best advice is that people questioned by the IRS or other law enforcement agencies should never represent themselves, even when dealing with seemingly innocuous issues. “It is critically important to have an articulate, competent professional represent you in any information exchange with the authorities. You need someone who knows all the potential pitfalls and can satisfactorily explain the situation.”

Mr. Laufer contends that this vigilance is part and parcel of who we are. “When you wear the ‘uniform’ of a frum Yid,” he says, “you’re seen as representing certain principles. If you simply follow the Torah’s commands, which prohibit lying, stealing, even geneivas daas deception, you stay out of trouble.”

Mishpacha: Keeping a White Collar Clean

I am very thankful to those who are the eyes and ears of this blog and a special thank you to reader rosie. Mishpacha has run an article in the recent edition titled Keeping a White Collar Clean. I need to get my hands on a copy of the magazine and plan to buy a copy later this week so I can write some though. Rosie summed up some of the reasons below (underlined) and I am very grateful for the summary as the information is enhancing from a professional standpoint. Below the summarized reasons, I've put some of my own notes and hopefully this post will serve as a reminder to me to get on the ball and take some time to write about some tax and personal finances topics that I've wanted to write about but need to clarify my thoughts in order to share valuable information.

1. Foreign bank accounts and not paying taxes on them.

Foreign bank accounts are a hot tax topic lately. In the past, such accounts were often ignored and in 2004 the government enacted a penalty for those who did not report foreign accounts--owned or signature authority--totaling $10,000 or more during the calendar year. More requirements on the FBAR are available at the IRS website. I'm not an expert on FBAR reporting requirements, nor do I have any foreign accounts of my own or intentions of opening foreign accounts.

The bottom line is that all income, no matter where it is sourced, must be claimed on the 1040 (in converted American dollars). Failure to claim the income can open the door to taking credits that the taxpayer is not eligible for. Foreign income can be excluded under certain circumstances (form 2555 or 2555EZ) or a tax credit can be claimed for foreign tax paid.

2. Business that often commit fraud such as the mortgage business.

3. Due to parental support, people with homes and cars get IRS attention because they claim no income.

It is important to understand that audits are mostly triggered based on ratios. When the "numbers don't add up" it arouses suspicion. People can't be spending all their money on mortgages, business expenses, medical expenses, etc. They still need to eat and wear clothing.

Excessive itemized deductions in comparison to income is a red flag, especially for years on end. I found a reference to the ratios through a firm: for itemized deductions 45% is the ratio and for Schedule C (business income or loss), expenses exceeding 60% of income is the trigger. Mortgage interest, taxes (real estate and state income taxes), and charitable donations are the big three itemized deductions. I checked our ratios and was please to be well under the audit trigger for both schedules.

I once had a Shabbat lunch with someone whose ratios had triggered an audit and the IRS examiner asked him "what do you live on?" I don't think "G-d provides" is the answer the auditor wants to hear. So if your ratios are excessive, it makes sense to have an answer. When my parent's tax return was flagged for audit, they were able to sufficiently explain to the examiner the market trend and never had to undergo the arduous process of a full blown audit as the explanation was reasonable and easily verifiable.

4. Larger than average charitable contribution deductions getting IRS attention.

I believe the IRS tracks average charitable deductions by taxpayer income. I recall reading somewhere that the average American donations between 3 and 5% of AGI (adjusted gross income). Exceeding the average is fine, but donations need to be well documented. In recent years documentation requirements have tightened. All cash donations need a receipt. A letter stating no goods or services received is required should a donation be $250 or greater. Cancelled checks or credit card receipts will suffice for donations under $250.

5. Money borrowed from gemachs that allows people to live with more than they make but attracting the attention of the IRS.

This clearly plays into the discussion of ratios above. I'd like to learn more about all of these money gemachs I keep hearing about. Out of town, we tend towards lending gemachs: simcha wear, children's clothing, baby equipment, and the like. An issue I can see arising should an auditor be presented with a bank register and out of wack numbers would be if the loans are really income, rather than loans and/or tzedakah (see the domino effect, #8 below).

6. Large checks over $10,000 hitting the banks or smaller checks that follow a pattern, alerting the government.

7. Jews incriminating other Jews during plea bargains or because they are involved in business or divorce disputes.

8. The domino effect when one fraudulent businessman is investigated and those who did business with him are investigated as well.

Some Good News About the Pesky 1099 Requirement

Hat Tip: A reader, thanks!

The 1099 Requirement hidden in the Health Care bill has been repealed by the Senate in an overwhelming vote. Let's hope that the other House does the same. After processing 1099s for clients, I'm hopeful that implementing a 1099 plan will be one task I can cross off my list of stuff to do. It isn't the printing that is the problem. Gathering the info on contractors alone can be difficult when organization is not perfect. And, I don't know too many small businesses with superb record keeping. I can't imagine gathering information on vendors. Let's hope that small businesses can breathe a sigh of relief soon.

