Friday, October 11, 2019

You're in the Military. You're Stationed Outside of California. The Letter they Sent you is WRONG

California has been sending tons of letters to people who didn't file a tax return in recent years (2017 mainly right now). All the ones I've seen (and I've seen a ton) have been sent to active duty military members stationed outside of California.

The letters tell them that information from DFAS indicates that they were required to file a California tax return.

They are not.

California has all the information needed to know this (active duty codes on the W-2 and an address outside of California). They send the letters anyway.

This is CRAP!

Just add it to the long line of abuses that states pile on to military members, knowing that some military members won't know enough to realize they don't need to pay, or will miss the letter due to moving (since they are in the military). Free money for their bloated budgets.

If you get one of these letters, or worse, a letter stating you ignored a previous one and now owe money...FIGHT. California is wrong. Badly wrong.

The letters usually have a place where you indicate you aren't required to file a tax return due to being active duty stationed outside of California. Fill it out and send it back. You might include a polite letter explaining your living situation for the year just to be sure. If it's a notice asking for money, send a letter saying something to the effect that you were active duty military stationed in (state you were stationed) and received no California source income, therefore a tax return was not required and no taxes were owed.

Sorry these states suck...

Thursday, October 10, 2019

It's October - What Should You Be Doing?

October is a good time to take stock of where your tax and financial life is, and to make adjustments if necessary. Here follows some advice on what you should be thinking about. It's not an all inclusive list, just what's on my mind after some conversations with clients. Don't let the business one near the top fool you, there's stuff in here for personal taxes too:

1. Get a flu shot around Halloween. Make this your Happy Halloween Habit. I know it's not tax advice, but do it anyway. You won't get the flu from it.

2. If you own a business, take stock. Run some rough numbers on income and tax deductions to see if you might be owing more or less money than you thought. This doesn't have to be perfect, a gross comparison of this year to last year can give you an idea where you are. If you are making a lot more money, set some aside for the tax bill, or look at PLANNED expenses for 2020 that might be able to be moved up to 2019. DO NOT just spend money to save on taxes - that's dumb. If you planned your estimated payments right, you should just be able to save the money in your bank or business account, rather than send it to the government. If income looks a little low, get hot and make more! The goal is for tax time to suck - that means you're winning! That said, if income is way down, and you're having trouble meeting expenses, you could talk to your tax dude about lowering your estimate for January and putting more money in your pocket.

3. Take a look at your investments (outside of IRA's and 401k's). See what your unrealized gains and losses are. You might be able to harvest some losses to offset capital gains, or a small amount of other income. If you already have losses, you might be able to offload some winners near their peak and minimize the tax hit. If your income is low enough (basically you are in the 12% tax bracket) you might be able to sell some winners, and then buy them right back, and avoid paying taxes on the gains - EVER. Talk to a pro before you do this, or make sure you FULLY understand how this works.

4. Work on maximizing your 401k and IRA contributions. If you got a raise this year, and your retirement accounts didn't, you're messing up. Make a plan to get these as close to the maximum as you can afford. Include your Health Savings Account in this calculus too. If you expect a big refund, lower your withholding and put the extra paycheck money into these accounts. Plan on using your refund to top the accounts off if you get one. You have until April 15th to do this. Just write the refund out of your spending plans!

5. Gather your latest pay stubs for you and your spouse and pop over to and run the numbers through their withholding calculator to make sure you are where you need to be. This tool is AWESOME if you feed it good information.

6. Check where you are with regard to itemizing. Add up your Real Estate Taxes, State and Local Income Taxes and Car Taxes (max of $10,000). Add in your mortgage interest (try to estimate the full year value). Now add any contributions to charity you have made or are sure you will make. Compare that total to your standard deduction (roughly $12,000 Single, $18,000 Head of Household and $24,000 MFJ - I plan on recycling this post every year, so these rough numbers will work for a while for this very rough thing we're doing). If you are close, or slightly over, consider clearing some junk from the house and donating it to a Goodwill type charity. Make sure to value the items at what they would sell for in a reasonable transaction, not what Goodwill would sell them for. If you are well below, but might be able to close the gap with a great charity year, consider making a plan to do all your charity donations every few years, rather than spreading them out. Pick one year and go nuts with Goodwill, clearing the house out of all the junk, and taking a BIG itemized deduction number.

