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I sat in on an enlightening chat today thanks to a heads up from Joe Kristan’s Tax Update Blog with Sen. Joe Bolkom and Rep. Jeff Kaufmann, lawmakers involved in setting Iowa’s tax policy, regarding the future of some of Iowa’s generous tax credits.  The biggest thing that I learned today was how the legislature has viewed the state of Iowa: like a law firm that is fighting to retain its biggest clients, rather than focusing on its value proposition.

That’s the essence of the tax credits, to attract or retain what government officials feel are the best clients for the state of Iowa.  I propose that the state of Iowa take more of a Wal-Mart approach, which is well summarized in the Quick and Dirty Iowa Tax Reform Plan at the Tax Update Blog.

The state government needs to strip down unnecessary (notice I’m not talking about waste, fraud or abuse) spending and get back to the basics of what the state government is obligated to provide to its citizens.  Then with this lean and mean philosophy, pass that savings along to the customers (taxpayers) and grow revenues for the state by attracting new customers, not by charging more to the current customers for something they don’t value.

For those who purchased a home after November 6, 2009, the wait is finally over, you can now apply for your first time homebuyer tax credit with the new and improved form 5405 and its related instructions.  You can use this new form with either your 2009 tax return or an amended 2008 tax return.  However, you will not be able to e-file your 2009 tax return if this form is attached.  If you are expecting a refund in addition to the credit, filing on paper and the additional verification of form 5405 and its attachments will slow down that refund as well.

With the new form 5405, the IRS is asking you to attach proof that you actually bought the house to help deter fraudulent claims.  Examples of what they consider proof:

• A copy of the settlement statement, preferably form HUD-1
• A copy of the executed retail sales contract for mobile home purchases
• For a newly constructed home, a copy of the certificate of occupancy

On these documents it is important that every line indicating the need for a signature is signed.  The IRS may reject tax returns that do not have all supporting documents signed.

The new form 5405 includes sections for long-time resident homebuyers to claim their credit as well, up to $6,500 if they have lived in the same residence for a period of 5 consecutive years out of the last 8 year period.  The IRS is also looking for some proof that you lived at the same residence for 5 consecutive years in the last 8 years so they would like you to attach the following for the 5 consecutive year period you assert:

• Form 1098 or other mortgage interest statement
• Property tax records
• Homeowner’s insurance records

For more detail about the requirements refer to the instructions for form 5405 or read the IRS press release.  If you find you need additional help, please consult a licensed tax professional regarding the best decision for your specific situation.

If you bought your new home after November 6, 2009, be prepared to wait before being able to file an amended 2008 return to claim your refund for the new and improved  home buyer tax credit. The changes made to this legal provision on November 6, 2009 prompted the IRS to revise the form 5405 that is required to claim the refund.  The IRS expects this form to be available by January 8, 2010, and then you can submit your amended 2008 returns to begin the process of applying for the credit.

It is expected that the new form will require additional documentation to be attached to substantiate the legitimacy of the credit as significant fraud with regard to this credit has been suspected.  It is also notable that any tax return that has the new form 5405 attached will likely be required to file in paper.  While this is not an issue for an amended 2008 return that must be filed on paper anyway, taxpayers who include this form on their 2009 returns may experience significant delays in receiving refunds due to the delay in paper processing and the scrutiny surrounding this credit.

Over the last week I have heard some replays of statements from our sharing is caring President regarding his ideas about “sharing the wealth” and “redistributive justice.”  It seems to me that he and his friends have somewhere in their childhood missed this wise old saying, “Give a man a fish, feed him for a day.  Teach a man to fish, feed him for a lifetime.”  I understand that there is a social good we all receive from reducing poverty in our great nation, but we need to do so in a way that is sustainable and does not create a prolonged burden on those that are out “fishing.” 

There are a good many people in our country that have wandered down a path of negativity in life and are seen by many as a menace.  However, I think that we can find some positive qualities in most that will help us in determining what type of fishing we should teach them.  Take a high level drug dealer for instance, talk about a menace to society.  Most people would write this person off and not care if they were killed on the street.

What if this person is really just an enterpreneur that never learned to work in the legitimate system or didn’t have financing for capital to start a profitable venture.  This person definitely has to understand quality control, sales and marketing, distribution management, vendor relationships, and customer satisfaction.  Thinking about the skills they may have acquired illegitimately may help us to find a good fit for them and provide long-term rehabilitation.  Do you think a person formerly running their own drug enterprise is going to find long-term fulfillment working on the line at Burger King for peanuts per hour?  No wonder they relapse into being their own boss and making real money.

There also seems to be a prevailing attitude that we can just educate people and that the path to good jobs is always through more education.  Now that has worked out well for me, but what if we are dealing with an entrepreneurial person that truly will never be happy working for someone else no matter how good the job is?  A job and a nifty resume aren’t always the answer to economic woes.  Sometimes it’s more about acquiring some useful skills or making some quality connections that give people a foot in the door to the life they really want.

At the end of the day people need to understand how to add value to our legitimate economic system in a way that compensates them well for the skills and connections they have.  Stop complaining about not being able to find someone to give you a job or give you some education or give you some of their wealth, but learn how to add value and create your own wealth.  We should focus our efforts on helping people understand themselves and how they fit into the picture of value creation as independent contributors, not dependent hand holder outers.  Remember, the hand you hold is the hand that holds you down.