Thank you for my readers who are sending me stories at a rapid speed. My apologies that I'm falling behind. I have not ignored any emails and I hope to get to each and every recent email. There are some great post topics there. Thank you.

Small Rant

Excuse a disgruntled and jumbled up post. Apologies in advance. I'm really not having a bad day.

The brief before the rant: I am getting really, really tired hearing about how "we" get nothing education wise for our tax dollars and how "we" are doubly taxed. 1. Everyone pays taxes. 2. Private Schooling is actually a choice. 3. "We" actually do receive some services, although the amount varies by state and locale.

The Englewood and Teaneck school district just received approval for the funding of a Hebrew-immersion charter school program (which is prompting a number of news stories that I'm afraid I won't be keeping up with) and a local Rabbi went on record saying the following: "Part of what motivates this [hand ringing over tuition] is the reality that we are being doubly taxed. Our property taxes are paying for the maintenance of the public schools, and we're paying tuition for the private schools."

Let's get one thing straight. Everyone pays property tax, directly or indirectly. Everyone pays property tax and other taxes funding education including those who will never have kids and those who have no intention of ever using the public schools.

I've been paying property taxes (directly) for a long time now. Many of those years, I did not have children. Currently, our children are in private schools. My parents have been paying property taxes (directly) for at least a handful of decades now. They did not have children in public school for the first decade of paying property tax. They have not had a child in public school for over a decade. My grandparents a"h and great-aunts and uncles (may they continue to live and be well, until 120) have been paying property tax for 60 plus years. They have not had children in public schools for over 40 years.

Now, let's get another thing straight: sending to private school is a choice. And I believe that part of "solving" the tuition crisis is to start to view it as a choice, a valuable choice in many cases, but a choice nevertheless.

I think the view that private school is "mandatory" prompts an attitude of entitlement that is not healthy. Perhaps my "small rant" is becoming a "large rant." But the attitude that the schools should accommodate their family (according to what they want to pay/ability to pay) because there are "no choices" is very frustrating. Yes, if you want a religious education for your children you have limited choices. But, when you "throw up your hands" to the schools in negotiation after negotiation months into school, you are leaving those expected to pay their bills with less choices of their own.

But back to the initial subject at hand. . . . there are those who do live in states where private school students receive little in terms of public money for schooling. Perhaps schools receive a little bit here and there for textbooks and computers. And, of course, there are special education services available to those who need them.

But there are other areas of this country where private schools DO receive an incredible amount of services and it is trying to read all the complains about "getting nothing."

I caught this little story on the Lakewood Scoop. I am in disbelief that there are Federal Funds totalling $112,000 being used to pay for a Torah U'Mesorah Shabbaton Retreat for administrators. The funds are reportedly earmarked for remedial education, but can be used for professional development. I cannot tell if this money is for a new conference or the past conference (the Lakewood Board of Education was informed that no religious content will be included in the conference, so it couldn't possibly be the Presidents Conference in Miami that took place recently and for which a Guest Poster offered some comments on my blog, right?). Nonetheless, $112,000 plus busing plus all of the publicly funded special education services isn't "nothing", right?

Quite frankly, I think funding for (public) education has spun out of control. Certainly if Mayor Bloomberg can threaten 21,000 teacher layoffs when NYC school district employs 75,000 teachers (that is a 28% staffing reduction folks), there is some room to cut back.

Nevertheless, I believe in the idea of publicly funded education for all Americans and I hope you won't find me complaining about being "double taxed" even if we never receive a dime in services from our own school district and even if our private school never receives a dime of public money. We're making a choice (better tell myself that now, because the tuition schedule is soon to arrive for 2011-12) and we have more dignity than to get bent out of shape over a choice we are making with complete free will. Better we make our choice b'simcha than fall into an angry and unproductive thought pattern.

New 1099 Rules for Landlords

In an attempt to keep readers current on tax law that might affect them, here is a new one which I would have missed had I tossed one of my recent accounting journals. Recently I alerted readers to the new 1099-MISC rules that were buried deep in the Healthcare Bill and that (should they not be repealed) take affect during 2012.

A new law that is likely to escape many a landlord is currently making its way into Accounting Publications (link: Journal of Accountancy) now and is effective NOW (2011!). Starting in January 2011, those who rent real property must start tracking payments to contractors.

It is January and there is no better time to have a plan if you are a landlord. It is always easier to get your paperwork in order in advance, rather than closing out the year in January only to find that you can't properly substantiate something later. As part of the Small Business Jobs Bill Act, taxpayers who own rental property must issue 1099-MISC forms at the end of the tax year (deadline: January 31, 2012) to service providers who provided a service of $600 or more during the course of the year.

Therefore, when you hire an accountant, plumber, electrician, contractor, or painter, you need to make sure you have the name, address, and taxpayer identification number or social security number on file. Be prepared to present your service provider with a W-9 when he or she walks through your door. Since no one wants a surprise, it is always a good idea to let service providers know right from the start that you will need their Tax Identification number. No need to end up in a sticky situation come January 2012 when you are trying to meet the 1099-MISC filing deadlines and you either can't find the contractor or they won't give you their identification number.

