Category: Uncategorized

Posted on

Estimated Tax Payments: What are they and How to be sure you aren’t behind?

One question that I get a lot from clients relates to confusion regarding estimated taxes. I get this question most often from taxpayers who have been employees for most of their careers and for whatever reason find themselves self-employed, either full-time or by just having a side gig.

Generally the questions fall around: “Do I have to pay quarterly estimates?”, “When are they due?”, and “How much do I have to pay?”

I’m going to lay down a “brief” primer on estimated taxes and why, primarily self-employed people, have to pay them.

Jimmy Fallon Lets Do This GIF by The Tonight Show Starring Jimmy Fallon - Find & Share on GIPHY

The Feds require all taxpayers to pay in both Income Tax and FICA taxes throughout the year as you earn your income.  Taxpayers who are classified as employees (those that work for “the man”) have both of these taxes withheld by their employer before they ever get paid .

Family Guy GIF - Find & Share on GIPHY

This is a pretty crazy development that we accept as the governed in that you agree to work with an employer for money and before you even receive it, the government carves out their share first.  I don’t want to stand too long on this soap box. So, employees have their taxes withheld and remitted to the government by their employer every pay period, generally.

For those who are self-employed, the government does not yet have a practical way to get their hands on the funds nor appropriately assess how much to withhold since self-employed taxpayers pay tax on their net income (income after expenses) rather than their gross income (cash that comes in the door).  Since self-employed taxpayers don’t have withholdings they are required to make tax payments every quarter for what they expect to owe. This is how we get the term “Quarterly Estimated Tax Payments”.  

Taxpayers are required to reasonably estimate how much tax they think they will owe when filing a tax return after the year closes.  Again this process is more difficult for a self-employed person rather than the employee.  A self-employed taxpayer may know how much gross income they have in a quarter, but the net income may be completely different depending on what expenses they incurred to generate that income.  These expenses reduce the amount of income they are required to pay tax on.  FICA taxes complicate matters further.  For employees, the FICA tax responsibility is shared between the employee and the employer, with each group remitting half of the tax.  In reality, the employee bares the cost of the full tax, they just don’t feel it. Therefore it is accepted.  One half of the tax is paid through direct withholding of the employee’s wages, the other half is indirectly paid by the employee in the form of suppressed gross wages that they never see because it is a cost of employment to the company. This unseen half is remitted to the Feds by the employer.   For the self-employed, they are directly responsible for both the employee and employer portions and this is reported to the IRS annually as a part of their income tax return. 

Since knowing what you are going to earn on a net basis may be difficult to predict, the IRS “offers” what are referred to as “safe harbor” calculations whereby, if you pay these safe harbors amounts, you will not be assessed any penalties for the underpayment of tax, even if you owe when you file your tax return.

The most commonly used safe harbor is related to the prior year tax.  If your adjusted gross income (a tax return calculation) is less than $150,000, then as long as your estimated tax payments total at least 100% of the tax owed in the prior year, you will not be assessed a penalty for underpayment of tax, even if you owe $1,000,000.  If your AGI for the prior year is over $150,000, then you have to pay 110% of the prior year tax to be eligible for this safe harbor.

The other safe harbor is much more subjective.  You have to pay in 90% of the tax for the current year to avoid penalties for underpayment of tax.

So, when are your quarterly taxes due?

Payments are due to be sent by calendar year taxpayers (most everyone) on the following schedule:

April 15th

June 15th

September 15th

January 15th (following year)

These dates are adjusted forward if they happen to fall on a holiday or weekend.

Underpayment penalties are assessed on a daily basis, for each day and amount of tax that you are underpaid.  When you file your return, the IRS generally assumes that you earned your income steadily throughout the year.  If you have a highly seasonal business where the bulk of your earnings occurs in the 3rd or 4th quarter, you can fill out the schedule as part of the Form 2210 for calculating underpayment penalties.  This will tell the IRS, “Hey, I didn’t earn my income evenly and I’m not underpaid.”

Still with me?

