Tom's Blog

As we approach Tax Season, I wonder how many people understand the potentially vast differences in the quality of tax return preparation? Are tax returns really the commodity that they seem to be? Is a tax return prepared by the tax service in the mall of the same quality as that prepared by a major CPA firm? What does it mean to have a "quality" tax return? In fact, can a tax return be prepared in such a way as to reduce income taxes?

As someone who has been involved in the tax return preparation process for almost 30 years, let me share some thoughts on this subject. As many of you know, I spent several years working on the tax staff at Ernst & Young. And you probably also know that I spent 4 years as the in-house tax advisor for Pinnacle West Capital, one of the largest companies based in Arizona.

What you may not know is that I started my career preparing tax returns for a couple of different small, local CPA firms in Salt Lake City, Utah and in Austin, Texas while I was attending the university in each of these cities. For the past 11 years, I have had my own firm, now called ProVision Wealth Strategists. So, I have a pretty diverse experience when it comes to tax return preparation.

In all the firms and companies at which I have worked, the basic accuracy of tax return preparation was excellent. There was always a good review process and I don't believe there were major mistakes on very many returns produced by these firms. I find this also to be the case on returns that I see from clients who are new to ProVision. It's rare that I find a flagrant error in a return.

But does that mean that these firms all produce the same quality of tax return? The clear answer in my experience is a resounding "NO!" Let me explain.

Accuracy in a tax return simply means that the information provided by the client was reflected on the tax return. It does not mean that the tax return was prepared in the BEST way it could have been prepared. In fact, I RARELY see a tax return from a new client that was prepared the way we would prepare it at ProVision.

Let me give you some examples. Suppose you have some expenses that could either qualify as investment expenses or business expenses. Either classification would be "deductible" on the tax return. BUT, a business expense is MORE DEDUCTIBLE than an investment expense. How is that possible? An investment expense is deducted on Schedule A and is classified as a "Miscellaneous Itemized Deduction." There are several limitations on a miscellaneous itemized deduction. First, you only get to deduct these type of expenses to the extent they exceed 2% of your income. So, if you have $300,000 of income and $7,000 of investment expenses, you only get to deduct $1,000. What's worse is that if you are in the Alternative Minimum Tax like millions of taxpayers, you don't get any benefit for your investment expenses.

On the other hand, if you were able to deduct these same expense on your Schedule C or your Schedule E, you would be able to deduct 100% of the expenses. In addition, the expenses would reduce your self-employment income from your business. That's another 15.3% tax benefit on top of the income tax benefit.

Another example of less than stellar tax return preparation relates to depreciation. Depreciation is the government's gift back to investors, especially real estate investors, for investing in long-term assets such as equipment and buildings. What most tax preparers don't understand is the idea of a cost segregation or chattel appraisal. The whole goal with depreciation is to get more of it sooner. This provides the investor with a terrific tax benefit in the early years of property ownership. And under the important wealth creation principles of leverage and velocity, the sooner we have cash, the sooner we can invest it and obtain major returns from our investment. The problem appears to be a lack of knowledge from many tax preparers and CPAs about the rules surrounding cost segregation.

The one area where I do see mistakes relates to those taxpayers who file returns in multiple states. This is a specialty area of mine, which I teach at Arizona State University. Even in the major firms, there is a lack of understanding by the Federal tax departments of the many opportunities for tax savings when preparing multistate tax returns.

What it comes down to is whether your tax preparer/CPA has the knowledge and creativity necessary to prepare the BEST return possible. And is it worth it to you to pay a little more to get the better result? Are you focused on the amount you pay your advisors or are you focused on the return they provide you on your investment? Let me give you an example.

Suppose you have a choice of paying $750 for your tax return to a small CPA firm or $2,000 to an innovative, knowledgeable firm. All things being equal, anyone would choose to pay the lesser amount. But what if all things are not equal? What if the $750 gets you an adequate, accurate return but the $2,000 would get you a return where you pay $5,000 less in tax? Which is the better deal? In one, you are out $750 with no return on your investment. In the other, you are net ahead $3,000. Clearly, the $2,000 fee returns a greater value.

This tax season, review your own tax situation and the advice you are receiving from your tax preparer/CPA. Are you getting the return on investment you want? Are you getting the planning ideas you need? Are your taxes going down or do they continue to increase? Taxes are such a major part of your wealth creation that you cannot afford to ignore one of the most important part of the tax planning process - tax return preparation.

Warmest regards,

Tom

Recently, I received the following question about the tax benefits of investing in real estate:

Hello, I had a question for you guys. I just want to make sure I understand. It is about tax benefits. I have a business right now and I have to pay full taxes! If I had real estate like family home, commercial etc...i could take the depreciation of this properties and apply it towards my business income is that right? Can i do that even if I make money on it every month? Could I really reduce or even eliminate my tax payment?? thanks HARRY.

There are actually several subtexts within this question. The first is concerning taxes on business earnings. I'm always concerned when I hear a business owner complain about their high taxes. This tells me that they are not getting good tax advice. The best tax benefits in the Internal Revenue Code belong to businesses and business owners. But many business owners are just like Harry - they don't know how to structure there business to obtain the greatest tax benefits. So number one is to work with a CPA who can help you take full advantage of business tax benefits.

The second question is whether real estate can really give you deductions against other income even when the real estate in question provides positive cash flow. The answer to this is a resounding "YES." As remarkable as it may seem, the IRS actually allows you to take a loss on appreciating real estate even when you have positive cash flow from the property. This is the magic of depreciation. Depreciation is a non-cash deduction that can easily be more than the cash flow from your rental property. The result is a loss that you may be able to use to offset income from your business or salary. There are several limitations, of course, most or all of which can be overcome with the proper planning. Be sure to talk to your Tax Coach about this amazing benefit and how it can apply to you.

The final question of Harry's is whether real estate tax benefits can actually be great enough to reduce a person's income tax to zero? Hard to believe? It's true, though. We have several clients who have substantial positive cash flow but pay no income tax due to the tax benefits from their rental real estate.

Thanks for asking such a great question, Harry.

Warmest regards,

Tom

One of the most common questions I get regards "tax-favored" investment vehicles such as Self-employed Retirement Plans (SEP's), IRA's, 401(k)'s, and, in Canada, RRSP's. With the exception of the Roth IRA and Roth 401(k), these vehicles primarily rely on the time-honored tradition that paying taxes later is better than paying taxes today. In each of these (except Roth's), the taxpayer receives a deduction today for their contribution to the plan, the investments grow tax-deferred while in the plan, and are taxed at ordinary income rates when withdrawn fromt he plan.

Sounds like a great plan, right? Wrong!!! Let me briefly outline my complaints about these types of investment vehicles.

1. The tax benefits rely on the premise that when you retire, you will be in a lower tax bracket than you are now. Unfortunately, this is true for many people who use these vehicles, because they will retire poor. However, if, like all of our ProVision clients, you want to retire rich, you will likely be in a much higher tax bracket than you are now. Why? You will have fewer deductions. No business deductions (remember, you are retired), no dependent exemptions, no home mortgage interest. And you probably want to have more income available when you retire than when you are working because you have places to go and things to see.

Let me tell you a story about a client of mine. He was a very successful businessman for many years. He set up a very nice pension plan to which he contributed faithfully every year. Then he retired. While he was in business, he paid very few taxes and was actually in a very low tax bracket. When he retired, though, he no longer had all of these deductions. Immediately, he was in the highest tax bracket possible. He complained to me constantly about his high taxes. But, given that he was retired and all of his income was coming as distributions from his pension plan, there was nothing I could do for him. He just had to pay the tax.

2. You have very little control over the funds. Who has control? The government. They control what you can invest in, how much you can add to your investment and when you can take it out. I find that this lack of control normally results in lower returns.

3. You can't take advantage of other tax-advantaged investments. For example, you cannot receive the tax advantages (e.g., depreciation) from real estate to produce lower taxes from your other income. You don't receive capital gains treatment from dividends and long-term stock gains. And, if you do invest in a business (a very complicated matter within a tax-deferred plan), you are severely restricted as to your operating entity.

There are times when these arrangements can be very profitable. I know several options traders who use their self-directed IRA's for option trading. Since there are no current tax benefits for option trading, why not defer the tax? The same goes with hard money loans.

My gripe with SEP's, IRA's, 401(k)'s and RRSP's is that the financial institutions and the government push them so hard that people think they are the ONLY alternative. There are many other ways to save taxes that are much better for many people. One of our primary goals at ProVision is to educate the public about the other tax advantages available. Please visit us at www.ProVisionWealth.com and join our Wealth Strategy U (WSU) for FREE information about serious tax saving opportunities.

Warmest regards,

Tom

At ProVision, we recently announced our new School of Tax Strategy as part of our Wealth Strategy U. Welcome to all those who have signed up for this extraordinary opportunity. Let's kick this off by answering a few of the questions already asked by some of our students.

Q. What happens to mortgage deductions after the 1,000,000 base mortgage and 100,000 HELOC? Does it go to nothing? Is there a way to get a tax benefit for over those amounts?

A. I was speaking at an AZREIA (Arizona Real Estate Investors Association) meeting the other night and was asked this exact same question. Most people know that home mortgage interest is limited to $1,000,000 of acquisition indebtedness and $100,000 second mortgage. But does that mean that interest on amounts in excess of these limits are automatically nondeductible?

The answer is NO. The general rule for interest of any kind is that it's character depends on the use of the loan funds. If the use of the funds are for business, the interest is business. If the use of the funds is real estate investing, the interest is attributed to the real estate investment. The same holds true for excess home mortgage borrowing. If the excess borrowings are used for your personal residence, then the excess interest is nondeductible, personal interest. However, if the excess could be traced to a business or investment use, the interest will be business or investment interest.

Let's take an example. Suppose you have a home that cost $1,000,000. Suppose the home appreciates to $2,000,000. You take out a line of credit of $600,000 on the home and use that in your business. The interest on the line of credit is business interest.

Q. Do you recommend TurboTax or other software for tax prep and planning?

A. I don't. I recommend using your Tax Strategist to prepare your tax returns. The reason is that how you prepare your return can be just as important as the tax planning you do. Why? Simply because there are many options for how to report income and deductions on a tax return. The person/firm who created and helped you implement your tax strategy would be the best person/firm to prepare your tax returns.

Look for more answers to more questions next week.

Warmest regards,

Tom

People frequently ask what is the number one tax question I get? Inevitably, whenever I speak at a seminar or to any group, the requested topic is "How do I structure my business and/or investments?" Not only is this the most common question, but it is also the most important for any business owner or investor. Why? Because it is the foundation of any good tax strategy.

The other evening, I was speaking at an AZREIA seminar for people who fix and flip real estate. AZREIA is a terrific organization that provides a wealth of education for Arizona real estate investors. Go to http://www.azreia.org. I began the presentation by asking what topics they would like to discuss. As usual, the first response was about how to structure their investments.

So, here is the answer. IT DEPENDS. I know it sounds like a bit of a cop out, but it's true. Every investor has different objectives and needs an entity structure that is specific to their needs and goals. Of course, there are three primary types of tax entities - Sole Proprietorships (which really are not entities at all and should only be used in extremely limited situations due to the usually negative tax consequences), Partnerships (both general and limited), and corporations (both S corporations and C corporations). As I explained at AZREIA, there is no such thing as an LLC, or limited liability company, in the Internal Revenue Code. Instead, taxpayers are allowed to elect the tax treatment of an LLC. (I'm constantly amazed at how many tax professionals and attorneys do not understand this rule.)

My advice? See your Tax Coach to determine the right entities for you based on your personal income tax strategy. No Tax Coach? Call us at 480.467.4400 or contact us at http://www.ProVisionWealth.com and we will get you to the right tax professional.

Warmest regards,

Tom

It's October 16th, the day after the final due date for 2006 tax returns. Yesterday, the ProVision office was scurrying about getting many tax returns to the IRS for our clients who waited until the last minute to give us their tax return information.

So I started wondering - Why do so many people wait until the last minute to get their tax return information to their preparers? We experience the same frantic rush twice a year, in April and in October. How could we reduce the stress we feel each year when we scramble to get our tax return info together for our CPA's?

The key is DOCUMENTATION. The problem is that most people do not have a good system for maintaining the documentation for their tax returns. It's bad enough that we have to deal with taxes, but add in bookkeeping and logs and receipts and it's no wonder so many people put off doing their taxes.

So, here are a few hints to simple documentation and making life easier for tax time. First, HIRE A BOOKKEEPER!!! This is some of the best leverage available. If you need a referral, please feel free to call our office at 866.467.5809.

Second, buy a bunch of manilla folders. Then, go to http://www.irs.gov and pull a copy of Schedule C from their 1040 forms file. At the top of each folder, write one of the expense categories from the Schedule C. Then, as you have receipts for deductible items, put them in the appropriate manilla folder. Then, when tax time comes, simple add up all of the receipts in each category and give the totals to your CPA (they don't really need the receipts and it will save you considerable professional fees if you do the addition yourself).

Third, set a date when you will get all of your tax information to your CPA. Even if you want to extend your tax return, get your information in early and then simply as your CPA to file an extension.

Fourth, meet with your CPA/Tax Coach in November to figure out what you might owe in April and what might need to be done to ensure a lower tax bill the following year. Your Tax Coach can give you additional ideas for documentation.

Don't let tax return time stress you out. Get your documentation done early and get it to your Tax Coach early so you can get your return done in plenty of time for the deadlines.

