Roth IRA’s

Dear CPA:

I am working on my retirement planning and definitely need to increase the amount that I am saving. How can I look up the tax bracket that I am in so that I can figure out the net I should deposit into a Roth on a monthly basis?

Dear Taxpayer:

The tax bracket that you are in does not directly affect the computation of your Roth IRA deduction.  The absolute amount of your adjusted AGI is the important figure.  The phase out limits are listed here.  The amount that may be contributed for 2008 by April 15, 2009, is generally $5000 per person.  I recommend contributing for 2009 as early in the year as possible to gain an extra year of tax free growth.

Margin Tax Predictions

From Bob Owen CPA, of the Texas Society of CPAs: 

  • Many taxpayers have complained about the tax to their legislators.
  •  Some of those legislators have contacted TSCPA to ask:  “Can we save the margin tax?”
  • Some legislators have not received any complaints.
  • The National Federation of Independent Business wants substantial revisions to the tax to help small businesses.
  • The Business Tax Advisory Committee has issued its first report which says, among other things, that small businesses experienced a drop in taxes.  Click here to learn more about the BTAC and its first report.
  • The margin tax calculations have proven to be complex.  To see the results of a TSCPA survey on cost and complexity, click here.
  •  The margin tax collected about $1.6 billion less than anticipated.
  •  Big businesses are not complaining about the margin tax (see previous item).
  •  Rumors persist that some want to raise the margin tax rate, but I can’t find anyone willing to admit it.
  • Almost all suggested changes to the margin tax (except for the above rumors) would further reduce state revenue.
  • The state doesn’t have enough projected revenue to meet projected budget needs.
  • A group of conservative legislators are interested in repealing the tax and replacing it with an alternative business tax.



Health Savings Account

1.  What is a Health Savings Account (HSA?)

A Health Savings Account is a savings account which cn be used to pay medical expenses not covered by insurance.  Contributions to the plan are dedctible from an account holders’ federal income tax, and, where permitted, from state income tax.  Individuals can accumulate funds in the account from year to year.  Anyone can open an HSA that has a qualified High Deductible Health Insurance Plan.

2.  What is  High Deductible Health Insurance Plan (HDHP)?

For the purposes of an HSA, an HDHP is a medical insurance plan that requires a $1,100 minimum deductible plan with a total out-of-pocket maximum of $5,500 per individual and deductibles of a $2,200 minimum with a maximum of $11,200 out-of-pocket for families.  If an insurance plan has high deductibles, but is not an HDHP plan by IRS definitions, the policyholder does not qualify for an HSA.  

3.  What’s the difference between an HSA and a flexible spending account?

A flexible spending account is an employee benefit provided by an employer that can be used for medical expenses the employee or her family incurs during a plan year.  Funds in a flexible spending account not used by the employee resort to the employer at the end of the plan year.

Most individuals save on taxes using HSAs because of the IRS limits on deducting medical expenses.  How much will depend on your income bracket, any state taxes and whether your state allows a deduction for HSA funds.  The HSA deduction is an adjustment to Adjusted Gross Income, which is not subject to deduction phase-out rules or Alternative Minimum Tax calculations.

From:  Today’s CPA, January/February 2009.

Have you documented your charitable contributions?

Charitable contribution documentation requirements have increased substantially.  A taxpayer recently lost all charitable contributions when the court said, “Must have acknowledgement in hand before the return is filed.”  Securing the acknowlegement just before the audit or just before the court hearing will not make the charitable donation allowable.  

Contributions of $250 or more must be substantiated by a contemporaneous written acknowledgement from the donee.

“How much was your 2008 stimulus check?”

Yes, the amount of the stimulus payment is required to calculate any additional stimulus amount for your 2008 Form 1040.  Given that the IRS may have offset a part or all of the stimulus check against outstanding tax debt, your best source for the correct amount is a copy of the IRS letter.  The amount deposited in the bank may be a net number.