This new regulation is certain to surprise unsuspecting landlords (and their accountants too, no doubt). Filing that first 1099-MISC can be a bit of a mystery (the filing address is printed on the 1096 transmittal form, not on the large list of where to file on the IRS website).

There are a number of online softwares to file 1099-MISC forms. If you are only filing one or two 1099s, I believe this is the most cost effective way despite the slightly higher cost per form, as the packages in the big box office stores only come with 3 1096 transmittal forms in a package. The deadline to get the 1099-MISC to your service contractors is January 31. The IRS requires 1099-MISC be transmitted by February 28 (non-electronic) or March 31 (electronic).

Mental Tricks and Extra 2% in Your Pocket

The first paychecks of January 2011 should be arriving soon, and for those that fell behind with the news, a bill passed both houses which will put an additional 2% in your pocket. The social security withholding rate fell from 6.2% to 4.2%. Medicare withholding rates remain the same (1.45%), as do the employer's portion of withholding (7.65% total).

I was able to confirm that those of us who are not subject to withholding, but rather pay the Self-Employment Tax through Schedule SE will also see our rates fall 2%, from 15.3% to 13.3% (effective rate of 14.1% to 12.3%).

It is unfortunate that the taxpayers still have no real certainty, but the taxpayer should have more money in their pocket in 2011, up to $2136 per wage earner (Social Security Tax is paid on the first $106,800 of wages).

I believe that it is extremely important for individuals and families to understand the basics of tax. There is a lot of discussion out there if taxpayers will notice the extra money. Some experts believe that taxpayers will notice their paycheck is higher, but won't know why. And, not realizing that their "pay raise" is temporary, there is a real danger of spending the funds, or worse yet, making commitments that won't be so affordable come 2012.

Because the money is temporary, I think it is really important for individuals and families not to increase their consumption. I work with a variety of clients and the common thread I find amongst spenders/debtors is that new found money is already mentally spent before liabilities and savings are considered. Finally, I can get that new data plan! This 2% windfall will be a nice treat, but also has the potential to hurt the undisciplined or unaware.

Changing subjects slightly, a friend (hello to you!) sent me an article that starts with a mention of an MIT inventor that is attempting to create a prototype of a wallet that will become increasingly hard to open as one approaches the limits or exceeds their monthly budget. Cute! I love the idea.

The article goes on to discuss mental tricks people use to help "close the gap between good intentions and human nature."

I'd love to hear from my readers what mental tricks they use to control spending. The article mentions many of the usual mental tricks such as setting broad goals in terms of saving not budgeting (I think this becomes easier as a person realizes goals and starts to really see money and equity grow), making separate accounts and subaccounts (I love the setup at ING's online bank for this--highly recommended), paying yourself first through automatic withdrawals into savings, buying savings bonds through an employer and/or taking advantage of 401(k) accounts (all of the above is good advice).

I have a few mental tricks of my own in addition to those above. When we refinance our home loan around 18 months ago, we continued to make a similar mortgage payment. Besides paying off the mortgage quicker, this trick makes it easier to absorb future property tax increases. Another trick we have is not including interest income in the spending budget. We basically ignore that income until year end when we decide if we need to keep the income in the emergency fund or if we can put that money into a different type of investment vehicle.

Readers, please share any mental tricks you have and I will try to share in a future post. The more interesting the better! And if you don't mind sharing, what do you plan to do, or not to do, with that 2% savings in Social Security tax.

P.S. I have some posting ideas coming up, but I've hit another busy season here and due to the tax law changes, I have a bit of extra work cut out for this week. :)

Coverdell Update

I have great readers, with great suggestions, and great questions. Julie writes:

While we are asking questions, what is the status of the Coverdells? Are they part of the Bush tax cuts that will continue for the next two years? Will we still be able to use them to fund private school education K-12? Does the old limit still apply?

I'm going to forgo writing my own post and pointing readers to one of the excellent financial sites out there, Saving for College (division of Bank Rate) on the Coverdell Fade-Out.

Certain Coverdell provisions are scheduled to sunset if Congress does not vote to extend certain provisions such as the ability to use the Coverdell for private K-12 education. Should Congress not extend the Coverdell in its current form, contributions will be further limited from $2000 a year to $500 and funds will be restricted to college expenses only after December 31, 2010.

Some will roll their tax advantaged Coverdell IRA into a 529 College Savings Plan. Others might leave their Coverdell in place. Some might spend their funds (and quick).

We will be leaving our Coverdells in place. Investing is not my strong point, but I like the flexibility to invest in a whole host of funds, which is not possible under the 529 plan. Having both the Coverdell and a 529 for my children gives us a chance to diversify what investments we do make. While I am sad that the gains will (likely) no longer be available for K-12 expenses, when the market bottomed out, I already mentally wrote off being able to use these custodial accounts for K-12 expenses. I'm not willing to take a loss when we can expand our investment time frame and come out ahead. So, college it will be! Thankfully I wasn't counting on spending this money in the near future. When we move money into restricted accounts, we play the mental trick of "forgetting about the money."