The new and beefed up homebuyer tax credit will likely help home sales continue to improve, but does it help in a temporary or long-term manner?  While a temporary boost makes us all feel warm and fuzzy, the real focus of any economic program needs to come back around to long-term fixes.

An area of the expanded program I have a real problem with is the extension of the credit to those that already have a home.  They need to have lived there for at least five years, but I don’t know how this matters much when you’re giving someone money to take one home off the market and put another one right back on.  This may stimulate home sales and inflate prices a bit, but it actually has a net zero effect on home inventory.

Another conceptual problem that I have had with the credit from the first time it rolled out is that we are trying to fix a market that suffered inflated prices due to outside manipulation by trying to stimulate inflated prices with outside manipulation, because we liked the higher prices better.  Higher home prices made us all feel wealthier and to the extent that you could take a loan on the inflated equity on your home and spend that cash, it truly did inflate your wealth.

The problem is that the wealth created by inflating home prices wasn’t real wealth, it was a glitch in the system that distorted the market with inflated, but unsustainable prices.  To the extent we are trying to restore that false market, the homebuyer tax credit only delays the day that we have to face the real market.

The long-term fixes to the market are the ones that are taking place on the lending side of the equation with tighening lending standards and honest loan evaluation.  More conservative valuation estimates for homes.  Making loans that will most likely be repaid, not making loans with the intent to refinance on a higher valuation in a few years.

The government throwing credit money around to help home sales will mostly leave us with temporarily inflated home prices and a bigger tax bill to pay in the future.  As if there weren’t plenty of other plans for spending all of our future income.

August 28, 2009 IRS Summertime Tax Tip 2009-23

Although most people won’t be filing their tax returns for several months, the dog days of summer are actually a great time to start planning for the tax filing season by ensuring your records are organized.  Whether you are an individual taxpayer or a business owner, you can avoid headaches at tax time with good records because they will help you remember transactions you made during the year.

Here are a few things the IRS wants you to know about recordkeeping.

Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you are billed for additional tax. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.

Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:

• A home purchase or improvement
• Stocks and other investments
• Individual Retirement Arrangement transactions
• Rental property records

If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

For more information about recordkeeping, check out IRS Publications 552, Recordkeeping for Individuals, 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• IRS Publication 552, Recordkeeping for Individuals (PDF)
• IRS Publication 583, Starting a Business and Keeping Records (PDF)
• IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses (PDF)

This graph demonstrates that while the health care market may as a whole find an equilibrium price, we suffer from few customers for health care.  The main customers for health care are major health insurance companies and the government.

If we were to segment the prices paid by those respective customers into private and government, we would necessarily find that the government pays below the market rate, while the private insurers pay above the market rate, and no one really pays the total market equilibrium.  It is a theoretical price that is somewhere between the two.

I would also anticipate that any small amount of cash customers in the market will be charged even more than the common private insurance rate, which is already above market, due to lack of bargaining power.  I suppose this based on my own billings that start with an artificially high price, and move down to a negotiated rate with the insurance provider.  Without the insurance negotiation, I would be charged the top line price.

Private insurers do not have the same incentives and motivations as their customers and are primarily driven in the health care market by what is needed to succeed in the health insurance market, covered in a forthcoming post.

If the health insurance market were to suffer a huge shift towards government plans, and future government plans also paid significantly below market rates in the health care market, care becomes necessarily rationed because of the gap in supply and demand caused by the price ceiling below the market rate.  If private insurers survive a large shift to government insurance, the disparity between the two prices paid will become greater, further affecting the competitive landscape of the health insurance market.

I have finally gotten around to publishing my income statement from check register for multiple activities in one account in an Open Document Spreadsheet (.ods).  I have made a few improvements from the version I made in Excel, mostly around making the year of the income statement another factor in the equation so that you can record information for more than one year into the check register and pull each year separately by changing the date on the income statement.  I tried to also integrate the pivot table version of the spreadsheet, but I have found that Open Office does not seem to have an equivalent to the getpivotdata() function.  However, the array function seems to work with less latency in Open Office than it did in Excel, except when changing the year on the income statement.

Let me know if you have any comments, questions or suggestions!

Mutiple Activities in One Account

I’ve been watching a lot of the health care debate and town-hall meetings lately, as I believe this is a seminal issue that will define our view of rights vs. privileges in this country for a long time to come.  Now the analogy that I am going to draw is a stretch, but it really is the general direction that we are currently headed.

What if some legislators decided that everyone in America had a right to ‘affordable’ professional tax preparation?  How would this potentially affect the market for tax preparation services?  Furthermore, these same legislators want to tell you how to provide this service and help you define the extent of service each client may need.  At the same time, they will tell you how much this service is worth under the auspice of ‘negotiating the best deal for the customer.’

Would you be excited to be providing services in this type of marketplace?  Would the customers be excited to receive the services that are grudgingly provided by professionals who used to work in a free enterprise?  Would there still be the same incentives to become more effective and efficient and utilize technology or would these improvements be mandated with more legislation and grudgingly implemented?

How do you think that doctors and patients will fare any better than other professionals under the same circumstance?  Are they so much more altruistic that it will work?