Transforming Student Loans from Taxes Back into Debt

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James Pethoukoukis notes the skyrocketing ratio of student loan debt to household income, the currently spiking default rate on student loans, and wonders if a new federal government bailout is in the works:

See where this is heading? When you take into account America’s burgeoning bailout culture and the rising political power of younger voters, it’s no surprise that Citigroup thinks taxpayers might end up riding to the rescue:

Taxpayers already (or will) indirectly subsidize both the housing and healthcare sectors by covering GSE losses and paying for a healthcare system that pays out more than it receives in revenues. If the continued misalignment of educational resources ultimately leads to government “forgiveness” of student loan debt, it will simply be one more example of fiscal subsidies for a narrow demographic.

Citigroup estimates that writing off defaulted student loans would cost $74 billion, though such a move might nudge other borrowers to strategically default in hopes of a bailout of their own.

We have a very easy solution for this scenario, which enterprising politicians might use to both ride to the rescue of distressed student loan borrowers while avoiding the moral hazard issue of encouraging other borrowers to strategically default on their student loans: restore the ability of distressed borrowers to have their student loan debt discharged in bankruptcy!

In one fell swoop, it would be possible to both relieve the genuine distress of the excessive debt held by these individuals in such a way that would stop other less-distressed but really opportunistic people from considering strategic defaults on their student loans, thanks to the restrictions and higher costs of future borrowing activity that would be placed upon them in bankruptcy proceedings.

Plus, this reform would have the unique benefit of forcing the undoing of one of the biggest political power grabs of recent years: the federal government's takeover of the student loan industry.

Here, the unspoken goal of President Obama's policy has been to fully exploit the restriction of borrowers from being able to discharge their student loan debts in bankruptcy court as a backdoor means by which he could increase the amount of money that the federal government collects from low and middle income earners. All, we might add, without having to go through the hassle of fighting the political battle that would come from attempting to directly increase their income tax rates.

Just in case you wondered why President Obama has always been so keen to push "cheap" student loans....

That's also why President Obama has been so focused on increasing the tax rates of just those with high incomes, while pushing to keep the Bush-era tax cuts in place for low and middle income earners, even though such a strategy will do very little to reduce the federal government's annual budget deficits or the national debt. Since most income in the United States is actually generated by people who earn much less than $200,000 (or $250,000 per household), the President is simply using the old deceptive magician's trick of distraction in an attempt to keep low and middle class earners from recognizing how much of their income they're really paying in total to the federal government.

It doesn't matter that it's called "debt". If you cannot discharge it in bankruptcy and you owe it to the federal government, which sets the size of your payments according to the amount of your annual income, then the money that you're paying to the government should more properly be called "taxes".

At the very least, the federal government should require student loan borrowers to write that number somewhere in the "taxes you paid" section of their tax returns....

Image Source: ZeroHedge.

Racing the Clock to Beat the Dividend Cliff, Part 2

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In Part 1, we pointed out that companies waited a little over a week after the re-election of Barack Obama on 6 November 2012 to begin responding to the guarantee of higher taxes on dividends that would take effect on 1 January 2013. In today's post, we're simply going to point out how much money they've have pulling into 2012 to avoid those higher taxes waiting in 2013 and from where:

As of the dividend futures data available for 10 December 2012, companies such as Walmart and numerous others have collectively pulled about 4.3% of the total amount of dividends that had been projected to be paid out in the first quarter of 2013 into the fourth quarter of 2012 instead.

While some companies like Oracle have simply pulled ahead the dividends that they had originally intended to pay out in the first, second and third quarters of 2013, at least 123 other companies at this writing have announced they will pay a special dividend before the end of 2012. One of those companies, Costco, has actually taken out a loan to pay a special dividend to its investors before the higher dividend tax rates of 2013 take effect.

These companies are rushing to take these actions because many of their largest shareholders fall into the income range that will be most negatively impacted by the higher taxes on dividends. We estimate that over two-thirds of all dividends go to these individuals, who are often the primary owners or founders of the companies that pay out dividends.

A First Look at 2013's Quarterly Dividends

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We now have dividend futures data through the fourth quarter of 2013. Our chart below shows how the expected future for dividends looks:

Given all the dividend-related activity following the 6 November 2012 election in the United States, where companies have acted to pull dividends from 2013 into 2012 instead to beat a now guaranteed dividend tax increase, we anticipate that there may be quite a bit of error in the actual dividends that will be paid in 2012-Q4 and for 2013-Q1. We believe the value that will actually be recorded for 2012-Q4 will be about $0.42 per share higher than what we've shown on the chart above based on how much money appears to have been transferred from 2013-Q1.

Looking at the history of the expected future for that quarter, 2013-Q1's expected cash dividend of $7.88 per share is down considerably from the high value of $8.30 per share that was expected to be paid in that quarter back on 17 October 2012. Almost all of the decline in the level of expected dividends for 2013-Q1 has taken place since 15 November 2012.

Looking forward now in time, the expected level of cash dividends for the S&P 500 looks as if the first three quarters for the U.S. economy in 2013 will be lackluster. The fourth quarter looks as if it will be better by comparison, but even here we've already seen some erosion in investor expectations for that future quarter.

Here, the expected dividends for that quarter first debuted on 13 December 2012 at $8.90 per share. That has fallen to $8.84 through the futures for 19 December 2012.

We hope you've enjoyed 2012. As we've long forecast, 2013 will be a very different story....