Check out the Coverdell fade-out article and let me know your plans if you own Coverdell accounts.

Year End Financial Checklist

It is hard to believe that another calendar year has almost come to an end. Perhaps it was because I was still dealing with normal April, May, and June client projects come October that the end of the year has snuck up on me. Feel free to add more items to this very incomplete year-end checklist. Here is what is on mine:

1. Review all entries in my accounting software to make sure there are no errors, computer or human. Last night I caught some computer errors. Believe it or not, a person can categorize something correctly in their software, and it can show up in the wrong area. I split my income into employer income (W-2) and self-employed/contract income so I can calculate self-employment tax amounts. Somehow, there was Schedule C income that showed up under my W-2 category. There was no entry problem, so I eliminated the category class and tried again until the computer put the income into the correct category. (Necessary for step 2).

2. Review books to make sure depreciation and mileage have been taken. Fairly self-explanatory, but many self-employed people miss these non-cash expenses when putting together their year end tax records. Also, make a print copy of the mileage log for records.

3. Cut year end tzedakah checks, or not? Make an additional mortgage payment or not? Unless I'm mistaken, we still are operating in the arena of uncertainty for 2011 tax planning, but it looks likely that for at least two years tax brackets will remain unchanged. Those tax payers sitting on the edge of two brackets or on the edge of credit phaseouts, will need to crunch the numbers and make the best informed decision they can despite the uncertainty. Deadline: December 31, 2010. Below are the 2010 tax brackets. My apologies for format and leaving off head of household. Exemptions remain the same, as does the standard deduction for all but head of household ($50 increase).


Tax Brackets as per Bank Rate
Married Filing Jointly Single
10% Bracket $0 – $16,750 $0 – $8,375
15% Bracket $16,750 – $68,000 $8,375 – $34,000
25% Bracket $68,000 – $137,300 $34,000 – $82,400
28% Bracket $137,300 – $209,250 $82,400 – $171,850
33% Bracket $209,250 – $373,650 $171,850 – $373,650
35% Bracket Over $373,650 Over $373,650

4. Run a final calculation for estimated taxes owed at both the Federal and State levels and pay up possible shortage. Baruch Hashem this year was better than expected. During the 4th quarter, in anticipation of the "Bush Tax Cuts" expiring, I worked to push income into 2010. So, now it is time to make sure that we are paid up by January 15, 2011.

5. Figure out how to spend down the excess funds in the Flex Spending Account. I've never overfunded an FSA, but I can't complain this year because the reason for the excess funds were all positive. Nevertheless, the money is there for the spending and I need to put together a plan. Over the counter reimbursements will end in 2011. So, while I can deal with dental appointments, visions appointments, new prescription glasses or sunglasses purchases, and physicals in 2011, if I plan to stock up on a few OTC medications, I better plan a trip to the drug store soon. Deadline: March 15, 2011. But, I prefer to be on the safe side, so the earlier the better.

6. Fund the Coverdell Plans by the end of the calendar year. These plans might also be called IRAS, but their funding schedule is different. but my bank seems confused as to the deadline which a reader pointed out should be April 15, 2011. Deadline: December 31, 2010.

7. Fund IRA or ROTH IRA. Deadline: April 15, 2011.

8. File that growing stack of papers, make sure tax letters are on file for any donation over $250. I'm certain this note just pertains to me. Certainly everyone else has kept to their schedule of daily or weekly filing (smiles). Deadline: Before putting the tax return in the mailbox.


Other tax payers might be interested in re-evaulating the portfolios, selling loosing stock, writing up a new will, making sure their insurance coverage is adequate, or creating a new budget and financial goals. My list is far more barebones, but should keep me busy enough.

$250,000 in Income = Spend Wisely

I'm not quite sure how $250,000 in income (an income level unimaginable to me, or in the words of the article "an unattainably high annual sum") became the threshold of "rich", but somehow that number is thrown about both in our world and in the outside world.

While the magical quarter-of-a-million dollar figure can certainly make a family comfortable (especially if the distribution of the income earners is favorable), such income is not indication that one can throw conscious to the wind.

One of my readers (as well as my husband) pointed out this financial article that is making the rounds, Down and Out on $250,000 a Year. What can we learn from this article and it's eight city analysis:

1. Location, location, location: Living on either coast is expensive. If you can manage to earn a high salary away from the coasts, you will automatically be better off.

2. Location, location, location: Even better if you can earn a high salary in a income tax-free state or in a location where property taxes are more under control.

3. House, house, house: Especially considering the couple presented uses public schools, it makes a lot of sense to live in a better area which can be costly, but this presentation is a good argument for "moving on up" and rolling the money one is able to *save* while living in a nice, but less expensive, area with good home resale when the kids are younger. No matter how you cut it, paying a mortgage (even with 20% down) on a home in an expensive area is hard to sustain, especially if the financial situation changes for the worse.

