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Recent Tax Court decision could wreak ha

Glover v. Comm, a recent tax court decision, presents several issues to Merchant Mariners. Mr. Glover worked for Reinauer Transportation. His tugs pushed oil coastwise as far as Virginia. The tugs wou

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Recent Tax Court decision could wreak havoc on Mariners

State Taxes and Mariners

Suz asked this question So, what about if you live in one state (TN) and work as a merchant mariner in another state (HI), 45 days on/45 days off rotation? Do you pay HI state taxes, or does the payro

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State Taxes and Mariners

Mariner Tax Update January 2011

E-Filing alert! How many times have you read that mariners cannot E-File? How many websites have posted this. Year after year. And then all of a sudden preparers start proclaiming “mariners can

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Mariner Tax Update January 2011

Employee vs. Non-Employee LLC and S-Corp

I’ve been a client of yours for a few years now and I had a general tax question concerning my wife’s job status. She currently works full time for a marketing firm in “Deleted”

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Employee vs. Non-Employee LLC and S-Corp Planning for Mariners and their families

Maritime Tax Preparers and the Alternati

What they don’t want you to know… This video points out the tremendous effect of the AMT on merchant mariners. Seamen taking business deductions and offsets may very well be realizing litt

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Maritime Tax Preparers and the Alternative Minimum Tax

Mariners have flexibility finding residences

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by on November 7, 2010 at 3:53 pm

How you live plays a factor

Studies have evolved to encompass the “individual” factors in financial decision making. State tax rates can be quite deceiving if we don’t account for all taxes imposed. A mariner examining only the State’s income tax is ignoring many other taxes the State may impose on their specific lifestyle.

A smoker wanting to save some dough might prefer to live in South Carolina, which charges just 7 cents a pack — as opposed to the state tax average of $1.19. A heavy drinker might want to move from Oregon, where hard liquor is taxed at the rate of nearly $21 a gallon, to Maryland or Washington, D.C., which have the country’s lowest liquor taxes, $1.50 a gallon.

Are you a lottery devotee? You’ll keep more of your winnings in Rhode Island, which takes a tax of 22 cents on the dollar, and the least in West Virginia, with a 61-cent tax.

Of course, even Ted Taxpayer and Debbie Deduction, two people making the same salary and living in the same neighborhood, pay different amounts in taxes. For example, Ted’s house is worth more, so he pays higher property taxes; Debbie buys fewer goods and services, thus saving on sales taxes; Ted drives a gas hog and commutes farther to work, costing him more in gas taxes; Debbie doesn’t drink or smoke, so she saves on so-called sin taxes.

via The best and worst states for taxes – MSN Money.

Bush tax cuts: Obama will negotiate – Nov. 6, 2010

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by on November 7, 2010 at 3:33 pm

The look of compromise

So what kind of tax-cut extension could both parties live with?

Two Washington tax policy analysts — Clint Stretch of Deloitte Tax and Anne Mathias of MF Global’s Washington Research Group — believe the most likely compromise will be a temporary extension for everyone for one or two years.

Mathias believes Obama “will not veto a bill that extends them for all.”

Stretch said that a temporary extension for all carries less political risk for Republicans than other scenarios floated, such as a permanent extension for the middle-class but a temporary one for the rich.

“If the Republicans really care about high-income taxpayers, they can’t let them get separated from the middle class,” Stretch said.

Democrats, meanwhile, can frame a temporary extension as a way to give everyone time to figure out how to slow growth in the U.S. debt, much like what House Majority Leader Steny Hoyer suggested this summer, Stretch said.

via Bush tax cuts: Obama will negotiate – Nov. 6, 2010.

in IRS Updates

Integrated Financial Partners – HOT TOPIC: Risks of Relying on Social Security

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by on October 18, 2010 at 1:43 am

Consider the Risks of Relying on Social Security

The 58 million Americans who currently receive Social Security benefits will not receive a cost-of-living adjustment (COLA) in 2011. This is the second consecutive year in which payments were frozen because the Consumer Price Index measured little or no inflation.1

Although the decision to freeze benefits in 2011 is not directly related to the social insurance program’s projected funding shortfall, consider it a lesson in the risk of relying too heavily on a program that has a potentially uncertain future. Millions of Americans who rely on Social Security just found out that they won’t receive an anticipated benefit increase — and they learned this only a few months in advance, too late for them to do much about it.

