Don’t forget to file your extensions today if you haven’t done your taxes. You have until midnight to get out the extensions. Most Post Offices are open until then today.

If you’re really lazy, you can file it online and if you’re really cheap (like me) you can file it for free!

Just go to Tax Act Online to file the extension for free. Make sure you click all the way through to the ‘Submit’ button at the end.

Several companies like Intuit are charging for this service. So its nice of the people at Tax Act to make it free.

Also when it comes time to file the taxes, there are several companies that will efile for free if your AGI is under $52,000. Make sure you go to IRS’s website to find out which ones offer that deal.

How many of you do your own taxes?

Got this humorous email today. Enjoy.

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20. “Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’
They realized that $20 divided by six is $3.33.

But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before.
And the first four continued to drink for free.
But once outside the restaurant, the men began to compare their savings.
“I only got a dollar out of the $20,”declared the sixth man.
He pointed to the tenth man,” but he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got TEN times more than I!”
“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works.
The people who pay the highest taxes get the most benefit from a tax reduction.

Tax them too much, attack them for being wealthy, and they just may not show up anymore.
In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For many parents, savings for their kids education is a big concern. Many opt to put them in a tax-deferred savings vehicle like the 529 plan.

Not only is this a good way to save for children’s education related expenses like tuition, lodging, groceries, books, etc but there are some other loophole available too.

* You can change the beneficiary at any point to favor someone who goes to a more expensive school.

* You can use the money for your own education.

* You can give upto $60,000 to a single beneficiary in one go, although you can’t give that same beneficiary any more contributions for 5 years.(since the maximum gift amount is $12,000 per year)

* You can use it as an estate planning tool by moving money out of your estate (but not necessarily out of your control). If grandpa & grandma each gift $50,000 to each of their 5 grandkids, thats $500,000 out of the estate in one fell swoop! Of course, they better not die too quickly, else some of it may be taxable!

* Being able to change the beneficiary may also allows you to skip paying estate tax for several generations!

It might be complicated to understand and setup, but I think its definitely worth checking into.

According to the WSJ, Landowners Rush to Take Advantage of New Law That Boosts Deductions for Blocking Development.

Here’s how it works: A landowner typically donates a conservation easement to a land trust, a type of non-profit organization that helps put together the easement and monitors its restrictions over time. The value of the donation for income-tax purposes generally is the difference between the land’s unrestricted value and its new value with limited development or usage rights.

Landowners can now deduct the value of a donation up to 50% of their adjusted gross income per year, up from the previous ceiling of 30%. That means if your adjusted gross income is $100,000, you are now eligible for as much as a $50,000 tax deduction a year, instead of $30,000. And if your income is too low to deduct the full amount of your gift in one year, you can now carry forward the deduction for 15 additional years, up from five years previously.

The law is even more generous for career farmers and ranchers who earn at least half their income from their land. These property owners, who are often land-rich, but cash-poor, can now deduct up to 100% of their income. “If you’re a farmer you could pay no federal income taxes for 16 years,” says Rand Wentworth, president of the Land Trust Alliance, a coalition of 1,600 land trusts across the country.

So if you’re one of the lucky rich people who can afford to buy land out in the wilderness for horse riding or camping or whatever, you can now write it off. All you need to do to promise not to build on it. Now thats a neat tax deduction.

Tax Time Again

Its that time of year where I really need to file my tax return and get my $2,000 out of the IRS. I really hate doing my taxes and I usually file an extension and postpone it until the very last moment. This year my wife suggested a novel idea. Have my CPA do them! I normally do them myself, but last year I found a competent CPA and had him look over them after I had already done them. He said they were fine and didn’t need any changes, so I had him sign and send them in. According to Perfectly Legal, this reduces your chance of an audit.

I really hadn’t thought of just giving him all the stuff and having him do the taxes. Its probably my deep-rooted belief that no one cares for your money like you do. My CPA’s very competent and probably does several hundred tax returns a year, so his knowledge is better than mine and he’ll probably do them quicker as well.

Incidentally, he set me up with a 401k pension plan combo for my corporation, of which I’m the trustee! So technically I can invest in any damn investment I please and its all tax deferred!

Of course, theres a lot of discussion about investing in 401ks and avoiding the capital gains tax but being stuck with income tax when you withdraw [income tax is higher than capital gains, hence the discussion]. While that true, everytime you realise a gain on an investment, you need to pay tax[unless you defer it using a 1031 or some other method]. This could be as often as every year! This way atleast I don’t have to worry about taxes for 30+ years!

Of course a better way would be to use a self-directed ROTH IRA. I’m currently researching how to set one up and I’ll post my findings soon.

A really good book on tax deductions is 422 Tax Deductions for Businesse. Its a very easy read.

Another good book I read over the weekend is Missed Fortune: Dispel the Money Myth-Conceptions–Isn’t It Time You Became Wealthy?. I only read the half the book on not paying off your home and leveraging it into better investments. I didn’t read the part on insurance but its a pretty interesting book nonetheless.

