Monday will be President’s Day and the U.S. Postal Service chose that day to issue a special commemorative stamp honoring the 100th Anniversary of President Kennedy’s birth. He was born on May 29, 1917. The new forever stamp will be available at post offices throughout the country on the next day since President’s Day is a legal holiday and post offices will be closed except for the special post office station at the John F. Kennedy Presidential Library and Museum in Boston where the stamp will be issued.
I collect first day covers which are envelopes with a new stamp postmarked on its date of issue usually with a specially designated cancellation marking the stamp’s issuance. To encourage readers to experience this fine hobby, I will send a free first day cover to anyone emailing me their postal mailing address. The envelope will contain a portrait of President Kennedy drawn by artist and illustrator Don Bloom.
I will also send information about the American First Day Cover Society (www.AFDCS.org) should anyone wish to pursue this hobby by joining the only national association dedicated to this fine hobby.
CHECKLIST OF 46 TAX FILING ERRORS YOU SHOULD AVOID
Taxes are hard enough without making avoidable errors. Before you file, double check to make sure you do not make these errors.
- Not signing the return (if you file paper copies)
- Number transposition and spelling errors
- Unchecked or unanswered questions
- Entering incorrect or unpaid estimated tax payments
- Missing pages in a paper filed return
- Not correcting reason for a tax notice for a prior year, on this year’s return, if there is a continuing issue
- Underpaying or overpaying [Ugh!!!] the tax due
- Sending your tax check or making out the check to the wrong tax agency
- Not calculating underpayment penalty (on Form 2210), if applicable
- Not calculating a penalty on an early withdrawal from a retirement or IRA account
- Calculating a penalty on a permissible early withdrawal from a retirement account
- Paying tax and penalty on IRA distributions that were timely rolled over to another IRA account
- Not calculating a penalty if you took more than one 60 day tax free rollover in a 365 day period
- Not filing Form 5329 (Additional Taxes on Qualified Plans Including IRAs and Other Tax-Favored Accounts) when it was required and if being filed separately from tax return, it must be signed
- Not calculating self-employment tax on freelance income or commissions
- Information from K-1 schedules entered incorrectly or withholding tax on those forms not properly claimed as a tax payment credit
- Responding to an email notice from a tax agency – they do not send emails. You received spam
- Your paid preparer did not sign your return or enter their ID number
- Claiming the wrong exemptions or omitting a correct Social Security Number
- Claiming an exemption for someone that properly can claim themselves (this can occur when a dependent marries during the year and files a joint return; or no longer qualifies as a dependent such as because of excessive income and/or is not a student for at least five months of the year or is a student and over age 24 at end of the year; or a child you support where your ex-spouse is entitled to the exemption under a divorce agreement)
- Omitting a Social Security Number for someone you paid alimony to
- Not itemizing deductions when you should have
- Claiming excessive home mortgage interest deductions is a red flag. Interest on home mortgages over $1,100,000 is not deductible
- Deducting points in full on refinanced mortgages, instead of amortizing them
- Reporting mortgage interest and real estate taxes on rental properties as itemized deductions
- Not claiming investment interest costs properly and not being aware of limitations or interest tracing rules
- Omitting or reporting incorrect state tax payments and withholdings as an itemized deduction
- Reporting deductions that stretch the imagination, e.g. someone with high debt indicated by a high mortgage and extensive home equity loan interest (not reportable) usually won’t be making cash charitable contributions equal to 16 percent of their gross income
- Not properly picking up carry forward expenses or credits from the prior year’s return. This includes charitable contributions, investment interest expense, net operating loss deductions, capital losses, suspended losses from passive activities, alternative minimum tax credits and foreign tax paid credit
- Reporting as income the state tax refund you received and that was reported on a 1099 when you did not get a full deduction for that on your prior year’s return because you claimed the standard deduction or all or part of the payments were “disallowed” because you were subject to the alternative minimum tax
- Not correctly answering foreign account questions on bottom of Schedule B especially when Schedule B is not otherwise required to be filed and then not filing the FBAR FinCEN Form 114
- Overstating charitable contributions or deducting contributions you did not make, or overvaluing non cash contributions
- Not having proper charitable contribution receipts in your possession when you file your return claiming those deductions
- If you made non cash contributions over $500 additional forms must be attached to your return
- Not having a certified appraisal if you made a gift of tangible property over $5,000. The entire contribution can be disallowed because of this
- If your income is sufficiently high, not adding the 3.8% tax on net investment income or the .9% tax on earned income
- If you were a “real estate professional” that did not claim yourself as such you possibly subjected yourself to the tax on net investment income
- Reporting incorrect cost basis on sales of capital assets. This is common with inherited stocks, stocks received as a gift, or with dividend reinvestment account accumulations or where you had a previous wash sale
- Not treating wash sales properly. If you have a wash sale, any losses are not deductible but increase the basis of the purchased shares that caused the wash sale
- Reporting gross sales from brokerage transactions that are less than the amounts reported on the 1099s issued by your brokers
- Not reporting proper basis on employer stock sales that were also reported as income on your W-2 form
- Self-correcting and reporting the “correct” amount where you received an incorrect 1099 (and cannot get a corrected 1099 in time to file your return). You should report on your return the amount on the 1099, even if it is wrong, and subtract as an adjustment on another line (e.g. line 21) so the net amount is the proper income you received
- Omitting allowable IRA, Roth IRA, SEP or other retirement plan contributions
- Omitting paying payroll taxes on your individual tax return for household employees
- You should self-check your return by a line by line comparison to last year’s return and understand large or illogical differences
- Inputting incorrect bank account numbers and information for your tax payment or refund
And… make sure you e-file or mail your return by the April 18, 2017 due date!