Good Morning Hello GIF by CBBC - Find & Share on GIPHY

I hope this helps you keep up with your tax payments when you start your own business or even a side hustle.  When you want more info on tax impacts of side hustles check out my prior post  HERE

Leave your tax questions or a personal story about estimated taxes down in the comments below.  We will what kind of future post I can cook to answer them.  Thanks for reading!

Posted on

3 Simple Ideas to Prevent your Side Hustle from Being a Tax Debacle

It seems everyone is looking for a little extra cash these days, particularly with the price of gas going up just a tick.

Blasting Off Here We Go Again GIF by Far Cry 6 - Find & Share on GIPHY

One common option people are turning toward is the side hustle, taking underutilized skills or time outside of their day job and generating some extra cash. 

Having some extra cash is great, but at some point, you get around to the question: do I have to pay taxes on my side hustle money?

Ponder Inspector Gadget GIF - Find & Share on GIPHY

Survey Says – Yes, its taxable.  That is the IRS default position on most income.  As an example and not an idea endorsed here, the IRS maintains that even income derived from illegal activities is still subject reporting and income tax.  The number one story told to all accountants in every fraud course, is that it was the accountants who took down Al Capone for tax evasion on his illegally earned income, not the actual racketeering or murder.  

How I Met Your Mother Nod GIF - Find & Share on GIPHY

So 3 things we are going go over today:

Income and Expense Tracking
Self-Employment Tax
Tax Form Reporting

I will sell you the whole seat, but all you will need is the edge.

Income and Expense Tracking. Reporting income from a side hustle is different than dealing with income you may receive from a job where you are employee.  You will need to have a method for keeping up with payments you receive from you customers, even if it as simple as a piece of paper.  Sometimes, it is easy and done digitally, like for Uber drivers, but at the end of the day you are responsible for reporting all of your income.  If your side hustle is service related and you collect $600 or more from a single customer, that customer is required to send you a form 1099-NEC (Non-Employment Compensation).  This will aid in helping you, but it will still be your responsibility. 

On the flip side, you need a method to keep track of your expenses.  Possible options could be as simple as paper or Excel, or there are numerous, easy to use accounting software packages to help you.  (If you sell an accounting software and would like to sponsor this post, I am accepting sponsorships.) Keeping track of your expenses is extremely important as they will help minimize your tax burden.  Have you ever heard the term “write off”?  This is what that is. 

Schitts Creek David GIF - Find & Share on GIPHY

Self-Employment Tax.  Income from side hustles falls into a different category of income than employment income.  Side hustle income that we are talking about here is generally going to be considered self-employment income.  Rather than being employed by a company that hires you as an employee, you are working for yourself.  All businesses large and small are required to pay taxes based on the wages paid to their employees.  These taxes go to fund Social Security and Medicare programs and are equal to 15% of your wages, up to various limits.  I’m not going to bore you with limit discussions here but they exist.  When you are an employee, this 15% tax is shared by you and the company you work for.  The piece you pay directly is withheld from your paycheck and then company pays their other half to the IRS .  When you are self-employed, you have to pay both side of the tax, out of the gross income you have collected from your customers.  We could go into a discussion about how you really pay both sides of the tax as employee as well, via a reduced gross salary to account for your true cost of employment by the company but that is a soapbox for another day.  Long story, but the self-employment tax can feel like a big bite of your earnings.  The good news is that is it calculated on you net income (gross income minus expense) rather than your gross income.  This is where those expenses come in handy we mentioned earlier.

Reporting.  If you haven’t set up an organized company (See here for more on that), you will need to file a Schedule C with your income tax return.  The Schedule C reports both your gross income and expenses while calculating your net taxable income. You will pay both income tax and self-employment tax based on the net income from your Schedule C.  When you get paid from a company as employee, you most often have your all of your taxes withheld, both income and employment, before you ever even get paid. With Side hustle money, nothing has been withheld.  This will unfortunately make your end of the year tax bill higher.  A good rule of thumb in order to make sure you have some money set aside to pay your taxes at the year-end is to save about 25% of your gross income, until you have a good idea how much tax you have to pay.

