Tax Cut Has Little Impact On The Economy In January

reprinted from Associated Press

WASHINGTON – A Social Security tax cut that economists say should help the economy this year is off to a slow start. Consumers increased their spending last month at the weakest pace since June, even with the extra money in their paychecks.

Some people may be using the additional money to pay down holiday credit card bills or higher gas prices, analysts said. And harsh weather may have deterred some people from shopping in January.

Personal finance experts say the real test of the tax cuts impact will come this spring, when the Easter holiday sales begin.

Still, consumers increased spending by only 0.2 percent in January, the smallest gain since June, the Commerce Department said Monday. At the same time, their incomes rose 1 percent — the biggest jump in nearly two years and a reflection of the tax cut.

The increased income is part of an additional $110 billion that economists say workers will receive this year from the cut in their Social Security taxes. Most families will see about $1,000 to $2,000 in extra income. Households with two high-income earners could receive up to $4,000 more.

In December, when President Barack Obama signed the tax cut as part of a broader tax package, economists predicted Americans would spend about two-thirds of the extra money and save the remaining one-third. Higher-income taxpayers were expected to save a little more; lower-income households would spend a bit more.

Economists said the extra spending would help boost growth and could lead businesses to hire more. Still, all that was before tensions in the Middle East sent oil prices spiking. And a surge in global commodity prices is now expected to push U.S. food prices up slightly this year, too.

Many analysts say such inflation could siphon off most of the benefit of the tax cut. Several scaled back expectations for growth Monday after seeing January's disappointing report.

"It doesn't look like the economy is going to get any strong net boost from the Social Security tax cut," said Paul Dales, senior economist at Capital Economics. "It will just go to pay higher prices on food and energy."

Consumer spending was growing at the fastest pace in four years in the final three months of 2010, helping to support the overall economy. The weak showing in January raised questions about how strong consumer spending, which accounts for 70 percent of economic activity, will be this year.

The modest 0.2 percent rise in spending was even weaker when inflation was taken into account. After adjusting for price changes — particularly a steep rise in energy costs — spending actually dipped 0.1 percent in January. That was the poorest showing since September 2009.

One factor that the report doesn't take into account is how much was spent on reducing debt. Households may have boosted their spending in December — after hearing about the pending tax cut — and spent the extra money in January to pay credit card bills.

Marshal Cohen, chief industry analyst for a N.Y.-based consumer market research firm, cautioned that most people might not have spent a lot because they didn't see much change in their income after only one month.

"One or two percent in your paycheck is not going to change the way you live," said Cohen, of the NPD Group Inc. in Port Washington. "It'll make living easier. What it will do is keep you spending the way you've been spending, so it will keep the status quo."

Over time, however, as consumers have the opportunity to pay down credit card and other debt, they'll feel more like spending again, Cohen said.

That could bode well for retailers, who are now looking for shoppers to open up for spring.

"I think the next big event we need to watch for is Easter sales," said Arun Jain, professor of marketing research at the University at Buffalo School of Management. "That will reflect what they want to buy for spring. That to me will tell us how confident they are."

An early sign of that would be an increase in clothing sales at discount department stores such as Sears, J.C. Penney, and Target, Jain said.

J.C. Penney launched its spring advertising during Sunday night's Academy Awards show, buying seven 30-second commercials focusing on its "We make it affordable, you make it yours" clothing campaign.

"When people get these types of paycheck boosts from the government, typically the first area people will spend on is essentials for the family," Jain said.

Job growth would also boost spending.

Sal Guatieri, senior economist at BMO Capital Markets, predicted the government will report Friday that the economy added around 200,000 jobs in February, much better than the 36,000 jobs created in January.

Still, the weak January spending data caused him to trim his forecast for overall economic growth for the current quarter from a rate of 3.5 percent down to 3.2 percent.

He said the January numbers suggest many families are still stretched financially.