4. Savings, savings, savings: Saving the max in a company's 401k tax plan makes a big difference in your tax bill and allows you to put away from the future. If you don't do this, your tax bill will be even higher and every additional dollar you earn will be worth less.

5. Used, used, used: Your car that is. Two car payments when you make a quarter of a million makes just as little sense as two car payments when you make a lot less.

6. Debt, debt, debt: Student debt of the couple presented isn't particularly "high" but it, combined with the high mortgage and the car payments is a killer. Getting rid of debt is key to getting and staying ahead.

7. Shave, shave, shave: Even though our couple doesn't go overboard with expenses, if they want to get ahead and stay ahead, they need to shave expenses from each area of their budget. That would be the "little" expenses including activities for the kids, annual vacations, entertainment, dog, transportation (public transportation makes a lot of sense given parking and gas in this budget!), cleaning help, dry cleaning, and food (both take out and lunches--brown bag it!), in addition to controlling he big expenses listed above including the mortgage and automobiles.


As a final note, I have a rule to NEVER include investment income in a regular budget and was a bit surprised to see it included here, although the article shows two bottom lines, one with only earned income and one without earned income. It is a style issue, but I am of the opinion that investment income is best kept in a separate budget and then moved into other investments. If you need your investment income to meet your bottom line, you are way over budget, even if you include 529 college savings in the budget. My preference is to create a separate budget for such investment income and fund other investments from the spin off, or put away the extra for every-ten-year purchases. (Clarification based on a comment: my rule to not include investment income in a regular budget is not actually a never, ever. Obviously, a family in retirement will be relying on their investment income. My comments were more based on the type of budget I would create for a young/youngish family that has limited investment income. To get ahead, I highly recommend that such income should be used to strengthen one's financial position, not building such income into the budget for consumption and meeting regular expenses).

Even if it is hard to relate to the (young) $250,000 couple (there is still $15K in the budget for childcare) and it is easy to imagine that as the kids get older some of the expenses could ease, the article underscores just how important thrift is at all budget levels. And, it underscores the difficult situation that higher income earning couples in our own communities have when tuition is piled on.

P.S. I do realize that some of the out-of-pocket medical expenses are also exaggerated for a family without major issues. I don't know how one gets to over $4000 dental and over$5000 medical with insurance and without (bli ayin hara) major issues. However, the point of the article and anaylsis is still infomative and educational.

Look Before You Leap: Debt Settlement

(Any reader who is an imamother commentor, feel free to post my advice on any of the recent threads discussing debt settlement. . . . Disclaimer: This post is informational only and does not constitute personalized tax advice, just a summary of potential issues to be aware of).

There have, sadly, been numerous recent posts on imamother from families in untenable financial situations, often accompanied by plenty of debt, usually credit card debt. The "solution" offered by others is to settle the debt. You don't even need a company. . . you can do it yourself! is the advice. Some offer their success stories of negotiating debt down to pennies on the dollar. And, it it worked well for them, it should be something you should try too, right?

Well, maybe not. The decision whether to settle debt isn't just another solution for the amateur to test drive, like asking a credit card company to lower your rate or engaging in juggling debt from one credit card with a promotion to the next. . . . . nor is it particularly advisable to the leave it to the "professionals", i.e. those debt settlement/consolidation companies that have sprung up like weeds with all sorts of incredible claims that could work for you too. (I've noted many companies advertise heavily in the frum world).

Take my advice: before pursuing this route, consult a tax advisor/CPA who is familiar with the issues at hand. Just like in any other profession, the initials alone do not an expert make.

In short, debt settlement, unlike bankruptcy, can be a taxable event. In bankruptcy, unsecured debt is forgiven, although student loans and taxes owed still remain. In a debt settlement, there may well be a taxable event that one needs to prepare for. In such a case, the debt needs paid off as negotiated, and come tax time, an unfamiliar tax document called the 1099-C (Cancellation of Debt) will arrive in the mail and a new debt may be incurred, this one to good ol' Uncle Sam, as well as the State and Locality of residence. The taxable amount will, of course, be taxed at the marginal rate and could eliminate valuable tax credits. This could make the settlement not quite the bargain assumed.

The short of the long is that the amount shown on the 1099-C is taxable up to the net worth of the taxpayer. And, there is the rub. While some professionals in the debt settlement business will tell you ". . . relax about paying taxes on canceled debt balances. That should be the least of your concerns if you're upside down financially. Don't let the misguided criticisms of financial writers (who haven't done their homework) discourage you from looking into one of the most popular and flexible options for achieving debt-freedom," you might define insolvency from a different standard than the legal standard.

(See Pub. 4681) When a taxpayer is deemed insolvent, there is no tax incurred. Where a taxpayer is solvent, tax is incurred on the amount of the debt settlement up to the amount of solvency. The insolvency worksheet (p. 6) assists the taxpayer in determining their Net Worth. Assets include just about everything, from the home to jewelry. Liabilities include all debts owed, from the house to the babysitter.