U.S. Markets Long Since Over the Fiscal Cliff

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On Sunday, December 30 2012, President Barack Obama claimed that financial markets would be negatively affected by the failure of the U.S. Congress and his administration to reach a rushed, last-minute deal to extend President Bush's 2001 and 2003 tax cuts for the middle class:

Low income tax rates first put in place under Republican former President George W. Bush are due to expire at the end of the day on Monday - the last day of 2012.

Obama said that failing to reach a deal would have a negative impact on financial markets.

"If people start seeing that on January 1st this problem still hasn't been solved, that we haven't seen the kind of deficit reduction that we could have had had the Republicans been willing to take the deal that I gave them ... then obviously that's going to have an adverse reaction in the markets," he said.

The problem with this statement is that U.S. markets have already adversely reacted to going over the so-called "fiscal cliff". Following the outcome of the November 6, 2012 national election, which ensured that President Obama would remain in office and the higher tax rates he seeks to impose upon investment income would go into effect on January 1, 2013, major shareholders at several hundred U.S. companies have acted to avoid those higher taxes by either moving up dividend payments into 2012 or by paying out special dividend payments before the end of the year.

To be able to make those dividend payments, companies have tapped the funds they were setting aside to pay out dividends in 2013. The chart below reveals how much money per share has been moved into 2013 for just the 404 companies of the S&P 500 that pay cash dividends to their shareholders:

As we can see in the chart, most of the money being used to boost dividend payments in the last quarter of 2012 is being taken from funds that were set aside to pay dividends in the first quarter of 2013. [The trick to reading the chart is to consider the difference between the amount of the dividend payments expected to be paid out in the first quarter of 2013 and later quarters in 2013 - these typically move together based upon future expectations for the private sector economy in the United States, but the divergence here directly coincides with the announcements of a large number of companies acting to boost their dividend payments to investors in 2012 before they become subject to higher taxes in 2013.]

Since November 15, 2012, which marks the beginning for when U.S. companies began announcing changes in their dividend payments to avoid President Obama's higher taxes on this kind of investment income in 2013, roughly 4.6% of all the funds being set aside to pay dividends in the first quarter of 2013 have been moved up to be paid out in 2012 instead.

With a total adjusted market capitalization of $12.53 trillion on December 28, 2012, the S&P index value of 1402.43 per share indicates that there are 8.93 billion shares outstanding in the market. In the period from November 15, 2012 through December 12, 2012 which saw the majority of all dividend policy changes reacting to 2013's guaranteed higher taxes on investment income, at least 37.8 cents per share has been pulled out from the first quarter of 2013 to be paid out before December 31, 2012 instead. That works out to be a shift of nearly $3.4 billion dollars that will be taxed at 2012's dividend income tax rate of 15% rather than 2013's post-fiscal cliff dividend income tax rates, which are set to be taxed at the same rates as for ordinary income.

Going by the IRS' income tax statistics for 2009, the most recent year for which data is available at this writing, we estimate that over two-thirds of all ordinary dividends being paid out in 2013 would be subject to the maximum dividend tax rate of 43.6%. The massive difference between the maximum dividend income tax rates from 2012 to 2013 and the desire to avoid 2013's much higher dividend income tax rate is the motive for the actions taken by the S&P 500's dividend paying companies.

The bottom line is that U.S. markets have already reacted to going over the so-called "fiscal cliff" - any adverse market activity now would be solely due to a worsening business outlook for the nation in 2013. We wonder what might happen to stock prices if companies now act to reduce their future dividend payments because they don't have the cash flow to regenerate the funds needed to pay the dividends they're currently promising.

Your Paycheck in 2013: Part 2

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Ready for Take 2 on how much of your paycheck you will be allowed to take home in 2013?

Here's the deal. Late on 31 December 2012, the IRS kicked out an advance release of its withholding income tax rates that will apply in 2013, giving U.S. employers until 15 February 2013 to implement them, so our Your Paycheck in 2013, Part 1 tool may still apply until that time, which is something that will depend upon how quickly your employer is able to revise their payroll accounting systems to coincide with the information the IRS cranked out.

The good news is that the bracket creep issue we previously noted in Part 1 has gone away - the personal and withholding allowances have been adjusted for the inflation that occurred from 2011 to 2012. The bad news is that the withholding income tax rates issued by the IRS in its Notice 1036 appear to be based upon the income tax rates that applied before 2001 and 2003, which means that they don't take the tax rates just set by the fiscal cliff deal just passed by the U.S. Congress into account.

So there will almost certainly be a Part 3 edition of our 2013 paycheck tool. In the meantime, the Part 2 edition of our tool will estimate how much of your paycheck you'll actually be allowed to take home before the IRS issues yet another set of new tax withholding instructions to U.S. employers, and also before any state income tax withholding that might affect it is factored into the calculations (unless you live in the states of Alaska, Florida, Nevada, New Hampshire, Tennessee, Texas, Washington or Wyoming, where our tool will give you a pretty good estimate of how much of your paycheck that you will be allowed to keep.)

Your Paycheck and Tax Withholding Data
Category	Input Data	Values
Basic Pay Data	Current Annual Pay
	Pay Period	Daily Weekly Biweekly Semimonthly Monthly Quarterly Semiannually Annually
Federal Withholding Data	Filing Status	Single Married
	Number of Withholding Allowances	0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
401(k) or 403(b) Contributions	Pre-Tax Contributions (%)
	After Tax Contributions (%)
Flexible Spending Account Annual Contribution Data	Health Care Spending Account
	Dependent Care Spending Account
What if You Had a Raise?	Desired Raise (%)

Your Paycheck Data
Category	Calculated Results	Values
Basic Income Data	Proposed Annual Salary (Including Raise!)
	Typical Paycheck Amount
Federal Tax Withholding Amounts	U.S. Federal Income Taxes
	U.S. Social Security Taxes
	U.S. Medicare Taxes
401(k) or 403(b) Contributions	Pre-Tax Contributions
	After-Tax Contributions
	Total Contributions
Flexible Spending Account Contributions	Health Care Spending Account
	Dependent Care Spending Account
Take Home Pay Estimate	Net Paycheck Amount

We'll update our tool, again, once Washington D.C. gets its act together.