Warmest regards,

Tom

Last week, the Senate passed the Mortgage Relief Act (MRA). Now it goes back to the House for a vote. Since the Senate made some changes, there likely will be a Conference Committee (members of both the House and Senate) go through it before it gets finally passed. Today, I want to give you an overview of this legislation as initially proposed and the portion that has been voted on and approved by both the House and the Senate (and which will surely be included in the final bill). Tomorrow, I will comment on the new provisions put in by the Senate, as they are significant for a wide range of people.

As originally proposed, the MRA was intended to provide tax relief to people who receive debt forgiveness as a result of foreclosure or renegotiating their loan. There are three primary provisions of this act.

Tax Treatment of Debt Forgiveness: Currently, if a person receives debt relief, the amount of the relief normally is included in their income for tax purposes. Under the MRA, if the debt relief related to their home mortgage, and the mortgage interest on that debt is deductible, then the debt relief IS NOT included in their income for tax purposes.

Deduction for Private Mortgage Insurance (PMI): Currently, PMI is deductible, subject to phase out for adjusted gross income in excess of $100,000. This provision is scheduled to sunset (go away) after December 31, 2007. The MRA extends this deduction through 2014.

Exclusion of Gain on Sale of Residence: Currently, gain on the sale of a personal residence is excluded from Gross Income up to $250,000 for a single individual and $500,000 for a joint return if the property is used as a primary residence for any two of five years prior to the sale. The MRA modifies this provision to tax gain from “nonqualified use.” Under the bill, any time that the property was not used as a primary residence (e.g., rented) prior to the taxpayer moving into the house does not qualify for gain exclusion. This means that if you purchased a property, rented it for three years, moved into it and lived in it for two years, and then sold it, only a part of the gain would be excluded. In this instance, only 40% of the gain could be excluded.

HOWEVER, you do not get punished if you turned your residence into a rental property and then sold it. So, in our example, if you lived in the house for two years, then turned it into a rental property and held it for three years and then sold it, ALL OF THE GAIN would be excludable up to the normal limits.

Stay tuned tomorrow for the important amendments made by the Senate to this legislation.

Warmest regards,

Tom

P.S. – For those of you following my weight loss, I will give you an update on Wednesday.

President Bush signed into law the Mortgage Relief Act of 2007. I mentioned the major provisions of this legislation in my blog on Monday entitled "Mortgage Relief Act Passed by Senate." The House left he Senate's version unchanged. He also expected to sign the AMT relief bill.

What does the MRA mean to you? Simply, if your primary residence is foreclosed upon or you do a short sale of your primary residence, then the debt forgiveness (up to $2 million) will not be included in your taxable income. This provision is retroactive to the beginning of 2007.

For real estate investors, this is very good news. It takes away one big barrier that sellers might have to doing a short sale. What's a short sale? Effectively, it's a sale of a house by means of someone (you or the buyer) negotiating a reduction in the note with the lender(s) prior to the sale. The buyer purchases the note(s) from the lender(s) and then buys the house from the seller for an amount equal to the note(s). This prevents the homeowner from the negative effects of a foreclosure and the investor gets the property at a good price.

As I mentioned last Monday, the other major provision of this law is to increase the late filing penalties for partnerships and S corporations. In effect, Congress is giving a gift to one set of taxpayers who were unwise and penalizing other taxpayers who are unwise. All in all, very bad tax policy. Penalty provisions should never be used as revenue raisers. I understand the public policy behind the bailout, but I don't agree with using tax penalties to raise the revenue to pay for it. Just remember to get your partnership and S corp returns filed on time this year (fortunately, the penalty provisions are NOT retroactive).

As for the AMT relief, Congress raised the exemption amount to $66,250 for joint filers. This new exemption is good for one year. They only did this for one year because they did not have a revenue raiser to offset the decrease and the House wanted the bill to be revenue neutral.

I hope you all have a wonderful Christmas. I'm looking forward to spending it with my wife and two grown sons.

Merry Christmas!

Tom

P.S. - I'm still at 173 lbs. At least I haven't gained anything so far during the holidays. More on this later this week.

In our School of Tax Strategy call last week, I was asked the question, "What constitutes travel away from home and why is it important?"

In order for certain business travel expenses to be deductible, you must be traveling "away from home." There are actually two parts to this question. The first is, "Where is my tax home?" The second is, "What constitutes being 'away' from home?"

Your tax home is a facts and circumstances question. That is, each person's tax home will be different, not just depending on location of the person's residence, but depending on the person's circumstances. For most of us, our tax home is where we live full time. But there are many circumstances where this is not clear. For example, where is a full-time student's tax home? Is it his permanent address with his parents or his temporary address while at school nine months during the year?

Or, what happens if you don't really have a permanent residence? This was the situation in a case several years back where a traveling salesman traveled so much that the IRS and the court concluded that he did not even have a tax home.

Then, we have the question of how far do we have to travel to be "away" from our tax home? Is an hour across town sufficient? What about going 50 miles away to a neighboring town? There are many court cases discussing this question. One court suggested that a taxpayer had to go beyond the metropolitan area in which he lived in order to be "away." Another court said that the taxpayer had to go into another county.

Finally, how long do you have to be away in order to qualify as "away" for tax purposes? The courts and the IRS generally have held that if you need to stay overnight to rest because of the work and the distance, then you are "away." But, if you can reasonably go to and from the location in a single day without rest, you are not away from home.

Why is this important? If you are away from home, your meals and lodging are deductible so long as they are ordinary and necessary to your business. Meals are always deductible if you have a business purpose for the meal, specifically if you are eating with a business associate or client. But what if you are eating alone? Then, you have to be traveling away from home for the meal to be deductible. Even lodging is only deductible if you are away from home.

Since everyone's situation is different, if you have a question about whether your trip is away from home, I suggest you contact your tax coach to get help. If you don't have a tax coach or would like to find someone new, please feel free to contact us at info@provisionwealth.com or toll free at 1-866-467-5809. We serve tax clients through the U.S. and wealth and business clients throughout the world.

Warmest regards,

Tom

The other day, a client asked about how to handle receipts. And in our School of Tax Strategy group coaching call last week, we were talking about documenting meals and entertainment expenses. So, I thought now would be a perfect time to address this issue.

The IRS requires receipts to be saved for expenses in excess of $25. This can become a burden for our filing systems, particularly when it comes to little receipts for meals and miscellaneous expenses. And, these receipts tend to fade over time (especially the yellow copies of credit card receipts) so that by the time the IRS audits you, the receipt is illegible.

I think the best answer to this dilemma is to purchase one of the many scanning products that are available. You can get a scanner that is specifically for your receipts or you can use a normal scanner. The advantage of the receipt scanners is that they come with software to organize your receipts electronically. Kind of an electronic filing system. Some even maintain that they can download your receipts directly into Quickbooks.

I haven't personally used the scanning software, but I maintain all of my receipts electronically. My partner won't even let me bring any hard copy receipts to her office. She insists that they all be scanned and emailed to her. Since the IRS accepts scanned copies, there really is no reason for keeping hard copy receipts any more.

I encourage everyone to take advantage of this technology and to get your tax documentation in order. If you are a client of ours, we are very happy to accept scanned copies of any documentation you need to provide us to do your tax returns. In fact, our website is set up specifically so you can scan your documents and upload them to our secure site. For more information about this, please contact your Tax Coach or call us toll free at 1-866-467-5809.

Warmest regards,

Tom

Corey listened to our teleseminar with Doug Lodmell and asks the following question:

Q: Tom, Thanks for the great information on Asset protection. It seems the more I read though the more confused I become. In the Rich Dad series Garrett Sutton talks about Nevada and Wyoming LLC's and Nevada Asset Protection trusts being great for asset protection. Douglas Lodmell listed these as poor when it comes to asset protection in his teleseminar. I guess the question is who is correct or are they both correct and I am misunderstanding the presentation?

A: As Doug pointed out in his teleseminar last week, there are several levels of asset protection. Doug showed a scale of poor, good, better and best types of asset protection. I don't think there is any question that the offshore asset protection Doug advises is the ultimate in asset protection. But that doesn't mean that you don't want to do at least some of the other pieces as well. As Doug suggested, most of your investments and business interests you want to be held in an LLC. This is what Garrett is talking about. This is good asset protection and is the minimum anyone should do.

The next level beyond LLC's would be a domestic asset protection trust (DAPT). I don't believe Doug addressed these during his presentation. Here is how the DAPT works. In most states, a self-settled trust (i.e., one in which the person who puts the assets into the trust is also the beneficiary) does not protect you against lawsuits. However, a few states have enacted DAPT statutes that do protect you in a self-settled trust. Wyoming, Alaska, Nevada and Utah are a few of the states with these laws in place.

So why go to the trouble and expense of an offshore asset protection trust when you can just form a DAPT? There are two reasons I can think of. First, these trusts have not been tested in the courts. So, we don't really know what will happen when they are tested. More importantly, however, is the situation where you don't live in one of these states or your assets are located in a state other than the state in which your trust was formed. When you are sued, which state's law is going to apply? If I were a plaintiff, I would sue in the state where the property is owned if it is not a DAPT state. Will a court in a state without the DAPT statute protect you? This is a big unknown.

What we do know is that offshore APT's have been tested for over 20 years and have proven to work. Hopefully there will come a day when all of the states have DAPT statutes and we don't have to go offshore. In the meantime, though, if you want maximum asset protection, especially if you own property or live in a non-DAPT state, you should consider an offshore APT as suggested by Douglass Lodmell.

Let me know if you have any other questions about this. Hope it helps.

Warmest regards,

Tom

This is the time of year when all Americans think about their tax situation and what they might do differently to reduce their heavy tax burden. There is a record of an ancient civilization that was required to pay 50% of their earnings to their captors. They considered themselves in bondage. And yet, many Americans who earn over $100,000 per year pay far more than that in federal and state income tax, sales tax, social security tax, property tax and excise taxes.

I'm not against paying taxes for necessary government services. To the contrary. What I am opposed to is paying a dime more than I have to. But MOST OF YOU are paying far more than you have to. Why? In most cases, it's simply because you are getting poor tax advice.

The reality is that the Internal Revenue Code is full of opportunities to reduce your taxes. I have spent almost 30 years pouring through the Code and learning all of these opportunities. And I am continually learning new ways to reduce taxes. It's all a matter of understanding the law and applying it the way Congress intended. That's right, Congress intended to provide tax benefits to individuals and companies who behave a certain way. Why? Simply because Congress has long used the Internal Revenue Code as a way to promote social, energy and economic policies.

But how do you know if your tax advisor is giving you the best advice? Unless you are legally paying no taxes, you really don't. The answer, quite frankly, is to have another, experienced tax advisor review your tax returns from prior years and your current tax situation. It may be that when you were a simple wage earner that there were few ways to reduce your taxes. But now you are in business or you are investing in real estate. What's happened is that YOU HAVE OUTGROWN YOUR TAX ADVISOR!

Before you commit to another advisor, have them review your situation. Don't expect that they will give you free advice. But find out if they think they can do something different. Just the other day while reviewing a tax return I found $60,000 of taxes that a prospective client was paying that we could easily eliminate. What would you do if I found $60,000 of ANNUAL tax savings for you? I hope you would jump on this opportunity and hire me.

Whatever you do, remember that "if you always do what you have always done, you will always get what you have always got!" Come join us at ProVision for a free teleseminar tomorrow night to learn 5 Tax Mistakes That Cost Business Owners $20,000 or More http://www.provisionwealth.com/seminars/Details.asp?Seminar_ID=19.

Stop paying so much tax that you feel you are in bondage to the government. Don't waste any time. Let me help you. You can reach me at cs@ProVisionWealth.com or 866.467.5809.

Warmest regards,

Tom

Here we are less than a month from the due date of tax returns. Most of you are scrambling to get your information together for your accountant. You hope the tax bite is not too big this year - that you won't have a big tax payment due on April 15th. You wonder, "Is there anything that can be done on my tax return to lower my taxes?" After all, it's a little late to "plan."

I have great news for you. There are literally hundreds of things you can do in preparing your tax return that will both reduce your taxes AND reduce your change of being audited by the IRS. The other day, we were doing our weekly training of our tax professionals. I asked them to get together and list everything we do at ProVision for clients DURING the tax return preparation process that either reduced taxes or reduced audit risk.

Even I was amazed by the resulting list. We came up with over 60 categories of ways we help our clients reduce taxes/audit risk during the tax return preparation process. Specific items of savings number in the hundreds. And all of these savings are PERMANENT! I'm going over some of these ideas during our FREE! teleseminar tonight. You can join us by registering at http://www.provisionwealth.com/seminars/Details.asp?Seminar_ID=19.

So the question you should be asking yourself right now is whether your tax return preparer knows enough of the law and how to apply it that they can produce the best result for you. If you are like most people, you are leaving THOUSANDS OF DOLLARS on the table. Your tax preparer may not charge a lot, but WHAT ARE THEY COSTING YOU???

My analysis, as illustrated in our free cd, "What Your Financial Planner Will Never Tell You" (go to http://www.ProVisionWealth.com/wealthcd), proves that if you take the tax savings from good tax advice and reinvest it, you can double the amount of wealth you might otherwise accumulate.

So don't be thinking that you are saving money by using an inexpensive tax preparation service. Over 95% of the tax returns I see prepared by other preparers overstate the client's tax. It's not too late to make a change. So do something now. At least have another advisor look at your taxes from last year. You can reach us at cs@ProVisionWealth.com or call us toll free at 866.467.5809.

