All Things Financial Planning Blog


Who’s Preparing Your Tax Return?

For many of you, your answer will be “I prepare my own return.” If your return is a simple one because all you have is a W-2 form for your wages and maybe you have some interest income and you are taking the standard deduction, then this may be the right move for you.

For the rest of you, the answer is you may need a paid preparer to provide you with the expertise to file a complete, accurate and correct tax return. If you have not used a paid preparer in recent years, you have missed a lot of what the Internal Revenue Service (IRS) has done to improve the procedures and controls over the paid preparer tax community.

Several years ago, the IRS put in place a PTIN program for preparers. PTIN stands for Preparer Tax Identification Number and was meant to replace using the Social Security Number of the tax preparer for security purposes. In 2011, the IRS began the next phase requiring anyone paid to prepare tax returns to have a PTIN and to sign the returns that they were paid to prepare. All paid preparers were also required to be licensed, pass a basic competency test and take continuing education classes. Today one of the following certifications or licenses is required to prepare, sign, and be paid for a tax return:

  1. Attorney
  2. Certified Public Accountant
  3. Enrolled Agent
  4. Registered Tax Return Preparer

Each of these groups has different requirements for maintaining their license to practice. They also have different requirements with respect to keeping abreast of the tax laws and ethics of preparing tax returns. So let’s look at each category of preparer.

  1. Attorneys. Individuals who are attorneys gain their right to be an attorney from each state. The rules are different in each state for maintaining their license. The IRS grants them the ability to prepare and sign tax returns by virtue of their state issued license, but they still need a PTIN to file tax returns. They have annual continuing education requirements designated by their state to keep their license. A lawyer may represent a tax client before the IRS for any tax matter for any year as well as represent that client before state tax authorities.
  2. Certified Public Accountants (CPA). A CPA receives and maintains their license under the rules of each state they are licensed to practice in. The state rules determine the amount and type of continuing education that each CPA must have each year. The IRS allows CPA’s to prepare and file tax returns by virtue of their CPA license but they still need a PTIN to file tax returns. A CPA may also represent a client before the IRS and state tax authorities for any tax matter for any year even if the CPA did not prepare the original return.
  3. Enrolled Agents (EA). A person who is an EA is federally licensed by the IRS and has unlimited practice rights to represent any clients before the IRS on any tax matter. This license is obtained by taking a comprehensive 3-part exam that requires a minimum passing score in the areas of individual tax, corporate tax, and regulation. Some people may obtain their EA license through their work experience with the IRS in certain job areas. Like the attorney and the CPA, the EA can represent the client on any tax matter for any year even if the EA did not prepare the original tax return. The IRS has established that an EA must have 72 hours of continuing education on tax matters every three years and a minimum of 16 hours in any one year. These hours must include 2 hours of ethics training per year. Failure to meet these education requirements will result in loss of the EA designation.
  4. Registered Tax Return Preparer (RTRP). In 2011 the IRS established a new designation of RTRP for individuals who want to be tax preparers but do not have the above noted licenses. This license is obtained by taking a basic competency test on individual taxation. The rules for 2012 and beyond require that all tax preparers (other than the above licensed preparers) must be an RTRP as the minimum designation to be a paid tax preparer and signer of any tax return they prepare. This RTRP license is limited in scope when it comes to representing clients since they can only represent you on a return that they prepared. They cannot represent you on prior year returns which they did not prepare and they cannot represent you on all collection activities that you might become subject to if your return is selected for audit. The IRS has established a minimum of 15 hours of continuing education per year for individuals with the RTRP license with 2 hours being ethics training.

Given the newness of the RTRP tax preparation license, it is important to understand the breadth and limits of the person who has the RTRP designation. When the new designation was established in 2011, anyone who wished to prepare tax returns could register to get the RTRP designation and the corresponding PTIN number. For that group, they had until the end of 2013 to take and pass a basic test of their knowledge of the preparation of a Form 1040 tax return. They were also required to have the 15 hours of continuing education in 2012 to keep the RTRP into 2013 and they had to re-register their PTIN number by December 31, 2012.

For individuals who want to have the RTRP designation in 2013 and were not previously registered as a RTRP, they have to first take and pass the RTRP exam for the Form 1040 tax return and, in 2013, have 15 hours of continuing education on current tax rules and ethics.

All categories of tax preparers are required to renew their PTIN each year, meet continuing education requirements, and sign each return certifying that the return is complete and accurate to the best of their knowledge. All preparers also are subject to the requirements of Treasury Circular 230 which sets forth the Regulations Governing Practice before the Internal Revenue Service, including penalties for non-compliance.

So as you contemplate who to use as your paid tax preparer for your 2012 tax return, use this information to have an informed discussion with the person or persons you are considering entrusting with this task. Be sure that this person is signing the return because they are attesting to the completeness and accuracy of the amounts you are reporting on your tax return. If the person who prepares your return does not sign the return or does not have one of the credentials noted above, you may be signing an incorrect return and be setting yourself up for penalties if your return is selected for audit. You may also have to engage an attorney, CPA or EA to assist you with resolving the issues the IRS wants to discuss with you. If a preparer is not willing to sign a return that they prepare, they are not likely to stand by you when the IRS comes knocking.