Previously on Political Calculations

We've been in the business of calculating people's paychecks (not including state income tax withholding) since 2005!

• Your 2005 Paycheck
• Your 2006 Paycheck
• Your 2007 Paycheck
• Your 2008 Paycheck
• Your 2009 Paycheck
• Your Paycheck in 2010
• Your Paycheck in 2011
• Your Paycheck in 2012
• Your Paycheck in 2013: Part 1
• Your Paycheck in 2013: Part 2

But before we forget, your employer pays a lot more to keep you on the payroll than just your paycheck! The tool below shows how much it costs to employ you in 2011-12!

• How Much Does It Really Cost to Employ You? (2011-12 Edition)

And you should also be aware that the employer's portion of Social Security and Medicare taxes (aka "FICA" taxes) have replaced corporate income taxes almost dollar-for-dollar over the years. Don't let anybody pull the "U.S. corporations aren't paying a fair share of taxes" line with you - they're really paying almost exactly the same share of all U.S. taxes that they have been for the last several decades!

Republican Approach on Budget Fix Works

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It seems the Conservative approach to fixing the budget deficit will work for everyone, but the problem that has arisen is the progressive Democrats will not go along with it as it might actually work which will make the Democrats look bad as they don't have any solution, and never have, that will fix our economic problems.

The biggest problem for the progressive socialists Democrats is not how to solve problems for the country, it's how to get what little revenue that's left among the working population into their collective hands. That the entire country will collapse isn't important, it about getting that last dollar away from the stupid citizens so the socialists can use it to their personal advantage but buying more votes from those they have already driven into dependency and poverty.

What will happen to the progressive socialists when the country goes down the tube, they have all figured out, they have already purchased their tickets out of the country. It's an important part of their founding, 'take the money and run'.

Leave the Consumer Price Index and Cost-of-Living Adjustment Out of the Budget Talks
Source: Stephen J. Entin, "Leave the CPI and COLAs Out of the Budget Talks," Tax Foundation, December 6, 2012.

House Republicans have made switching from a regular consumer price index (CPI) to a chained CPI the centerpiece of their deficit reduction proposals, says Stephen J. Entin, a senior fellow at the Tax Foundation.

• The CPI adjusts various federal tax and spending formulas for inflation.
• Republicans advocate this because the chained CPI has risen about half percent less each year than the regular CPI.
• The hope is that the switch would slow adjustment of income tax brackets for inflation and reduce annual cost of living increases (the Cost-of-Living Adjustment, or COLA) for Social Security retirees.

Some people argue that fixing the CPI and COLA will fix the projected deficits that Social Security faces. However, that is not the case as there are many other factors that contribute to Social Security's potential insolvency.

• First, the demographic shift as baby boomers retire, as well as an increase in life expectancy, will mean there is a smaller ratio of people working to receiving benefits.
• Second, the initial benefit formula -- consisting of several factors that determine each person's initial monthly benefit check -- is going to allow benefits to rise for people across the board.
• As a result, retirees are going to receive higher benefits despite being rich.
• Additionally, changes in the COLA won't change the initial benefits that future beneficiaries receive. Switching to a chained CPI would reduce COLA by about half percent a year.
• This amounts to an average of only a 5 percent reduction over the life of a recipient.

Moreover, the switch to a chained CPI would push people more quickly into higher tax brackets. For instance, people in the 15 percent bracket would be pushed into the 25 percent bracket faster. This is, in effect, a tax rate hike in disguise and undermines the progressive tax rate structure that makes people with higher incomes pay more tax.

In addition, the regular CPI prevents the real wage gains of taxpayers from turning into a "real bracket creep." Under a chained CPI, much of the workforce could end up in the top tax bracket, curbing economic growth and threatening jobs around the country.

Instead, amend the benefit formula and/or raise the retirement age in an effort to slow the growth of benefits. One proposal, progressive price indexing, would allow some wage-adjusted growth at the bottom bracket in the benefit formula while adjusting the benefit formula for the top bracket to raise lower income benefits relative to upper income benefits.

Get ready for the new year with January's Tax Due Date Reminders!

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The staff at Holdsworth & Co. joins you in saying goodbye to 2011 and ringing in a healthy and prosperous 2012!  

Thanks for visiting our recently launched blogsite.  As we begin the new year, we want to help keep you on course with a list of tax due date reminders for January.  We're happy to answer any of your questions and are just a phone call away. 

January 10	Employees - who work for tips. If you received $20 or more in tips during December, report them to your employer. You can use Form 4070, Employee's Report of Tips to Employer.
January 17	Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2011.Individuals - Make a payment of your estimated tax for 2011 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2011 estimated tax. However, you do not have to make this payment if you file your 2011 return (Form 1040) and pay any tax due by January 31, 2012.Employers - Nonpayroll Withholding. If the monthly deposit rule applies, deposit the tax for payments in December 2011.Farmers and Fishermen - Pay your estimated tax for 2011 using Form 1040-ES. You have until April 17 to file your 2011 income tax return (Form 1040). If you do not pay your estimated tax by January 17, you must file your 2011 return and pay any tax due by March 1, 2012, to avoid an estimated tax penalty.
January 31	Employers - Give your employees their copies of Form W-2 for 2011 by January 31, 2012. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting by January 31.Businesses - Give annual information statements to recipients of 1099 payments made during 2011.Employers - Federal unemployment tax. File Form 940 for 2011. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 10 to file the return.Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2011. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2011 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.Individuals - who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 17, you may choose (but are not required) to file your income tax return (Form 1040) for 2011. Filing your return and paying any tax due by January 31 prevents any penalty for late payment of last installment.Payers of Gambling Winnings - If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W-2G.Certain Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2011. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2011 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.