Warmest regards,

Tom

Corey asks the following question:

A partner and I have an LLC with 50% ownership each. We both plan to transfer title via a Quick Claim Deed for both of our current homes to our LLC. We then plan to move out of these homes and rent them. We will then keep the new homes that we purchased in our own personal names. Both of the homes that we plan to put into the LLC have been lived in for more than 2 years. Is the transfer of our homes into the LLC a taxable event? Also is there anything else besides the Quick Claim Deed that needs to happen in order to fully transfer the new properties into the LLC and protect us from legal liability of our new rentals?

A: Like most tax questions, this one prompts another question. How is the LLC being taxed? If you are taxing it as a partnership (my recommendation), there probably is no tax consequence to tranferring the houses into the LLC. However, you may want this to be a taxable event. If it is a taxable event, then you will receive a basis in the property (for depreciation and subsequent sale purposes) equal to the fair market value of the property at the time of the transfer. And as long as the fair market value is not more than $250,000 greater than what you paid for the house, there should be no tax on the transaction. This is a tremendous benefit, but you need to make sure you handle the transaction properly. I recommend you sit down with your tax advisor to make sure you do this right.

There is another issue regarding this transaction and that is the use of a quit claim deed. You should speak to your title company about this. They may recommend that you use a warranty deed instead so you don't lose the benefit of your title insurance. Be sure you also speak to your regular insurance agent to make sure your houses maintain the appropriate coverage for property and casualty insurance purposes.

For more about this, visit our Tax Mastery section of Wealth Strategy U at http://www.ProVisionWealth.com/wealthu.

Warmest regards,

Tom

Alfonso asks the following question:

This past year I paid to my children for helping my business. I did not have an LLC. I just operated as a sole proprietor. Are these payments deductible for me? Are they taxable to my children? If so, how?

A: I have good news for you, Alfonso. Not only do you get to deduct your payments to your children, they may not have to pay tax on them. And, you don't have to withhold any payroll taxes.

Paying children can be a great way to shelter income from tax not just for you, but for your children as well. At ProVision, this is such an important part of our clients' tax strategies, that we have developed an entire education product called, "Getting Your Children in the Game." This product is about to be released for the first time ever at http://www.provisionwealth.com/products.

Getting your children in the game can save you $5,000 - $12,000 in taxes EVERY YEAR. Don't miss out on this critical part of your tax strategy. In tomorrow's blog, I'm going to tell you how I used this strategy to get my 18-year old a house of his own.

Warmest regards,

Tom

Yesterday, my son, Sam, closed on his first home. Sam is a senior in high school and will attend the university next year. Several months ago, after reading Rich Dad Poor Dad, he asked me if he could get started in real estate. He especially wanted his own house where he could live and his buddies could rent rooms from him to help pay the mortgage.

Little did Sam realize that I had started planning for this years ago. I arranged my business structure in such a way that Sam is an owner in my business and shows income from my business on his tax returns. Not only has this saved significant income taxes for me, it has enabled Sam to begin his real estate investing at a very young age. His older brother, Max, is also an owner of this new house. Max has been investing in real estate now for several years (and has an excellent credit score).

With the help of my Arizona real estate agent, Brian Matlock, we found a nice little house that is convenient to the University (and to our house so Sam can bring his laundry home or can come for a good meal). Between Sam and Max, they were able to purchase the house and get a great rate on their financing. And, we bought the house at more than $30,000 under market value.

So start planning now with your children. It's never too early to get them in the game. For more information on this topic, go to Wealth Strategy U on our website at http://www.provisionwealth.com/wealthu.

Warmest regards,

Tom

Alonzo asks the following question: I made some business payments via wire transfers from my bank account to their bank account. Can I deduct this? I don't have a receipt for it.

In today's business world, we frequently make payments to vendors using online banking or wire transfers. Alonzo's question about documenting these transfers is critical to making sure the IRS allows a deduction for such payments. After all, documentation this the number one key to convincing the IRS to allow your deductions.

There are two simple ways to document these payments. First is good bookkeeping. If your books properly reflect the payments and properly categorize them to the right accounts, the IRS is likely to allow the deductions. Having a full set of books is a critical part of this. So, don't just use a checkbook accounting program such as Quicken. You need to use a full accounting program that has a balance sheet and income statement (i.e., dual-entry accounting) such as Quickbooks.

Second, you do need to have backup documentation. This can be in the form of an invoice from the vendor, a HUD-1 in the case of a property purchase, or a contract. You can keep these in scanned form if you do not want to maintain paper files (scanned copies are actually safer and last longer than paper copies).

Don't be afraid of using wire transfers or online banking. Just be sure to maintain proper accounting and backup documentation and you should be fine.

Thanks for the question, Alonzo. I'm sure a lot of people are wondering the same thing.

For more information on documentation, go to http://www.provisionwealth.com/wealthu.

Be financially free now!

Tom

One of our School of Tax Strategy participants recently asked me the following question: Last year, I opened a trade name for a Marketing company. After that, I was paying individuals for their services, such as delivering fliers, helping on presentations, etc. How do I deduct these payments and are their any filing requirements with the IRS in this regard?

The first question we have to answer is whether these folks are employees or independent contractors. The IRS has a list of factors that help determine this. For more information, visit ProVision's Wealth Strategy U at http://www.provisionwealth.com/wealthu.

For now, let's assume these are independent contractors. As such, you do not need to withhold any taxes or file quarterly reports. You do, however, need to file a form 1099-MISC for each of them no later than January 31st of each year if you paid them more than $600 for the year.

Since you did not have a separate entity, your Marketing company is a sole proprietorship. As such, you should deduct the expenses of the company against the income on Schedule C of your personal tax return.

Remember that to get the greatest tax benefits from your business and investments, YOU MUST LEARN THE RULES! My company, ProVision, has recently produced some marvelous education modules on a wide variety of tax planning topics. Visit http://www.provisionwealth.com/products
for more information.

We received an interesting email from a long-time client today. She asked to be removed from our email list (though stay as a client) because she does not like our emphasis on reducing taxes. She feels that by helping you lower your taxes, we "help eviscerate the social safety net in America."

As you might imagine, I have a little different take on this, having spent a 30-year career helping people lower their taxes by 10-40% or more. Let me explain by giving a little history lesson on one of my favorite subjects - the U.S. income tax system.

When the income tax was first introduced in the early 20th century, it was a flat rate on high-income taxpayers. As the Government needed more money, the rate increased and the tax base broadened to include more and more people. If this were the end of the story, I would not be writing this blog and would not spend my time helping people lower their taxes.

The Government soon learned that taxes were an excellent way to stimulate the economy. It started using the Internal Revenue Code to effect not only economic policy, but also social and energy policy. The primary tools it used (and continues to use) were tax deductions, exemptions and credits aimed at encouraging certain investment behavior among the American people.

For example, to encourage home ownership, a provision was enacted whereby homeowners could deduct interest and property taxes. To encourage charitable giving, a provision was enacted to allow a deduction for gifts to qualified charities. These are deductions that the average American now sees as their right and if they were taken away, people would scream. In fact, it is these very deductions that have prevented Congress from enacting a Flat Tax. And I would bet that my friend who is worried about us "evicerating the revenues of the U.S. government" would be very unhappy if we did not claim their home mortgage interest, real estate taxes and charitable deductions on their tax return. In fact, they would probably fire us and rightfully so.

But are all tax deductions as justified as these? In fact, I would argue that the business and investment deductions and credits are even more justified. Why? Because they help create jobs and housing by getting more money put back into business and real estate.

I was talking to a good friend of mine just the other day. He was telling me that he puts all of his money back into business and into real estate so he doesn't have to pay so much in tax. Here is at least one person who is doing EXACTLY WHAT CONGRESS WANTS HIM TO DO and by so doing is helping to build the U.S. economy.

To be sure, I am all for eliminating loopholes that affect a very small part of the economy and sometimes only help a single company (yes, these are still passed on a regular basis). And if Congress wants to change the laws and eliminate some deductions and credits, that is entirely their right. However, I have never met a single person who VOLUNTARILY pays the government more than is required.

As Judge Learned Hand of the Second Circuit Court of Appeals once said, ""Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister
in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

For more on how to lower your taxes LEGALLY by 10-50%, check out our tax education products at http://www.provisionwealth.com/products or call us at toll-free 1-866-467-5809.

Warmest regards,

Tom

On Tuesday (Tax Day), John McCain announced his idea for how to simplify the tax filings for mllions of people. Finally, a workable idea!!! His idea is quite simple and would solve many problems. For those of you who didn't hear about it, here it is in a nutshell.

Create an alternative tax that is optional (not mandatory like the AMT). The alternative tax would be a flat tax, with two tax rates, a generous standard deduction, and nothing else. Taxpayers would have the choice of filing under the regular tax system or the alternative system.

This solves many problems without creating the remarkable complexity that comes from a consumption tax (e.g., national sales tax) or other "flat tax" proposals. Because you have a choice, you would be able to take the complex route of the regular tax, using a firm like ProVision to handle your tax filing. If, on the other hand, simplicity is most important to you, you can simply use the flat tax and file a postcard-type return.

What I like about this proposal is that it should eliminate many of the complainers about the current system being too complex. They would have the opportunity to use the simple form. At the same time, it's not a massive overhaul of the current system and so is politically doable, as no one loses. It should allow the IRS to reduce it's audit staff (especially office audits). Finally, it allows the government to continue using the tax system to encourage investment in real estate and business. (Personally, I'm not sure I care whether the government uses the tax system for economic, social and energy policy. The government sure seems to like it, though.)

The only downside I can see is that it would take the pressure off the government to do a massive overhaul of the current system. At this point in history, though, it seems almost impossible to undo decades of complicating the tax system. The tax system is woven throughout our entire economy. So I think that Mr. McCain's proposal is a very good step in the right direction.

One other aspect of John McCain's proposal that I really like. With a flat tax, any time the government wanted to raise or lower taxes, it would be very obvious, since it would have to include a rate change or a change to the standard deduction. It couldn't be hidden like the haircuts we have on Schedule A (itemized deductions) or the income limits on certain tax benefits or the alternative minimum tax.

There are still many issues that would have to be ironed out, such as which income is taxable, but let's give Mr. McCain a round of applause for coming up with a reasonable step in the right direction towards tax filing simplicity for the average, middle-class American.

Warmest regards,

Tom

Chris asks the following excellent question about the consequences of qualifying for real estate professional status:

If I elect aggregation for RE professional status for 2 rentals, what are the implications when I sell? One possible scenario in this current market would be that I incur a loss on one property (even with recapturing depreciation!) and a gain on the other, presuming I sell both in the same tax year.

A: As with most tax questions, the answer is "it depends." It depends on whether you have always qualified as a real estate professional. If so, then you simply have gain or loss in the year of sale and that gain or loss is treated as a Section 1231 gain or loss. See your tax coach for more on the consequences of Section 1231 gain or loss (generally positive).

If you have not always been a real estate professional, you may have unused passive losses relating to these properties. If you sell the properties in a fully taxable disposition (e.g., there is no gift or 1031 exchange involved), you will free up these unused passive losses to be available for use against other income (including any gain from the sale).

If you sell one, but not the other, you will not free up any passive losses. This is because you have not disposed of the entire property (which, because of your aggregation election now includes both properties). You will not free up the losses until you dispose of the other property. The result is that you could end up with these passive losses trapped and unused for years and years.

For this reason, I strongly recommend you consult with your tax coach to determine the best tax strategy even before you make the aggregation election for the first time.

For more information on how to be a real estate professional for tax purposes or the consequences of doing so, see our new ProVision education product, How to Uncover the Hidden Cash Flow from your Real Estate at http://www.provisionwealth.com/products.

Warmest regards,

Tom

My friend, Dave Sullivan, asks the following question about "component" depreciation:

I was wondering if rental real estate held in an LLC can use component depreciation for accelerated paper losses, and a resulting higher monthly cash on cash return? I read component depreciation could be used in Robert Kiyosaki's real estate book, but then saw this online:

"Component depreciation
At the end of a seminar to a religious group, he says he (Robert Kiyosaki) recently did a real estate deal where he got a 17% cash-on-cash return and that "there's 24% component depreciation on the property." Really? Gee, and I thought component depreciation was explicitly outlawed by the Economic Recovery Tax Act of 1981. Actually, I'm sure of it. It's right there in Section 168(f)(2) of the Internal Revenue Code."

A: I'm not sure where Dave read this comment about component depreciation, but the person making the comment is simply misunderstanding the difference between component depreciation and cost segregation. While it is true that "component" depreciation was eliminated with ERTA (the 1981 tax act), we can still do what we now call "cost segregation." After the 1986 Act, the IRS initially believed that cost segregations were still outlawed. However, this position by the IRS was overturned by the courts, notably in the Health Corporation of America (HCA) case in 1993. With this case, the IRS finally gave in and formally announced that it would allow cost segregations for property placed in service after 1986. There is even an IRS audit guide that specifies how a cost segregation must be done in order to be allowed by the IRS.

A cost segregation, while technically not component depreciation, has the same effect as component depreciation, just under the "new" (i.e., post-ERTA) depreciation tables. This means that we can segregate the costs of the building, the building fixtures (e.g., cabinets, ceiling fans, window coverings), and land improvements and depreciate them under the appropriate rates for those types of items. Typically, a cost segregation will result in much more depreciation in the early years of building ownership which can put a lot more money in the pockets of the owners through lower taxes.