I can easily envision situations where a debtor may see no way out from their mountain of debt, see settlement as a great option, and end up in a pickle come tax time. This especially could be true where equity exists in a home or business. So, tread carefully. And feel free to point to this very, very incomplete synopsis when others recommend debt settlement. For some, it might smell like roses; For others, like rotten eggs.

Reposted By Request: Flexible Spending Accounts

Below is an educational post I wrote in 2006 about Flexible Spending Accounts. Is it really almost that time again? I received a request to address the subject, so I am re-posting. Just a note that the new health care legislation will slash the health care FSA to $2,500 from amount employers normally allow, $5,000 although there is federal technically no limit.

Flexible Spending Accounts

The end of the calendar year is quickly approaching, and many employees are currently being asked if they want to fund a "Flexible Spending Account" (FSA). While the subject is relevant, I wanted to write a brief overview of these accounts, in addition to discussing their advantages and disadvantages.

In brief, the advantage of an FSA is the tax savings. The program allows an employee to put aside "pre-tax" money from earnings each pay period to help pay for two types of expenses:
1) Qualified Out-of-Pocket Health Care expenses and/or
2) Qualified Dependent Care expenses, i.e. childcare or adult dependent care expenses for qualified dependents that are necessary to allow you or your spouse to work, look for work (so long as you find a job and earn income), or attend school full-time.

An employee can put aside funds for one or both of these purposes, but funds must be designated separately for the entire calendar year. Both spouses can contribute the maximum amount allowed to their own Health Care FSA (HCFSA), however the amount allowed for the Dependent Care FSA (DCFSA) is limited per household.

Question: Just how much tax can you expect to save on your designated funds?
Answer: No less than 7.65% (FICA withholding that all employees are subject to) to upwards of 50%, although most will fall somewhere between 20 and 40%. To estimate your tax savings, add together your respective federal marginal tax bracket (ranges between zero and 35%), your respective state marginal tax (can range up to approx. 10%), and the 7.65% FICA withholdings.

Question: What Out-of-Pocket Health Care Costs qualify for coverage?
Answer: Basically all expenses except insurance premiums (e.g. dental and vision insurance) and items like over-the-counter vitamins. Of course, the list of allowable and unallowable expenses is a long and tedious read. But, before you go about designating your earnings, you should become familiar with it. [As of 2011, non-prescription, over-the-counter medicine and items like band aids will no longer qualify for reimbursement].

Question: What are the disadvantages?
Answer: The prime disadvantages are the following:
1) "Use it or Lose it" Whatever money is left in your account at the end of the Benefit Period (usually March of the following year, I believe) you forfeit for good. There are no refunds. This is a requirement of federal law.
2) If you are laid-off or leave your job without spending your account, it is gone forever.
3) The paperwork and record keeping. Proper documentation (receipts, bar codes on over the counter medications, etc) will need to be submitted with claims. Organization is key and those who lack time [or organizational skills] will suffer.
Update: Many companies do have paperless reimbursement for certain expenses like co-pays.

Question: Can I still receive a tax credit for my childcare on my 1040 Tax Return if I am using a DCFSA?
Answer: No and Yes. You cannot receive the tax credit for the amount you designated in your DCFSA, but the incremental excess amount that you spent beyond your DCFSA designation can be claimed. (It is a bit complicated, but here is an example: A household with two children can claim a credit on a percentage of $6000 in childcare costs or $3000 per child. If the family only designates $4000 to their DCFSA, they can claim a credit on the excess $2000.)
Note: The same goes for trying to deduct health care expenses above 7.5% of your adjusted from income on your Schedule A (Itemized tax deductions).

Question: Is it better to use the tax credit or the DCFSA?
Answer: It depends. Because a greater dependent care tax credit is offered to those with lower household incomes, some will benefit more from using the tax credit.

Question: Does my childcare provider need to be paid "over the table?"
Answer: Yes, yes, yes. Don't make your designation unless you know your provider is filing their taxes. You will need the Tax ID or Social Security number for your daycare provider or babysitter. Without this vital information, you will not be reimbursed. You also might want to make sure that your provider understands why you are asking for this information(!). [Regardless of your decision of whether or not you should use an FSA, your childcare provider should be paid legally].

Question: Is camp a qualified DCFSA expense? What about yeshiva tuition?
Answer: Day camp for a child 13 and under is a qualified expense. But, overnight camp is not, unless there is itemized billing for day services only! And, no tuition for an elementary school child does not qualify either. But, before and after-care services do if they are separately itemized.

Question: How much should I designate to my FSA?
Answer: Review your prior years expenses and estimate upcoming and new expenses [to come to a reasonable prediction of] future expenses, but be careful not to overestimate what you will spend because of the "Use it or Lose it" clause. Also, be very careful you only include qualifying expenses. You don't want to end up buying ridiculous amounts of over-the-counter drugs because you stand to lose a significant amount of money otherwise. [As of 2011, even if you are using 2010 funds within the grace period, you will no longer be able to buy over-the-counter drugs or a lifetime supply of band aids].