IRS Permits Changes in 529 Investment Strategy

In a new Notice, 2009-01, 2009-2 IRB, IRS says that for calendar year 2009 only, 529 plans may permit two changes in investment strategy, as well as upon a change in the designated beneficiary of an account. This new flexibility was prompted by concerns from 529 plan sponsors that in today’s market environment the lack of flexibility in switching investments could imperil many 529 accounts.

A person can make nondeductible cash contributions to a Code Sec. 529 plan (known colloquially as a 529 plan) on behalf of a designated beneficiary to pay for qualified higher education expenses. The earnings on the contributions build up tax-free and distributions from a 529 plan are excludable to the extent used to pay for qualified higher education expenses. A 529 plan is a tax-exempt program established and maintained by a state (including a state agency or instrumentality), or one or more eligible educational institutions (including private ones).

529 plans have proved to be an extremely popular way to save for college costs. The College Savings Plan Network estimates that accounts in these plans represent savings of over $120 billion in more than 11 million accounts nationwide.

Stimulating the Economy: Tax Cuts or Public Works?

A landmark study done in 2002 and confirmed in 2008 by Civic Economics compared the local economic impact of shopping at two beloved Austin indie stores – Waterloo Records and BookPeople – to that of shopping at Borders. (At the time, the chain planned a new store across the street from the two stores.) The Liveable City study found that $100 spent at Borders had just $13 in local economic impact; the same expenditure at Waterloo and BookPeople yielded a $45 impact. (“Austin Unchained”, Austin Chronicle, 11/21/08).

Luis Uchitelle reports in the NYTimes that Obama  “speaks of a recovery that would generate 2.5 million jobs in the first two years of his administration. That would require not just zero economic growth, but a fairly robust expansion — a swing in effect from the present 4 percent contraction to a growth rate of 2.5 to 3 percent a year.  Achieving such a swing would mean adding nearly $1 trillion in annual output to the economy. ”

The trick is figuring out the proper combination of outright spending and lower taxes.  In public Senate Budget Committee hearings, Mark Zandi, chief economist at Moody’s Economy.Com,  said  that every $1 of direct spending for public works creates $1.50 or more of economic activity as those dollars are spent in local economies on household costs.    

This multiplier effect is missing when taxpayers receive a tax break because they may not spend the savings.  The stimulus payments issued this year failed to stop the contraction of the economy because some of the windfall was saved while some was spent on imported goods which does not add to the nation’s economic output.  

In dollars, this means that the government could spend “just” $750 billion on direct public works to achieve a $1 trillion rise in output while a stimulus devoted entirely to tax cuts would require the full $1 trillion.

My advice,  if you receive an additional stimulus tax cut, spend it in your local community on locally produced goods.

Failed Monsters of Mortgage Finance

AIG is back at the trough: US Throws New Lifeline to AIG

On October 7 the House Committee on Oversight and Government Reform held their second day of hearings on the financial crisis in Wall Street. The first day addressed Lehman Brothers, the second, AIG.  

Michael Sullivan, the fired executive of AIG, blamed mark to market accounting rules required under  FASB 157 for all of AIG troubles:  “No disaster as massive as the unforeseen and unprecedented financial market disruption that has occurred over the past year is the result of a simple or single cause. The world’s current economic challenges are obviously related to multiple actions by multiple parties. To assist the Committee, I would like to focus on one particular factor-the role played by one accounting rule applied to corporations.  

“The accounting rules require that certain assets be ‘marked to market.’ In other words, companies must declare the value of those assets, on a quarterly basis, at the price such assets could sell for on the market at that point in time. Companies must declare these values on their books even if they have no intention of, or immediate need to, sell the assets, and even if they have not realized any actual gain or actual loss. FAS 157, which was adopted relatively recently, set out specific guidelines as to how companies must determine the “market price” of certain categories of assets. However well FAS 157 operates under any reasonably foreseeable market conditions, in the unprecedented credit crisis which began in the summer of 2007, FAS 157 had, in my opinion, unintended consequences.  In a distressed market where assets cannot be readily sold, companies are forced to declare the value of those assets at fire-sale prices.”