Side hustles are great way to earn some additional cash, especially with companies like Uber, Door Dash, and other gig economy based apps in the marketplace.  Even sites like Etsy are helping people use their skills to create fun unique items and bring them to a bigger market.  Being prepared to deal with potential issues, like taxes, before they become a problem, will make that extra cash even better, rather than it becoming a big headache come filing season.  Until next time: 

See Ya Duck GIF by DefyTV - Find & Share on GIPHY

Posted on

Unrealized Gain – Why taxing them is a terrible idea

Recently, an idea has been proposed by our political “leaders” (cough, overlords, cough) that the unrealized capital gains of “billionaires” should be subject to a minimum level of income tax because they “aren’t paying their fair share” on these record levels of profits. See Comments by Secretary Yellen. Today class, we are going to be discussing why this is a bad idea and complete

Lying Top Gun GIF - Find & Share on GIPHY

As everyone who wants money knows, the best place to get money is from those that already have it. And who has so much money that they don’t even notice the Benjis falling out of their pockets? Billionaires.  Problem and solution, right? What’s the big deal?  This article is going to, at first glance, come off like I’m trying to protect billionaires, who admittedly have a lot people smarter than I am to do that, but as you will see, I’m talking about issues that affect all of us.  Also, in an effort to be honest with my tens of faithful readers, full disclosure, I am not a billionaire.

Shocked Oh No GIF - Find & Share on GIPHY

If any of you feel very strongly about rectifying this, you can Venmo me at #accountantsneedmoneytoo.

Since I don’t have much faith in our public school system, we are first going to discuss a few terms we will be using quite a bit so that we all have a working knowledge in common.  We will be talking about capital gains in this article and there categories of them – unrealized, realized, and recognized.  Unrealized gains occur when the value of an asset, whether it be a publicly traded stock, piece of real estate, business interest or piece of art, increases in value above what you bought that asset for plus any additional expenses incurred in maintaining it.  Your cost plus expenses is called basis. The difference between the increased value of the asset and your basis is the unrealized gain.   For example, if you bought a house 10 years ago for $250,000 and then you added a sweet fire pit and pool to the back yard, for $100,000.  Your basis is now $350,000.  Since our real estate market is white hot (for now), if an appraiser says your property is now worth $2,000,000, you would have an unrealized gain of $1,650,000 but not have any actual cash in your hands.

Realized gains and recognized gains often occur together but not necessarily.  A realized gain occurs when you actually sell that house and get cash (or other property) in your pocket.  Say you only sell it for $1,800,000.  Your realized gain is $1,450,000.  Your recognized gain is what you have to tax on after your gain is realized.  If you read a great blog post like this one: Sell your house and pay $0 tax, your recognized gain to calculate tax on would only be $950,000.  The proposed tax change seeks to collapse these categories and have just the unrealized gain of $1,650,000 be taxable. 

Why it is a bad idea

Fluctuating Nature of Value. One of the main reasons recognized gain is tied to the realization of gain is that realization of gain defines the value by converting your asset into dollars, generally.  Assets are only worth what another buyer is willing to pay and until you actually transfer the asset, that value is subject to fluctuation. 

We all know that stock values go up and down based general economic factors as well as circumstances specific to each company, real estate prices continuously fluctuate, and interest in a private business can change depending on a wide variety of factors.  How would the fluctuating value of the assets affect payment of the tax from year to year?  If the value of your asset goes down but you paid tax based on the value 12 months ago, are you able to request a refund the next year?

Another reason recognized gain (taxable gain) is tied with realized gain is that you actually have a liquid, trade-able asset (cash) to pay the tax, rather than something that may be without a ready market, like real estate.  If tax is calculated on your unrealized gain, you don’t have a way to pay the tax since all of the value is still locked in the asset.  This sounds like a great deal either for banks for financing or transactions markets as it could force liquidation of the very asset for the which you are paying tax.   

Not applicable to just billionaires. This “billionaire” tax isn’t applied to just billionaires, even though, if it was, I would still have an issue with it.  The tax would be applied to anyone worth $100 million dollars.  I get it, these folks aren’t hurting for cash either, but calling it a billionaire tax and applying it to people with 10% of that level wealth is at best disingenuous and seems like an out right lie to make the public OK with the law.  On to the next point. 