Given that nothing like this has happened before, the disappointment among Social Security beneficiaries may have been compounded by an element of surprise: 2010 was the first year since 1975, when Social Security instituted automatic COLAs tied to the rate of inflation, in which benefits did not increase year-over-year.2 It’s likely that many retirees believed that the lack of a COLA in 2010 meant that one would be virtually guaranteed in 2011 because it would be unheard of for the government to go two years without increasing benefits. But that is exactly what has happened.

Going forward, it might be prudent to expect more surprises from Social Security. The program’s already fragile situation has deteriorated further in the face of widespread unemployment and a significant reduction in the payroll tax receipts that fund the government’s largest program. The Congressional Budget Office now expects that in 2010, Social Security outlays will exceed tax revenues for the first time since Social Security was amended in 1983. Although the CBO expects that revenues will generally equal outlays over the next few years, growing numbers of retiring baby boomers will eventually overwhelm the system and cause outlays to regularly exceed tax revenues by 2016. The CBO also projects that Social Security’s so-called trust funds, which are actually IOUs issued by Congress for borrowing Social Security’s surplus revenues in years past, will be exhausted by 2039 if no changes are made to current laws.3

What if It Happened to You?

Imagine what your own financial situation might look like if Social Security announced shortly before your anticipated retirement date that, because of underfunding, it would cut benefits and raise eligibility requirements.

Although these measures have not been adopted, it’s worth noting that they are being considered. The Congressional Budget Office has studied policy options that include reducing benefits, raising the retirement age, limiting future COLAs, and increasing payroll taxes.4 Because there is little consensus among lawmakers or the public, a solution reached by political negotiation could combine several different measures.

Fortunately, Social Security’s precarious financial situation has not gone unnoticed. Seventy-seven percent of Americans now believe the enormous cost associated with entitlement programs like Social Security and Medicare will eventually create major economic problems for the nation if they are left unchecked.5 Fifty-six percent of retirees believe they will eventually suffer a cut in their benefits, and 60% of workers have expressed doubt they will ever receive Social Security payments.6

It seems clear that, at the very least, Social Security will not be able survive without making some adjustments. The good news is that you are already aware of the likelihood, so it might be wise to prepare for your own retirement on the assumption that Social Security won’t be able to provide the same level of benefits that you might currently be expecting. Better to make such an assumption now, and begin seeking ways to offset the potential shortfall, than wait until it’s too late to do anything about it.

via Integrated Financial Partners – HOT TOPIC: Consider the Risks of Relying on Social Security : Newsletter: HOT TOPIC: Consider the Risks of Relying on Social Security.

Medical Deductions, Fertility Treatment, and FSA Alternatives

1
by on October 12, 2010 at 12:25 am

Should I Save My Medical Receipts?

Quick answer – hopefully not! Medical expenses have to exceed 7.5% of adjusted gross income (AGI) before they have the ability to start counting.

If your AGI was $100,000, you would need $7,500 in medical expenses before you could take a tax deduction. KEEP IN MIND – this doesn’t mean you will be deducting the entire amount. Only the amount that EXCEEDS the limitation. So in this case, medical deductions totaling $7,501 would allow a $1 deduction.

When are deductions likely?

  • On a very low income year. Ironically, income would probably be so low that you wouldn’t recognize a substantial benefit.

A low income year can lower the AGI threshold. AKA 7.5% of $20,000 is $1,500. This is a much easier amount to surpass. When examining disabled and elderly taxpayers, remember some income is not used in arriving at AGI – certain amounts of Social Security, disability, etc…

  • Taxpayers do not have medical insurance

A very tricky situation. If I was personally not paying expenses, this would be my last to go. If you are in this situation where you cannot afford insurance you should check with your State to see what assistance programs they may have available. More and more States are requiring all residents to maintain adequate health insurance. They have programs that provide assistance for those who cannot afford it on their own.

If you’re on unemployment, you should also check to see if there are cobra or other medical insurance subsistence programs available.