Discover Your Pot o' Gold...in Your Tax Deductible Vacation!

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Dublin, Ireland 


Tim, who owns his own business, decided he wanted to take a two-week trip around the US. So he did--and was able to legally deduct every dime that he spent on his "vacation". Here's how he did it.

1. Make all your business appointments before you leave for your trip.
Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible.
Wrong.
You must have at least one business appointment before you leave in order to establish the "prior set business purpose" required by the IRS. Keeping this in mind, before he left for his trip, Tim set up appointments with business colleagues in the various cities that he planned to visit.
Let's say Tim is a manufacturer of green office products looking to expand his business and distribute more product. One possible way to establish business contacts--if he doesn't already have them--is to place advertisements looking for distributors in newspapers in each location he plans to visit. He could then interview those who respond when he gets to the business destination.

Example: Tim wants to vacation in Hawaii. If he places several advertisements for distributors, or contacts some of his downline distributors to perform a presentation, then the IRS would accept his trip for business.

Tip: It would be vital for Tim to document this business purpose by keeping a copy of the advertisement and all correspondence along with noting what appointments he will have in his diary.

2. Make Sure your Trip is All "Business Travel."
In order to deduct all of your on-the-road business expenses, you must be traveling on business. The IRS states that travel expenses are 100% deductible as long as your trip is business related and you are traveling away from your regular place of business longer than an ordinary day's work and you need to sleep or rest to meet the demands of your work while away from home.

Example: Tim wanted to go to a regional meeting in Boston, which is only a one-hour drive from his home. If he were to sleep in the hotel where the meeting will be held (in order to avoid possible automobile and traffic problems), his overnight stay qualifies as business travel in the eyes of the IRS.

Tip: Remember: You don't need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status.

3. Make sure that you deduct all of your on-the-road -expenses for each day you're away.
For every day you are on business travel, you can deduct 100% of lodging, tips, car rentals, and 50% of your food. Tim spends three days meeting with potential distributors. If he spends $50 a day for food, he can deduct 50% of this amount, or $25.

Tip:The IRS doesn't require receipts for travel expense under $75 per expense--except for lodging.

Example: If Tim pays $6 for drinks an the plane, $6.95 for breakfast, $12.00 for lunch, $50 for dinner, he does not need receipts for anything since each item was under $75.

Tip: He would, however, need to document these items in your diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation shall consist of amount, date, place and business reason for the expense.

Example: If, however, Tim stays in the Bates Motel and spends $22 on lodging, will he need a receipt? The answer is yes. You need receipts for all paid lodging.

Tip: Not only are your on-the-road expenses deductible from your trip, but also all laundry, shoe shines, manicures, and dry-cleaning costs for clothes worn on the trip. Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry cleaning receipt and have your clothing dry cleaned within a day or two of getting home.

4. Sandwich weekends between business days.
If you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend.

Example: Tim makes business appointments in Florida on Friday and one on the following Monday. Even though he has no business on Saturday and Sunday, he may deduct on-the-road business expenses incurred during the weekend.

5. Make the majority of your trip days business days.
The IRS says that you can deduct transportation expenses if business is the primary purpose of the trip. A majority of days in the trip must be for business activities, otherwise, you cannot make any transportation deductions.

Example: Tim spends six days in San Diego. He leaves early on Thursday morning. He had a seminar on Friday and meets with distributors on Monday and flies home on Tuesday, taking the last flight of the day home after playing a complete round of golf. How many days are considered business days?

All of them. Thursday is a business day, since it includes traveling - even if the rest of the day is spent at the beach. Friday is a business day because he had a seminar. Monday is a business day because he met with prospects and distributors in pre-arranged appointments. Saturday and Sunday are sandwiched between business days, so they count, and Tuesday is a travel day.
Since Tim accrued six business days, he could spend another five days having fun and still deduct all his transportation to San Diego. The reason is that the majority of the days were business days (six out of eleven). However, he can only deduct six days worth of lodging, dry cleaning, shoe shines, and tips. The important point is that Tim would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible.
Consult us before you plan your next trip. We'll show you the right way to legally deduct your vacation when you combine it with business. Bon Voyage!
Tim, who owns his own business, decided he wanted to take a two-week trip around the US. So he did--and was able to legally deduct every dime that he spent on his "vacation". Here's how he did it.

1. Make all your business appointments before you leave for your trip.
Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible.
Wrong.
You must have at least one business appointment before you leave in order to establish the "prior set business purpose" required by the IRS. Keeping this in mind, before he left for his trip, Tim set up appointments with business colleagues in the various cities that he planned to visit.
Let's say Tim is a manufacturer of green office products looking to expand his business and distribute more product. One possible way to establish business contacts--if he doesn't already have them--is to place advertisements looking for distributors in newspapers in each location he plans to visit. He could then interview those who respond when he gets to the business destination.

Example: Tim wants to vacation in Hawaii. If he places several advertisements for distributors, or contacts some of his downline distributors to perform a presentation, then the IRS would accept his trip for business.