Trickle down effects.  Not talking about the economic effects on this one.  This blog is about tax.  Did you know our current income taxing system when it was ratified in 1913 (let’s not even bring up the income tax during the Civil War) was designed to “force the wealthy to take a on a fairer share of the federal tax burden”?  Less than 4 percent of American families made an annual income of $3,000 or more, the floor to even be eligible for the tax1.  After deductions permitted, the pool of taxpayers was even smaller.  Does this sound like anything you may have heard of?   As we know it now, the general income tax affects at least 50% of American households.  Our government has an incredibly poor history of instituting a tax under the guise that it will only affect a few and then expanding it once it is passed.  See nearly every federal tax currently in existence.  It seems foolhardy to expect that this tax would stay limited to the “few who need to pay their fair share”.  If this is your expectation, History would like a word.

Establishing Value.  Establishing value and basis in order to calculate these unrealized gains will be annual valuation headaches at best and nightmares at worst.  Sure, some things like a publicly traded stock are easier to determine value, but what about the other component, the basis?  For some stocks it will be quite simple, but for others, who maybe were owned privately before being taken public, have been paid in various types of restricted stock options or other types transaction, establishing basis can be involved.  What about business interests that aren’t publicly traded.  Will annual valuations by qualified professionals be required? Same for real estate and collectibles.  Will annual appraisals of theses assets be necessary to determine the fair market value each year?  Will basis be increased since tax has been paid on the gain moving forward?  These are accounting questions primarily (adjusts nerd glasses) but they can get expensive and time consuming very quickly.

How does the Government know.  I saved this point for last but considered putting it first.  How does the Federal Government know who the $100 millionaires are?  Sure, some investments are required to be disclosed to regulatory agencies, but not nearly all of them.  Currently, the IRS is privy to primarily income documentation and reporting since that is what our tax is based on.  Sure, income can give you an idea of who might be liable for the tax, but it has little to do with unrealized gains. That is the entire reason the government has proposed this idea in the first place.  Will all taxpayers be required to assert that they are not liable for this tax via disclosure of their asset holdings and values?  Will the IRS actively be reviewing this treasure trove of new data?  They are limited in their ability to audit as it is.  This would seem like a huge invasion of privacy of every tax payer in order to assess a tax that will initially be levied on less than 1% of Americans.  These actions fall right in line with the previous proposal of requiring banks to report all transaction in excess of $600 to the government.  That went over really well. 

The Mueller Report See GIF - Find & Share on GIPHY

The Federal Government was designed to have limited ability to invade the privacy of the individual.  The income tax already provides a greater window than many would like.  This new unrealized gain tax would bust down the wall like the Kool-Aid man demanding that you give him your data.

Excited Oh Yeah GIF - Find & Share on GIPHY

So this ended up a pretty long post:  In summary, it’s a bad idea for the following reasons:

  1. Fluctuating asset values and liquidity to pay the tax
  2. Not just billionaires
  3.  Trickle down effects
  4. Establish value headaches
  5. Huge privacy issues

For a shorter summary, see comments by Iceman.

Parks And Recreation Whatever GIF - Find & Share on GIPHY

Posted on

How to Crush the CPA Exam – One Man’s Guide

In my world of accounting, The Exam looms over new entrants to the profession or really anyone who hasn’t passed it yet.  And I have seen a lot of really smart people struggle to get over this hurdle.  It can be discouraging and maddening when you spend all of your time studying and then don’t find the success you crave.  I’m here to help.

To be clear, I don’t have any magic to pass the exam.  There isn’t a substitute for knowing the material.  It requires a vast amount of studying. This post is about a couple of things that helped me score just enough points to be called a CPA.  Feel the glory. 