  • Taxpayers incur a substantial amount of uninsured medical expenses within a year

Generally these are elective surgeries or similar. A common high level expense is fertility treatments. Bills can pile up in the tens of thousands. Most medical insurance programs do not cover these expenses. This is one scenario where you may be able to recognize a medical deduction within a high income year…

Tips and tricks

  • Remember – a big stack of bills does not mean you have a deductible medical expense. It means you have bills you haven’t paid. Unless you have paid the expenses or have a secured loan they will most likely not be deductible.
  • A surrogate is not a medical expense. This is becoming more common these days. A surrogate mother will carry a child to term. Since the surrogate did not have an ailment (she was able to bear children) it is not deductible.

Best financial medical defense is the FSA

If you know you are going to incur substantial medical expenses (your deductible is $3,000 and you’re going to have a baby that year) use your FSA. An FSA (flexible spending account) allows you to set aside earned income to cover certain medical expenses. This income circumvents Federal, State, Social Security, and Medicare taxes. This is a huge benefit! My average client saves 30-35 cents on a dollar with their FSA

Keep in mind that FSA’s are a use it or lose it system. If you haven’t spent the money by the end of the allocated expense period you lose it. So never allocate more than you’re certain you’ll spend. As FSA rules and regs become more lax, there are more and more items that they can be used to purchase. OTC drugs, acupuncture, perhaps reiki. Look to your plan provider regarding availability and allowable expenses. Federal regs give the individual employers a great deal of leeway in administering the plans.

Home Ownership Advantages

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by on October 3, 2010 at 12:37 pm

Should Mariners Buy A House?

Jim gives a quick overview of the tax advantages of home ownership.

Don’t forget that these benefits aren’t just from a primary residence. Investment properties have the same properties in general.

Investment properties are not the same as rental properties. Be sure to check out our articles examining the cost benefit of rentals and how they differ from other properties.

Sailors want a fair shake

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by on September 26, 2010 at 8:46 pm

Tax Planning Never Goes Out of Style!

If there is one common trait we all share it is in taxation. There’s rarely a movement “by the people… for the people” to increase taxes. We occasionally feel cheated and wronged. We voice our outrage when we discover officials trusted with our hard earned tax dollars have squandered them away. We stand dumbfounded when businesses responsible for catastrophic economic downturns are fronted billions… of which they hand out bonuses.

We’re okay with a “fair share”

In my experience, mariners are generally content in paying taxes. Most see it as a civic duty. I’m not saying they run into my office dancing for joy at the possibility of owing Uncle Sam another mortgage payment. Only that they accept it as a part of citizenship. But we also share another common trait. No one wants to pay more than their fair share. (more…)

New IRS Rules for Investors

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by on September 10, 2010 at 12:43 pm

If you have a brokerage account, you soon will get a mailing or call about a new tax law that takes effect next year. Don’t ignore this one.

The subject: what you must do now that your broker must report an investment’s cost basis to the Internal Revenue Service after you sell a stock.

Cost basis is an area that is both crucial and confusing to taxpayers. It refers to the price of acquiring an investment, which then becomes the starting point for figuring tax when it is sold. Tracking basis can be complex, especially when there are multiple purchases, splits or dividend reinvestments. Shares in the same investment sold for the same price, for instance, generate different amounts of tax if they have different cost bases.

via Tax Report: New IRS Rules for Investors – WSJ.com.

in IRS Updates

The Growing Popularity of Preferred Stocks

1
by on August 13, 2010 at 1:54 am

The Growing Popularity of Preferred Stocks

Appeal Tied to Dividend Priority, Low Correlation to Common Stock

Companies that are seeking to raise money usually have two basic options: They can sell equity shares or they can borrow by issuing bonds. However, an increasing number of companies are turning to a less-used option: issuing preferred stock.

Preferred stock is becoming more popular among certain types of companies, especially banks, because it can be less expensive than issuing equity and it helps keep debt off the balance sheet.1

Investors may be attracted to “preferreds” because they are a potential source of dividend income. Preferreds also enjoy a low correlation with common stock returns, and they offer yields that are typically higher than those available from bonds, short-term debt instruments, and common stock.2

The essential difference between preferred stock and common stock is that preferreds convey additional rights to shareholders, although not all of these additional rights translate into guaranteed advantages.