"The key going forward will be job growth," he said. "If we start to see jobs growing in a stronger fashion, that will support the consumer in the face of rising gasoline and food costs."

www.mbtaxpro.com

Erin Murphy

David Bixel

MB Tax Pro

Portland, OR 97210

What To Do If You Are Missing A W-2

Before you file your 2010 tax return, you should make sure you have all the needed documents. If you worked as an employee for someone else at any time during 2010, then those necessary documents include all your Forms W-2. You should receive a Form W-2, Wage and Tax Statement, from each of your employers. Employers had until January 31, 2011 to send you a 2010 Form W-2 earnings statement.

If you did not receive all your Forms W-2, follow these four steps:

1. Contact your employer. If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

2. Contact the IRS. If you still do not receive your W-2 and it is after February 14th, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, city and state, including zip code, Social Security number, phone number and have the following information:

• Employer’s name, address, city and state, including zip code and phone number
• Dates of employment
• An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2010. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return. Even if you do not receive all your W-2 statements, you still must file your tax return or request an extension to file by April 18, 2011. If you do not receive your Form W-2 by the due date, and you have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating your income and withholding taxes as accurately as possible. Be aware that there may be a delay in any refund due while the information is verified.

4. File a Form 1040X. On occasion, you may receive your missing W-2 after you filed your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return. Form 4852, Form 1040X, and instructions are available at the official IRS website at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

If you have any questions in regard to these requirements, consult your professional tax advisor or tax preparer. Please also feel free to share this article with others that might benefit from this information.

www.mbtaxpro.com

Erin Murphy

David Bixel

MB Tax Pro

Portland, OR 97210

Tax Deductions With Some of the Biggest Payouts

reprinted from Yahoo! Finance

A $5,000 or $6,000 deduction for IRA contributions, a $4,000 deduction for college tuition and fees, a $1,000 child tax credit — these are hefty tax breaks for which a taxpayer may understandably yearn. But they’re small beans when compared with the tens of thousands of dollars in savings some reap through deductions and credits.

How about taking a $50,000 deduction for state and local taxes paid, a $37,000 deduction for medical expenses, a $28,000 deduction for mortgage interest, or a $21,000 deduction for charitable contributions?

Those are the average amounts claimed for each of those deductions in 2008 by taxpayers with adjusted gross income higher than $250,000, the group with the highest average claim for each of those deductions that year, said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based tax publisher and unit of Wolters Kluwer. (The average dollar amounts are rounded, and count only those taxpayers who claimed that particular deduction.)

Some tax breaks “basically don’t have any limit,” Luscombe said. For example, to take the medical-expense deduction your expenses must exceed 7.5% of your adjusted gross income.

“That puts a floor on it, but as far as a top number, the more medical expenses you have, the higher the deduction,” Luscombe said. (Some deductions discussed here are restricted or disallowed under the alternative minimum tax.)

For taxpayers with adjusted gross income of $30,000 to $50,000 in 2008, the average deduction for state and local taxes was about $3,800; for medical expenses, $6,000; mortgage interest, $9,000; charitable contributions, $2,200, according to CCH.

For taxpayers with AGI of $50,000 to $100,000, the average deduction for state and local taxes was about $6,000; medical expenses, $7,000; mortgage interest, $10,600; charitable contributions, $2,700.

The mortgage-interest deduction is limited by the value of your home — generally speaking, you can claim it for interest paid on mortgage indebtedness up to $1 million, plus another $100,000 of home-equity debt. See this IRS page for more on the mortgage-interest deduction.

Meanwhile, some credits don’t have an upper limit, Luscombe said. The residential energy-efficient property credit for installing solar, wind or geothermal systems is worth 30% of the amount spent — whatever that amount is.

But don’t confuse that credit with the one for home energy-efficient upgrades, such as new windows and doors. That credit was worth up to $1,500 in 2010 but lawmakers reduced it for 2011, in the Tax Relief Act passed in December.

Other credits have a top limit, but it’s hefty: The adoption tax credit is worth up to $13,170 in 2010, up from $12,150, and it’s now refundable. Read more about the adoption credit on IRS.gov.