i feel it GIF by Anime Crimes Division

Develop skills in test taking

Tip #1 Break it down

Growing up in the age before Windows,

episode 4 before the empire GIF by Star Wars

(just kidding Widows is great), the Nintendo Entertainment System reigned supreme and computer games were only a shadow of what gamers experience now.  They required using the Doss system (a blinking cursor) and a floppy disk (aka the save icon) to access your game through a string of typed commands that made no sense to me at the time, or now for that matter.  Me being the cool kid I was growing up, could perform this sorcery whether I understood it or not.  I had 4 primitive games, Win Lose or Draw ( which I still suck at), Wheel of Fortune (with a red headed Vanna White),  Classic Concentration, and Jeopardy, Jr.  I invested much more time in the latter 2 games than the former.  Everyone knows Jeopardy and that is where we will spend most of our time but Classic Concentration was a great game consisting of a grid of tiles overlaid on a Rebus puzzle.  Look it up.  The goal was to solve the underlying puzzle that was uncovered as you match tiles in a game of memory.  I have won enough virtual Chrysler Lebarons to start a dealership.  Anyway, I learned a lot about test taking through these games.

Here is a secret to Jeopardy and a lot of tests in general… it isn’t always about knowing the exact fact that answers the question.  I learned this so well growing up playing Jeopardy that it changed how I look at most questions and subsequently made me really good at trivia games.  Seriously, I have played trivia games where it was me against whoever else was in the room, 3 or 15. I don’t lose.

When you are presented with a question in Jeopardy and the CPA exam as well, there are almost always clues within the question that can aid you in getting to the right answer, if you break the question down and sort through what you know, even if it isn’t necessarily the answer to question.  Here’s an example from Jeopardy:

The Category is “Playwrights”, the question: His marriage to Marilyn Monroe inspired his play “After the Fall” 

What can we learn about the answer from this question?  It combines literature and pop culture. We are looking for a playwright, who wrote a play “After the Fall” and he was married to Marilyn Monroe.  I know next to nothing about playwrights and have never heard of the play mentioned  but I did know Marilyn Monroe had 3 husbands and that Joe Dimaggio (one of the 3) wasn’t a playwright.  My pool of possible answers is down to 2 names now instead of hundreds of playwrights.  I happened to know one other person she was married to, Arthur Miller, and that is the answer.  By breaking down the question, I was able to get the answer without necessarily knowing the fact.

How does this principle apply?  The CPA exam takes a bit of pride in that it requires you to select the “most correct” answer, meaning multiple answers could potentially apply but one answer does a better job than the others.  Using the above methodology, you can sort out what you know and apply it to the question to eliminate answers and narrow your pool of potential answers.   If you eliminate 1 answer as obviously incorrect, you increase your odds of guessing the correct answer by 8% from 1 in 4 to 1 in 3.  That may not sound like a huge difference but getting 3 or 4 more questions right could make the difference between a 70 and a 75.  If you can eliminate another answer, you increase your odds another 17% to 1 in 2.  That is a huge increase.  So break it down and take a guess. 

Tip #2 Get Some Sleep

You can google numerous studies on the benefits of sleep.  Sometimes it can feel like you need to cram, cram, cram and trade sleep for study.  But without proper sleep, your ability to recall that information is severely limited and you haven’t adequately rested your body and mind.  It is during sleep that your brain converts those last minute cram sessions into information that can be recalled. I have been known for having an above average memory (probably due to playing Classic Concentration) and I have noticed a significant difference in its function depending on the sleep that I get particularly over multiple days.  It isn’t recommended taking the CPA Exam while drunk.  Likewise, it isn’t recommended taking it exhausted. If you are embarking on a career in public accounting, you will have plenty of “opportunities” to pass up sleep and work instead.  Take the sleep now.

Tip #3 Eat a Good Breakfast

 Yes, even if “you don’t do breakfast”.  To be clear, I don’t mean grab a poptart or egg McMuffin.  Eat a legitimately good breakfast.  Breakfast helps start your metabolism and get your brain working properly.  If your only option is a bad breakfast or no breakfast, skip it then. But it doesn’t take long to scramble some eggs, toast some bread or eat some Greek yogurt.  Eating a good breakfast will keep you from being hungry, which breaks your concentration, and will give you fuel for your brain to function.  Despite your brain occupying 5%of your body weight, it can require 20% of your daily calorie usage.  Feed it. 

hungry ron swanson GIF

Tip #4  Take it as soon as you can

This is a tip that is universal but I realize may come too late for some.  Take the test as quickly as you can after college.  You will never be better equipped than right out of school to take this test.  The CPA Exam covers a wide breadth of material, as did your accounting degree.  Your job will not.  Most likely you will focus in one area of accounting and the longer you wait, the more specialized you will become.  Don’t misunderstand, experience and specialization are good for your career but not the test.  The ability to study and the ability to take tests are largely learned.  You won’t do this much in your career and those skills will atrophy. 