Tip: It would be vital for Tim to document this business purpose by keeping a copy of the advertisement and all correspondence along with noting what appointments he will have in his diary.

2. Make Sure your Trip is All "Business Travel."
In order to deduct all of your on-the-road business expenses, you must be traveling on business. The IRS states that travel expenses are 100% deductible as long as your trip is business related and you are traveling away from your regular place of business longer than an ordinary day's work and you need to sleep or rest to meet the demands of your work while away from home.

Example: Tim wanted to go to a regional meeting in Boston, which is only a one-hour drive from his home. If he were to sleep in the hotel where the meeting will be held (in order to avoid possible automobile and traffic problems), his overnight stay qualifies as business travel in the eyes of the IRS.

Tip: Remember: You don't need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status.

3. Make sure that you deduct all of your on-the-road -expenses for each day you're away.
For every day you are on business travel, you can deduct 100% of lodging, tips, car rentals, and 50% of your food. Tim spends three days meeting with potential distributors. If he spends $50 a day for food, he can deduct 50% of this amount, or $25.

Tip:The IRS doesn't require receipts for travel expense under $75 per expense--except for lodging.

Example: If Tim pays $6 for drinks an the plane, $6.95 for breakfast, $12.00 for lunch, $50 for dinner, he does not need receipts for anything since each item was under $75.

Tip: He would, however, need to document these items in your diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation shall consist of amount, date, place and business reason for the expense.

Example: If, however, Tim stays in the Bates Motel and spends $22 on lodging, will he need a receipt? The answer is yes. You need receipts for all paid lodging.

Tip: Not only are your on-the-road expenses deductible from your trip, but also all laundry, shoe shines, manicures, and dry-cleaning costs for clothes worn on the trip. Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry cleaning receipt and have your clothing dry cleaned within a day or two of getting home.

4. Sandwich weekends between business days.
If you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend.

Example: Tim makes business appointments in Florida on Friday and one on the following Monday. Even though he has no business on Saturday and Sunday, he may deduct on-the-road business expenses incurred during the weekend.

5. Make the majority of your trip days business days.
The IRS says that you can deduct transportation expenses if business is the primary purpose of the trip. A majority of days in the trip must be for business activities, otherwise, you cannot make any transportation deductions.

Example: Tim spends six days in San Diego. He leaves early on Thursday morning. He had a seminar on Friday and meets with distributors on Monday and flies home on Tuesday, taking the last flight of the day home after playing a complete round of golf. How many days are considered business days?

All of them. Thursday is a business day, since it includes traveling - even if the rest of the day is spent at the beach. Friday is a business day because he had a seminar. Monday is a business day because he met with prospects and distributors in pre-arranged appointments. Saturday and Sunday are sandwiched between business days, so they count, and Tuesday is a travel day.
Since Tim accrued six business days, he could spend another five days having fun and still deduct all his transportation to San Diego. The reason is that the majority of the days were business days (six out of eleven). However, he can only deduct six days worth of lodging, dry cleaning, shoe shines, and tips. The important point is that Tim would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible.
Consult us before you plan your next trip. We'll show you the right way to legally deduct your vacation when you combine it with business. Bon Voyage!

Fiscal Cliff - How might the Alternative Minimum Tax affect you?