Almost Half of Taxpayers Don’t Owe Federal Income Tax

Taxpayers may enjoy the bounty, but these deductions and credits — plus other tax breaks that never show up on our returns, including those we get through 401(k), Roth IRA and 529 plans — all add up to a lot of money the U.S. government is not collecting.

While the definition of what should be counted as a so-called “tax expenditure” varies, “by any measure, the revenue losses from tax expenditures are large,” according to a Tax Policy Center report, co-authored by Eric Toder.

“Adding up all the tax expenditure estimates in the 2010 federal budget, we calculate a sum of about $1.1 trillion in fiscal year 2012, or about 6.7% of projected gross domestic product.” Read the report.

That’s a lot of tax breaks.

“Our tax system is such that for 2010 we estimate 45% of American households will pay no income tax, because of the combination of credits and deductions and so forth,” said Roberton Williams, a senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution in Washington.

And that includes high-income people, he said. For instance, recent IRS statistics showed that about 2,000 people with income of $1 million or more don’t pay income tax, Williams said. “A part of it is that money is earned overseas and is subject to foreign taxes; a part of it is they have a lot of money in tax-exempt bonds so they don’t pay tax on that income,” he said.

“For one reason or another these very, very wealthy people have set up their financial situation in such a way that they avoid U.S. federal income taxes entirely.”

Keep in mind that some of the largest tax expenditures don’t show up on your tax return. For instance, the value of employer-provided health insurance isn’t counted as income for most taxpayers.

Few Deductions Available to Some Taxpayers

Still, for his clients — most of whom are high-net-worth retirees who’ve paid off their home mortgage — deductions can be hard to tap, said Rial Moulton, a certified financial planner and certified public accountant in Spokane, Wash.

For a married couple filing jointly, the standard deduction in 2010 is $11,400, and it’s $5,700 for a single filer. “To think about itemizing, you have to have [deductions that total] more than that,” Moulton said. “For most people in our area, if you have your house paid off, it’s hard to get above that number unless you have significant health-care costs.”

Meanwhile, for taxpayers at a lower income level, one of the most valuable deductions is the earned income tax credit, worth as much as $5,666 for those with three qualifying children in 2010. For a family with three children to be eligible, AGI can’t exceed $43,352 for head-of-household filers and $48,362 for married-filing-jointly filers. Read this IRS page for more information.

There’s also a saver’s credit, worth up to $2,000 for married-filing-jointly couples and up to $1,000 for single filers, but that maximum credit phases out as income rises. And the maximum adjusted-gross-income limit to get any of the credit is $55,500 for married-filing-jointly filers and $27,750 for single filers. See this IRS page for more information.

Erin Murphy

David Bixel

MB Tax Pro

Portland, OR 97210

www.mbtaxpro.com

Is My Income Taxable or Not Taxable? That is the Question...

reprinted from Shadian Law

As tax filing season quickly approaches, many taxpayers will wrestle with the question of whether certain income they have received is taxable or non-taxable. Generally, most income you receive is considered taxable, but there are situations when certain types of income are partially taxed or not taxed at all.

To help taxpayers understand the differences between taxable and non-taxable income, following are some common examples of items not included as taxable income:

• Adoption Expense Reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers’ compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

• Life Insurance. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.
• Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
• Non-cash Income. Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

All other items—including income such as wages, salaries, tips and unemployment compensation—are fully taxable and must be included in your income unless it is specifically excluded by law. These examples are not all-inclusive. Special rules also exist for income received by certain members of the clergy or members of religious orders, and certain employees of foreign employers or the military, or those who are volunteers.

For more information, visit our website at www.mbtaxpro.com, or see Publication 525, Taxable and Nontaxable Income, which can be obtained at the official IRS website at www.irs.gov. Please also forward this article to others that may benefit from this information.