As a young staff, in general, you will never have more time available to you than you do now to take this test.  You may feel like you are busy and don’t have time but you are wrong.  You will have busy season, but that will never go away.  Then you may add a spouse, civic activity, and kids.  After having a child, I can’t imagine trying to make time to study too.  And that is just with one.  Children are wonderful, and they take a ton of time.  The more kids you have, the more time they you want to invest in them.   I digress,   but the point is, take the test as soon as you can after college.

Tip#5 Stay calm

Take a deep breath and focus on what you know.  Noticing your breathing will help you to focus on what you can remember and move through the questions in a consistent way.  Don’t get too bogged down on any one question. If you get hung, don’t overthink it, go with your gut.

It could be worse. “More Experienced” accountants love to tell the youngsters about how terrible the test used to be and how hard their experience was.  In many respects, it was harder having to take all 4 parts over 2 days or whatever it was. But in our defense, there wasn’t as much material to cover in each section either.  You’ve put in the work.  Trust what you have done, and knock it out. 

Posted on

Getting Your Business Organized

Organization can mean different things from an accounting perspective.  Most people would think it refers to how well you keep up with your receipts and tax docs.  It does mean that but not in this post.  In this post we are talking about how your business is organized, meaning, how it is setup and structured.

You may think, what is it the point of that?  I have the next great industry disrupting doo-dad with orders to fill.  Awesome.  But how you have your business structure setup can have huge tax impacts now and in the future, depending on what you are doing.

One of the biggest reasons to organize your business is for protection.  Certain types of entities (Corporations and Limited Liability Companies) can provide liability protection for you as the business owner.  What is liability protection?  Well, if someone gets hurt using your new doo-dad and they initiate legal action, in theory, your entity acts like Dikembe Mutombo protecting the rim and will protect your personal assets from creditors looking for restitution. 

(Yes, I know that’s not Dikembe)

Thats a legal thing though and you may want to talk to an attorney about more details.  Sometimes you can accomplish similar things using insurance.

There are multiple options to choose from:  Sole Proprietorship, General Partnership, LLC, or Corporation.  LLCs are can serve a lot of different functions if you are looking for flexibility, but taxation can get pretty tricky pretty quickly if you are operating in multiple states or trying to being in new capital.  Corporations can be simpler but they aren’t as flexible and can subject your income to being taxed twice if you don’t plan properly.   

Different entities fit different purposes. Right now, the top corporate rate is lower that the top individual rates, but that doesn’t mean you should automatically choose a corporation as your business structure. It is definitely a better fit than it used to be but if you get tripped up and get your income double taxed, the rate won’t be lower at all. There isn’t a one size fits all recommendation. Be sure to do your homework.

Posted on

Getting rid of your house and Paying $0 in tax

As a professional practicing CPA (I know..I made poor life choices), I bet every other month I have a client ask a variant of the following question: “I’m selling my house. Do I have to pay tax on that?”  Sometimes, the answer is “It depends on who you are asking”.  If you ever ask someone from the government this question, the answer is nearly 9 times out of 10, you definitely have to pay tax.  But I say in the immortal words of the great Lee Corso:

Inside the depths of the IRC (that’s tax speak for Internal Revenue Code) there lies a great exclusion from tax for the gain on the sale of your personal residence.  Here is how it works.  First off, you are only taxed on the gain you make off the sale, not your gross selling price.  You are allowed to deduct things like:

  • brokerage commissions
  • home improvements
  • your original cost of the house

from the sales price. This net amount, the gain, is at most what you might pay tax on.

If you owned your house for at least 2 years and it was used as your personal residence for at least 2 out of the last 5 years, you can exclude up to $250,000 of gain income from taxation.  If you owned the home jointly with your spouse, you both get the exclusion.  That’s $500,000 of gain to be excluded from tax.   