At ProVision, we recently developed a home-study course about how to maximize your depreciation deductions. Look for it's release in the coming weeks at http://www.provisionwealth.com/products.

So when you are buying a building, consider performing a cost segregation following the IRS guidelines. IRS guidelines require an outside professional, such as ProVision, to do the cost segregation. Contact us at 866.467.5809 or cs@provisionwealth.com for more information on how we can help you maximize your depreciation deductions.

Warmest regards,

Tom

Alphonso asks the following question: Hi Tom, thanks for keep in touch with me. Your Information is so valuable and very welcome. At this time, I have some questions about income. How can I split my income as a 1099? I understand we need to manage and organize every penny, so I am splitting in this way: 10% Tith 15% Tax Savings 15% Advertising 30% Personal Income 30% Business Expenses Any suggestion? My other question is about my wife. She is W2. How you suggest to split her income? Thanks

A: I'm not exactly sure what Alphonso is asking, but let me suggest there could be two different questions here. The first is the best allocation of income to various expenses. I think that is a question for your Wealth Strategist. At ProVision, we believe that each investor should develop their own personal wealth strategy that is unique for them. Visit http://www.provisionwealth.com/wealthstrategies.asp for more information or see our wonderful Wealth Strategy home study course, Financial Freedom Now! at http://www.provisionwealth.com/products.

The other possible answer to the question has a tax angle to it. Could a person split their 1099 income between multiple companies to lower tax brackets? The answer very well could be "yes." If different companies perform different tasks for a client, then the client could pay each company for that service rendered. This could be especially beneficial if one of the companies were a "C" corporation. C corporations have their own tax brackets and the first $50,000 is ordinarily taxed at a 15% tax rate. Look for more on this strategy when we release our home study course on using C corporations. It will be released in the next few months, so be sure to keep a look out for it. We recently included it with the package we released to the Rich Dad Forum participants and it was very well received.

Remember that permanent tax savings, such as lowering tax brackets, are one of the key secrets to a successful tax strategy.

Warmest regards,

Tom

Thanks to David for giving the following feedback to our recent email entitled, "The HUGE difference between tax and legal terms and how it impacts your tax strategy."

Good point Tom.

Even though we have to consider taxes, and asset protection together, we also need to remember it's a joint effort by the CPA, and Attorney. It's good that a CPA find the best tax advantages, and consult with the Attorney for the best asset protection for the individual situation. A CPA that keeps an eye on the big picture is a bonus, but one that ignores tax advantages because of well known legal advice is a drawback.

After reading the part "I find that those who have the most successful tax strategies are those who understand the basics thoroughly. And by that I mean they know enough to know when to ask questions and seek expert advice. " I agree totally. Will I have access to the "Fundamentals in the Entity Formation section of Tax Mastery in Wealth Strategy U"

A: There is a tremendous amount of free information in Wealth Strategy U under the Tax Mastery section. Just log in at http://www.provisionwealth.com/wealthu. For even more information about entity formation, you might want to try our recently released home study course entitled, "How to Create Your Own Tax Savings By Building the Perfect Tax Structure: 5 Strategies to Selecting Entities that Reduce Your Taxes." You can get this through our website at http://www.provisionwealth.com/products.

Warmest regards,

Tom

Craig asks a very interesting question about his automobile expenses:

Q: Presently I am taking the standard cents per mile deduction on my vehicle under my current occupation. Due to the AMT, my accountant tells me I net back only about 2% of ALL of my expenses. How can I use my C-corp or LLC more for these expenses.

A: The issue here is that if you are an employee and you have unreimbursed expenses, such as automobile, travel, meals or other, they are only deductible as miscellaneous itemized deductions (MID) on your Schedule A. The problem with this is twofold. First, they are subject to a 2% floor, i.e., you only get to deduct MID to the extent they EXCEED 2% of your adjusted gross income (AGI). Second, they are not deductible at all for AMT purposes.

The solution is to incur these expenses as a business, not as an employee. Let's say, for example, that you are in sales. Your company allows you to either be an employee or an independent contractor. As an employee, you lose the deductions. But as an independent contractor, all of a sudden these expenses become fully deductible, not subject to either the 2% or the AMT limitations.

Of course, there are other issues with becoming an independent contractor that you need to consider, including loss of benefits and Social Security taxes.

Just paying these expenses out of an LLC or corporation will not solve the problem, so long as you remain an employee. The reason is that they expenses relate to your employment and not to your LLC or corporation. You can only deduct expenses in your LLC or corporation that belong to that entity. Paying someone else's (in this case, your) expenses is not allowed as a deduction by the IRS.

Contact your ProVision Tax Coach for tax strategies to take advantage of the independent contractor status. There are ways to minimize the Social Security taxes and even the loss of benefits.

Warmest regards,

Tom

Aloha from the Big Island of Hawaii. I'm here on my annual trek to total relaxation. Normally I don't do work during this 2-week break, but I have a little break from activities (strenuous ones, you know, like golf and scuba - more about this in a later email).

Sheila L. asks the following question: Any thoughts on... a Self-directed IRA versus a Solo 401k as a better method for reducing taxes while maximizine investment opportunities for retirement funds?

As always, a question like this prompts an important additional question - What are you going to invest in?

What you invest in has a huge impact on whether you should contribute to either a 401(k) or an IRA. If you are investing in real estate, it is almost always better to invest OUTSIDE of your IRA or 401(k). For more on this, see our course about investing in real estate in an IRA at http://www.provisionwealth.com/products.

On the other hand, if you are doing option trading, an IRA or 401(k) can be great, so long as it is a Roth IRA or Roth 401(k). In this case a solo Roth 401(k) is probably better, since you may be able to contribute more than you could to your IRA.

If you are investing in a business, normally you are better off investing outside of your IRA or 401(k). However, there are siutations where investing through your Roth IRA or Roth 401(k) can be hugely beneficial. If this is your situation, I strongly suggest you call our office at 866.467.5809 and schedule an appointment with us so we can discuss how to best help you. We have developed some unusual techniques for investing in business through an IRA or 401(k) that I have not seen elsewhere (I'm not talking just about using a C corp for this - there are even better ways for those of you reading this who are aware of the C corp IRA strategy).

I realize you did not really ask the question of whether to invest through an IRA or 401(k) versus investing outside of an IRA/401(k) but I would be remiss in not mentioning that sometimes you just don't want either one.

Thanks for sending such a great question. Glad you are thinking about maximizing your tax benefits.

Warmest regards,

Tom

One of the central themes of the current presidential campaign that will gain even more notice as the compaign continues is taxes. The two candidates seem to have quite opposite viewpoints as to what should happen to the tax system. Currently, it appears that McCain is in favor of the status quo and perhaps even making the Bush tax cuts permanent while Obama wants to revert to the pre-Bush tax rates.

At this point, I am not going to comment on the specific proposals of the two candidates. As the compaign goes on, however, be sure to pay close attention to what each candidate is saying about what they would like to see happen with the tax laws. As we have seen in the past, changes in the tax law can have both a significant impact on our personal tax situation as well as on the economy as a whole.

One thing is for sure. No matter which candidate wins the election, tax planning is sure to be more important than ever. If McCain wins, planning under the current system will be critical to maximizing your after-tax dollars in a difficult economy. If Obama wins and succeeds in implementing his tax changes, even more planning will be required in order to offset his tax increases. Either way, a good Tax Strategy will make a huge difference in permanently reducing your income taxes. Be sure to contact one of our Tax Coaches/CPAs at 866.467.5809 to find out how you can permanently reduce your taxes under either candidate's proposals.

Warmest regards,

Tom

Recently, we sent an email to our database suggesting that many of you might want to form a C corporation in order to take advantage of certain tax benefits in a C corporation. In response to this email, I received the following comment from my friend and respected Arizona attorney, Richard Keyt:

Tom, Arizona law does not have a type of entity called a C corporation. Don't mix the type of entity formed under Arizona law with the method of tax under federal income tax law. The corporation is an obsolete entity type in Arizona except in a few limited circumstances. The term "C corporation" confuses lay people and makes them think they should form an Arizona corporation when most of the time they should form an LLC. If it is appropriate, the members of the LLC can then file an IRS form 2553 and cause the LLC to be taxed under subchapter C of the Internal Revenue Code.

First, I want to thank Richard for his comment because if he found something confusing then chances are that some of you had the same question. Second, let me be clear that when we offer tax advice, we are only offering tax advice and always recommend that our clients speak to their attorney for the legal aspects. And when you do tax planning, you have to think in terms of the Internal Revenue Code. Under the Internal Revenue Code, there is a C corporation and there is no such thing as an LLC. I understand that this can be confusing because income tax law is different from state statutes. We frequently recommend that our clients form an LLC and then elect to tax it as a C corporation (not so in all states, but in many of them, an LLC is preferred to a corporation for asset protection reasons). But let's be very clear that for tax purposes, it is a C corporation we are talking about and recommending.

By the way, Form 2553 is used to elect to be taxed as an S corporation, not a C corporation. You will want to use Form 8832 to elect to be taxed as a C corporation.

Hopefully, this clears up any confusion. If any of you have additional questions, please email me at cs@provisionwealth.com or call our office at 866.467.5809.

If you have not subscribed to our newsletter, please go to http://www.provisionwealth.com/wealthu and sign up to be a member of ProVision's Wealth Strategy U.

Warmest regards,

Tom

Here is a recent question from Michael about the deductibility of educational seminars.

Q: I am having an IRS audit and they are trying to not allow my deduction for taking a personal development seminar. Tony Robbins like seminar. I am in networkmarketing? and I thought that those were deductable. I cannot find any case law? can you help?

A: First and foremost, I always suggest to people that they hire a qualified CPA to handle any IRS audit. It's cheaper than handling it yourself as you will always end up paying less tax if a good CPA is in charge of the audit. Also, it seriously reduces the emotional strain of the audit because you don't have to deal with the IRS. That said, let me answer the specific question.

Section 212 and Section 274(h)(7) of the Internal Revenue Code specifically disallows deductions for seminars taken for investment purposes (i.e., production of income). These are probably the rules being cited by the IRS auditor as why your seminar is not deductible.

However, Section 162 allows a deduction for all "ordinary and necessary" expenses carried on in a trade or business. Michael's challenge is proving to the auditor that the Tony Robbins course specifically relates to his business. Again, this is where an experienced CPA would be useful in conducting the negotiation and proving the relevance of the course to the business.

For more about how you could take advantage of the expert negotiation team at ProVision, please visit our website at http://www.provisionwealth.com or just pick up the phone and call us toll free at 1-866-467-5809.

Warmest regards,

Tom

Debbie from our School of Wealth Strategy asks the following question:

Q: My life partner and I purchased two single family homes this year as rental properties and see advice as to what entity should be established to take full tax advantage/asset protection. One of these properties is in the Go Zone and we seek advice as to allowable depreciation on this property.

A: Seems like a simple question, doesn't it? As simple as it seems, we actually have multiple questions and sub-questions. Let me address them one at a time. The first question is which entity is best for tax purposes. This, of course, depends on your ultimate strategy and where you live and where you invest. In most states, we recommend forming an LLC that is taxed as a partnership. Especially because you are not married, we suggest you have an attorney draft an operating agreement for the LLC. We also suggest you get with your Tax Strategist make the most of the tax benefits of the LLC. If you don't already have a good Tax Strategist, please call our office at 866.467.5809 and we will be happy to get you lined up with a qualified Tax Strategist.

The second question is closely related to the first and this is the asset protection question. Again, in most states we would recommend an LLC, but ALWAYS recommend you speak to a qualified asset protection attorney. If you don't know one, call us at we will recommend one that will meet your requirements.

The third question is about the depreciation. And this has a couple of sub-questions. If you qualify for the GoZone depreciation, you can take 50% of the cost of the property, not including land, plus ordinary depreciation on the remaining 50%. But even if you qualify for the GoZone depreciation, you may be limited as to how much you can take this year, depending on whether you are passive or active in the real estate, your adjusted gross income, and whether you qualify as a real estate professional. For answers to all of these sub-questions, I recommend you go to our website at http://www.provisionwealth.com/products and subscribe to our School of Tax Strategy where you will get a new course on a specific tax strategy each month, including a course on making the most of your real estate tax benefits and one on depreciation.

It sounds like what you really need is a good Tax Strategy. For this, I strongly recommend you speak to my assistant, Beth Rojas, at 866.467.5809 and set up an appointment with one of our Tax Strategies to determine the best approach for you.

Warmest regards,

Tom

We all know how important reducing taxes can be for our family finances, especially in these difficult times. But are some tax strategies better than others? Are there some that can provide benefits to our children for generations to come while others may actually hurt our loved ones when they need the money most?

The answer is a resounding yes!!! Most tax plans focus only on you and your current situation. Tax planners often don't take into account the trouble that a temporary tax plan can cause your spouse, your family or even yourself years down the road. Let me tell you a quick story to illustrate this point.

John, one of my early clients at ProVision, was advised to defer as much money as possible into his retirement years by contributing as much as possible to the pension plan of his corner grocery store. It seemed like a great idea at the time. But years later, when his family needed the money after he died a sudden death, they found out that they had to pay enormous taxes use the money in John's pension plan. In the end, this client's temporary tax plan ended up preventing his family from living the comfortable lifestyle they were used to.