Disclaimer: Please do your more research if you have questions and read your enrollment forms carefully. This is a primer on the subject and is in no way a complete overview. FSAs are an excellent and legal way to make your income stretch further.

Tax Strategies for 2011

2011 is around the corner and a reader asked me, in regards to my previous post:

SL: Assuming that Congress is too fractured to do anything about restoring some of the tax cuts, at least for the middle class and below, are there any particular tax strategies that you think make sense - i.e. sell stocks that have appreciated to get the lower capital gains tax, defer charitable contributions? accelerate charitable contributions? etc.

Getting ready for 2011 will probably be an ongoing subject here at Orthonomics, so consider this installment one. Tax professionals are only starting to figure out what strategies make sense. Or, as one journal writes "new taxes requires us to think outside of the box when it comes to tax planning. In many cases, this means considering strategies that would be contrary to conventional planning practices."

Here are a few strategies to consider:

Accelerate income and defer deductions: normally we try to defer income and accelerate deductions. Hence, a small business owner or landlord might expense equipment in full, a family will try to lower their capital gains taxes by selling loosing stock offset gains, those who pay estimated payments will make sure to send their estimated payment to their state before the close of the year, and in December of the Fiscal Year a family will write out some checks for last minute tax deductions.

When impending tax rates are significantly higher, due to increased marginal rates and the elimination of the 10% bracket, individuals should consider the following (I'm including advice for those who file a Schedule C or Schedule E):

Be aggressive with collecting accounts receivable: If you can collect in 2010, it is worth more than in 2011. Start bothering your customers, subject to whatever halachic restrictions there are of course. (I think I am going to bother a client right now). If you are a second income earner teetering on the next marginal rate, the motivate to collect now is high. Likewise, it makes sense to push off expenses/acquisitions, but only in a way that is yashar. I'm not recommending forgoing payment of bills to vendors, only holding off purchases or changing payment schedules where possible.

Defer Itemized deductions from 2010 to 2011: So long as it is yashar and halachically proper (it wouldn't be proper to withhold a pledge due imo), holding off a voluntary donations from December 2010 to January 2011 makes sense, as does sending estimated tax payments to your respective state in 2011, rather than at the end of 2010 as you might be accustomed to doing.

If you depreciate equipment and have normally either used a double-declining method or fully expensed under Section 179, consider a straight-line or other approach. Of course, you will need the cash flow to be able to pay the tax bill.

If you have a NOL (non-operating loss), you should consider carrying it forward (a one time non-revocable election) rather than carrying back, as is often done.

Capital Gains If you are thinking of selling appreciate assets, 2010 might be the right year to do just that. If you are experienced with stock dealings, you are probably accustomed to selling your losers to offset the gains. For 2010, you might want to defer the losses until 2011, to offset higher future capital gains or just take the up to $3000 loss allowable by tax code.

Retirement Savings
Convert IRAs to ROTH IRAs/Invest in ROTH IRAs. The advice to convert IRAs to ROTH IRAs seems to be popular advice, and in many cases it is good advice. But you have to be very careful here. 1. You need to have the cash in hand to pay the tax bill (actually the rules have changed an you can defer 1/2 of your bill, but I don't recommend playing this type of game) and 2. Conversions can threaten your child tax credits where you are on the verge of being phased out. Taking at $800 hit on your tax credit in the here and now, e.g., might not be the wisest idea. For that reason, while the advice does make sense, it is so important to run the numbers in order to understand the full impact and make an informed decision.

That is it for now. More to come as the strategies develop. Now back to reminding a client that is long overdue with funds that although I've been flexible due to the situation and trust relationship, I need that money before 2011.

Higher Taxes: No I'm not Crazy Thinking that Yeshiva Tuition is Going to Become Even Harder To Pay

With apologies to my readers who object to politically charged posts, please be forgiving . . . . . . I realize that not all my reader are fans of the ATR (Americans for Tax Reform) and might take issue with the use of the terms "ObamaCare" and "Death Tax" as opposed to Health Care Reform and the Estate Tax, but as far as I can tell, all the details in the following article (posted after my ramblings) are accurate. I have also spoken to tax professionals and any repeal of the rollback appears highly unlikely. (Happy 4th of July!)

One thing I can't stand is when discussions of political policy turns completely self-centered and the entire focus of the frum community is inward, i.e. what's in it, or not in it, for me? But one reason I'm pointing out the tax changes coming your way and mine is because this is something the frum world needs to grapple with and get prepared for now. In January 2011 your withholdings should go up. If you are self-employed/contractor, prepare to make greater quarterly payments. In 2012, a higher tax bill is coming. So, feel free to self-center the comments and let us know which tax hikes are going to affect you, and how they will affect your ability to give tzedakah and/or pay yeshiva tuition.