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI

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Are You Ready for Some Tax Planning?

While we are all awaiting to see what Congress does to deal with our tax rates for 2012 and 2013, I thought it would be good to deal with some practical tax planning that will work for you regardless of what Congress does with all the tax issues they need to address. (I will write about the tax changes they make once we know what those are.)

Let’s start with how we can reduce our tax liability by using our Schedule A-type itemized deductions to help us over several years. All tax payers get to use the standard deduction or to itemize for certain items as a choice. For instance, we can claim a standard deduction of $5,950 if we are Single or Married Filing Separately or $11,900 if we are filing as Married Filing Jointly (MFJ). If we are 65 and older, the amount is increased by $1,450 if Single and by $1,150 for MFJ. So if both taxpayers are over age 65 and MFJ, the standard deduction is now $14,200 and if both were disabled the amount goes up to $15,500.

For many taxpayers, the ability to itemize and exceed these limits rests on whether they have a mortgage and own a house (real estate taxes). Without these two items, your ability to itemize is reduced unless you have high medical expenses or make charitable contributions. In some cases, you barely get over the standard amount allowed with what deductions you do have. So this article is meant for people who do not have enough to itemize or barely get over the limits each year.

If you are below the limit or barely over each year, you may want to look at how you pay things like real estate property taxes. In some states (Michigan is one), you receive two real estate tax each year with one of them due in the early part of the year. This gives you the option of paying it in December or in January, thus the opportunity for some tax planning. If you are not able to get the advantage of itemizing this year, you could wait and pay this tax bill in January 2013 and then plan on paying the December 2013/January 2014 bill in December of 2014.

Assuming the above might work for you, the next item would be to look at your charitable contributions. If you were going to postpone the real estate bill to January 2013, then you might also wait until January 2013 to write those year-end checks to charities. Should this become your plan for this December, then put a note on your calendar that next December you will write the charity donation checks in December to again double up on the donation items for 2014. This also works for those donated articles of clothing and other items that you drop off periodically at places that take donated items. Just remember to make that detailed list of the items donated, maybe take a picture for documentation purposes, get your receipt from the charity, and then make the right value of each item for tax purposes. For those checks you wrote, be sure to get a receipt from the charity for amounts over $250.

Now let’s move on to medical expenses. As you know, medical expenses need to exceed 7.5% of your adjusted gross income before you can take any medical expense deduction. This exclusion amount is going up to 10% in 2013, so you may want to look at getting some health care needs met in 2012 in order to help get this deduction. Examples of year-end health care might be a dental checkup, eye glass exams and new glasses, and filling prescriptions in December that you might normally fill in early January. I am not suggesting spending money without a reason, but many times we might have exams in the first quarter of the year that could be performed in December. Remember if you put the amount you are responsible for on your credit in December, it is considered paid for tax purposes even though you may not pay the credit card balance until next year. If you have a medical expense deduction for tax purposes, be sure to count up the miles that you incurred to get that medical treatment at round trip miles including to pick up your prescriptions and doctor office visits ($.23 per mile is what is allowed for medical miles in 2012).

This plan for itemizing one year and using the standard deduction in the next year should result in you claiming more over the two years than you would have claimed by not doing this planning. For instance, let’s assume you are Single and under age 65 with a standard deduction amount of $5,950 and your itemized deductions were normally $6,500 each year. With no planning you would be taking the $6,500 each year. You do your analysis and you find that there is $1,000 of the $6,500 that you can control as to when you pay out this money and thus get the tax deduction. So for the first year you take the standard deduction of$5,950 and in the second year you have $7,500 of itemized deduction for a total of $13,450 over the two years. This is $450 more than what you claimed by itemizing each year, saving you $68 in taxes if you are in the 15% tax bracket. Now that is tax planning and you get rewarded for this great planning.

To your list of things that you can do to move deductions from one year to the next, add making estimated tax deposit for state income taxes you know you will owe when the tax return is due (make the deposit in December 2012 rather than January 2013.) Make your January 2013 mortgage payment so you can claim an extra month’s mortgage interest each year.

For your charitable contributions, if you give stocks or mutual funds that have a huge capital gain to the charity, you get to claim the current market value rather than what you paid for the stock as the donation, just be sure to transfer the stock certificate rather than selling it. If you sell it first then you have the gain and the tax bill.

After the Schedule A items, your next stop is to look closely at your taxable investment portfolio to see how each investment is doing as it relates to what you paid for it originally. While we want all of our investments to grow, it would be unrealistic to think they are all worth more than what we paid for them. So consider harvesting the ones with loses, because you can take $3,000 of losses each year against your other income and that will reduce your taxable income with the tax bill going down by $450 if you are in the 15% tax bracket.

Finally, if these two ideas can reduce your taxable income enough to keep you in the 15% tax bracket, then any dividend income for 2012 will get taxed at Zero% versus 15% if you should end up in the 25% tax bracket.


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI

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Are You Better Off Today Than Four Years Ago?

Every day we get bombarded with reminders that we are not better off than we were four years ago. Obviously, if we have been unemployed during some or all of that time then we are not better off than we were four years ago. Having someone close to me in that situation I am able to see first hand how that has played out.