This all could have been avoided and the family spared this crippling tax burden if the client's tax strategist had focused their efforts on permanent tax benefits. Don't let this happen to your family. A ProVision tax strategy includes several ways to permanently reduce taxes so spouses and family members are not subject to huge taxes when their loved one dies.

Permanent tax strategies can include employing children and contributing their nontaxable wages to a Roth IRA, using a corporation to make medical expenses deductible and converting taxable income from ordinary income to capital gains. For more on these strategies, visit our School of Tax Strategy at http://www.ProVisionWealth.com/products. And please let me know if you found this blog entry helpful to you and your family.

Remember that your family's financial freedom is closer than you think.

Warmest regards,

Tom

It's common for us to look at a new year and think about what we would like to change and what we would like to accomplish in the New Year. Those things we want to change we call resolutions and those we want to accomplish we call goals.

It wasnt' many years ago that I was adamant against setting goals and making resolutions. My reasoning was that I had an idea of what I wanted to do and that was enough. Writing things down just made my life more restrictive and set me up to fail. Does anybody else out there think this way?

These days I have done an about face. My wife kind of chuckles at this, remembering just how strongly I felt against making goals. What changed? I learned the Hawthorne effect from my friend, Robert Kiyosaki. The Hawthorne Effect states that what we measure improves and what we measure and report improves exponentially. So, writing down our goals and resolutions and then reporting on them goes a long way to helping us accomplish those goals and make the changes we need in our life.

So, if you don't mind, I'm going to share 3 of my goals for 2009 with you and each month I will report my progress. I apologize for getting a little personal here, but it helps me and hopefully will help you in your goals. I encourage you to do the same, i.e., to write down your goals and then measure and report to someone on a regular basis.

Goal #1: Build my house in Park City, Utah. As some of you know, this has been an ongoing project for several years now. The holdup for the past six months has been the Deer Mountain HOA. The Board rejected my plans because they thought the house was too big based on an arbitrary change to the rules that they made last year. So, the first step in achieving this goal is to get my plans approved, either by changing the Board's mind (working on this through a petition) or changing the plans to fit within the new guidelines.

Goal #2: Size 32 pants. I'm not that far off - I'm in a size 34, but that extra 2 inches would make a big difference in how I look and feel. First step goes to one of my resolutions - work out 5 days a week. I have been working out 3-4 but I have let my travel interfere with this.

Goal #3: Complete an Olympic triathlon in less that 2 hours and 45 minutes. My previous best is just under 3 hours. Next step is to work with my naturopath to strengthen my ankle muscles to I can start running again. This will help a lot with my travel as well, so I can run when I am away from home. (I have found it extremely difficult to find a pool to swim in when I travel.)

Now that I have measured and reported my current status of these goals, I will ask you to hold me accountable. And feel free to share any of your goals with the rest of us. We would be happy to be a part of your measurement and reporting process.

You may wonder why I share health and vacation home goals in a blog about wealth. But isn't wealth just a way to improve our life and obtain financial freedom? Health produces it's own freedoms. Even a smaller pant size increases your freedom as you are free to shop for nicer clothes that look and feel better.

And the ProVision Team is all about freedom; especially your financial freedom. Join us at http://ProVisionWealth.com and sign up for WealthStrategyU to start on your path to Financial Freedom. And let us know how we can help. We have a full team of Tax and Wealth Strategists at your disposal. You can contact us at cs@provisionwealth.com or call us at 866.467.5809.

Remember that your financial freedom is closer than you think.

Happy New Year!

Tom

My friend, Maria, asks the following questions:

Hi Tom, we are exploring 1031''s. How long should our current primary residence be a rental property before it can qualify for an exchange? Is it possible to leverage the equity in this property to a property with more cash flow without a cash outlay? If so, how?

A: Let's start with the second question. Suppose you had a building that was worth $2,000,000 and your loan was $1,200,000. What are the restrictions on what you can buy in a 1031 (i.e., like-kind) exchange. The general rule is that when you sell a property, you recognize taxable gain for the difference between the sales price and your adjusted (i.e., net of depreciation) cost. Under IRC Section 1031, if you follow the rules, you can defer any gain if you exchange your property for another "like kind" property.

The rules for Section 1031 are complex and detailed. But there are a couple of simple rules of thumb you can rely on to answer some of the general questions before going to your CPA for more detailed answers. First, so long as the new property costs more than the property you sell, you should not have to recognize gain (again, as long as you follow all of the other rules). So, in the example, so long as the new property costs at least $2,000,000, you should not have to recognize gain on the sale of the old property.

Your old property has a loan equal to 60% of the value of the property. Let's say that you find a bank that is willing to loan 80% of the value of the new property. That means that with your $800,000 of equity in the old property, you should be able to purchase a new property costing 5 times this amount or $4,000,000. There is no maximum value of the new property from a tax standpoint. The only real restriction is the bank's lending requirements.

Now let's look at question number 2. Suppose you turn your personal residence into a rental property. How long do you have to rent it out before you can do a 1031 exchange? The IRS guidelines say that you need to hold the property as a rental property for one year and a day. If you do that, they will not challenge you. Even if you hold it as a rental property for less than a year and a day, however, you may be able to do a 1031 exchange. See your CPA for the detailed rules about this and the related risks. If your CPA does not specialize in real estate, call the ProVision office at 866.467.5809 and schedule an appointment to speak to one of our real estate tax experts (all of whom own investment real estate).

One other question that comes to my mind is how you changed the property from a personal residence to a rental property? Did you know that you could have excluded as much as $500,000 of gain permanently if this was done the way we would recommend at ProVision? This could have eliminated entirely the need for a 1031 exchange and created a permanent tax benefit. For more on this and other tax saving strategies, call us or enroll in our School of Tax Strategy at http://www.provisionwealth.com/products.

Warmest regards,

Tom

I blew it and I'm sorry. My resolution was to blog every week day and I missed yesterday. But here's the thing about resolutions. The tendency is to drop them if we goof. Instead, I prefer to admit I made a mistake and keep going. So, I'm going to keep blogging every day even though I'm already not perfect this year.

Today's question comes from one of our School of Wealth Strategy members. Jerry has a tax question. This is totally appropriate since taxes have such a huge impact on wealth building.

Q: Do the S-Corp minutes need to declare a per-share dividend in order to take quarterly distributions? If so, do I need to hold quarterly meetings to declare them or can I make a blanket declaration for the year? Thanks for your help and the great courses and workbooks. I’ve learned a lot and am applying it as I go.

A: You do need to declare quarterly distributions in an S corporation. The key is to act as if you are a regular corporation, like IBM. Each quarter you hold a meeting to declare the dividend and then you pay the dividend. Of course, you may want to hold your meeting with your spouse at a nice restaurant and make the meal deductible. But you do need to maintain minutes of your meeting and keep them in your corporate book. For more about how to handle S corporations, meals & entertainment and corporate formalities, I suggest you subscribe to our School of Tax Strategy (http://www.provisionwealth.com/products)where, just like the School of Wealth Strategy, each month you will receive a new course on a different tax strategy topic. All three of these topics are complex enough that we have created a separate course for each of them.

Thanks for being patient with my goof yesterday. Keep reading and feel free to send the link to my blog to your friends.

Warmest regards,

Tom

I had fun this morning doing two radio interviews - one in Gainesville, Florida on WOCA and one in Atlanta on WDUN. The hosts in Florida were Larry and Robin. Very nice, genuine people. The hosts in Atlanta were Joel and Bill - funny guys. What stood out the most for me was how basic I had to be in explaining what I believe to be basic financial concepts. Don't get me wrong - it was not that the hosts weren't intelligent people - to the contrary. Rather, it became more apparent than ever that the financial landscape is full of weeds (i.e., bad advice) and a desert of good information.

For example, a caller on WOCA who is retired called and asked what he should do to make more money on his investments. When I asked him what he currently did with his money, he said that he had it in cd's making 3-4% interest. How sad! Think about how much better he could live if he was making even 5-10% on his money. And what if he learned the rules of wealth that we teach in our FREE cd (that you can get at http://www.provisionwealth.com/wealthcd) and made 20-30% on his money? He could be traveling first class all over the world.

Another example was talking about taxes. The focus was on how much to withhold. While this is important, how much more important to actually reduce your tax bill permanently like we teach in our School of Tax Strategy at http://www.provisionwealth.com/products.

My point is that the keys to great wealth are:

1. Dream big
2. Learn the Rules
3. Take control of your wealth with a wealth strategy (plan)
4. Learn the ProVision Investment Process
5. Build your wealth team so you don't spend hours and hours managing your investments

I am passionate about getting this information out to the world. Would you please help me? We have tons of free education online at http://www.provisionwealth.com. Pass this link on to your friends, your family and anyone else you know. Let's get the world educated. If we do, this recession will be over in a hurry.

A special thanks today to WCOA and WDUN for helping to get this message out. I really appreciate you taking time to talk to me to get more of this information out to your audience.

Warmest regards,

Tom

One of my fellow adjunct professors asks the following question as a follow up to my recent email:

Q: "Excellent article! I admit, however, I was hoping to see whether in your opinion an adjunct professor is able to deduct his/her mileage traveling to school.
Samantha

A: Well, Samantha, like most tax questions, the answer is that this depends on your facts and circumstances. The general rule is that if you are an employee, then your travel to and from your work location is considered commuting and is not deductible. However, that doesn't mean we couldn't change your facts to make it deductible.

Let's say, for example, that you don't have an office at the university. But you do have an office at home that meets all of the tests for home office. And you work in your home office each day you teach preparing your lesson prior to traveling to school. Then, I think you have a good argument that your commute is to your office and school is the second location of the day.

Remember, that the travel still is treated as unreimbursed business expense and will only be deductible on Schedule A if you meet the 2% floor for total miscellaneous itemized deductions.

For more about how to maximize your auto expense deduction and how to make sure your home office is allowable, join us in our School of Tax Strategy where we have courses specifically on these two subjects. Go to http://www.provisionwealth.com/products.

Warmest regards,

Tom

Many clients of ProVision and our School of Tax Strategy have chosen as their preferred growth asset category stock and option trading. When done properly and with the right set of systems, this category and be very lucrative. We have clients who are doing as well as 7-10% per month on their trading activity. Of course, there are many people who lose money because they don't have the training or don't strictly follow their criteria.

In either case, the question comes up as to how to treat the expenses of trading and how to treat the gains and losses from trading.

The IRS has consistently asserted (and won) the argument that gains and losses on strock trading by a noncorporate taxpayer are capital gains and losses. This is true whether the taxpayer is considered an investor or a trader. The effect of this is that losses can only be used to offset capital gains except for $3,000 per year that can offset other income.

But what about the other expenses of trading? Whether they are deductible or whether they are also capital losses depends on whether the taxpayer is considered a trader or investor. If the taxpayer is an investor, the expenses are simply additional costs of the stock and will be capital losses. If the taxpayer is an investor, the expenses will be deductible as incurred in the production of income.

There are three tests the IRS and courts use to determine trading status:

1. The taxpayer's investment intent
2. The nature of the taxpayer's income to be derived from the securities (interest and dividends for an investor versus gains for a trader) and
3. The frequency, extent and regularity of the taxpayer's trading activities

In general, it takes a lot of trading activity (multiple trades each day) to show that you are a trader. Because the test is based solely on your specific facts and circumstances, I recommend that you sit down with your Tax Coach to figure out whether you are a trader or investor and how you should carry on your trading activities (i.e., individually or through a corporation). Call us at 866.467.5809 to set up your appointment to speak to one of our experienced Tax Coaches or join our School of Tax Strategy at http://www.provisionwealth.com/products.

Best of luck in your trading activities. Remember to stay focused and stick to your criteria.

Warmest regards,

Tom

Last night, I had the great privilege of being a guest on Kim Kiyosaki's webinar that she does each quarter for PBS. The topic centered around our current economy and whether this is an adversity or an opportunity. Kim asked me a very important question:

Q: What are you recommending to clients in this current economy about how to deal with financial challenges?

A: Education, education, education. I explained that as our knowledge about finance and investing increases, two things happen. First, our risk goes down. The more we know about any investment, the lower the risk because we know how to invest. Second, investment returns go up. We are able to take advantage of better investments when we know how to deal with them and how to find them.

I went on to say that after knowledge, the next key is FOCUS. It's critical that you focus on a single type of investing activity. I was very clear that the idea of multiple streams of income from multiple types of investing as recommended by several of the "gurus" is garbage. It simply doesn't work. In fact, it cannot possibly work. How can you possibly master multiple investment strategies?

We teach our clients how to determine the right investment category for them and how to create a strategy that will be successful for them in our School of Wealth Strategy. If you haven't had a chance to review this wonderful educational product, please go to http://www.provisionwealth.com/products and check it out.

In reality, the only way to solve your current economic situation is to get educated in a new way to look at wealth. The old ways simply don't work anymore. Come visit us and let me know what you think.

Warmest regards,

Tom

We all know that a home business is one of the best ways to reduce taxes. The Internal Revenue Code is full of tax deductions, exclusions and credits for businesses. Of course, because of all of these benefits, the IRS is always on the lookout for abuse. One of the abuses they look for is hobbies that people "mistakently" report as businesses.

Q: When is a business a business and not a hobby?