7. Remind yourself what tax paperwork you need to be looking for (or might need to get - like daycare statements) and make a checklist. Put it near where the mail comes onto your desk or table and check things off as they come in. Make sure to look for a 1098 form from every mortgage company who held your mortgage if it was sold or you refinanced.

Wednesday, October 9, 2019

Master Index of Posts

I've compiled a Master List of my posts for easy reference. Not every post is included, and I have changed the order to put the most important or timely ones on top, and to group some based on categories (Military, Obamacare, Tax Software). I will try to keep this updated and just below the latest post. Please let me know in the comments if I screw up a link :) Some of the posts are OLD so be careful assuming the information is current.

If you have a Kindle, you can get a copy of my entertaining and useful book, The Short, Cheap Tax Book for Everyone for only 99 cents!

For the new tax law, there's The Short Cheap Tax Book for the Trump/GOP Tax Law

If you like the blog, buy my other books: Kirk Taylor, EA Author Page

Important or Time Sensitive Posts

October Tax Checkup
The $10,000 Question for Students and Parents
My Advice on IRA's
2018 Social Security Warning!
Wants and Needs and Kids
Emergency Fund Advice
Solar Credits and Solar Sales
The Dreaded CP2000 Letter from the IRS
The IRS did NOT Call You!
I Got an E-mail from the IRS!
I Want to Lower my Taxes!
10 Simple Pieces of Tax Advice
10 Things Everybody Should Do
Check Your Withholding

Trump/GOP Tax Law

Post 2018 Tax Season Thoughts on the New Law
Quick Thoughts on the New Tax Law (Post 2017 Tax Season Edition)
2018 Tax Bill Changes
What the New Tax Law Didn't Change (2018)

South Carolina

SC Gas Tax Credit Advice
SC Military Retirement Change (2016)
Obamacare in SC - Something's Fishy


Military Spouses Residency Relief Act 2018 Change
Military Spouses Residency Relief Act Details and Matrix
Retiring from the Military? Tax Warnings!
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
2018 Military State Tax Guide
2017 Military State Tax Guide
2016 Military State Tax Guide
2017 Boomer Deduction Worksheet
2016 Boomer Deduction Worksheet
2015 Military State Tax Guide
2015 Boomer Deduction Worksheet

Tax Software

TurboTax Admits That Easy Is Better Than Accurate
Tax Preparation Software Sucks - An Open Letter to H&R Block

Business Guides

Sole Proprietorships are Bad
Avon, Pampered Chef, Party Lites, Amway, etc. MLM Tax Guide
UBER Driver Tax Guide
Tax Guide for Contractors - or - 1099MISC WTF?
Real Estate Agent Tax Guide
Rental Property Guide for Homeowners
Rental Property Sale Worksheet

General Posts

Getting Married? One Piece of Important Tax Advice.
The Dreaded CP2000 Letter from the IRS
Investing and Taxes - A Primer
How Much does it Cost to File Taxes?
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
Open a Roth IRA Today! And Not For the Reason You Think
Foreign Earned Income Exclusion Warnings - Update
Charity Made Simple
How Fast Can I Get my Refund?
Make Estimated Tax Payments the Easy Way
Depreciation Recapture - an inaccurate description
Don't Touch that 401K or IRA!!
What do you do with that Big Tax Refund?
It's Okay to Get a Big Refund - Really...
Common Tax Return Errors - Updated
Common Tax Return Errors
Mortgage Tax Credit Information
Lesson from the Government Shutdown - Emergency Fund
Don't Pay Capital Gains Taxes if You Don't Have To!
I got a 1099C - Now What?
Cancelled Debt and Insolvency
The IRS, email and privacy...
IRS Checking Facebook?
>$250 Donation Acknowledgement
Drop Box Donations - US Marines
Tax Scams
Taxes and Divorce
Random Thought about Books
Taking Care of the Client
Warning - Tax Resolution Scams
Foreign Earned Income Exclusion - WARNINGS!
IRS.GOV Website Update

Affordable Care Act (Obamacare) Posts

The Affordable Care Act (Obamacare) and People with Health Insurance
Affordable Care Act (Obamacare) for the 2014 Tax Filing Season
Obamacare, Affordable Care Act and Married Filing Separately - Warning
Affordable Care Act, Obamacare update and advice
Healthcare Law, Obamacare, Affordable Care Act Info
Weird Obamacare Strategies and Incentives - 1
Weird Obamacare Incentives and Strategies - 2
Weird Obamacare Incentives and Strategies - 3
Weird Obamacare Incentives and Strategies - 4
Weird Obamacare Strategies and Incentives - 5
Weird Obamacare Strategies and Incentives - 6

Tuesday, October 8, 2019

The $10,000 Question for Students and Parents

The American Opportunity Credit is worth up to $10,000 over four years of undergraduate schooling. Getting this right is a HUGE $10,000 huge. So read on!