Ever wondered how you can deduct your Playboy magazine subscription on your taxes? Well neither did I, but read on anyway.

Playmate Amy Sue Cooper Beats Mutual Fund Managers in stock picking contest

Playmate Amy Sue Cooper Beats Mutual Fund Managers in stock picking contest

Doug of The Strategic Investor has a great post on Amy Sue Cooper, the Playboy Playmate who beat Mutual Fund managers at picking stocks. So now you can claim you read Playboy for the financial advice!!! And by extension, you should be able to legitimately claim a tax-deduction since you’re using it for financial advice.

Two of my investor friends told me they were going to ask me about 1031 exchanges. Rather than give them the same spiel, its just easier I wrote my own opinions here so I never have to repeat myself! Since its a long topic I’ll break it down into a few different posts.

What is a 1031 exchange?
Its a means by which you can sell or exchange property and defer paying taxes. Deferring your taxes is a good thing. It allows you to grow you money at a faster rate.

What sort of property qualifies for a 1031?
Any property held as an investment is eligible. Most CPAs will tell you that you need to demonstrate an intent to hold the property as an investment and ideally you want to hold it for atleast 12 months.[some even say 18 months]. Short term flips do not qualify. Apparently the IRS doesn’t equate speculation with investment.

What can I exchange my property for?
You can exchange your property for like-kind property. If you own property you can exchange it for any other kind of property and oil royalties too. However livestock and vehicles are covered under this rule too and you can’t exchange your cows for an airplane or a tractor for land. However within the scope of real estate, land for apartment buildings, SFHs for oil wells and even lease-hold property for fee-simple property is allowed. A lot of investors are cashing out there investments and are investing in tenants-in-common commercial buildings. They 1031 into larger investments with a bunch of other investors and get a fixed rate of return[usually 6-11%]. They essentially exchange management headaches for a fixed rate of return.[More info on that in another post].

What are the steps involved in setting up a 1031 exchange?

  • You need a qualified intermidary, also called an accomodator. You must not receive any money from the sale of the property. It has to be held by the accomodator. He takes possession of the proceeds from the sale of your property, uses the funds to purchase the new property, then transfers title of the property to you.
  • You have 45 days from close of escrow to identify the replacement property. You should start looking much earlier than that but you need to give written proof to your accomodator of your selections.
  • Close on the purchases within 180 days from the sale of the original property, or before you file your tax return. If you sell you original property on December 31st, you have until April 15th to close on the replacement, unless you file an extension.

It gets a lot more complicated than these simple steps. There are rules for mortgage amounts and total property amounts, partial exchanges and taxes owed on boot[the amount that you’ve withdrawn].

One of the funny things is that any equity you put down during the original purchase of the house is locked into the exchange. If you pull that out during the exchange it will be considered boot and you will have to pay tax on that money. One way to get around this is to refinance the house a year before you plan on doing a 1031 and pulling your equity out. Alternatively, you could complete your exchange and then refinance the property to pull your equity out.

Its getting late, more on 1031 exchanges later.

I get periodic emails from John Burns Real Estate Consulting.
Today’s email was particularly enlightening. I’ve reproduced it below and I recommend everyone sign up for it.

Tax Proposal Could Wipe Out Housing Market

Executive Summary

You may be aware that the Bush administration is proposing to eliminate the tax deduction on mortgages in excess of $227,000 to $412,000 (depending on metro area). The proposal also reduces the tax break on all mortgages to a 15% credit. While those of us who live in expensive housing markets initially believe that the odds of this passing are next to zero, especially under a Republican administration, we need to remind you of a couple of things:

1. The vast majority of Senators and Congressmen represent areas where their supporters have mortgages less than $227,000. The median existing home price of a home purchased last month was $220,000.

2. In 1986, Congress (under the Reagan administration) passed a tax reform bill that reversed tax benefits created in 1981 that encouraged apartment construction and investment. An 81% increase in multifamily construction from 1981 to 1985 was followed by an even steeper decline in construction.

3. In 1989, Congress passed the FIRREA Act, which effectively wiped out the capital to the home building industry and resulted in a 20% reduction in single-family construction in a 2 year period. A significant Congress-induced reduction in defense spending didn’t help either.

4. In 1997, Congress (under the Bush administration) passed a tax cut bill that encouraged investment in single-family residences. The law has created tremendous wealth for households and investors alike, and helped deplete the IRS coffers during a period when government spending is growing significantly. Since 1997, single-family construction is up 53%.

What would the passage of the proposed tax law due to the new home construction industry? For those who say “but the demographics for single-family housing are awesome,” we point out that those same demographics supported apartment construction in the 1980s when the younger Baby Boomers were graduating from college. The demographics and mortgage rate environment have been phenomenal, but they haven’t created a 53% increase in demand over an 8-year period.

A stable housing market is in the best interest of almost every household in the country. In the past, it has been elected officials that have created booms and busts. Let’s encourage the elected officials to leave the housing market alone or, at a minimum, implement changes over a long period of time instead of the immediate “phase in” of radical changes that has occurred in the past.