A: The IRS recently provided additional guidance on this, citing several factors that make a business a business and not a hobby:

1. Does the time and effort put into the activity indicate an intention to make a profit?
2. Does the taxpayer depend on income from the activity?
3. If there are losses, are they due to circumstances beyond the taxpayer's control or did they occur in the start-up phase of the business?
4. Has the taxpayer changed methods of operation to improve profitability?
5. Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
6. Has the taxpayer made a profit in similar activities in the past?
7. Does the activity make a profit in some years?
8. Can the taxpayer expect to make a profit in the future from the apprication of asets used in the activity?

An activity is presumed to be for profit (and not a hobby) if it makes a profit in 3 out of the last 5 years. This may become a problem for many businesses in the current depression (yes, I said depression, not recession). So keep these other factors in mind. The more you meet, the more likely your losses will be allowed. Of course, if you have a profit, you don't really need to worry. So, the ultimate solution is to develop the Strategies and Systems you need, such as those we teach at http://www.provisionwealth.com/wealthstrategyu in order to make outstanding profits.

Remember that with the right Systems and Strategies, "Your Financial Freedom is Closer Than You Think."

Warmest regards,

Tom

Early this morning I arrived in Calgary, Alberta, Canada to teach at Greg Hasbritt's Master Wealth real estate seminar. My topic? U.S. tax strategies. So why would Greg ask me to teach U.S. tax strategies at his Canadian real estate seminar? For two reasons.

First, there are a lot of investors from the U.S. here. So, obviously, it makes sense to have a tax strategist explain the extraordinary opportunities to save taxes that are available to real estate investors.

But Greg also wants me here for the Canadian investors? Why? Because U.S. real estate is on sale; not just to Americans but also to everyone else in the world who can learn how to invest in the U.S. Of course, tax strategies for non-U.S. residents investing in the U.S. are quite different from those for U.S. residents. It's very easy to make mistakes if you are investing in the U.S. fo the first time.

At ProVision, we have created tax strategies specifically for the non-U.S. resident investor and the business owner. We now have in-house expertise in setting up tax strategies for the nonresident U.S. investor. And let me tell you - already I have had a number of Canadians express interest in setting up the right entity structure for investing in U.S. real estate.

So if you are a nonresident of the U.S. and have been wondering how to get started investing in the U.S. or you want to set up a business in the U.S. give us a call at 480.467.4400 or contact us through our website at http://www.ProVisionWealth.com.

Stay warm and continue your financial education. Your financial freedom is closer than you think.

Warmest regards,

Tom

Recently, I have been doing interviews on radio stations around the country. With the downturn in the stock market, every radio show host asks me the same question - What should i do about my 401(k)? Should I continue putting money into my 401(k)? What if my employer matches my contributions? Does that make a difference?

I'm going to give you an answer that you may not like. But it's the truth. Stop putting money into your 401(k), EVEN IF your employer matches you 100%! I say this for two reasons - tax savings and leverage.

Let's start with tax savings. Unless you 401(k) is a Roth 401(k), you are merely postponing your taxes to a later year in a 401(k). Now, if your only choices were to pay now or pay later, you would certainly want to pay later. But these aren't your only choices. Of the over 5,600 pages of law in the Internal Revenue Code, less than 400 relate to postponing or deferring income taxes such as with a 401(k) or regular IRA. The remaining 5,200+ pages explain how to permanently reduce your taxes.

So which do you prefer - temporarily postponing your taxes like most people do or permanently reducing your taxes like we teach our clients at ProVision? If you want to permanently reduce your taxes, don't be putting your money into a regulard 401(k). Instead, invest in some good permanent tax planning and get those savings every year without having to pay it back.

I will blog another time about the other reasons I don't like 401(k)'s. In the meantime, if you would like to know more about Permanent Tax Savings, visit our website at http://www.ProVisionWealth.com/wealthstrategyu and sign up for our Wealth Strategy University. It's all free with no obligation.

Warmest regards,

Tom

I just received an email from my friend, Toni, who does short sale negotiations. Her question is as follows:

Q: What are the income tax consequences of selling your residence through a short sale?

A: Let me begin by explaining the basic concept of a short sale. Unfortunately for home owners, short sales are fairly common now. Five years ago, I'll bet most people had never heard the term. A short sale is simply a way to sell a property when the combined loans on the property are greater than the value of the property. The buyer negotiates a deal with the bank to pay off the mortgage(s) for less than face value. Then, the buyer works with the homeowner, gets the paperwork done, and buys the property.

The tax question is what happens to the homeowner if the total of the loans is more than what the homeowner paid for the house? Is there a gain to the homeowner or some other income that has to be recognized?

As with most tax questions, the answer is "it depends." It depends on whether the house is the principal residence of the homeowner. If not, it depends on whether the loan is recourse or nonrecourse and whether the owner is insolvement or bankrupt. Let's take these one at a time.

If this is the homeowner's principal residence and has been for 2 of the past 5 years, then the income from the bank reducing the debt should not be taxable, regardless of whether the debt is recourse or nonrecourse.

If not the homeowner's principal residence and the debt is recourse, the amount of debt reduction by the bank generally will be treated as ordinary income unless the homeowner is bankrupt or insolvent (liabilities greater than assets).

If the debt is nonrecourse, their will be gain to the homeowner as if they sold the house for an amount equal to the debt of the property.

As you might imagine, I'm giving the quick and dirty answer here. There are details I can't cover. So, before you enter into a short sale, I strongly recommend you sit down with your Tax Strategist and determine exactly the effect of your short sale on your tax liability.

Hopefully, this gives you some idea of what to expect. Call us at 866.467.5809 and set up an appointment for more information about a specific situation.

Warmest regards,

Tom

I was in Orlando, Florida a couple of weeks ago speaking to 1,400 people at the Rich Dad Annual Forum. During my presentation, I mentioned a prospective client whose entity structure was likely to cost him over $200,000 in taxes if all he did was refinance his real estate. One of the participants, Crystal, later asked for clarification about how an entity structure could make this big of a difference. Here is the explanation:

The prospect, we'll call him Mario, had arranged his affairs so that he had an S corporation that owned three LLC's. In one LLC, he conducted his architectural business. In the other two, he held investment real estate - single family homes.

I asked Mario if he ever planned on refinancing the homes. He said yes and that he was about to do so and had about $1 million of equity in the homes. He also indicated that he would have to re-title the real estate into his own name in order to do the refinancing.

Here is the issue. When he re-titles the real estate to his name, the IRS will treat this as though he sold the real estate to himself out of the S corporation at fair market value. So, he will have to recognize AND PAY TAX on the $1 million of gain, even though he is just refinancing the property and putting it back into the LLCs. The result is at least $200,000 of tax that he would not have paid had he used a better entity structure.

When we create tax strategies for our clients at ProVision, we examine ALL of the tax consequences of the entity structure. Be sure your tax strategist is doing the same for you and does not make a mistake like Mario's did with him. For an evaluation of your tax situation, contact us at cs@provisionwealth.com or call us at 866.467.5809.

Warmest regards,

Tom

The IRS states that commuting to and from work is not deductible. So how do we make it deductible and stay within the IRS rules? That's the question Michael from Kentucky asks:

Q: I am a 1099 sub-contractor doing database consulting for a local spirits company. I have an LLC for my Computer Consulting business based in Shepherdsville, KY. I drive 30 miles one-way to the client in Louisville, KY four days a week. Are these miles deductible and if so, under which IRS tax code? P.S. Thanks for the great information at Rich Dad Annual Forum! It was great meeting you!

A: The way to increase deductions is to Learn the Rules. The question here is what's commuting? According to the IRS, commuting is traveling from your home to your first place of business for the day and then returning home from your last place of business for the day. In Michael's case, this means that if he travels directly to Louisville from home and then back, his entire trip is commuting and is nondeductible.

Instead of going directly to the client, what if Michael goes to his office in Shepherdsville, does some work, then goes on to the client in Louisville, returns to his office in Shepherdsville, and then returns home from there. This makes his trip to Louisville deductible. Only his trip to his Shepherdsville office is commuting.

What if his office in Shepherdsville is in his home? Then, his walk from his bedroom to his office is commuting and his trip from his office to Louisville is deductible. When he returns to his home office to do some work at the end of the day, his trip there from Louisville is also deductible. Of course, the real effect of this planning strategy is to make his entire trip to and from Louisville deductible. See what happens when you Learn the Rules?!!

For more on setting up your home office, see our home study product, Getting the Most of Your Home Office Deduction at http://www.wealthstrategyuproducts.com or even better, join our School of Tax Strategy at http://www.provisionwealth.com/products.

Remember that the more expenses you make deductible, the lower your tax and the faster you reach your financial freedom.

Warmest regards,

Tom

Weekend before last I was at the Marshall Sylver event, Financial Prosperity. It was a terrific seminar. The next one is in Orlando later this year and I encourage everyone to attend. I attended both as a participant and as a speaker.

One of the exercises Marshall had us do was to put together a business plan for an entirely new business. He put us into groups of 7 and we were to come up with a business that none of us had done before or were planning on doing. Our group decided to plan a business selling the latest solar panels.

Of course, my task was to come up with the tax benefits of solar panels. Fortunately, a client of mine, Jack McGill, recently had explained some of the tax benefits and they are extraordinary.

First, there is a federal tax credit equal to 30% of the cost of the solar panels for any homeowner who buys and installs the panels on their home. Many states also give tax credits (Arizona's is $1,000) and many utilities are offering rebates.

One other benefit is that if you put a bigger unit than is necessary to power your house, you can sell your excess energy back to the utility company. Our group estimated that with the new technology, a homeowner could easily recoup their investment in less than 5 years. After that, their energy is essentially free and they can still sell excess to the utility.

Sounds like a great opportunity for anyone interested in going green with their home energy consumption. The only challenge I found in my research is that you don't get the federal credit if the unit is used to heat your swimming pool. I'll have to figure out a way around that when I install the panels in my new home in Park City, since I will definitely be heating a pool.

For more information about tax saving strategies, join us in our School of Tax Strategy at http://www.provisionwealth.com/products. Go green and get those tax credits.

And remember that your financial freedom is closer than you think!

Tom

The first thing I remember learning from Robert Kiyosaki when I first met him years ago was the concept of context vs. content. Robert uses a glass to illustrate this concept. The glass represents the context while what goes into the glass is the content. Until you make the glass (your context) bigger, you cannot add more content then you currently have.

I was thinking about this the other day in terms of tax knowledge. What's more important - context or content? In my travels, I am finding that most people are lacking in both content and context when it comes to taxes. They know very little (and really don't want to know more) about the rules (which, admittedly, are complex) and know even less about how the tax law works.

As I do tax evaluations for our new clients, I routinely find that 90-95% of them are overpaying their taxes by 10-40% simply because they don't know how the tax law works. This is the context I'm talking about, not the content. As soon as we broaden their context, they instantly start paying less tax.

The first and most startling change in context for most people is that Congress has filled the tax laws with tax savings that act as incentives for handling their business and investments. In fact, of the approximately 5,700 pages of Internal Revenue Code, 5,600, or 98%, is dedicated to reducing taxes. Less than 100 pages are dedicated to raising taxes.

The second change in context is finding out that of the 5,600 pages of tax reductions, only 400 pages are dedicated to deferring, or postponing taxes through mechanisms such as IRAs, 401(k)'s and pension and profit sharing plans. The remaining 5,200 pages are dedicated to permanent tax reductions.

That's enough context for today. Are you beginning to get a sense of what I mean by changing your context when it comes to taxes? When you begin to understand how the tax laws function, they stop being so scary and you can start saving taxes immediately.

Tomorrow we will talk about another change in context regarding taxes that will change your life and permanently reduce your taxes. Stay tuned.

Warmest regards,

Tom

One of the great books of all time is "How a Man Thinketh by James Allen." The premise of this book is that we will do according as we think. And we will never do something that is not first a part of our thought process. Allen says, "All that a man achieves and all that he fails to achieve is the direct result of his own thoughts."

I have long believed this to be an essential element of how someone pays (or overpays) their taxes. Let's start with how most people think about taxes in the first place. Two words best describe how people think about taxes - fear and boredom. People are afraid of the IRS. And people are afraid of the complexity of the tax laws. And they see taxes as a boring subject in the first place.

Let's say you conquer your fear of learning about taxes and decide you will put up with the boring subject of tax law enough to read a book or go to a seminar or sit down with an accountant. What are you likely to be told in the book or seminar or by that accountant? It's very likely that you will be given a few tips to preparing your tax return, or some ideas about how to postpone your taxes to a future year, such as through an IRA or 401(k) or by prepaying some expenses at the end of the year.

When you read or hear information like this, how does it affect your thinking? Assuming it comes from a credible source, you probably believe it and begin thinking that this is what you should be doing. You should be defering (postponing) your taxes by maximizing your contribution to an IRA, 401(k) or profit sharing plan. You should be defering taxes by prepaying expenses. And it's just as likely that you will think that's all you can do. So, you start doing it.

Now, most of you are thinking right now that you have been doing this all along even without a book or seminar. Why? Because you have been told this by countless people in the media, including advertising from mutual fund companies, banks, insurance companies and others who want you to make these contributions because the contributions have to be invested and most likely will be invested in a company like theirs.

And, if you are like most people, this is the extent of your thinking about tax planning. It's all you know so it's all you do. The reality is that their are more than 5,700 pages of the Internal Revenue Code. Of these, less than 400 are devoted to tax deferral. Less than 100 are devoted to raising taxes. So what about the remaining 5,200 pages? Devoted to more meaningful ways to reduce your taxes.

