Common Mistakes

Gregory J Cook, EA, CPA

Gregory J. Cook, EA, CPA+
Accredited Tax Advisor

Past President Alabama Society of Enrolled Agents
Past President Alabama Association of Accountants

   



The person has taxable interest income and nondeductible consumer debt interest where the "spread" is negative. A negative spread exists where the after-tax cost of the borrowed funds exceeds the after-tax income from the investment.

Example: A person has an auto loan with an interest rate of 8.5%. The federal tax bracket is 28% and state is 5%. Because the interest is non-deductible, the true cost is closer to 11%. This same person has a CD that is earning 6%. The interest income from the CD is taxable and the after-tax yield is closer to 4%.

 
 
 Solution; A better use of the taxable income producing investment would be to pay off the consumer debt.

The person is carrying a large amount of consumer debt with the ability to obtain an equity loan on his/her home.

Solution; Replace the consumer debt with a home equity loan.

Reasoning; The person in the example above must earn approximately $ 1.31 to $1.37 in order to pay $ 1.00 of non-deductible interest. If the person can make the interest deductible by transferring the debt to a home equity loan, he will need to earn only $ .63 to $ .69 to pay $ 1.00 of interest!
Homeowners sometimes make extra payments to pay off their mortgage more quickly even as they continue to carry the more costly credit card debt.

Funding a tax deductible IRA while ignoring an employers 401{k} plan which offers not only a tax deduction but also a matching company contribution.

Non-cash charitable contribution. Most person s could donate enough old clothing, furniture, etc., to claim the $ 500 deduction limit IRS allows without filing form 8283.

Failure to participate, or maximize participation in retirement plans such as 401 [k], 403[b], IRA, Roth IRA, SEP, and Keogh Plans. Many person s do not realize how little this costs and how much of the plan is in essence being subsidized by government. There is a misunderstanding regarding the 10% early withdrawal penalty. The investment income earned on the tax deferred savings will generally equal the 10% penalty after 5-7 years.

Taxable Social Security. By utilizing growth stocks and tax-deferred investments, such as annuities and government bonds, taxable Social Security can often be reduced and possibly avoided. If investment income causes more of the Social Security to be taxed, the yield is not only reduced by the tax on the investment income, but also by the additional tax paid on the Social Security Benefits.

Not investing in equity securities.

Neglecting to write a will.

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Greg Cook


Greg Cook on the Recovery Act ...


The Recovery Act was passed by Congress and signed into law by President Obama on February 17, 2009. The purpose of the $787 billion Recovery package is to jump-start the economy to create and save jobs. The Act specifies appropriations for a wide range of federal programs, and increases or extends certain benefits under Medicaid, unemployment compensation, and nutrition assistance programs. The legislation also reduces individual and corporate income tax collections (to an extent), and makes a variety of other changes to tax laws.

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This Act will have far reaching consequences and we will be dealing with it for years to come (at least until 2018). Twenty-eight different agencies – such as the Departments of Education; Health and Human Services; and Energy – have been allocated a portion of the $787 billion in Recovery funds. Each agency develops specific plans for how it will spend its Recovery Act funds. The agencies then award grants and contracts to state governments or, in some cases, directly to schools, hospitals, contractors, or other organizations. The agencies are required to file weekly financial reports on how they are spending the money and their specific activities related to Recovery funds.


 Read more about The Recovery Act

Clary Business Machines, Inc.
 
    While Our Government Rolls the Dice with Deficit Spending ...

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    We endeavor to bring information to you that will help you keep taxes and your personal finances in check.
     



Have You Refinanced Your Home?

If you are one of thousands who locked into a lower home mortgage interest rate, then you've hit the savings jackpot! Besides getting one of the lowest rates in decades, you may be able to deduct some of the refinancing costs when you file your tax return. The “points” paid to get a home mortgage may be deductible as mortgage interest when you itemize on Form 1040's Schedule A. Points paid to get an original home mortgage may be fully deductible in the year paid. However, points paid solely to refinance a home mortgage usually must be deducted over the life of the loan.  

For a refinanced mortgage, you figure the interest deduction by dividing the points paid by the number of payments you will make over the life of the loan. You may deduct points only for those payments made in the tax year. Say you paid $2,000 in points and you will make 360 payments on a 30-year mortgage. You could deduct $5.56 per monthly payment, or a total of $66.72 if you made 12 payments in one year. If you used part of the refinanced mortgage money to finance improvements to your home and if you meet certain other requirements, the points associated with the home improvements may be fully deductible in the year the points were paid.

Also, if you are refinancing a mortgage for a second time, the balance of points paid for the first refinanced mortgage may be fully deductible at pay off. Other closing costs – such as appraisal fees and other non-interest fees – generally are not deductible. And the amount of your adjusted gross income could affect the amount of deductions you can take. Any way you look at it, between the lower interest rates and the tax savings, that's money you can take to the bank. For more information on deductions related to refinancing, contact your Cook and Co. Advisor.

 

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