In many cases, where students or parents are paying for school, or using student loans for expenses, the credit is straightforward and the choices limited. I'll briefly discuss the one main choice in this area, but the real purpose of this article is about students getting scholarships, or using 529 plan assets to pay for school. Their choices can be more complicated, and the dollar amounts lost due to mistakes are staggering.

First, let's talk about the easy scenario. If you pay all or most of your tuition, books and course related fees out of pocket or with loans, and you meet the other qualifications discussed later, your only real decision is which years to use the credit. You see, you can take the credit a maximum of 4 tax years, but most students will spend 5 or more tax years in school (because they start in the fall of one year and finish in spring of the fifth tax year, even when only in school 4 years). If expenses are extremely low in the first year, it might make sense to wait and take the credit in the second year to maximize benefits. This is kinda like playing tax-chicken - waiting to swerve until the last second hoping you spend more time in school and pay more for it in later years. It's not easy. I generally advise taking it at the earliest opportunity unless the dollar amounts are VERY low, or the undergraduate experience will be long - such as several years of Community College before going full bore into a bachelor's degree.

Now let's talk about the 2nd scenario - scholarships or college savings plan (529 or other tax deferred education account - names vary by state) plan money: Obviously, if you can get college paid for with your college savings plan or a scholarship you should just do it and not be out of pocket for any money, right? Sure, you don't get an education credit on your taxes, but your college is paid for, so, Even-Steven, right?

Not so fast. The American Opportunity Credit (I'll use AOTC from now on) gets you $2,500 for the first $4,000 of qualified education expenses. That's a 62.5% return on your money. To make things even more crazy, the first $2,000 of expenses come back DOLLAR for DOLLAR! Spend $2,000, get $2,000 - that's a 100% return! So the first $2,000 is MAGIC, but the next $2,000 ain't bad either.

I'm going to refer to all tax advantaged college savings plans as 529's from now on.

For 529 plans, it's easy: if you meet the requirements for the AOTC summarized at the end of this article, there will rarely be a situation where you don't win by paying $4,000 out of pocket and NOT using the 529 plan for that portion of education expenses. Run the numbers both ways before deciding, just to make sure (a tax pro might be useful). Unless you are in a very high tax bracket (in which case you probably don't meet the income limits for the AOTC anyway) the tax credit will exceed the tax benefits you get from using 529 plan money. Keep in mind, even though you are paying for college out of pocket instead of using 529 plan money which you had already saved, the 529 plan money is STILL THERE. It's still yours. You can use it for later years of school, transfer it to another student, or just take it out and pay the penalties and taxes. These taxes will ALWAYS be less than the maximum AOTC on $4,000 - a LOT less, since you only pay taxes and penalties on 529 plan EARNINGS, not the whole amount.

For scholarships and Pell Grants, which are generally tax free, you can include some or all of them as the recipient's income in order to allow the AOTC to be taken. Just add it to your wages line on your Form 1040 with "SCH" on the line in front of it (you have to figure out how to make your software do this). Generally, $4,000 of scholarships claimed as taxable income, meaning it was used for "living expenses" instead of tuition, will have less taxes on it than the $2,500 in AOTC that you get.

Over 4 years, this can make you $10,000 that you wouldn't otherwise have had. It is well worth working with a professional to make sure you do it right if you aren't certain. The IRS is pretty anal about the AOTC, but that's no reason not to take it.

Here are a few more things to consider:

This article has nothing to do with VA or other military education benefits. If you get them, you almost never get the AOTC, except maybe on books.

The simplified formula for determining how much expenses you get AOTC for is tuition  PLUS course related books and fees MINUS tax free scholarships and grants MINUS 529 type funds used. This amount, up to $4,000, gets you the credit. We are manipulating the 529 plan amount, and changing tax-free scholarships and grants  to make them taxable, to change the final number to maximize education credits.