That’s the basics.  Like everything in the IRC, there are a bunch of other details that can affect this “simple” exclusion like:

  • I own multiple personal residences
  • I didn’t own it 2 years
  • My spouse died
  • What is a personal residence?
  • I rent it out

If you run into questions like these, contact a professional for help.  Don’t call the IRS. They’ll just tell you its taxable.

Posted on

A Fire Shut up in my Bones

I never really intended for this to be the space where I would share this sort of thing, but I feel somewhat like the prophet Jeremiah that I referenced in the title of this post.  I have had a thought in my head for some two months now that I find often times distracting and I need to get it out.  This, at the current time, is the only spot I have to share it.  If I have enough of these, then maybe I will create another home for them.

A few months ago a friend of mine was sharing some communion comments at church and I wondered to myself, if I was asked, what would I even try and share.  What novel idea could I bring that would highlight our communion time? I didn’t have one.   A week or so later, I was prompted to revisit a book I hadn’t read in 10 years.  It was there that the following message was highlighted.  Sometimes, it is not the new message that needs to be shared, but the basic and easily overlooked.

He loves you.  It’s as simple as that.

So often in religion, it’s easy to get caught up in the “shoulds”; I should do this, I should want this, I shouldn’t do that.  Satan uses theses “shoulds” to drown out the simple message of Jesus Christ, The Father loves you.  The message of Jesus is good news and we let it get covered up by the mundane-ness of life and how we think life should be.  God loves you now, in this moment for who you are, not for who you think you should be.  God, the Father, loves you now, in the brokenness you know, and the brokenness you don’t yet know.  He knows your quirks, your bad habits, your struggles and doubts.  He loves you, all of you.  Are there things he would like to see you do differently?  Undoubtedly.  But that does not change this one simple truth: He loves you.   

Luke 15 tells the parable of the Prodigal Son. As a quick summary if you aren’t familiar, the story  revolves around one of the sons of a wealthy man who requests to receive his inheritance in advance and leaves his father’s house.  The son proceeds to completely squander the wealth and quickly finds himself with nothing, scraping by feeding pigs who are eating better than he is.  The son decides to return to his Father’s house, and beg to be a servant, since he knows servants in his father’s house are treated better than his current circumstances are treating him.  He returns to his Father and he is welcomed back not as a servant, but as the son he is, despite previous actions.  

But there is a great verse in Luke 15 that I had somewhat skipped over in the number of times I have read this story. Verse 20: “While he [the son} was still a long way off, his father saw him and felt compassion, and ran and embraced him and kissed him.” This is beautiful.  The son, in his regret and shame, has worked up an apology he intends to offer to his father with the faint hope his father will show him the slightest mercy and take him back as a servant.  This isn’t what happens at all.  He doesn’t even get the chance to give it.  Instead, out of the love the Father has for his son, He runs to his son and embraces him for the Father has his son back, no apologies.  The son offers the apology but it falls on the ears of an overjoyed father holding his son, ready to celebrate the reunion. 

This is the illustration that Jesus provides to demonstrate the good news he brings.  We have a Father who loves us from a long way off, not because of what we do or don’t do, what we could be or what we aren’t, but because He is who He is. The Father who loves. 

There is another son in this story, one who is always by his Father’s side, and one who is not excited about his brother’s return. The Father reassures this brother as well, that his own place has nothing to do with his brother’s return.  He has the Father’s love as well.  In my youth and arrogance, there was probably a time I saw myself in the shoes of the older brother, knowing I should have compassion on those who find their way back.  But as I have grown older and hopefully a little bit wiser, I realize just how far off I really am from the Father, and I’m thankful that He runs to me while I am still a long way off.  He loves me.    

Posted on

10 Ways for New Homeowners to save money on their Taxes : Way #1 – Your Mortgage Payment

You have decided to become a home owner…Congratulations!  Most people are very excited when they buy their first home, with good reason.   You have succeeded on huge decision and have a space to make your own.  Others may be thinking:

Most people never think of the tax advantages now available once they become home owners.