Numbers would be even better (feel free to mark yourself under an anon# name to preserve privacy). I'm not usually so open, but my current calculation of tax hikes (assuming no change in income) between 2010 and 2011 to be in the neighborhood of $2600, which doesn't include changes on dependent care credits and the use of Coverdells. Nor does that include additional tax which we will incur regardless of changes in income as our itemized deductions fall (yeah for refinancing, boo for the rest of it). I've included the social security and state tax damage from capping the Flexible Spending Accounts in my calculation. To put the $2,600 in perspective, it isn't peanuts.

It if probably a good thing that I'm already convinced that yeshiva tuition isn't going to be something we can afford long into the future because, I hate surprises! We might as well start mentally preparing now. As I was trying to explain to a friend recently, adding another tuition + covering the steep tuition increases + all the other expenses that come with age isn't a simple matter of just cutting back on retirement savings because there isn't a 1:1 relationship. (Someone really should remind me not to enter tax planet while on a pleasant day in the park with the kids and the other Moms because I just start running scenarios and talking mostly to myself. Not to be politically incorrect, but ladies generally like to give "chizuk" not listen to ramblings from an accountant about teetering on the edge of credit phaseouts, the next tax bracket, and how big medical expenses are about to become even less affordable).

The article detailing many tax hikes is cut and pasted below. There is a lot of bad news in here for Americans hoping for an economic recovery. There is a tax hike in here for everyone, and by that I mean almost everyone (yes, even Kollel Families!). The 10% tax bracket is being eliminated for starters. Below is a chart of what the estimated tax brackets for 2010 and 2011 for those who want to start making calculations. My apologies for only including Married Filing Jointly. I'm not attempting to discriminate, but to not overload a post with too much information. A few comments, as usual, in orange will be interspersed in the article.

2010 Estimated Tax Brackets (Married Filing Jointly)
10% Bracket $0 – $16,750
15% Bracket $16,750 – $68,000
25% Bracket $68,000 – $137,300
28% Bracket $137,300 – $209,250
33% Bracket $209,250 – $373,650
35% Bracket $373,650+

2011 Estimated Tax Brackets (Married Filing Jointly)
Tax Bracket Married Filing Jointly
15% Bracket $0 – $70,040
28% Bracket $70,040 – $141,419
31% Bracket $141,419 – $215,528
36% Bracket $215,528 – $384,860
39.6% Bracket Over $384,860

Six Months to Go UntilThe Largest Tax Hikes in History From Ryan Ellis on Thursday, July 1, 2010 4:15 PM

BREAKING: Wounded Warriors Face New Tax This Independence Day

In just six months, the largest tax hikes in the history of America will take effect.

They will hit families and small businesses in three great waves on January 1, 2011:

First Wave: Expiration of 2001 and 2003 Tax Relief

In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011:

Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:
- The 10% bracket rises to an expanded 15% [excluding those who get hit by the AMT, all benefit from the 10% bracket. My experience tells me that many large families and kollel families sit in the 10% bracket]
- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%

Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1000 to $500 per child. [Ouch! The child tax credit includes up to 3 children currently. Really an ouch. I mistakenly confused the phaseout on a welfare credit I deal with too often with this credit (oops). This will really hit families hard. Not really an upside, but families that cut back on retirement and hit the phaseout won't get such a double-whammy] The standard deduction will no longer be doubled for married couples relative to the single level. The dependent care and adoption tax credits will be cut. [A hit for dual income families].

The return of the Death Tax. This year, there is no death tax. For those dying on or after January 1 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones. [In other words, don't think a yerusha will pay your bills. . . and, no, tax planning isn't just for the super rich].

Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013. [Confusing sentence. In other words, dividends will be taxed as regular income and then, there will be an additional tax on investment income, including royalities and rental properties, come 2013 as part of the Health Care Package].

Second Wave: Obamacare

There are over twenty new or higher taxes in Obamacare. Several will first go into effect on January 1, 2011. They include:

The “Medicine Cabinet Tax” Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin). [In other words, if you overshoot on your FSA come 2011, you will end up forfeiting the funds because you will no longer be allowed to load up on Advil at tax advantaged prices].

The “Special Needs Kids Tax” This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently, there is no federal government limit). There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C. (National Child Research Center) can easily exceed $14,000 per year. Under tax rules, FSA dollars can be used to pay for this type of special needs education. [Special Needs is only one demographic sure to be hit by the lowering of the FSA. A few other demographics: families with lots of kids, families paying for catastrophic care, any family paying for braces or major dental work].

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

Third Wave: The Alternative Minimum Tax and Employer Tax Hikes

When Americans prepare to file their tax returns in January of 2011, they’ll be in for a nasty surprise—the AMT won’t be held harmless, and many tax relief provisions will have expired. The major items include:

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

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

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

Tax Benefits for Education and Teaching Reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families. [Unlike most employees who must meet a 2% floor before deducting any business expenses as an itemized deduction, educators have been given a nice gift, decreasing both federal and state income tax. Like I said, these changes are broad and there is an increase in there for everyone].

Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there. [Shuls, schools, and all tzedakas listen up. . . the news isn't good].

Read more: http://www.atr.org/sixmonths.html?content=5171#ixzz0sgPL3f3c