But what about the rest of us? Are we better off than four years ago? As a financial planner, I have opportunities to have that type of discussion frequently with clients or potential clients when we discuss their financial history. I thought I would make this blog a discussion of how some people have responded to this type of discussion or question.

Here is what the big picture is when I ask this question of people I interact with – if it is a recent observation then they probably do not feel good about the way they look at things. If, however, we discuss the issues over the entire four year spectrum, then they start to realize that things are probably better. Let me share how these issues come about.

Things that are better than four years ago:

  • Their mortgage rate is lower because they refinanced and significantly lowered their interest rate – one client went from 6.6% to 5% and the payment was lowered by $1,000 per month.
  • They stayed the course with their investment portfolio during the entire period. One client had $50,000 at the start that dropped to $35,000 and has since grown to $63,000 as the markets recovered. This does not include new money they invested.
  • That same couple continued to contribute to their 401k plans and they see that the per share prices for new contributions were lower in the early part of the four years so they have more total value today than they would have if the market had not recovered as it has.
  • Another couple was able to pay down their credit card debt faster than they have in the past, in part because they had refinanced their mortgage and used the extra money to apply to the outstanding credit card balance.
  • Several clients now had jobs versus being unemployed four years ago. During that time they used up much of their savings but now they had a new job, new career and things looked brighter.

What about the people who do not feel better off today than they were four years ago? In many cases the issues cited were based on more current observations:

  • They use their car a lot and the price of gas is much higher so they are spending a lot more of their weekly paycheck for gas.
  • They had credit card debt that they are struggling to pay off and the interest rates are very high so not much is going to reducing the principal amount owed with each payment.
  • The ones with credit card debt are also not able to get an equity loan on their home or to refinance the first because the first mortgage is higher than the current value of the property. In a few instances, the interest rate on the first mortgage is also higher than what it could be if they refinanced.
  • For some who have been scared off from investing in the stock and bond market, they see no growth in their investments because they have it all in cash. They are very afraid to get back in the market because they in some cases were burned from the earlier downturns in 2000 or thereabouts.

As you review this blog and the issues cited, how have you reacted to the issues in your specific situation? Are you thinking that things are going to be better or worse four years down the road? If you think they are going to be better, has that changed the way you look at how you save and invest for your future goals? If you think they will continue to be worse, does that make you even more conservative in how you invest for those future goals?

I would be interested in hearing from those who read this blog to get your insights.


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI


What Records Do I Need to Keep

I was working on my spring housecleaning the other day ( I know I was supposed to do this three months ago but tax season got in the way!) and came across an article that dealt with record retention suggestions from a few years ago. Since life has changed a little in the financial world, I decided this would be a great topic for a blog.

The IRS has added a few new forms in the recent past to our tax returns and we have all aged a few more years bringing us closer to when we will be retired and looking to withdraw money from our retirement accounts. All this raises issues about what records we should be keeping and what records we can get rid of.

High on the list of why to get rid of records we do not need anymore is the protection of our identity from people lurking to steal our identities. So any records that we can get rid of that have information about our name, social security number, address, etc., should be destroyed by shredding ourselves or going to a place that does shredding. Be sure that the shredder you use is a cross-cut shredder (old-style straight cut shredders leave too much opportunity to figure out the sensitive information on your documents). Should you be thinking of doing this, review what you are thinking of shredding to be sure that the following types of records will not be needed in the future:

  1. Records supporting what you have reported on your tax returns for the past 6 years should be retained in case of an audit. While the audit period for the IRS is normally 3 years, they do have the ability to go back 6 years if they believe that there is a reason to suspect underreporting of income or over claiming of deductions.
  2. If you have an investment portfolio that contains purchases from years ago, you should be sure to keep the records that show each purchase to support your cost basis. This would be especially true if you were purchasing stocks or mutual funds and reinvesting the periodic dividends and capital gains automatically. I have had clients who bought a major utility 20 years ago and reinvested the dividends every quarter for twenty years, had numerous stock splits and is sitting with over 4,000 shares today. There are numerous blocks of cost basis to choose from if they were to sell today, ranging from $1.50 to $35.00 per share. This gives them both gains and losses if they should sell to choose from but the burden is on them to prove it when they do sell and to report this information to the broker so the broker can report it on the brokerage 1099 statement at year end.
  3. Perhaps you invested in IRAs each year and did not take a tax deduction on your tax return in the year of the contribution, maybe 20 years ago. Each of these contributions are considered “cost basis” that will reduce the amount of taxable income when you take a withdrawal from the IRA in retirement. Again, it is your responsibility to document what your cost basis is when you report that on Form 8606 in your tax return. This is an area where you are the only one who knows what you did at tax time. So I would suggest you keep the Form 1040 for that year as well as the Form 5498 for that year. Form 5498 confirms that you made a contribution to the IRA or the Roth IRA and the Form 1040 shows whether you took a tax deduction for it that year. You may recall that back in 1998 when the Roth IRA was introduced, you had the opportunity to do a conversion of IRAs to Roth IRA and pay the tax over 4 years. This same opportunity was available in 2010 to convert and pay the tax in 2011 and 2012. I had a few clients who did the conversion in 1998 and they actually exercised their option to recharacterize the conversion back to an IRA which resulted in them doing the conversion again in 2010. Fortunately the clients had the above referenced documents to show this so that we could then reduce the converted amount of taxable income by their cost basis. Without that documentation being available, I would not have been able to file their tax return and show the cost basis as being not taxable.
  4. If you are one who contributes household items to charities to take a tax deduction, you may want to make a habit of keeping the purchase receipts of major items you buy to help support the value you will assign to the articles when you donate them to a charity. I am not suggesting that you can claim the price you paid but it does help to support how expensive the items are should the IRS want to question whether you buy expensive or inexpensive items that would then influence the value being claimed.
  5. If you operate a business and have equipment to claim on the return for depreciation, including the use of your car, you will want to keep the documents that show what you paid for the item and when it was purchased. These records will be needed for at least three years after the last year you have claimed it on a tax return. I would also note that if the item is no longer used in the business but you are still using it for personal reasons, you have a disposition of a business asset to reflect in the return when that occurs. An example may be the computer that your child is now using that you claimed 100% depreciation on your Schedule C for the past three years. It has a value to be reflected on your Schedule C as a sale of an asset. Or maybe it is the car that you used in business that is now used by your child to get to school.