Would you pay $7.99 for an idea you could use in your business? Well, the current issue [February 2017] of Fast Company has 175 ideas (at least) and costs $7.99 at the newsstand. You could also subscribe for $10.00 for 10 issues. Getting one usable idea a month for $1.00 an idea seems too good to pass up. Try it! Unless you have all the ideas you need, then skip it.
This publication and similar others are chock full of ideas from many thought leaders and successful managers. One way to handle these publications is to subscribe and when the issue arrives flip through it looking at each page not spending more than about three minutes per issue. Some ideas will stick with you and some you might want to rip out the page to read more of it at a free moment. Then take the idea and run with it.
Another way is to go to your local public library and spend twenty minutes to a half hour a couple times a month with 5 or 6 magazines – but do not rip anything out – if you want you can take a photo of it with your smart phone.
Both methods work because I do them. Think about it – it is just an idea.
Tomorrow is the fifth anniversary of the Partners-Network.com blog. This is the 520th blog that has been posted at a twice a week frequency. I have the over 900 subscribers to thank as well as the many others that read the blogs sporadically. I also appreciate the many emails and calls I get thanking me, commenting or asking questions. I would like that more if they posted them as comments so it could be open to a wider discussion.
The blogs cover a wide range of topics with some that would make a substantial book. In all I wrote over 240,000 words making the average blog about 460 words. The focus is to cover issues clients are concerned about and most of the blogs did that. Some involve me personally and my interests and hobbies, the accounting profession, book reviews, obituaries, some might be termed “creative writing,” and some provide updates about what is happening at Withum. The client focused blogs include business management and leadership, investing, financial planning and taxes.
Many of the blogs are generated by calls from clients. If I feel others would be interested, I write it up. The first draft takes about an hour and the editing adds an hour and half to two hours. For the last year Matt Basilo from our marketing department posts them after a quick look to see if anything egregious stands out.
I am asked if I get much business from the blogs and I do, but not the way one might expect. I rarely get a client from someone who reads the blog and feels they must call me and become a client. Rather readers occasionally pass on a blog to someone they know that has that issue and I get the client by way of this referral. The other way is when I print out a blog and mail it to a client or someone I know with a note that they should read the blog and call me if they want additional information or a consultation. That is very effective and almost always results in some business but the reality is it is an opportunity to assist clients in a critical area they weren’t aware of how a solution can be realized. Of course the personal stuff is just an expression of my interests and really has no business purpose except, maybe, to show what a great and interesting guy I am [and modest, too].
I like writing the blogs; find it very satisfying; and feel that they provide solutions to needs clients have and are an opportunity to offer some free information. Thank you for reading them, and I am looking forward to continuing for many more years to come.
P.S. This blog is exactly 460 words.
Yesterday’s New York Times had an article* about the irresponsible handling of Johnny Depp’s finances and the dire state of his wealth. I do not know Mr. Depp or his financial advisors but the article suggested a somewhat joint responsibility for the bad current situation. I thought about this and since I’ve previously advised an irresponsible client I thought about a letter I sent to that client to stress the criticalness of his situation. Here is an abbreviated version which suggests how a client could be made aware of their detrimental behavior. When this was sent, the client’s major income producing days were behind him. A moral of the story is to spend less than your income regardless of your situation or who you are (or were).
To my client,
This memo addresses some concerns I have regarding your financial situation and repeats many of the conversations we have had. I wanted to take this time to try to put it in urgent perspective for you.
Inevitability and reality
I feel you are on a course that will lead to an inevitable disastrous conclusion, and that the clear reality of the situation is not being recognized or dealt with. The inevitable conclusion is that you will run out of funds to support you and your family.
The reality is that your assets are finite, not growing, and that the income and cash flow being generated is declining. Even allowing for an unexpected windfall, or big hit, the situation is as it is, with dire conclusions if nothing is done to reverse the course you and your family are on.
