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

Housing Act

With all of the attention on the Economic Stabilization Act, many of the “Main Street” provisions of the Housing 
Act passed in August have received less notice:

H.R. 3221, the “American Housing Rescue and Foreclosure Prevention Act of 2008”—the Housing Act—was signed into law by the President on July 30, 2008. This sweeping measure is designed to shore up the ailing housing market as well as tighten lending practices and reform financial institutions associated with that market. It also contains a number of tax changes, including tax breaks for homebuyers and homeowners, relaxed requirements for tax-exempt bonds, eased AMT rules, tax changes for businesses, as well as highly specialized changes affecting low-income housing and special investment vehicles called Real Estate Investment Trusts (REITs).



Property tax deduction for non-itemizers. For 2008 only, those who take the standard deduction instead of itemizing deductions may claim an additional standard deduction for State and local property taxes paid (but taxes written off as business deductions don’t count). The deduction is $1,000 for joint return and $500 for all other filers (or actual property tax paid, if that’s less).


Reduced homesale exclusion for some sellers. After 2008, some homesellers who don’t use their properties as principal residences for their entire ownership period may wind up paying more of a tax bill than they would under current rules (or pay tax when none would be owed currently). The tax break affected is the homesale exclusion, which generally allows up to $250,000 of homesale profit to be tax-free if a home was owned and used by the seller as a principal residence (i.e., main home) for at least 2 of the 5 years before the sale. In general, the tax-free break can only be used once every 2 years. The tax-free profit amount is up to $500,000 for married taxpayers filing jointly for the year of sale if several conditions are met. A reduced maximum exclusion may apply to taxpayers who must sell their principal residence because of health or employment changes (or certain unforeseen circumstances) and as a result (1) fail the 2-out-of-5-year ownership and use rule, or (2) previously used the homesale exclusion within two years.

For sales after 2008, gain potentially eligible for the homesale exclusion will be reduced proportionately for the period of time a home wasn’t used as a principal residence. The prime example is a vacation home that is turned into a principal residence by its owners, but the new rule also can hit individuals who use a property as a main home for a while, rent it out for a period of time, and then move back in. There are, however, a number of exceptions. For starters, pre-2009 periods of non-principal-residence use don’t count, and neither do periods of temporary absence totaling no more than 2 years due to health or employment changes (or certain unforeseen circumstances), or up to 10 years of absence for qualifying members of the military or certain government employees. Finally, non-principal-residence use doesn’t count if it occurs (1) in the five years preceding the sale, but (2) after you permanently stop using the home as a main home.

Underground Economy:

Information reporting of merchants’ credit card transactions. After 2010, banks will be required to file an information return with the IRS reporting the total dollar amount of credit and debit card payments a merchant receives during the year, along with the merchant’s name, address, and taxpayer identification number (TIN). Similar reporting also will be required for third party network transactions (e.g., those facilitating online sales), with exceptions for certain small merchants. The new information reporting requirement is designed to boost the tax compliance rate of merchants.

Physics does Economics

Mark Buchanan, a theoretical physicist, is the author, most recently, of “The Social Atom: Why the Rich Get Richer, Cheaters Get Caught and Your Neighbor Usually Looks Like You.”  He explains in the NYTimes how physicists are creating models to explain the markets.  He offers examples of three models one of which explores how a very small, such as .1%, transaction tax can actually stabilize some markets.  The tax slows down speculation, especially in foreign currency markets.

Perhaps “Numb3rs” can do a “ripped from the headlines” show.

“The Giant Pool of Money”

As reported in the Sept. 29 issue of the NY Times,  This American Life reported in May 2008 on the housing crisis.  This is their introductory text:

“A special program about the housing crisis produced in a special collaboration with NPR News.  We explain it all to you.  What does the housing crisis have to do with the turmoil on Wall Street?  Why did banks make half-million dollar loans to people without jobs or income?  And why is everyone talking so much about the 1930’s?  It all comes back to the Giant Pool of Money.”

Go listen.

Another Accounting Debacle

As if Enron’s effects on the accounting industry weren’t enough,  Financial Week reported on September 18 that Fannie Mae and Freddie Mac inflated their core capital with the use of deferred tax credits.

The article states: “When companies have losses, they are allowed to recognize tax-deferred credits in the year of the loss, even though the reduction in taxes they produce will only be realized in future years in which they have taxable income, and thus a liability they can use the credit to reduce. Fannie Mae and Freddie Mac used that method to almost double the amounts they claimed as capital reserves.”

Financial Account Statement 109 provides the methods for computing deferred tax assets and requires that firms consider whether it is more likely than not that the deferred tax asset will be not be realized.  Freddie and Fannie haven’t shown a profit in several years and little prospect of futrue profit against which to use these deferred tax assets.

Quoting Robert Willins, a tax and accounting consultant, the article continues:  “They’re not writing down the tax assets at all,” said Mr. Willens, even though “it’s almost impossible to avoid a write-down when you have a history of cumulative losses. Nevertheless, these guys have been able to avoid it with the concurrence of their auditors.” 

Fannie and Freddie counted these “assets” toward their regulatory capital and were able disguise their lack of liquidity.


And so it goes.

Taxpayers Get a Second Shot at the Tax Rebate

Courtesy of Kiplinger’s Retirement Report, April 2008:

If your 2007 income was too high to qualify for the tax rebates, don’t despair.  Remember, the rebate is really a prepayment of a tax credit created for 2008 returns.  If your 2008 income falls below the phase-out levels–$75,000 on a single return or $150,000 on a joint one– you’ll get your tax benefit when you file your 2008 return next spring.

Should your income exceed the threshold in 2008, and you received the rebate in 2007, not to worry.  In an unusual heads-you-win/tails-the IRS-loses setup, you won’t have to pay the money back.

I want to know if my son will pay me back the $300 that I gave him since he did not qualify to receive the rebate this year as he was still my dependent in 2007?