There may be other documents you need to keep but this will get you started at relieving the clutter in your life. Enjoy the opportunity to open up some space around you.


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI

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Why Are My Taxes So High – Part II

In my previous blog on this topic, I focused on the different types of savings that could reduce your tax bill so that you would have more money to spend on your personal wants and needs. In this blog I am going to focus on issues that have shown up when I am preparing a client’s tax return. None of the examples relate to a specific client to protect the innocent but they do reflect how client’s are not paying attention to how the tax law treats the income they are receiving.

Let’s start with the different tax rates for different kinds of income. As you know your wages are taxed at what are referred to as ordinary tax rates. If you have interest income from savings accounts or certain other investments this income is also taxed at ordinary income tax rates. On the other hand, if you have dividend income from stock investments or capital gains from selling a profitable stock or mutual fund, this income will be taxed at capital gain tax rates in 2012. That rate can be zero % or 15% depending on what the rest of the taxable income is that is being reported on your return.

The income you have for your tax return gets “stacked” for purposes of determining what the tax rate is that you will pay in any given year. For instance, if your income is all from wages for you and your spouse and you file a joint return with your spouse, the income of the spouse is stacked on top of your income to determine the adjusted gross income, then you subtract your standard or itemized deductions and your personal exemptions to arrive at what is called “taxable income”. The amount of your taxable income then determines what tax rates will be applied to your taxable income. In a simple example, your wage income is $70,000 and your spouse’s wages are $40,000. You are using the standard deduction (because you rent and do not have enough itemized deductions) of $11,900 for 2012 and your two personal exemptions total $7,600. This leaves you with $90,500 of taxable income. The first $17,400 will be taxed at 10%, the next $53,300 will be taxed at 15% and the remaining $19,800 will be taxed at 25%. Because you are in the 25% incremental tax bracket, any interest income will be taxed at 25%, any dividends and capital gains will be taxed at 15%.

Let’s make a few changes to our example. Your neighbor, who has the same income as you from wages, has the ability to itemize because he has a mortgage on his house and has real estate taxes, state income taxes and makes charitable contributions. The total of all those deductions are $22,000. He also has 3 children so he has $11,400 of additional personal exemptions. These additional amounts reduce his taxable income to $69,000. In this instance, the first $17,400 is taxed at 10% and the remaining $51,600 will be taxed at 15%. This also leaves him with $1,700 that he could have in interest income that would be taxed at 15%. In addition, any dividend income or capital gains income that he would have would be taxed at zero % because he is in the 15% incremental tax bracket.

In comparing these two examples, if both of you had $1,700 of interest income and $2,500 of dividend income you would have $570 more tax than what would be the taxes your neighbor would have with the same income. This is because you are now in the 25% incremental tax bracket while your neighbor is in the 15% incremental tax bracket.

Now let’s look at some decisions that people are making that influence their tax bill. Your neighbor was concerned with what was happening with the financial markets and decided to get out of the investments that were creating the dividends and put all his invested assets into things that created just interest income. He still had a total of $4,200 to include on his tax return. That put his total taxable income at $73,200 and resulted in $2,500 of the $4,200 being taxed at 25%, or $625 in taxes that he would have by changing the nature of his investments.

Because of the challenges being faced by many tax payers due to loss of jobs or income from lower hours worked or lower paying jobs, people have taken money out of their 401(k) or IRA accounts to pay for their living expenses. When this happens these withdrawals are then taxable income. In many instances these withdrawals have caused the taxpayer to go into the next incremental tax bracket resulting in more tax being paid then may have been necessary.