Erin Murphy

David Bixel

MB Tax Professionals

Portland, OR 97210

www.mbtaxpro.com

5 Credit Myths That Lead To Disaster

reprinted from Forbes.com

The media and the credit reporting companies have done an excellent job promoting the notion of having a good credit score, almost too good a job because people seem to think that their credit score is the most important aspect of their financial life. Getting out of debt is secondary. Saving for retirement is secondary. It is almost as if when you have that perfect credit score of 720 or higher, then your life will suddenly become perfect. The advertising is working because even though everyone in the U.S. can order their credit report for free, every year millions of people are going to services that cost them $36 a year to get their "free" report.

[Click here to check current credit card offers, including rates and terms.]

People are obsessed with getting and keeping an excellent credit score. We hear these statements regularly on our financial helpline:

A caller who can't pay their monthly bills because their debt payments are so high says, "I can't go to credit counseling because I heard it will damage my credit score."

A caller who is not saving in their 401(k) and missing out on the company match says, "I don't want to pay off my credit cards. I am keeping a balance to help my credit score."

This makes no financial sense. People aren't going to seek help getting out of debt — lowering the interest rate and possibly the balance owed — because it will hurt their credit score? How is this helpful? If people don't get their debt under control, they may never retire. We'll have a nation of people working into their 80's with no savings but they can all come together and brag about their credit scores.

[See 10 Expenses to Cut to Help Pay Off Credit Card Debt]

Don't even get me started with the notion that carrying a balance on a credit card will somehow help the score. First of all it is wrong and secondly, people are actually harming themselves financially — thinking that paying high interest on credit cards instead of paying them off is a good financial strategy.

Don't get me wrong, having a good credit score has value; it can save on the cost of borrowing money so it is helpful to have the best score possible. Just make sure you are basing your credit strategy on sound information — not common myths that get you nowhere.

Let's examine some of the biggest credit myths that can lead to disaster:

Assuming if you pay your bills on time, you don't have to do anything else.

Paying your bills on time accounts for about 35% of your credit score but there is another 65% which includes amount owed (30%), length of credit history (15%), new credit (10%) and type of credit (10%). Consider all of the other factors.

Also remember that there may be errors on your credit report so if you don't check it, you'll never know and your score will be affected. According to Deborah McNaughton, author of The Get Out of Debt Kit, 80% of credit reports have errors (as cited by Bankrate.com). Many of the erroneous reports had missing information that may boost a score, such as missing a revolving account in good standing, or miscellaneous incorrect information such as an incorrect birthday.

Check your credit report. You can receive a free report from each of the three credit reporting agencies once a year at www.annualcreditreport.com. Credit reports are unique to Social Security numbers, so if you are married, you may want to stagger your requests with your spouse every six months. You can also request your actual score for a onetime fee (which is less than $15 through most credit bureaus). Most credit monitoring services will provide your score for free when you sign up for their service.

Assuming when you divorce, your accounts automatically divorce with you. They don't. If you have a joint account and one of the parties on the account is late, you are both late. With some types of loans, such as a mortgage or a car loan, the lender may not accept a letter asking you to be removed from the account after a divorce even if that property is going to your ex-spouse. They will need to qualify for the loan on their own before you will be removed from the account. Take this into consideration because if they don't refinance, and then have late payments, you may find yourself with some credit issues. When possible, close all joint accounts and refinance any debt separately. If it is not possible, maintain some type of control, whether it is an escrow account or at least access to information to make sure the accounts are paid in a timely manner. Don't assume. Also see the last point about closing accounts.

Avoiding consumer credit counseling because it will hurt your credit score. For someone with serious debt, working with a not-for-profit credit counseling agency to develop a debt reduction plan and get out of debt permanently should take priority over credit scores. Credit counselors will work with your creditors to try and reduce your monthly payments, or settle your debt altogether. Debt settlement doesn't affect scores as badly as you would think. In fact, many people don't realize that late payments affect scores more than a debt settlement. Here is an example of how a debt settlement can affect credit scores, and how that compares to late payments.