Think about that! 5,200 pages of ways to reduce taxes that are never discussed in the media, by your employer, by your accountant, or in the books you may find on taxes. Does anybody know about these 5,200 pages besides high-priced tax lawyers (most of them don't either, by the way)? Yes!!! The wealthy know these rules. They are the ones who pay the high-priced lawyers and accountants to keep their taxes down.

Isn't it time you started learning about the 5,200? Join us in our School of Tax Strategy for our education and monthly coaching calls. Visit http://www.wealthstrategyuproducts.com to learn more.

Warmest regards,

Tom

I recently did a tax evaluation for Joe, one of our students in our School of Tax Strategy. He has a follow up question to our discussion:

Q: Hi Tom I had a follow up question re our tax review. I took a 3 day rich dad stock trading class in Nov 08 ~$500 I also signed yup for stock trading advanced course work $24k. I don't have an entities set up for trading or real estate yet - we just file a personal IRS 1040 for 2007 tax yr Could we claim this education as a business expense? thanks lots, Joe

A: This is a common question from seminar participants. In recent years, the IRS has been challenging the deductibility of a lot of seminar expenses. The reason is that education, unless it's to improve job performance, is not deductible? Why? Because it is not for producing income.

There is a way, however, to make seminar expenses deductible. How? Simply show that you are using the seminar to POTENTIALLY produce income. In other words, start a business. Take that great information you learned at all of those seminars and put it into practice. Actually start that business. Then, the education expenses can be treated as Start Up costs. For more on Start Up costs and how to deduct them, try our course on Start Up expenses at http://wealthstrategyuproducts.com. If you want to learn how to start that business, join our School of Wealth Strategy at http://provisionwealth.com/products. At ProVision, we want you to succeed in your tax reduction AND in your business and wealth strategies.

Remember that when you reduce your taxes and build the foundation for a strong business, your financial freedom is closer than you think.

Warmest regards,

Tom

President Obama's new budget includes several changes to the tax laws. As promised, most of the benefits are for families earning under $250,000. These include the continuation of the 10% tax bracket, the child tax credit and education incentives. There is also a provision to increase the Alternative Minimum Tax (AMT) exemptions for 3 years.

The most notable change relates to the Estate Tax. As you may know, the estate tax is scheduled to go away next year and then the following year revert back to pre-Bush law (meaning that the standard exemption goes back to pre-Bush increases).

The proposal in the budget is to permanently allow a $3.5m exemption for individuals and a $7m exemption for couples. This is a relief to many of us, who were concerned that this Administration might severely reduce the exemption. This gives us some level of certainty for estate and gift planning.

If you have not done your estate plan, or would like a review of it, please contact our office at cs@provisionwealth.com or call us at 866.467.5809. We are happy to review your situation and help you determine what you can do to reduce or eliminate your estate taxes while protecting your family from probate.

Warmest regards,

Tom

Many of you have spent thousands of dollars on seminars in the past few years. One of the more common questions I get when I am speaking at a seminar or later when I am doing a tax evaluation is whether the cost of these seminars is deductible.

Like most tax questions, the answer depends on your circumstances. Some of you own a business and the seminars are likely to improve your business skills. You are the lucky ones, as your seminar expenses should be fully deductible against your business income.

Others of you are looking to start a business. Your seminar expenses probably are not currently deductible, especially given a recent decision by the Tax Court. The Tax Court held that expenses for a real estate seminar were not deductible. Instead, they were considered start up costs of the Taxpayer's real estate business. Why? Because the Taxpayer had not begun his real estate business prior to incurring the seminar expenses.

Still others of you are trying to decide whether to start a business. If you incur seminar expenses that don't relate to your employment and you never start a business, you probably cannot deduct the cost of the seminar at all under this new Tax Court case. Certainly, this is the position the IRS is taking.

If you have questions about how to handle start up expenses, join us in our School of Tax Strategy or check out our course specifically on start up expenses at http://www.provisionwealth.com/products.

Warmest regards,

Tom

The Issue: The states are all short on funds with the current condition of the economy. As a result, they are aggressively going after any business that makes sales in their state and has not been collecting sales tax. One of my friends recently found this out the hard way when state revenue agents showed up at his office and began collecting data from his computers without any warning. The end result? Writing a very big check to the Department of Revenue for unpaid sales taxes.

The Rule: A business is required to collect sales tax on sales of “tangible personal property” in any state in which they have a “physical presence.” A physical presence normally means employees or an office in the state. However, many states take the position that if you visit the state to do business, especially at a trade show or speaking event, then you have physical presence and they can require you to collect and remit sales tax on all of your sales.

Tangible personal property means, for speakers, any books, cd’s, or other information products whether there is a physical product (e.g., cd) or whether it’s merely a download. This means most information products other than seminars and coaching. Even seminars can be subject to tax if they come with a manual or other materials. Some states go so far as to say that even if there is no more than a handout at the seminar, the entire course is subject to sales tax. Our member who got hit with the recent audit puts on multi-speaker events and ended up paying the tax on all of the products sold at his events over the past three years by all of his speakers.

The Solution: The best solution is simply to collect and remit tax on all sales at seminars. If this is going to cause a closing ratio challenge for you, then you can separate out the charge for the materials from the charge for the seminar or coaching services and only charge tax (or pay it yourself) on the price you charge for the materials. Just be sure the price you list on your sales form for materials is reasonable.

The Rest of the Story: This is only the tip of the iceberg. Once you have a physical presence in a state (say you speak at a seminar in that state), all of your sales to customers in that state, even through the Internet, are subject to sales tax in that state. In addition, you will be subject to income tax in that state as well. The income tax rules are much broader even than sales tax and in most states don’t require a physical presence.

So beware of this major issue as a speaker and/or promoter. 7-8% of all sales straight to your bottom line literally could put you out of business. To be safe, contact a CPA who specializes in multi-state taxes and have them do a state tax review for you. A few thousand dollars of professional fees now could save you hundreds of thousands of dollars later. For more information, feel free to contact my office at 866.467.5809 or email me at cs@provisionwealth.com

There is a lot of talk right now about itemized deductions. Remember itemized deductions? Those great deductions on Schedule A for taxes, interest, charitable donations and investment expenses? The big discussion right now is about President Obama's proposal to limit itemized deductions to the 28% tax bracket. That's right. If you haven't heard, under Obama's budget proposal itemized deductions would provide at most a 28% tax benefit. Even if you are in the 35% tax bracket!

What most people don't realize is that itemized deductions are already limited for high-bracket taxpayers. The reason it's not obvious is that the calculation is complex. Let me see if I can break down all of the limitations on itemized deductions for you.

First, there are the "floors." A floor is a minimum amount of deductions that you have to have before you begin receiving any benefits from the deduction. And, you only receive a benefit for the amount of deductions you have above the floor. There are two types of itemized deductions that have floors. The first is the deduction for medical expenses. This floor is equal to 7.5% of your page one adjusted gross income (AGI). So if your AGI is $100,000, then you don't get to deduct the first $7,500 of medical expenses you incur. Only those in excess of $7,500 are deductible.

The other floor applies to miscellaneous itemized deductions. These include job expenses, investment expenses and, for many people, tax return preparation and planning fees. This floor is 2% of AGI. So, in our example, with $100,000 of AGI, the first $2,000 of investment expenses is not deductible.

The second limit on itemized deductions is the Alternative Minimum Tax, or AMT. The AMT is an alternative tax calculation to the regular income tax. If your AMT tax is higher than your regular tax, you pay the AMT. Taxes and miscellaneous itemized deductions are not allowed under AMT. And the floor for medical deductions under AMT is 10% instead of 7.5%. There is also a limitation on home mortgage interest under the AMT.

The third limit on itemized deductions is a little more complex. Once your income reaches a certain level, your itemized deductions are reduced by 3% of the amount your income exceeds this level. The current level is $166,800 for most people. So, if your AGI is $20,000 more than this, your itemized deductions are reduced by $600. This is a cap on this reduction, so that nobody has their itemized deductions reduced by more than 80%.

This last limit is phasing out under current law and is scheduled to entirely phase out at the end of 2009. Perhaps President Obama's new cap will replace it or perhaps it will be in addition. We will see.

The biggest question, then, is what to do about these limits on itemized deductions. The answer is fairly simple. Do everything you can to change your deductions from itemized deductions to business deductions. Remember that business deductions are not limited. So, if you have tax planning fees, if they are for your business, they can be deducted as business expenses and not subject to all of the itemized deduction limitations. There are even some ways to shift a portion of your home mortgage and real estate taxes to your business. And with proper planning you can completely eliminate the medical expense floor so you receive a deduction for 100% of your medical expenses.

If you have any questions about how to shift your deductions from itemized to business, join us in the ProVision School of Wealth Strategy at http://www.provisionwealth.com/products or call us for a tax evaluation at 866.467.5809.

Warmest regards,

Tom

I have never seen anybody be put out of business by the IRS over nonpayment of income taxes. There are two other types of taxes that can put you out of business. The first is payroll tax. Employers have a fiduciary responsibility to pay over employment taxes to the government. For some reason, this still trips up some business owners. They don't seem to understand that when they withhold taxes from their employees' wages, that money MUST be paid over to the government. If not, the IRS will come knocking and it can get nasty.

Of course, most employers understand that they have to pay over payroll taxes. And payroll taxes really are not difficult to compute. The only time employers really get in trouble with payroll taxes is when they are struggling financially and look at the payroll taxes as an opportunity for a short-term loan from the government. Not a good idea.

The other tax that can put you out of business is sales tax. This one is not so simple. Yes, if you collect the tax, you have a fiduciary responsibility to pay it over to the government. From this standpoint, it is similar to payroll taxes. The similarity stops there.

Sales tax can be complex. Most businesses really do not have a handle on when they have to collect sales tax. That's a challenge, since if you collect sales tax from your customers, your customers pay the tax. If you don't collect the tax from your customers and the State comes knocking on your door, you could owe the tax and never get to collect it from your customers. Really, now, how many of you think you can go back to a customer three years after a sale and collect sales tax from them?

Remember that it's not just the public that has been hit hard by the Recession. The states have also been hit hard. They built up all of their social programs during the boom times and now they want to continue funding these programs even though the taxes have plummeted. So what do they do? They look for more opportunities to collect tax.

The best tax for States to go after is sales tax. Why? Because the rules are complex enough and the law vague enough that the States can be aggressive in their collection activities. Recently, the Wall Street Journal ran an article on the front page of its Marketplace section entitled, "States Plot New Paths to Tax Online Retailers." One of my friends who puts on seminars told me that he was recently audited by the State and ended up paying a boatload of back taxes on sales that his presenters had made at his events.

While I may not agree with the States' position on what they can and cannot tax, the reality is that they are going after retailers, especially those who sell over the Internet. And isn't that just about everybody?

I have spent 14 years teaching multistate sales and income tax at Arizona State University. I can tell you that the laws are vague. Yes, the U.S. Supreme Court has held that a retailer must have a physical presence in a state in order for the state to require the retailer to pay sales tax. The question is - what constitutes physical presence? How much presence is enough? What if one of your employees visits the state for a couple of days of training? What if you have an affiliate in the state? Does the affiliate's presence count as physical presence for you?

My recommendation? All Internet and Seminar retailers should have a thorough sales tax review performed by a qualified sales tax professional. The challenge is finding such a professional, since most CPA's don't know any more about sales tax than you do. If you would like a referral to a qualified sales tax professional to help with your situation, please contact us at 866.467.5809 and we will get you to a good sales tax expert who knows the laws in multiple states. Or send us an email at cs@provisionwealth.com.

Don't let sales tax put you out of business!!! Learn the rules and avoid this tax burden altogether. Remember, that if you know when to charge sales tax, you often can pass this burden on to your customers.

Warmest regards,

Tom

One of our current School of Tax Strategy students recently sent this note to me:

"I need to start my legitimate business to be able to write off my leisure (golf, travel). I now am better educated than my tax preparer....scary."

Is this really possible? Unfortunately, the answer is yes!!! Too often I speak to prospective clients who really do know more than their tax preparer. The reason may be that their tax preparer really has very little education or it may be that the client has received a lot of education, such as anyone who is a member of our monthly School of Tax Strategy, receives.

Whatever the reason, when you know more than your tax preparer, it's time to get a new tax preparer. How do you choose? The best way is to interview and few of them and listen closely to the questions they ask you. Remember that the key to a good advisor is always found in the questions they ask you. You have the facts and the answer depends largely on the facts. So what questions should they ask you?

First, a good advisor will ask you about you, your goals, your business and investments and your family. Next, they will ask how you feel about taxes and how aggressive in the law you would like to be. Third, they will ask you about your specific concerns and where you want to concentrate the efforts of the advisor. Last but not least, they will ask how you prefer to work with your advisors. Is it once a year, once a month or once a week?

It's pretty easy to tell how much an advisor cares about your situation by the questions they ask. And at the same time, it will be pretty evident how much they know.

So I put this question out to you readers - Do you feel like you know more about taxes than your tax preparer? Let me know what you think.

Warmest regards,

Tom

A little while ago, Anji asked the following question:

Q: Can adjunct faculty deduct a home office and mileage to school and back?

A: The answer to this, like most tax questions, is that it depends on your facts and circumstances. For example, does the school provide an office for you? If they do, you may not be eligible for a home office deduction. Also, how much of your time and income is derived from your adjunct professor work? I was an adjunct professor at ASU for 14 years and the salary was not much. I only taught one class. Some people, though, work full time as an adjunct professor. Even if you have an office at the school to meet students, you may qualify for a home office in two circumstances.