Let’s go back to the first example of you and your spouse both working. Your spouse loses the job paying $40,000 per year. There is $40,000 in the IRA that you decide to take out to replace that lost wage income. If you took it out all at once, that $40,000 would result in $19,800 being taxed at 25% because that is what the incremental tax bracket was in the example. Now suppose that you talked with your tax professional before you did the withdrawal and she suggested that you take out $20,000 this year and then take the other $20,000 out next year. This would result in the incremental tax rate being only 15% for this year and 15% for next year (assuming the tax rates stay the same for 2013). In addition, your spouse might find a new job in the interim and you may not have to take out that second $20,000. By spreading the withdrawal over 2 years and keeping the tax rate at 15%, you would be able to save $1,980 (10% more tax rate on the $19,800) in taxes which gives you greater purchasing power for your money.

It is always better to have someone else review the options you have to choose from to figure out which ones will work best for you. In the end you will get better control over your tax burden and then you will have the answer to why your taxes are what they are.


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI


Why Are My Taxes So High – Part I

With the tax season officially over on April 17, 2011, I thought this would be an ideal time to address a question that was posed to me by several clients as I was finishing up their tax return – “Why are my taxes so high?”

This was not necessarily a question directed at the tax rates currently in effect (I try to stay away from the politically charged discussions) but rather to the actual taxes that the client was seeing on their return.

In many cases, the answer lies in that the client is not taking full advantage of contributing to tax-deferred programs that would reduce their taxable income. This would include the 401k, 403b and 457 type programs that are available to wage earners who receive a W-2 to report their income from their employer. It would also include the SEP_IRA, Keogh, and self-employed 401k plans available to individuals who get a 1099-MISC reporting of their income because they are independent contractors and are responsible for their own payment of self-employment taxes and for contributing to their own retirement programs. And, finally, it would include the Retirement Savings Credit that is available to certain wage earners who contribute to traditional IRAs and Roth IRAs. Each of these programs provides ways of lowering your tax burden and maybe increasing your tax refund. So let’s look at these in more detail.

401k, 403b and 457 Programs

These programs allow you to enroll through your employer to contribute to employer sponsored programs which will reduce your taxable income, increase the money available to you when you retire, and (when the employer provides a match to what you contribute) to increase the amount going to your retirement portfolio.

For example, if you contribute $100 to these programs each pay period, your take-home pay will be reduced by somewhere between $70 and $85 (depends on your tax bracket). The difference represents the federal and state taxes that you will not pay on the amount being withheld on your contribution. If you are in a high income tax state, the difference may be even greater. If your employer was matching 50% of your contribution, there would be an additional $50 going into your account. So for that $70 reduction in pay, you would have a total of $150 in your account. Now that is a great start towards your retirement!

The contribution limit on these programs is $17,000 per year and if you are 50 years old you can put an additional $5,500 into these programs. If your employer is matching, the total that can be contributed is $50,000. These limits may go up in the future, based on what happens to future inflation.

Simple 401k Program
Some employers provide a Simple 401k program for their employees. In this instance the contribution limit for the employee is $11,500 per year with a $2,500 catch-up provision for those who reach age 50 during 2012.

SEP-IRA, Keogh, and Self-employed 401k programs

Each of these programs have different limitations related to annual contributions but the key issue is that you are able to contribute to these plans as the employer and the employee for your self-employed income received on the 1099-MISC income reporting form. For the solo 401k plans the taxpayer can contribute a total of up to $50,000 if under age 50 and up to $55,000 if age 50 or older. The limitation will be further limited by the amount of net income from the business you operate and report on Schedule C or on the S Corp or C Corp tax return you file. In most cases the paper work to open this account needs to be done by December 31, 2012, but the actual calculation of the contributed amount will be done when you determine the amount of net income after expenses when you complete the tax return for 2012 sometime in early 2013.

Savers Credit
For certain taxpayers there is a Savers Credit (formally called the Retirement Savings Contributions Credit) that will reduce the tax liability for eligible taxpayers. This credit applies to individuals with a filing status and 2012 income of:

  • Single, married filing separately, or qualifying widow(er), with income up to $28,250
  • Head of Household with income up to $42,375
  • Married Filing Jointly, with incomes up to $56,500

To be eligible for the credit you must be at least 18 years of age, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.

If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.

The Savers Credit is in addition to other tax benefits you may receive for retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan. To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions. For more information, review IRS Publication 590, Individual Retirement Arrangements (IRAs), Publication 4703, Retirement Savings Contributions Credit, and Form 8880.

As one example of the potential tax savings, a taxpayer with a filing status of single and income of $25,000 contributes $2,000 to an IRA. This taxpayer could deduct that amount from her taxable income. This would reduce her federal taxes by $300. In addition she would be able to claim the Savers Credit which would reduce her taxes by another $200. Total savings in taxes would be $500 from this $2,000 contribution to the IRA.

In my next blog, I will focus on the types of issues that a taxpayer should be cognizant of when deciding where to invest their money as it relates to whether they are earning interest, dividends, or capital gains as well as how much they are earning of each will influence their tax liability.


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI

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Wow, My Tax Return is Due April 17th!

“I can’t believe I am a week away from when my tax return needs to be filed”. I am sure that there will be a few people who are reading this blog who have that thought in their mind and panic is starting to set in big time.

If this is you, what should you do rather than panic? First, get a cup of coffee, take a deep breath and relax. Second, get all the tax records you have for 2011 in front of you and, third, contact your tax professional to schedule a meeting (don’t be surprised if this is hard to do!)