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The election is over.  For the next four years, our country will be led by President Obama.  The White House placed their first “fiscal cliff” negotiations offer on the congressional table on Dec. 6^th.   The haggling over an agreement on the future of income tax rates, Medicare, payroll taxes, etc. continues, while American taxpayers try to remain optimistic that Congress will work collaboratively over the next 48 hours to develop a plan to create jobs, improve our economy and bring us out of the recession.  However, since it’s our hard earned money that Congress is making decisions about, we need to keep informed regarding how our own financial situations may be impacted by potential congressional gridlock. 
In our last blog, we discussed possible income tax hikes that could impact taxpayers if the extensions aren’t enacted by Dec. 31^st.  However, there is an obscure provision in the tax code, the “Alternative Minimum Tax” (AMT),  that is about to affect approximately 30 million of middle class households’ pocketbooks, amounting to $3,700 in additional tax liability, on average.   Many American taxpayers may not be aware of the AMT and that the patch may not be enacted.  Approximately 26 million households that have not had to pay the AMT in the past may not be prepared to pay the additional tax when April 15^th, 2013 comes around so it will benefit taxpayers to become informed.
WHAT IS THE AMT?It is a parallel tax system that operates in tandem with the regular tax, expanding the amount of income that is taxed by adding items that are tax-free under the regular tax system and disallowing many deductions.  It was originally created in 1969 to prevent the wealthiest taxpayers from using credits, deductions and other shelters to avoid taxes.  Basically, it’s a flat tax with two tax brackets, including a 26% and a 28% bracket.  However, since the AMT has not been indexed for inflation unlike income tax rates, which have been indexed, larger numbers of middle class taxpayers have been subject to the AMT.
WHY SHOULD TAXPAYERS BE AWARE OF THIS TODAY? As part of the 2010 Tax Relief Act, Congress revised the exemption amounts used in making AMT computations for 2010.  A patch was also enacted to decrease the number of taxpayers subject to the AMT in 2011 preventing their tax bills from increasing. However, the patch again expired at the end of 2011.  While the White House and Congress are still in budget negotiations, the IRS has assumed that the patch will be enacted.  If this does not come to fruition by year end, the IRS will be in a difficult position.  They will need to make software programming changes and change the ordering rules that determine how tax credits are applied to regular income tax and AMT.  This would require them to notify 60 million taxpayers that they may not file a tax return or receive a refund until late in March 2013 and possibly later.
For 2011, four million taxpayers were subject to the AMT with the following exemption amounts:
                              Single taxpayers:                                             $48,450                              Married taxpayers filing jointly                    $74,450                              Married taxpayers filing separately             $37,225
For 2012, 30 million taxpayers will be subject to the tax, with exemption amounts decreasing to:                                                                                                                                                                                                                                                                              Single taxpayers:                                              $33,750                              Married taxpayers filing jointly:                    $45,000                              Married taxpayers filing separately:            $23,500        Nationwide, one in five taxpayers will have to pay the AMT. For many taxpayers, such as a family of four, with two children and an income over $75,000, this will result in a much larger additional tax liability.  IRS officials expect that taxpayers in more expensive, urban areas will be affected the most.  The following Tax Policy Center calculator can be used to project your income tax liability with various tax policies. http://calculator.taxpolicycenter.org/
HOW DO I KNOW IF I AM SUBJECT TO AMT?Complete IRS Form 6251 http://www.irs.gov/pub/irs-pdf/f6251.pdf  to figure out if you owe anything under the AMT system.  If the tax calculated on Form 6251 is higher than the amount owed on your regular income tax return, you’ll need to pay the difference as AMT. 
WHAT CAN I DO TO REDUCE THE AMOUNT OF AMT I OWE?Understanding the differences between regular income tax and the AMT is the first step in reducing your tax liability. The AMT has a completely different set of calculations than the regular tax. For the regular tax, you add up your total income, subtract out various deductions and personal exemptions, then calculate the tax. Against the regular tax you can claim various credits to reduce your tax even further. The AMT, however, does not allow the standard deduction, personal exemptions, or certain itemized deductions. Also some income which is not subject to the regular tax is added for AMT purposes. Your tax under AMT rules may be higher than your tax under regular tax rules.
When calculating the alternative minimum tax, various adjustments are made. Some income is added which is not subject to the regular tax. Some deductions are adjusted downwards or eliminated entirely.The following items may trigger an AMT liability:·         Itemized deductions for state and local taxes, medical expenses, and miscellaneous expenses·         Mortgage interest on home equity debt·         Accelerated depreciation·         Exercising (but not selling) incentive stock options·         Tax-exempt interest from private activity bonds·         Passive income or losses·         Net operating loss deduction·         Foreign tax credits·         Investment expensesThis list is not comprehensive, but reflects the typical adjustments you should be aware of  that can trigger an AMT liability. Typically, the alternative minimum tax eliminates most or exactly all of the regular tax savings from the above-mentioned deductions. 
Devising tax strategies around the alternative minimum tax can be tricky, since the AMT often adjusts for various deductions and credits.  Feel free to contact any of Holdsworth & Co.’s knowledgeable CPAs to answer any questions you might have regarding the AMT and how you might plan ahead to reduce your future overall tax liability.
We will be mailing our client’s tax organizers in the first half of January with your appointment times.  If you are a potential client and would like to contact us to arrange an appointment, feel free to call us at 445-8633 or email us at info@holdsworthcpa.com.

Arizona Tax Credit Update: benefiting you and your community!

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With 2012 coming to an end and 2013 rushing in, we would like to update you on a few tax credits that are available to Arizona taxpayers. Two Arizona tax credits that will benefit you and your local community, without costing you money, are the Public School Tax Credit and Working Poor Tax Credit.
Public School Tax Credit Taxpayers can claim a credit for donations up to $200 for individuals and $400 for married couples filing jointly to a public school of their choice. The beauty of the tax credit is that it costs you nothing, keeps your money local and reduces your State of Arizona tax liability. Connect to our website at www.holdsworthcpa.com and click on "Community Involvement" to access links to various local school districts where you can donate online or, if you prefer, you can print forms to mail in your donation.
Working Poor Tax Credit If you itemize deductions, you can ALSO claim a tax credit of $200 for individuals and $400 for married couples filing jointly. There are numerous organizations that qualify to receive this credit. You can access a link to the AZ Department of Revenue’s "List of Qualifying Charitable Organizations for 2012" through our website at www.holdsworthcpa.com, under "Community Involvement". Our page also has links to two local organizations which benefit families in our community, Yavapai Big Brothers Big Sisters and Prescott Habitat for Humanity. Connecting to these links provides you with an easy way to donate online or get more information to mail in your donation.
Keep in mind that you can claim BOTH of these credits (assuming your state tax liability is at least as much as your donation) for a total of $400 individual and $800 married filing jointly. It is important to note that if you donate more than your state tax liability, you won’t receive the extra donation as a refund, it will carry to next year to offset your 2013 state taxes.For example: You file a joint return with your spouse and your state tax liability is $900. You elect to donate $400 to a public school and $400 to a qualifying charitable organization. Your tax to the state is reduced by $800 to $100.Note that you must make the donation by December 31^st of the same tax year for which the credit is claimed. If you would like to claim a Public School or Working Poor tax credit in 2012, you'll need to make your donations by December 31st, 2012.

Record Dividends as the U.S. Creeps Deeper Toward Recession

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According to S&P's latest Monthly Dividend Action Report [Excel spreadsheet], the month of November 2012 was a record month that saw some 3,327 U.S. companies make some kind of declaration involving their dividends (that's not the record!) Here are the astounding numbers:

197 companies acted to increase their cash dividend in the 8th best month on record (since January 2004), and the most in any November on record. The all-time record for regular dividend increases announced in a single month is 246, which was set in February 2007.