One of the fundamentals of accounting and taxation is that fair market value is what a willing seller and a willing buyer will agree is the value of an asset.    If an asset can’t be sold, it means there are no willing buyers, and the asset has no value.  The difficulty with the “toxic assets” that companies want to offload onto the taxpayer is that there is no market so that it’s hard to determine a value.    

From the hearing transcripts: Congressman Christoper Shays (R, CT):  “Yesterday we sent a formal request to the Chairman  asking for a specific commitment to make the federal mortgage companies a priority in this hearing, not an after afterthought.   We can’t wait until Halloween to unmask these two failed monsters of mortgage finance.”

To read the complete hearings:

The Emergency Economic Stabilization Act mandated a study of these Mark to Market Rules.  The study is to be performed by the Federal Reserve and Department of the Treasury.  The report is due January 9, 2009.

To listen to the first SEC hearings on this matter:  SEC Roundatable.

Thinking about giving to charity?

Melissa Berman, president and CEO of Rockefeller Philanthropy Advisors,  wrote, in 2004, about giving in tough economic times.  Since the giving season of 2008 is upon us, and 2008 will be much tougher than 2004, I wanted to share the questions she gives that can help us prioritize our giving:

What internal forces drive you to give? – It’s important to recognize your motivations for giving.  Giving motives clarify what’s most important to you:  causes you grew up with, issues that represent what you stand for, or problems around which your whole family can rally.

What external issues tug at your heart? – 

  • Big problems:  poverty, disease, global warming
  • Specific challenges:  literacy, Parkinson’s
  • Places:  Montana, Appalachia, Afghanistan
  • People:  artists, children, refugees, innovators
  • Institutions:  schools, museums, ballet companies

Once you have sense of the kind of issue you’re attuned to, you can explain clearly to yourself what you’re giving to.

How do you want the change to happen? – Consider how an organization tries to solve a problem, not just which problem it tries to solve.  
How do you want to get involved? – Decide how to invest your money as well as your time:

  • Number of gifts:  One gift? 10? 100?
  • Type of gifts:  General support? Specific projects? challenge grants?
  • Level of involvement;  Anonymous giving? Work on a project?  Lend professional expertise? Fundraising? Board service?
There’s no right or wrong level of giving or involvment, but once you’ve answered these questions, it’s time to put your “mouth where your money will be.”
Two websites to use to check up on charities:

Bullying in the Workforce

Courtesy of Accounting Web and the Texas Society of CPA’s:

If you thought you left bullying behind along with jump ropes and gym uniforms, think again. The Workplace Bullying Institute, yes there is such a thing, reported last year that 37 percent of the U.S workforce or 54 million employees are being bullied now or have been bullied at the workplace at some point during their careers.

“Organizations don’t realize that just rude behaviors, ongoing discourteous types of behaviors, have such negative effects on employees,” Sandy Hershcovis, assistant professor of business at the University of Manitoba, told

Although there are no laws on the books, several states have considered healthy workplace legislation to ban bullying behaviors, according to The Inside Training Newsletter. Since 2003, these states have included: California, Connecticut, Hawaii, Kansas, Massachusetts, Montana, Missouri, New Jersey, New York, Oklahoma, Oregon, Vermont, and Washington.

A form of workplace aggression, bullying behaviors include incivility, yelling, spreading gossip or lies, insulting employees, as well as hostility, verbal aggression, and angry exchanges. Various proposed laws define abusive conduct in a broad sense as “conduct of an employer or another employee that a reasonable person would find hostile or offensive,” Susan K. Lessack, a partner with Pepper Hamilton’s Labor and Employment Group told The Inside Training Newsletter