A late payment hurts your score more than a debt settlement if your score is in the 680 range; it only significantly pulls it down if you are in the 780 range. Let's be honest here, people ready for credit counseling probably don't have the highest scores anyways, and the bottom line is credit scores are fluid — they can be rebuilt. According to Credit.com, a debt write off can stay on your credit report from seven to ten years, but as the information ages, so does its negative impact.

Making late payments aren't that big a deal. According to FICO, a 30-day late payment can affect your score by as much as 110 points. Late payments can have a huge impact on your credit score causing it to drop like a stone. This is one disaster that is relatively easy to avoid. Simply set up all of your accounts with an automated minimum payment schedule from your checking account. This way you'll never miss a payment. You can always pay additional amounts through online banking. Set yourself up for success with this one because it can be an easy one to miss and makes a significant impact.

[See the Components that Make Up a FICO Credit Score]

Closing accounts to clean up your credit. Closing an account may be a good idea if you only opened the account to get a discount on merchandise or have too many credit cards which is causing confusion, but it won't clean up your credit or help your score. In fact, it can hurt your score when the account you close has a long credit history — especially a good one. Your credit history accounts for 15% of your score, so in making decisions which cards to keep and which ones to close, keep in mind how long you've had the account open and close the most recent ones first.

Are credit scores important? Yes, but they are not the "be all and end all." Now that we've dispelled some of the biggest myths, consider what the "be all and end all" is for you. What are your biggest financial challenges and concerns? Our latest research shows that less than 18% of employees feel they are on track for retirement. Are you part of the 82% that isn't? Do you have a personal net worth statement and is it going in the right direction? The point is when you focus on the important financial issues, you have a chance to meet your financial goals. Clean up your credit if you have to, and do your best to keep a good credit score, but let's not go overboard and lose sight of everything for just one number.

[See the Millionaire's Retirement Plan]

Erin Murphy

David Bixel

MB Tax Pro

Portland, OR 97210

Oregon Economy Marches Upward

December marked another month of positive economic gains in Oregon, with improvements in every major category tracked by the University of Oregon Index of Economic Indicators.

The index rose 2.7 percent in December to 90.5, the third consecutive monthly gain. The index has a benchmark of 100 set in 1997. Compared to six months ago, the index is up 3.5 percent.

Among the positive month-over-month gains in December:

• Initial unemployment claims fell to 8,237 — their lowest level since April 2008 — from 10,042.
• Employment services payrolls — largely temporary-help workers — were up to 31,452 from 30,499, a signal that firms are looking to boost hiring as the economy improves.
• Residential building permits rose to 709 from 564.
• Non-defense, non-aircraft capital goods orders rose to 41,228 from 40,730.
• Consumer confidence was up to 70.2 from 68.8.
• The interest rate spread between 10-year treasury bonds and the federal funds rate widened to 3.11 from 2.57, a signal of investor confidence in the U.S. economy.

December's strong showing combined with positive trends for national economic indicators has alleviated concerns of a double-dip recession, according to the index. And the gains in new orders suggest that business investment spending will accelerate this year.

Read more: Oregon economy marches upward | Portland Business Journal

MB Tax Pro

David Bixel

Erin Murphy

Portland Oregon

97210

Kitzhaber lures filmmakers to Oregon

Gov. John Kitzhaber wants to increase tax breaks for film and television production by $10 million a year.

The recent success of the Portlandia and Leverage television shows build on the state's colorful history of hits and flops, from The Goonies and Drugstore Cowboy to The Hunted and Animal House.

With some states talking about cutting their tax breaks for Hollywood productions, "There are quite a few movie operators and directors looking for a place to land and we thought we might have them come here," Kitzhaber said.

In the scheme of the state's $14.7 billion general fund budget, the tax break for filmmakers is pretty small, about $7.5 million a year currently. Supporters say it has helped persuade filmmakers to spend more than $178 million on projects in Oregon over the last four years.

Read more at OregonLive.com.

Erin Murphy

David Bixel

MB Tax Pro

Portland Oregon 97210

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