If you are going to do this yourself, that is fine, but recognize that you may have issues that are complex and need that tax professional to assist you.

Since we are approaching the deadline, you may want to take advantage of filing Form 4868, Request for Automatic Extension of Time to File Your Return, so that you do not make any rash decisions in filing the return and save yourself the time to file an amended return when you find some mistakes or corrections later.

Filing Form 4868 is solely for the purpose of delaying the filing of paper, it is not for delaying the payment of any tax due. Taxes are due by April 17th, any amount paid after that date may result in penalties and interest for late payment. So you need to get most of your tax return completed to figure out what tax, if any, is due that needs to be paid with the filing of the extension.

What kind of things could delay the completion of your return by April 17, 2011? Here is a list, but by no means everything, that could be needed:

  1. You may not have all your itemized deductions or business expenses compiled. Missing items could mean you would be over paying your tax liability. Maybe you did not keep all your medical receipts and when you work on your return you realize you can get a medical deduction on Schedule A. Maybe you need to figure out the value of the donations you made to various charities of clothing and household items.
  2. You may have sales of investments that you do not have the cost basis to figure the correct gain or loss. When you go to complete Schedule D this year, you will also find a new Form 8949 that requires more information than what you were required to report in past years. This may prevent the completion of your return.
  3. If you have Schedule C income, you may want to consider contributing to a SEP-IRA or other retirement account that basis its amount on how much you have as a profit for the year. Once you calculate this amount, you would have until October 15th to put that contribution into the SEP-IRA to get the deduction for 2011. This contribution would reduce your tax liability so this is a positive action to take.
  4. You may be missing some tax forms and need to get copies of them to get a complete and accurate return completed. Many brokerage firms have issued corrected Form 1099-B that reports your dividend, interest income and capital gain and loss activity for 2011. You may need to track these items down.

Once you file the Form 4868, you will have until October 15, 2012, to complete and file the actual return. So don’t forget to finish this job up in the next few months.

If you do file the Form 4868, don’t forget to include the check for any tax due from what work you did on your return. Not paying now could result in a potential penalty for underpayment when you file the finished return later and you owe too much come October.

While you may delay the filing of your return until October, you only have until April 17th to fund any Roth IRA or Traditional IRA that you want to do for 2011. The maximum amount for either of these is $5,000 per person ($6,000 if over age 50 in 2011). So you need to act on this in the next few days.

Finally, if you do complete your return and get it filed by April 15th, and you see you have a large refund coming, consider changing the amount of taxes being withheld each pay period to give yourself a raise in take home pay. Then be sure to set up an automatic transfer of that extra money in your checking account to go to that Roth IRA that you have been meaning to do for several years to give your retirement fund a jump start. Thought I was going to forget that this is a financial planning blog?


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI


Why Invest in the Roth IRA?

Roth IRA! Roth IRA! Roth IRA! I am sure you have never heard that pep rally cheer at any program you have gone to. But then again, most times we suggest that we need to look at your goals and objectives and a bunch of other aspects of your life before we make recommendations on what you should do with your money.

For this blog I am assuming most readers would say “I need to put money away for my eventual retirement and I have a few goals along the way that will require some money to be saved. I just don’t know when those goals will show up or how much they will cost me.” Those elusive goals might include a down payment on a house or tuition for your children’s education.

So the important thing here is you need to save money, you want access to this money when these goals show up, and you want this to be tax efficient along the way. In the end, the money not used on other goals will be funding your retirement.

Given the above requirements, I would be recommending that you have the Roth IRA on your list of places to be putting your money each year. So let’s look at what the Roth IRA is all about.

The Roth IRA was established by the Taxpayer Relief Act of 1997 (Public Law 105-34) and named for its chief legislative sponsor, Senator William Roth of Delaware. In the first year (1998) of this program, the annual limit was $2,000 that could be contributed to this retirement fund for you (and your spouse if married) based on the level of your earned income. As long as you earned at least the maximum allowed to be contributed, you could have a Roth IRA. So if you earned $1,500 in a year, you were limited to contributing $1,500 to the Roth IRA.

Contributions to a Roth IRA are from after-tax income which is where it gets some of its tax-free benefits. In addition, contributions to a Roth IRA are over and above what you might be contributing to a 401k or 403b type program through your employer.

Today the annual contribution limit for 2011 and 2012 is $5,000 per year if you are age 49 and below and $6,000 per year if you are age 50 in that year. This limit assumes that you had at least that amount in earned income for the year. If you are married, the earned income for both of you would have to be twice those amounts. There are limitations to contributing to a Roth IRA based on your income, but there is a way around that limitation (a subject for another time).

When you contribute to a Roth IRA, the earnings on the Roth IRA grow tax-deferred just like the earnings in your employer’s 401k plan during the period of accumulation while you are working and saving. Once you reach age 59 ½, the total value of the Roth IRA (contributions and earnings) is available for withdrawal by you with no income tax liability for any amount withdrawn. That is a huge difference and advantage over your 401k account which will be totally taxable as you make withdrawals each year. That means you have increased purchasing power with the Roth IRA money compared with the 401k money.