I am an accountant, and am looking at this as a numbers situation, and am not considering any personal elements or feelings or relationships. That provides me a luxury that you cannot have – it allows me to view your situation more objectively. Additionally, my professional background has permitted me to have an experience in matters such as you are in now, so that I can reasonably project a conclusion. Unfortunately, in your case, it is a bleak forecast if no changes are forthcoming.
Your annual expenses are in excess of $1,000,000. This includes you, your wife and the support you provide to your children and their families. Your projected annual cash flow is just over $600,000. The present deficit of about $400,000 and is being provided by reductions in your assets.
You will deplete your cash in less than two years, and your assets in less than ten years assuming some sort of orderly liquidation of the assets. You will have no substantial income source after the assets are depleted. These projections consider a reduction in cash flow as some of the assets are liquidated as well as a reduction of certain costs needed to maintain non income producing properties. These are the amounts you provided to us, and while we did not audit or otherwise confirm them we concur with the substance of the conclusion.
Since your efforts to earn income has declined, additional revenue sources cannot be a remedy.
I suggest that the only thing you can do is to drastically, substantially and immediately reduce your cash outflow so that it is not in excess of your income. This requires all four of you (you, your wife, son and daughter) to recognize the reality** of the situation and to stop draining the assets with expenses that will have to be eliminated anyway if nothing is done. And it has to be done as triage. I believe it is that critical!
Not responding is a decision to continue as is. I feel that will be the height of irresponsibility for you, your wife and children.
This short memo repeats numerous conversations that were started after we met a little over two years ago. Nothing in here is new and your situation has declined as we have discussed. You have the numbers! You know how to interpret them! And you know the consequences of making no changes! Only you can do something. And I believe you must! And it must be now!
* The Depp Riddle: Who Should Watch the Money?
** Face reality as it is, not as it was or you wish it to be! (First said by Jack Welch)
A perennial quandary for investors is whether passive investing makes more sense than active investing. For my typical client I believe passive is a better move. I have clients that are sophisticated traders or who use high powered investment managers and my blogs do not address them. I do feel the average investor can benefit from the guidance provided by my blogs and that is who I write for.
By way of definition, passive investors try to duplicate and are satisfied with the market index returns. Active investors seek to exceed the performance of the indexes which are available in index funds as well as exchange traded funds (”ETFs”). Your broker or investment manager can advise you on what is most appropriate for you. Here is a brief discussion of these two major investment styles.
Two weeks ago JPMorgan issued their 2016 analysis indicating that 65% of the actively managed mutual funds did not do as well as the underlying indexes for their portfolios. This is approximately the same result as for 2015. Passives beating actives is so ubiquitous that if for some chance the active funds beat the passives it results in a well headlined news story. For example on Nov 7 a Barron’s cover story heralded “Active Beats Passive” because 60% of actives beat the passives for the four month period since July 1. Those that read my blogs know that I use an investment horizon of at least seven years. There will always be short periods of great performance of actives over passives, but I don’t expect that for longer periods.
Another observation is in this week’s Barron’s that had an article by Andrew Bary about the Harvard University endowment fund’s underperformance over the last 10 years and how they are now considering index funds. The article also referred to Warren Buffett’s constant exhortations about the benefits of passive funds.
No one knows everything or has all the answers, and many do not even understand the right questions to ask, but it seems to me that investing in low cost index funds with reasonable and steady dividends makes more sense for most people than chasing greater gains which are dubious at best.
I have many clients that ask me to review their portfolios and provide a “second opinion” on how they or their investment advisors are performing. I do that but find that some get annoyed at some of what I tell them. Here are the top 10 reasons for this.
- I show them why they are not doing well and explain why
- I show them how their investment managers are underperforming the market and explain why
- I tell and show them how their asset allocation is not aligned with what they told me their long term goals are
- I tell and show them how they are not diversified enough
- I tell them that they need to better understand what they are investing in and how they could gain or lose on what they are doing
- I tell them they are assuming too much risk based on their goals or how they told me they feel about risk
- I tell and show them that they are not taking on enough risk based on the goals they want to achieve
- I tell them that setting aside 10% of their investments to “play around” in the market is imprudent and that they need to approach investing in the most serious manner they can
- I tell and show them how they are overpaying their investment managers (who they profess “love” for and who they don’t want to ever part with)
- I tell and show them that a meaningful portion of their portfolio is in inappropriate assets
- I tell and show them how they are overpaying taxes because they or their managers are not considering taxes in their investing activities
My best wishes are that I tell a client that everything is fine and on track and to keep up the good work they are doing or that they have a great investment manager and should tell them that I said this.
For those of you that noticed I provided 11 reasons rather than 10, I hope you are as diligent in measuring your investment performance.