228 companies acted to make a special cash dividend payment to their investors, the most ever. To put that number in context, the most announcements that companies would pay an extra dividend in an entire year was 233 in 2007. For the period of time for which we have data, the average number of extra dividends announced per month from January 1994 through October 2012 is 33. The previous record of 97 in one month was set in December 2010.

But this drive to pay out dividends in 2012 before the tax rates on them goes up in 2013 masks the deteriorating situation for many companies in the U.S. The number of companies announcing they would cut their cash dividend payments in the month of November 2012 rose to 27, up one from the previous month.

To put that increase in perspective, the average number of companies that act to decrease their cash dividends in a non-recession month is 4. The 54 dividend cuts that have been announced in just the last two months alone is more than would be expected in an entire average non-recession year.

In the chart above, it takes at least 10 companies announcing dividend cuts in a given month for the U.S. economy to be considered to be in recessionary territory. Through November, U.S. companies have announced 151 dividend cuts in 2012.

U.S. Jobs Five Years After Their Peak

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We're going to look at the change in the U.S. employment situation since the total level of employment in the U.S. peaked five years ago in November 2007, but first, let's look at the change since October 2012.

Through November 2012, the U.S. employment situation for young adults Age 20-24 was good, for all older adults it was bad, and for teens, it was "meh".

Overall, some 6,000 more teens and 62,000 young adults than in October 2012 gained jobs, while some 190,000 fewer individuals Age 25 and older were counted as being employed. Doing the math, the net change in the number of jobs in the month from October 2012 to November 2012 came in for a loss of 122,000.

The total number of employed Americans fell by that number to 143,262,000 in November 2012, which is 3,333,000 less than the so-far all-time peak number of of 146,595,000 Americans who were counted as having jobs in November 2007.

The number of employed teens in the U.S. has declined from 5,927,000 in that month to 4,479,000 some five years later. Over this period of time, the number of young adults Age 20-24 with jobs has fallen by 405,000 from 14,001,000 to 13,596,000 and the number of older adults has fallen by 1,480,000 from 126,667,000 to 125,187,000.

Looking at the total decline in the number of employed Americans through November 2012, jobs lost by U.S. teens account for 43.4%, young adults for 12.2% and adults Age 25 and older account for 44.4% of all jobs that have disappeared from the U.S. economy over the last five years.

In November 2007, teens represented 4.0% of the entire U.S. workforce. In November 2012, teens account for just 3.1% of the reduced U.S. workforce. At this point, jobs that were most likely to have been held by teens are 14 times more likely to have been negatively affected by the employment situation over the past five years than their numbers among the entire U.S. workforce would suggest.

In retrospect, it seems that the U.S. Congress' action to boost the minimum wage by nearly 41% in three stages from 2007 through 2009 without doing anything to boost the revenues of teen employers by an appropriate percentage to compensate them for their higher costs of doing business during this period of time wasn't such a hot idea.

Random Thoughts

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How do we know that the Fed pays attention to the things we write? Previously, commenting on the apparent lack of effect that the Fed's latest round of quantitative easing has had on stock prices, we observed:

1. The Fed is doing it wrong. In the two previous rounds of QE, the Fed purchased large quantities of U.S. Treasuries. So far in this round, the Fed is only purchasing Mortgage Backed Securities. The stock market just doesn't get the same bang for the buck as when the Fed buys up Treasuries, which acts to reduce long-term interest rates across a wider swath of the economy, which is really what helped boost stock prices in earlier rounds.
2. QE, as an effective policy, is running out of gas. The interest rates that the Fed might hope to lower in its QE programs started off at a much lower level, and a lot closer to their minimum zero level, than in its previous incarnations. With less room to maneuver, the Fed's actions just don't have the same oomph they once did.

And now, the Fed has announced that they've gotten the message and are going to start "doing it right" and also buy Treasury securities, which will give this latest generation of QE more "oomph". Interestingly, they've also announced the economic targets that must be satisfied before they will discontinue the plan. All together, that suggests to us that they're thinking the future for the economy in much of 2013 will be somewhat worse than other official sources are letting on....

It looks like that as far as the pace of layoffs in the U.S. is concerned, the impact of Hurricane Sandy lasted for just three weeks.

Assuming that the volatility we've previously noted dies down, we should have enough data to begin projecting the new trend in initial unemployment benefit claim filings within a few weeks.

Suppose we converted a house to run entirely off the grid on green, renewable energy sources like solar or wind, so that we would never again have to pay an electric bill or generate any carbon emissions for the power it consumes, as President Obama would seem to desire all Americans do. What possible environmental harm would we cause by lighting it with the soon-to-be-banned 100-watt incandescent bulbs, which we might note are far more friendly for the environment and are much less costly than their CFL replacements? And if the answer is "none", why must we have the government progressively ban all incandescent light bulbs from production?

On a development note, we can't help but notice that if we combined the site traffic our tools for determining individual, family and household income distribution percentile rankings, they would collectively represent the most popular tool ever on Political Calculations. So guess what will be coming soon!...

And speaking of coming soon, here's our Christmas countdown clock!

A First Look at 2013's Quarterly Dividends

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We now have dividend futures data through the fourth quarter of 2013. Our chart below shows how the expected future for dividends looks:

Given all the dividend-related activity following the 6 November 2012 election in the United States, where companies have acted to pull dividends from 2013 into 2012 instead to beat a now guaranteed dividend tax increase, we anticipate that there may be quite a bit of error in the actual dividends that will be paid in 2012-Q4 and for 2013-Q1. We believe the value that will actually be recorded for 2012-Q4 will be about $0.42 per share higher than what we've shown on the chart above based on how much money appears to have been transferred from 2013-Q1.

