Hiring a Tax Preparer

The IRS began the process of regulating all paid tax return preparers in 2011.  A PTIN or Preparer Tax Identification Number is now required by all tax preparers. The government required that all licensed professionals renew their PTIN as well. This includes CPA's, Attorneys and Enrolled Agents (EA's).

Why is this important? Well, up until 2011, anyone could prepare a tax return for pay without any suitability check and without being licensed or regulated.  Only those professionals with a CPA, EA or a lawyer had to adhere to strict regulations.  This is changing by the end of 2013 when all legitimate tax preparers will be required to have an RTRP designation. RTRP stands for Registered Tax Return Preparer and the designation is granted via a competency exam that covers the 1040 series of forms and the Circular 230 covering professional ethics. All legitimate tax preparers will also be required to have the PTIN until the IRS stops issuing them.

Because the new regulations don't take effect until 2014, there will still be those unlicensed and possibly unethical individuals who have not passed any competency exam preparing taxes without knowing or caring about your best interest. The use of a PTIN does not guarantee that the tax preparer you are employing is qualified or licensed. Please use diligence in hiring a tax preparer. Look for the proper designations such as RTRP, EA, CPA or tax attorney. At the very minimum, your tax professional should posses an RTRP designation. This ensures that your tax return preparer is accountable to the IRS when he/she signs your tax return.

Article by: Joan Villazon, CFO

Consumer Debt Solutions, Inc.

http://www.consumerdebtsolutions.net

What is the AMT?

AMT refers to the flat Alternative Minimum Tax devised by the government in 1969 as a tool to keep the wealthiest of taxpayers from avoiding their fair share of tax payments with large deductions and loopholes. The AMT runs parallel to the regular income tax and makes the taxpayer pay the higher of the two taxes. The problem is that the Alternative Minimum Tax was not adjusted for inflation and has begun to affect middle class income earners. Taxpayers falling under the AMT will pay an average $2000 more in taxes than they would without the AMT.  

The taxpayers most at risk for paying the AMT tax rate are usually married with two or more children and own homes located in states with high income taxes such as California, Michigan and New York. The reason these particular taxpayers are affected is because the government will not allow all of the tax deductions to lower their taxable income. The deductions are viewed as excessive. The following items normally trigger the AMT:

• Itemized deductions for state and local taxes, medical expenses, and miscellaneous expenses
• Mortgage interest on home equity debt
• Accelerated depreciation
• Exercising incentive stock options
• Tax-exempt interest from private activity bonds
• Passive income or losses
• Net operating loss deduction
• Foreign tax credits
• Investment expenses

Note that the first two items are common to many taxpayers owning a home. The remaining items refer to investments and self employment income. There is no real income level in which a taxpayer falls under the AMT. Rather, the qualification for AMT is dictated by the percentage of income that deductions amount to. As it currently stands, the AMT tax rate is 26% on the first $175,000 of AMT taxable income and 28% on the remainder of AMT taxable income

There is an exemption to the AMT if taxpayers qualify for the higher tax. Under the tax relief act of 2010 the exemption amounts were increased substantially. If the fiscal cliff is allowed to occur without congressional intervention, the exemption is scheduled to go back to $33,750 for single and head of household taxpayers, $45,000 for married filing jointly and/or qualifying widows or widowers and $22,500 for married people filing separately. What this means is that if a taxpayer qualifies for the AMT, the exemption amounts referred to above are not taxed at the AMT rate. Lower exemption amounts will result in a greater number of taxpayers having to pay the AMT rate.

Article by: Joan Villazon, CFO
Consumer Debt Solutions, Inc.
http://www.consumerdebtsolutions.net

Should Social Security endure another year of cuts?

The Congressional Budget Office (CBO) released its’ report on the state of the Social Security program on October 2, 2012.  In the report, the CBO shows that the Social Security program had more expenditures than tax revenue in 2011, the result of two years of a payroll tax cut included in a negotiated deal on tax policy between President Obama and congressional Republicans.

The shortfall, as stated by trustees of the Social Security program, does not take into account the interest earned by Social Security assets (special issue U.S. Treasury securities). When including accrued interest, income exceeded expenditures by $69 billion. The main concern is the ever increasing number of retiring baby boomers who will burden the system to the point of exceeding tax revenues by 20% in 2030.

Given the findings, the pressure is on to extend the payroll tax cut for an additional year. However, how wise was it to negotiate the cut in the first place? Presumably, the original intention of the tax cut was to boost consumer spending in an effort to stimulate a sluggish economy and increase GDP. If the tax cuts are extended, GDP is forecast to grow by 1%. If the tax cuts are not extended and the fiscal cliff is allowed to occur without congressional action, GDP is forecast to increase by a dismal .5%, theoretically throwing the country into recession. Should the Social Security program tolerate another year of cuts? You do the math.

Article by:

Joan Villazon, C.F.O

Consumer Debt Solutions, Inc.

www.consumerdebtsolutions.net

What is the GDP?

GDP refers to Gross Domestic Product and it is one of the tools that measures the economic health of the nation. There are two approaches to calculating GDP, the income approach and the more common expenditure approach.

The income approach involves adding up:

1. total wages, salaries, and supplementary income plus

2. corporate profits

3. interest and miscellaneous investment income

4. farmers’ income

5. income from non-farm unincorporated businesses

6. indirect taxes minus subsidies and

7. depreciation.

The expenditure approach involves adding up:

1. consumption - private spending on durable and non-durable goods and services

2. investment - business spending on equipment and household spending on new housing

3. government spending - on final goods, public servant salaries and military spending and

4. net exports - total exports minus total imports.

 

 

GDP can also be thought in terms of production. It is the total value of everything produced by all people and companies within the country. The Bureau of Economic Analysis (BEA) reports on Real GDP (GDP adjusted for inflation). Last year, GDP was $15.3 trillion.

Why is GDP important? Economic growth or contraction is measured by the change in GDP from quarter to quarter. This makes GDP important to everyone since it impacts employment and stock prices. Negative growth in GDP is one of the leading indicators for whether the economy is in a recession. The Federal Reserve makes monetary policy decisions surrounding GDP. Following GDP statistics can help prepare consumers for future layoffs if the growth rate is negative or for higher interest rates if the growth rate is increasing.

Joan Villazon

CFO

Consumer Debt Solutions, Inc.
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