Make sure you include the income and credits on the right tax return: parent or student. Mostly, the 529 plan and taxable scholarship money will be on the student's return, and the credit will be on the parent's. Unless a student is over the age of 24, or has job income that equals more than half their support, or is fully emancipated, the AOTC will be far better on the parent's return (and may not be allowed on the student's). If there is a choice, do the returns side by side to make sure. If you still aren't sure, talk to a pro.

If either the student or the parent is getting the Earned Income Tax Credit for having a low income and children, the inclusion of scholarship money as income can have a bigger negative effect. Run the numbers, using no AOTC, $2,000 for AOTC and $4,000 for AOTC to see which is better, and then act accordingly.

Here are the simplified requirements for the AOTC (don't rely on them for final decisions, these are just here to let you know if this entire article might be useless to you):

For 2019 tax year, if you file Married Filing Jointly, your AOTC is limited if your AGI (basically income before most deductions) hits $160,000 and is gone at $180,000. Other filing statuses the numbers are $80,000 to $90,000.

The student must be going at least half time
The student can't have been convicted of a felony drug offense
You get AOTC a maximum of 4 tax years per student

The AOTC is for undergraduate work, so you can't have completed a 4 year degree (you can get AOTC for graduate work you do in the same year you finish your bachelor's degree - TAX SAVING SECRET)

Must be attending an eligible education institution for an eligible degree or certificate (most 2 or 4 year schools will qualify, others, double check yourself.

For more great information designed for College Students, Check out The Short Cheap Tax Book for Students

Sunday, September 22, 2019

Will you be Getting $50 from South Carolina?

This December, 57% of SC taxpayers will be getting checks for $50 in the mail. This is a rebate from lottery money the state got when we had a huge winner.

How do you know if you will get one?

Simple, if you got all your SC tax withholding back last year (or they kept less than $50) - no check

If you don't file your 2018 (last year) tax return by October 15th - no check

If you are married and filed jointly - you get one check for both of you.

Most military spouses working in SC get all their taxes back (or should) - that means no check

As best I can tell it's as simple as that.

Thursday, August 22, 2019

My Advice on IRA's

One of the major changes for the 2019/2020 version of Everyday Taxes was the addition of a "My Advice" portion at the end of most chapters. This is where I tell people what 20 plus years of experience in taxes, 25 years of experience in the military, and 50 years of life experience have taught me.

Copied below is the that section from the IRA chapter.
The main reason I wanted to include it here is the Roth versus Traditional debate. Math often says one thing, but life doesn't always play well with the math...

My Advice:

1. Tax people and investment advisors will argue endlessly over the Roth versus Traditional debate. There is a lot of math that can help you figure out which one is best from a tax perspective, but I want to add my 2 cents. After 20 years, and thousands of clients, I have literally ZERO clients who regret investing in Roth IRA’s and MANY who wish (or should wish) that they had picked Roth over Traditional. There are a ton of things going on in retirement that make the amount of taxes paid lifetime insignificant compared to real life in retirement. Here’s my point: Talk to your financial advisor and tax person about YOUR situation, go over the numbers, your financial desires and the implications and make the best decision for you, BUT, if you are still unsure, or it’s a close call, go Roth.
2. Open a Roth IRA and put some money into it as early in life as you can. Parents should open a Roth IRA for their children as soon as they get their first job and encourage them to invest in it. Money saved in a Roth before age 18 is MAGICAL due to the long time horizon for it to grow.
3. If you make too much money to invest in a Roth IRA, you can make non-deductible contributions to a traditional IRA and then convert them to a Roth with no tax implications. This is called a “back-door Roth”. Your financial advisor can assist you in doing this.
4. Start taking required minimum distributions out of traditional IRA accounts in the year you turn 70 and a half vice waiting. Making two withdrawals in a single year can really mess your taxes up.
5. Totally personal advice: You invested in these accounts so you could enjoy your retirement. SPEND THE MONEY! Obviously make sure you don’t run out, but enjoy life – don’t leave it to your kids!

Common Law Marriage is Dead in South Carolina...

The long-standing existence of common law marriage in SC has been overturned by the courts.

No more tax desk marriages...