One of the difficult parts of my job is not being able to answer questions simply.  Nearly anytime one of my friends says, “Hey, I have a tax question.  Is _____ deductible?”  The vast majority of the time my answer is “It depends”.  Nearly everything in the tax code is subject to some stipulation, income limit, or other qualifications.  If you actually read the forms, it is like trying to follow the most lame “Choose your Own Adventure” book ever.  The end of every story is “You owe more money”.

Following in this post and others to follow are a few areas where home owners can save money on their  taxes.  As always, these are general suggestions and may not be applicable to everyone.  Pretty much every thing in the tax worlds can end with that disclaimer.

Mortgage Interest

For all of the excitement that owning a home brings, the downside is that it comes with a monthly mortgage payment.  In case you are brand new, your mortgage payment is one payment that is generally paid to your mortgage lender to fund some of the costs of you home ownership.  Your mortgage payment is generally a combination of 3 different payments sometimes 4 depending on your loan.  It is always split between amounts applied to principle and interest and then usually another piece for escrow items.  We’ll cover escrow in a minute.  Depending on your loan situation, you may have a 4th piece that is for mortgage insurance.  The portion of your payment designated as interest is deductible as an itemized deduction on your tax return.  It is often one of the biggest deductions that people have.

Itemizing – what does that mean.  When it comes to deductions on your tax returns, there are 2 primary categories:  business and personal.  Business expenses specifically reduce business income.  We’ll go over those another time.  For your personal expense, the IRS allows you 2 options:  You may take the “standard deduction “or “itemize” your deductions.  The standard deduction is a per person amount that is pre-determined.  If you have specific expenses that exceed the standard deduction, you can file Schedule A and provide an itemized listing of these expenses.  Mortgage Interest falls here.

Real Estate Taxes

Local municipalities generally assess a tax on real estate and the property owner is responsible for paying it.  Most new homeowners pay this tax as a part of their mortgage payment.  It is one of the things that is paid through the escrow account.  The escrow account is an account with your mortgage holder where they administer certain funds to pay necessary costs of the home that protect their mortgage security.  The funds you put into escrow are usually used to pay your real estate taxes and home owner’s insurance.

Real estate taxes are paid annually and are also deducted as an itemized deduction on Schedule A, just like your mortgage interest that we discussed earlier.

So here is the new downside about Real Estate Taxes, as a part of the recent Tax Cuts and Jobs Act, deductions for local taxes are limited to $10,000.  Real Estate taxes are a piece of that.  That sounds like a pretty generous deduction that most first time home buyers wouldn’t need to worry themselves with, except that other state income taxes are also included in this limitation.  If you live in a state that has an income tax, it is pretty easy to hit that phaseout, especially if it is a state like New York or California that imposes a relatively high income tax combined with relatively high property taxes.

Mortgage Insurance Premiums

These have been around for a long time but really came to the forefront after the bottom fell out of the real estate market starting in 2008.  Banks experienced dramatically higher rates of foreclosure and in order to help protect their exposure, began requiring more borrowers carry mortgage insurance.  In most cases, unless you make a down payment of at least 20% of the cost of your house, you will be required to also pay mortgage insurance.  Since more people were foreclosing, the rates on this insurance increased dramatically.  As a way to help homeowner’s, Congress allowed this insurance premium to qualify as an itemized deduction.  You are disallowed from taking this deduction if you are deemed to make too much money.  We in the biz call this a “phaseout”.  For a couple filing a joint return, it was $110,000 for 2017.

 

That covers all of the deductions incorporated into your new monthly payment.  Generally most lenders will report all of these numbers on your annual Form 1098 mailed to you at the beginning each year.  Each number is in a different box on the form.  On this form moving forward, you will also find the balance of your mortgage, which becomes important if your balance is over $750,000 and didn’t originate before 2017.  All of this should help put a little more money back in your pocket which is what this blog is all about.  If you have any thoughts or questions, please leave me a comment below.  I will follow up with you there, or potentially through a future blog post.

Posted on

Welcome

Thanks for visiting!  This is a blog for curious students who want to learn a little about finance and have some fun doing it.   Or its a blog for those in need of a chuckle with some knowledge on the side. Either way, I’m glad you’re here and hope you have a good time.  Peruse the site, leave a comment, ask a question.  I’ll be happy to answer.