The second advantage of the Roth IRA account is that during the years before you reach age 59 ½, you have access to the amounts you contributed each year with no tax consequences. This is because you would be withdrawing what you had contributed annually form after tax dollars. What you cannot touch during this period is the earnings portion of your account – that amount would be subject to a penalty if withdrawn before age 59 ½.

A third advantage becomes available to you at age 70 ½ and later. The Roth IRA does not require any minimum annual distributions like you are required to do with your 401k account that you may have rolled over to an IRA when you left your employer or retired. If you do take money from the Roth IRA in your later years, the amounts withdrawn do not create any taxable income under current laws.

A fourth advantage becomes available to your heirs upon your passing. The heirs get to receive this money in annual or lump sum distributions in the same tax-free way that you would have. By contrast, if they receive your 401k/IRA as an inheritance, they will have to pay taxes on the amount withdrawn each year, just like you did.

The fifth advantage is tied to those other goals that you might have along the way. Let’s use the college tuition as the example. Your child reaches college age and you need some money for tuition. You could withdraw the amount from the Roth IRA for the tuition as long as it was less than the annual contributions you had made to date. For instance, if you had contributed $5,000 per year for 15 years you would have a total of $75,000 that could be withdrawn from the Roth IRA to meet the college expenses. There would be no tax liability on that withdrawal and the remaining value of that account would continue to grow for your retirement. 

Had you decided to take money from your 401k/IRA to pay the same $75,000 of college expenses, you would have had to pay income tax and probably a 10% penalty for that early withdrawal.

All these advantages are not without some penalty to you. The biggest disadvantage is that you are putting this money into the Roth IRA with after-tax money. This means you already paid tax on the amount your contributed each year as compared to the amount you put into the employer 401k plan was before taxes. That tax cost to you would be based on what your incremental tax rate is currently applied to the contributed amount. If you are in the 15% tax bracket, then the tax cost on the $5,000 contribution is $750 on your annual contribution.

In the meantime, the growth of your Roth IRA investment over many years did not cost you any income taxes!

Roth IRA! Roth IRA!


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI

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What is This New Schedule D – Form 8949?

You have all your tax documents in front of you and they look much the same as in prior years except for the report from your broker on those stock sales you had in 2011. There seems to be so much more information on it and all kinds of codes to look at and understand. Then you open up the tax forms to prepare your return and see that Schedule D – Capital Gains and Losses – has also changed and makes reference to information from Form 8949 and boxes A, B, and C, Part I and Part II.

Welcome to the new world of the IRS reporting and tracking! The IRS wants to know a lot more about each sale you had of a stock, bond, or mutual fund. So let’s see what all is being asked of you when you go to complete your tax return for 2011.

Form 8949 has been created to accumulate the information about each sale you had of various securities, much like what you reported on Schedule D in the past. Totals from this Form are then transferred to the new Schedule D in a summary fashion.

The Part I and Part II of Form 8949 are much the same as in the past. Part I tracks short term sales of securities and Part II is for long term sales. The definition of short and long term has not changed from the past. You still need to hold a security for more than one year to get the long term treatment of the gain to be taxed at the lower tax rate. So you will still want to be cognizant of which security you are selling and whether you held it for the required time to save those tax dollars by having long term gains.

When you look at Form 8949 you will see the box to check whether you are reporting an A, B, or C transaction. A separate form must be used for each type of transaction being reported. An A transaction is where your broker has reported a cost basis on Form 1099-B that goes to the IRS and you agree with that cost basis. A transaction that is going on the B schedule for Form 8949 is when the cost basis was not reported to the IRS on Form 1099-B. Finally, the C transaction is when you cannot code a sale as an A or B transaction.

The next thing to notice about this new form is the information that you will enter for each sale, starting with the column headed (b) –“Code for column (g)”. There are 10 different codes to choose from for this column. Several codes are to indicate that the information on cost basis or gain/loss on the 1099-B is incorrect or the sale is subject to the Wash sale rules.

So what is all this new information about? The IRS would probably say it is to improve accuracy of the tax return information and therefore the correctness of the reported income or loss. I would agree with that thought but I would add that the IRS may also be using this new information to help them in identifying transactions that they may want to do some further review and auditing.

The IRS has never had information available to them in the past about the cost basis on the sale of securities until you filed your return and provide that information. Now they are getting this information from investment houses as part of the 1099-B reporting. When you (or your tax preparer) enter codes on this new form that indicate the information is not correct on the 1099-B, it appears to me that you are indicating you have knowledge that your broker does not or that your broker has incorrect or incomplete information. Neither position appears to me to be what you necessarily want to be communicating to the IRS. So what do you do about this?

The answer lies in reviewing your records with the broker before you ever get to the point of selling the security you own. In this review, you want to be sure that the broker has the correct cost basis for every share you own of that security. If the broker does not have that information on file because maybe you moved the securities from another broker or adviser sometime in the past, then it behooves you to get this information to the broker long before you think of selling the security.