1. You need a home office in which to do your administrative work, including grading papers, because the school does not offer you a computer to use and other tools that you may need.

2. You perform the duties of an adjunct professor primarily to further another business, such as recruiting for your own business. Then, you may need a home office for your business and you do your administrative work for the school in the same office.

As for the travel, that depends on whether you qualify for a home office. If you have a legitimate home office and you do work in your home office before you go to school, then the travel to school is essentially to a second place of business and should qualify as deductible.

Here is the lesson!!! The Tax Law is not linear. You cannot determine whether your commute is deductible without also determining whether you have multiple places of businesses. The challenge most accountants have is that they look at the law like it's a recipe. The Tax Law as a recipe is like the cook who hide different parts of their recipe throughout their house and you have to go look in all the corners to get the complete recipe. Many of the tax provisions interact with each other, so you have to have an understanding of ALL aspects of the law.

That's why it's so important to have a CPA who asks you the right questions and who understands the law in its entirety. And that's our goal at ProVision. Please feel free to contact us, no matter where you live and/or do business, at 866.467.5809.

Warmest regards,

Tom

My good friend and brilliant attorney, Steve, recently asked me the following question:

Q: Tom: I’ll assume you are aware (I wasn’t until 5 minutes ago) of amendments to the California Corporations Code (Sections 1150-1160) effective January 1, 2008. Basically, they provide that corporations can convert into an “other business entity”—LLC, LP, GP—and vice versa, on a no big deal basis. And the entities converting into other entities can be foreign corps, LLCs, etc.

My hopefully quick question: this is a provision of California Law. Are there provisions of the IRC that are violated by this? I mean, I tell a client “No problem—I can convert your Cal entity either way.” And then I find out WHAMMO!! We’re socked with adverse federal tax consequences.

Thanks, Steve.

A: There are three possible events that could happen here from a federal tax standpoint. First, you could have an entity, such as an LLC, that is being taxed as a limited partnership that is changed to an LLP, which is a limited partnership. Or, an LLC taxed as a GP converted to a GP. In these cases, there will be no tax consequence as you have not changed the nature of the taxable entity.

Second, you could have an entity that is taxed as a GP that is converted to an LLP or an LLC taxed as an LP. In this case, there may be some tax consequences for those partners/members who changed their tax status (i.e., GP to LP). The consequence comes from two levels. First, their income from the partnership could be converted from active to passive, subjecting them to the passive activity loss rules of Section 469. Second, their basis in the partnership would change if they were no longer on the hook for the recourse debt of the partnership. This could cause them to be limited on their losses or could even cause a gain to them as the relief of debt is considered to be a distribution for tax purposes.

Third, you could have an LLC that is taxed as a corporation (having previously made an election to do so) that is now taxed as a partnership because it was converted to an LLP or a GP. In this case, you would have a complete liquidation of the corporation and you would compute gain to the entity in an amount equal to the difference between the value of the assets and the basis of those assets.

Warmest regards,

Tom

Yesterday, the House released it's newest version of the Health Care Reform Bill, HR3962. Several major tax increases are included to pay for the cost of the bill. They include:

Surtax on the "wealthy." This is a 5.4% additional tax on incomes over $500,000 for single individuals and $1,000,000 for married couples. Income means adjusted gross income less investment interest expense.

Surtax on medical devices. Medical devices sold by physicians and hospitals to patients generally are assessed a surtax of 2.5% when sold.

Limit on contributions to cafeteria plans. Contributions to cafeteria plans will be limited to $2,500/year.

The Senate version was previously released. It includes the surtax on medical devices as well as the limit on contributions to cafeteria plans but does not include the surtax on wealth individuals.

Both of these bills will be modified and eventually we will get a combined bill. I'll let you know how it goes.

Tom

Over the weekend, President Obama signed into law new legislation entitled, "Worker, Homeowner and Business Assistance Act." This bill extends the new homeowners tax credit until May, 2010. But that's only part of it. This bill also allows anyone who has lived in the same house for the past 5 years to qualify for the new homeowners tax credit. The credit is reduced to $6,500 for these homeowners and the new house they buy can't cost more than $800,000. Still, this is a great benefit for anyone thinking of getting out of their old house and upgrading.

In addition, the income limitation to qualify for this credit has been raised from $150,000 income limitation to $225,000.

This could just be the best time ever to buy a house. Not only do you get a tax credit, there are terrific deals out there. So even if you have to take a hit on the price you get for your current home, you could very well get a great deal on a new home.

Pretty exciting news. Another stimulus package for homeowners. And that's not all. There are tax benefits in this new law for business owners that I will discuss in tomorrow's blog.

Warmest regards,

Tom

As a follow up to my last blog, the new legislation signed by President Obama last week also includes a provision that allows businesses to carry back a net operating loss from 2009 for up to 5 years. This is an extension of a provision that applied in 2008.

A net operating loss is the excess of your business expenses over your business income. For a C corporation, the calculation stops there. For an S corporation, partnership, or sole proprietorship, the net operating loss is a little more complicated. You have to net against the loss from the business your income from other sources, such as wages, pensions and dividends. There are several other minor adjustments, so be sure to ask your accountant to calculate your NOL for you.

Carrying back your NOL means you get to use it against income from a prior year. Normally, you have to carry it back two years and use it against the income from two years ago. If you don't have enough income from two years ago, you can carry any excess forward to the next year. And if you still don't have enough income to offset the entire NOL, you can carry the remainder forward for 20 years.

The new legislation allows you to choose to carry back your NOL 5 years, 4 years, 3 years or 2 years. The reason you might want to carry it back to an earlier year is because you might have had more income and even a higher tax bracket in an earlier year.

This is a great benefit and can put some money into your pocket right away. Carrying back NOL's is INSTANT CASH. So don't hesitate. Get to your accountant now and ask if you have a Net Operating Loss that can be carried back. If your accountant doesn't understand this, GET A NEW ACCOUNTANT!

Warmest regards,

Tom

On this Thanksgiving day, I am most thankful for what I know and to realize how much I don't know. Here is something you might want to know. Congress is proposing a surtax of 1% on all taxable income to fund the war in Afghanistan. And under the proposal, this percentage could increase if the president thinks it's necessary to fund the war. Basically, this is an open checkbook for the government to spend whatever it wants to on the war. AND IT'S YOUR CHECKBOOK!!!

The only people who don't have to pay this tax is those with taxable income of less that $30,000. Everybody else pays it. And, you cannot offset it with credits - not even the alternative minimum tax credit.

Just thought you would like to know what Congress is doing with your hard earned money.

Happy Thanksgiving.

Tom

Many of you know that the estate tax is scheduled to go to zero next year before it reverts to the pre-Bush rates and rules in 2011. So dying in 2010 seems like a good plan (just kidding, of course).

We all knew this was too good to be true, didn't we? There is now a bill in the making that will permanently extend the 2009 estate tax provisions. While this may be sad for those planning to die in 2010, it's really very nice for the rest of us.

You see, the pre-Bush estate tax provisions only allowed a $1,000,000 exclusion and taxed everything over that at 55%. The 2009 rules allow a $3,500,000 exclusion and the rate for estates greater than this is 45%. So, this would be a very nice change for future years.

Hopefully, they will also add a provision to increase the exclusion for inflation. I'll keep you up to date on this bill as it makes its way through the system.

FYI, there is another tax bill that has been introduced in the form of a "technical corrections" bill. People think technical corrections just mean minor clarifications, but sometimes they can be significant provisions. I'll let you know more about that bill in a future blog.

Stay on top of taxes and so you don't get blindsided and keep control of your hard-earned money.

Warmest regards,

Tom

This is the question on a lot of high-income earners minds this year. Because this is the year that you can convert your regular IRA to a Roth IRA regardless of your income. And there is no penalty for converting. You just have to pay the tax as if you had taken a normal distribution of the IRA (no early distribution penalty tax).

Corey, one of our School of Tax Strategy students, has been very patiently waiting for an answer to the following questions about Roth IRA conversions:

Q: We have traditional IRA's(after tax contributions) that we are planning on converting to Roth IRA's this year. My Wife has a current Simple IRA from her work. Does she need to include the amount of the Simple IRA in the "total of all IRA's" for the pro-rata basis to figure the taxable amount of the conversion. Thanks

A: You only have to include the IRA's that you are converting. If you have a Simple IRA at work, you will have to ask your employer if there is a way to convert this to a Roth separately.

Q: For high income earners, I wanted to know if you thought it better to used saved money to contribute to a traditional IRA (with thoughts of conversion to a Roth IRA in 2010 and beyond) or to use the money for a down payment on real estate to use as a rental. Thank you. Corey

A: The answer to this question really depends on your wealth strategy. Everyone needs to create their own personal wealth strategy. This strategy should focus on a particular type of investing so you can become an expert in that type of investing. You could be focusing on real estate, paper assets (e.g., the stock market), commodities or business. Your focus will determine the answer to this question.

If you decide to invest in real estate, then definitely stay out of the IRA, Roth or otherwise, as it will diminish your ability to leverage your real estate and you will lose all of the tax benefits that real estate has to offer.

If you decide to invest in business, then stay out of the IRA since business income is taxed to IRA's just as if you had earned it outside of the IRA.

If you decide to invest in paper assets, using a Roth IRA can be very beneficial, as the income and gain will never be taxed.

Commodities, such as oil and gas and gold and silver, can be good or bad in an IRA. Oil and gas has tremendous tax benefits right now, so I would not use an IRA for this investment. But a Roth IRA can be a great place to invest in gold and silver, since you will never be taxed on the gains.

So start by determining your wealth strategy. If you would like help with this, please contact our office at 866.467.5809 and ask for Wendy, or email us at cs@provisionwealth.com.

Warmest regards,

Tom

Scott just joined our School of Tax Strategy and has a couple of questions.

Q: Tom, new to your program, came from the Rich Dad training. going through info overload but have some initial tax questions. I have an S-corp with deferred income ($90,000) from an installment agreement when I sold the assets. I also took an equity position in the purchasing company (LLC), ($184,000) the company is effectively out of business and am wondering if the loss on the 184K will offset the $90,000 deferred income, I wont see any of the income in the future either. Second issue, I received a letter from the IRS stating I have a dependent that was claimed on another return. I dont know for sure, but it could be true, My daughter got married last October and she probably claimed herself on her and her husbands 2008 return. question, can a dependent be split between 2 returns? what is the definition of a dependent? she is 23 graduated ASU as a full time student in spring of 2008 and started working full time in aug 2008 but still lived at home through September.

A: Your first question is a little complicated to answer on a blog. In order to answer this question, I would need a lot more information. I suggest you speak to your tax advisor for this first question. If you want to know more about our personal tax advisory services, please call our office at 866.467.5809 and ask for Wendy.

Your second question is a little easier. You can’t really split a dependency exemption. Once your daughter is married and files a joint return with her husband, you can’t claim her as a dependent. If she files separately from her husband, and you provided more than half her support, you could have claimed her as a dependent. My guess is she filed that joint return with her husband so you are probably stuck.

Warmest regards,

Tom

Last week, President Obama announced that he would work with Congress and the Senate to develop a smaller health care reform bill. Finally, some progress. I'm not opposed to health care reform. There are a lot of people who go without proper health care because they don't have health insurance, either because they can't afford it or just can't qualify for it.

Still, the bills that the Democrats have been trying to shove down the American people's throats are so expensive that it would be better to simply hand everyone without health care a voucher for free insurance than it would to fund these bills. The bills have been full of provisions that don't solve this fundamental challenge.

I, for one, am glad to see the President bending on this and looking for some compromise. The audacity of the Democrats to this point has been galling to the American people. Thank goodness Scott Brown got elected in Massachusetts. Let's hope the President means what he says when he says he is willing to work on a smaller bill and include both sides of the aisle in the measure.

Yesterday, the Senate cleared the way for passage of a "minor" tax bill that will extend certain tax benefits and add additional costs and penalties to small businesses.

The American Workers, State and Business Relief Bill extends several tax benefits that would otherwise have expired, including the increased Section 179 deduction and the research and development tax credit. Those in favor of this bill say that it will stimulate the economy. And it may help. There are a few provisions, however, that add an increased burden to small businesses that you should be aware of.

First, the bill expands and extends unemployment and Cobra benefits. This is a huge cost to small businesses who have had to reduce their work force because of difficult economic times. Let me give you a personal example. Over a year ago, we let an employee go in part to reduce our work force and in part because he wasn't measuring up to our standards. He has not found a job since. So, we continue to pay unemployment on him and continue to pay his Cobra benefits.

I'm not unsympathetic to his circumstances. Still - he can't find any job in a year? Sometimes I wonder if these extended benefits just serve to give people an excuse and means for not working.

Another provision in this bill that hits the small business is an increase in the penalty for not filing correct 1099's from $50 to $100 per 1099. With this increase in penalty, the IRS is sure to start enforcing this penalty in earnest. The issue is that it's very difficult for small businesses to get correct information from many of their vendors. Of course, this emphasizes the need for good bookkeeping and good compliance procedures in every small business. Can you imagine if you had 20 vendors that you couldn't get good information from so now you have a $2,000 potential penalty?

These so-called "little" tax bills can be huge for small businesses, so be sure to watch for them and all of their provisions. Most importantly, make sure your tax advisor is aware of them and informing you of these "little" changes.

Warmest regards,

Tom