Looking at the history of the expected future for that quarter, 2013-Q1's expected cash dividend of $7.88 per share is down considerably from the high value of $8.30 per share that was expected to be paid in that quarter back on 17 October 2012. Almost all of the decline in the level of expected dividends for 2013-Q1 has taken place since 15 November 2012.

Looking forward now in time, the expected level of cash dividends for the S&P 500 looks as if the first three quarters for the U.S. economy in 2013 will be lackluster. The fourth quarter looks as if it will be better by comparison, but even here we've already seen some erosion in investor expectations for that future quarter.

Here, the expected dividends for that quarter first debuted on 13 December 2012 at $8.90 per share. That has fallen to $8.84 through the futures for 19 December 2012.

We hope you've enjoyed 2012. As we've long forecast, 2013 will be a very different story....

Your Paycheck in 2013: Part 1

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How much money will Uncle Sam allow you to keep from your paycheck in 2013 in the form of federal income taxes?

Thanks to the so-called "fiscal cliff" standoff in Washington D.C., the answer, for now, is exactly the same as you would have taken home in 2012. That fact will hold true even if the reported deal struck and passed in the U.S. Senate early on 1 January 2013 is passed by the House of Representatives later in the day.

That's because President Obama has previously directed the IRS to not issue any change in the directions it provides for withholding income taxes from individual paychecks to the nation's employers until a deal is finalized. As a result, the rules that the IRS issued for employer withholding taxes in 2012 will continue to remain in force, at least for the time being.

And because those same withholding tax rates, income thresholds, personal exemptions and allowances will continue to apply into 2013, the amount of money that the U.S. federal government will take from your paycheck represents roughly a 2.6% increase over what it would otherwise be, thanks to the return of bracket creep for the first time in nearly 30 years.

That means that 2013 will mark the first time since 1984 that the corrosive effect of inflation upon personal income will be allowed to affect the amount of taxes withheld from individual paychecks.

While bracket creep specifically refers to the situation where individuals suddenly find themselves paying higher levels of taxes even though their inflation-adjusted income may not have increased at all, in this case, it will affect every working American who has federal income taxes withheld from their paychecks because the IRS' inaction also means that the size of the personal exemption and withholding allowances that they might claim through their W-4 form is not being increased to account for the effect of the inflation that has occurred since 2011.

But then, those are the income tax increases that most people are unlikely to notice on their paycheck. By contrast, they won't be able to help but notice that the size of the take-home portion of their paychecks is shrinking by 2% of their income thanks to the expiration of President Obama's temporary "stimulus" Social Security payroll tax cut, which isn't affected by the "fiscal cliff" standoff over federal income taxes. Here, the Social Security tax rate on personal income will return to 6.2% from its 2012 level of 4.2%, no matter what happens with the fiscal cliff situation. [There is no change in the portion of Social Security taxes paid by U.S. employers, who have continued to separately pay 6.2% of their employees' income to Social Security - Social Security has been running deeply in the red in part due to President Obama's "stimulus" tax cut.]

Our tool below reveals what your paycheck, minus any state income tax withholding, will look like for now in 2013:

Your Paycheck and Tax Withholding Data
Category	Input Data	Values
Basic Pay Data	Current Annual Pay
	Pay Period	Daily Weekly Biweekly Semimonthly Monthly Quarterly Semiannually Annually
Federal Withholding Data	Filing Status	Single Married
	Number of Withholding Allowances	0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
401(k) or 403(b) Contributions	Pre-Tax Contributions (%)
	After Tax Contributions (%)
Flexible Spending Account Annual Contribution Data	Health Care Spending Account
	Dependent Care Spending Account
What if You Had a Raise?	Desired Raise (%)

Your Paycheck Data
Category	Calculated Results	Values
Basic Income Data	Proposed Annual Salary (Including Raise!)
	Typical Paycheck Amount
Federal Tax Withholding Amounts	U.S. Federal Income Taxes
	U.S. Social Security Taxes
	U.S. Medicare Taxes
401(k) or 403(b) Contributions	Pre-Tax Contributions
	After-Tax Contributions
	Total Contributions
Flexible Spending Account Contributions	Health Care Spending Account
	Dependent Care Spending Account
Take Home Pay Estimate	Net Paycheck Amount

We'll update our tool once Washington D.C. gets its act together.

Speaking of which, if you want to find out how much federal income taxes would be being withheld from your paycheck in 2013 if not for President Obama's bracket creep, or to find out how much higher they might be if no deal is ever reached and the IRS has to go back to the income tax rates of 2001, our tool "Your Paycheck Over the Cliff" will answer those questions for you.

Previously on Political Calculations

We've been in the business of calculating people's paychecks (not including state income tax withholding) since 2005!

• Your 2005 Paycheck
• Your 2006 Paycheck
• Your 2007 Paycheck
• Your 2008 Paycheck
• Your 2009 Paycheck
• Your Paycheck in 2010
• Your Paycheck in 2011
• Your Paycheck in 2012
• Your Paycheck in 2013: Part 1

But before we forget, your employer pays a lot more to keep you on the payroll than just your paycheck! The tool below shows how much it costs to employ you in 2011-12!

• How Much Does It Really Cost to Employ You? (2011-12 Edition)

And you should also be aware that the employer's portion of Social Security and Medicare taxes (aka "FICA" taxes) have replaced corporate income taxes almost dollar-for-dollar over the years. Don't let anybody pull the "U.S. corporations aren't paying a fair share of taxes" line with you - they're really paying almost exactly the same share of all U.S. taxes that they have been for the last several decades!