First in Line for Dividends

Preferred stockholders are first in line when the company decides to issue a dividend. Preferred stocks generally offer a fixed dividend, usually a percentage of earnings, which must be paid before any dividends can be paid to common shareholders. Although the company is not generally required to pay a dividend (and may elect not to offer one when its earnings are below a certain level), some preferred shares are designated as cumulative. This means if the company fails to issue an expected dividend, the obligation to preferred shareholders accumulates and must be satisfied before the company can issue future dividends to common shareholders.

Low Volatility vs. Limited Upside

Preferred stocks tend to be less volatile than their common counterparts, but this is a sword that cuts both ways. If a company enjoys an accomplishment that causes the price of its common stock to rise, the preferred shares may not experience the same appreciation. Yet if the price of the stock falls for some reason, preferred shares are not as likely to experience a corresponding loss of value.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Sometimes Convertible, Usually Callable

Preferred stocks that are convertible can be exchanged for a certain number of common shares according to a conversion ratio set by the issuer. A conversion might make sense if the common shares are worth more than the preferred shares for which they can be exchanged. Of course, after a conversion, the preferred shareholder is no longer entitled to preferred dividends.

Keep in mind that most preferreds are callable at the option of a company. This gives the issuer the right to buy back the shares according to terms outlined in the prospectus. Callability is among the reasons why preferred shares are sensitive to interest rates. When interest rates fall, the issuer may be able to reduce costs by calling its preferred shares and issuing new shares that better reflect market conditions.

When interest rates increase, the value of preferred shares will usually decline as a result. If rates fall, outstanding preferred shares typically become more valuable, but they are also subject to an increased call risk. Preferred stocks have evolved in recent years as the demands of investors have changed. Call to learn more about the role that preferred stocks could play in your portfolio.

via Integrated Financial Partners – The Growing Popularity of Preferred Stocks : Newsletter: The Growing Popularity of Preferred Stocks.

in Investing

No Brainer – FSA Dependent

1
by on June 18, 2010 at 1:21 am

Easy tax money

If deciding between the dependent care credit and using the FSA is keeping you up at night – I’ve got great news for you!!! It’s bedtime. 99.999% of the time it makes way more sense to use the FSA account.

What is a Dependent FSA?

The Dependent FSA is similar to the medical FSA in that you are allowed to circumvent Federal, State, and payroll (social security and medicare) taxes. You can allocate $5,000 into your FSA. One dependent will generally produce effective tax savings in the range of $1,000-$1,400. There aren’t any pesky phase out limitations to worry about as well.

VS Dependent Care Credit

The dependent care credit allows for a credit offset of $600 per child (with limitations). Cash credits are generally king. But in this instance we’re able to circumvent several taxes while lowering our AGI (these deductions are usually after AGI is calculated “known as from AGI”).

What are the drawbacks?

This is essentially a no brainer as far as tax maneuvers go. The biggest drawback is that you have to offset dependent care eligibility with the FSA offset. Still, 99.999% of the time it’s better.

Advantages?

Besides the obvious tax savings you’re lowering your AGI. This can reduce the impact if you’re in one of those pesky phase out positions where you are losing child or other tax credits. It can also effect AMT phase outs and exemption allocations.

Unfortunately…

Well I have to add this in… Even though we almost always effectively save more, there’s an issue. We as taxpayers tend to base our savings on our refund. Problem being that payroll will lower your withholding when you contribute to your FSA. Meaning your refund will most likely not be better (it actually might be less)….

FSA factors for Mariners to consider

First – there are unfortunately very few maritime employers who have implemented flexible spending accounts. And if they’re not available, there’s no option.

Second – Multiple States… Say you live in New Hampshire. You sail foreign. Your spouse works in Massachusetts. Both employers offer FSA’s. Who Pays in? THE SPOUSE DOES… Not because we’re mean. Simply because your spouse has to file a non-resident return in Massachusetts every year. Meaning they’ll be able to offset that pesky State tax where you will not.

Third – State Employees… Flashback – (My dad had a sign that said “A Taxpayer is someone who doesn’t have to pass a civil service exam to work for the government….”) Joking aside, many State employees aren’t required to pay into Social Security and Medicare. Meaning if one spouse does, you’re losing a 7.5% offset. Always determine what Federal and State retirement systems you are paying into.

American Opportunity Credit

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by on January 29, 2010 at 8:54 pm

Way Better Than The Hope and Lifetime

The American Opportunity Credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.

via American Opportunity Credit.

in IRS Updates