There is another reason to pull this information together now rather than later. These new rules also require you to provide timely notice to the broker of which “lots” of a security you are selling. For instance, you bought 100 shares of stock when you were very young and have been reinvesting the dividends every quarter for the last 20 years, so you actually have at least 81 “lots” of this stock. I am sure this stock may have also split several times during these 20 years, so you actually have more than 81 “lots” and may own like 3,000 shares of Stock A today. Each “lot” is also going to have its own cost basis and they may be all over the place in value.

Let’s say you decide you want to sell 500 shares of this stock at today’s price of $30.50 per share. In the past 20 years the stock has traded between $15 and $57 per share and dividends have been paid every quarter at these different prices. What lots are you selling – the highs or the lows? The highs give you a loss and the lows give you a huge profit. To do this correctly today, you need to let the broker know what you are selling when you sell, not when you do your tax return.

So, if you do not have this information readily available or do not want to do this work yourself, you need to decide who to go to for this not so easy and quick task. Maybe you start with your tax professional or financial planner to see what assistance they can provide, but you better not look for that to get done in the next few months. And be prepared to get a bill for that time and effort!


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI

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I am Married – What is My Filing Status?

It is tax time and a frequent question I get is – Can I file married but separately for tax purposes?

The easy answer is yes, but as always there are issues to consider what status is the best one to use. This article will cover the various issues that need to be looked at before making that decision.

When I get this question, I usually ask why the client wants to file separately since there are very good reasons for not using this filing status. I get numerous reasons for wanting to file separately as it relates to the income and expenses of the other spouse being questionable by the client sitting in front of me and sometimes the client thinks the tax bill will be lower if they file separately.

When you are married the joint filing status provides you with all the deductions and credits that the tax law provides to us whereas the filing status of separate has quite a few disadvantages with respect to deductions and credits.

There are also some limited times when the filing status of Head of Household can be used for someone who is married but can be “considered unmarried” at the end of the year. So let’s look at each filing status and see how you fit into these categories.

Head of Household Status (HOH)

This filing status is available to someone who is married but as of the last day of the year is “considered unmarried”. To fit this category, you must:

  • File a separate return
  • Paid more than half the cost of keeping up your home for the tax year
  • Your spouse did not live in the home during the last six months of the year
  • Your home was the principal place of abode of your child, stepchild, adopted child or foster child for more than half of the year, AND
  • You can claim the child as a dependent (unless the other parent can claim the child under the rules for divorced or separate parents)

If your spouse was a non-resident alien at any time during the year, then you are considered unmarried and eligible for HOH filing status unless you make an election to treat your spouse as a resident alien.

Two important issues are in the above rules. First is that only children can be the qualifying dependent for this status, you cannot use other relatives as the qualifying person. Second, the cost of keeping up a home includes rent, property taxes, mortgage interest, food consumed in the home, utilities, repairs, and other household expenses. All other expenses are excluded from this calculation.

Married Filing Separately

When you use this status you are not liable for the accuracy of your spouse’s return or for the payment of their taxes. If the other spouse owes on their return, owes child support or other federal debt, your tax refund is not at risk. If you have concerns about the income that your spouse is reporting on their return and do not want to be liable for any taxes, penalties, or interest on such income, you might want to file separately. 

In some cases, you might pay less tax as a couple by filing separately. This could occur when one spouse has large itemized deductions subject to AGI limits (medical expenses or employee expenses) that may result in a lower tax by filing separately.

Despite the above advantages, there are a number of disadvantages when you file separately:

  • The tax rate applied to taxable income is usually higher than on a joint filed return
  • The standard deduction is half the amount allowed on a joint return
  • If one spouse itemizes the other spouse cannot claim the standard deduction
  • The exemption amount for figuring the AMT is half of that allowed for filing joint
  • Capital loss deduction limit is $1,500 (not the $3,000 limit allowed on a joint return)
  • First-time homebuyer credit is limited to $4,000 ($3,250 for long-time residents)
  • There are several deductions and credits that are reduced at lower income levels
    • Deduction for personal exemptions
    • Itemized deductions
    • Child tax credit
    • Retirement savings contributions credit

You are also ineligible for the following credits:

  1. Child and dependent care expenses in most cases
  2. Earned income credit
  3. Exclusion or credit for adoption expenses, in most cases
  4. Education credits, student loan interest, and tuition and fees deduction
  5. Cannot exclude interest income from US Savings bonds used for education

When you are figuring the items to include on Schedule A for itemized deductions, it will be important to identify who is legally responsible for the item being paid and claimed. For instance, if one spouse owns the title to the house and has the mortgage, only that spouse may claim the mortgage interest and property taxes, even though the other spouse may have the greater income which is being used to pay these items.

If the spouses lived together at any time during the tax year, the following issues arise:

  1. Neither spouse is eligible for the credit for the elderly or disabled
  2. Must include up to 85% of social security or equivalent railroad retirement benefits in income
  3. Cannot convert IRA amounts to a Roth IRA

If you are considering using the Married Filing Separately status, I would suggest you prepare the returns under both separate and joint statuses to see what the difference is in tax liability before making that decision to file separately. Even though the tax liability difference may be significant, you may still want to file separate returns to keep away from the tax liability and tax liens that could be filed against your assets that could result from actions by your spouse on that return.


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI


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