Author's note: I had
anticipated writing about the tax changes that were included as part of the
final bill addressing the Debt Ceiling crisis. Alas, as of July 31st,
Congress had not yet agreed on what to do. So instead I've updated this
popular article that was first posted in
February, 2007, and will wait
until next month to write about any changes to the tax laws brought on as part
of the solution to the Debt Ceiling crisis.
A dollar today is worth more than a dollar tomorrow.
Known as the time value of money, that's one of the first concepts taught at
any business school program.
If that statement doesn't makes sense to you, don't
overlook the impact of inflation. Even at a low rate of 3%, a dollar
today only buys 97 cents worth of goods and services after one year.
Wait ten years and the buying power of a dollar falls to just 77 cents.
So what does this have to do with taxes? Unless the
amount of a tax break is indexed for inflation, that tax break becomes less
valuable over time. And less valuable tax breaks equate to your paying
During 1986, President Reagan signed the massive Tax
Reform Act of 1986 into law. Even though 25 years have since passed,
some of the tax breaks haven't increased at all over the years. But
how has the dollar fared since then? According to the
calculator available at the website of The Department of Labor, Bureau of Labor Statistics, a basket of goods and
services that would have cost $1,000 in 1986 now costs $2,060 today.
Let's look at some of the tax breaks which haven't
changed over the years:
Mortgage Interest Deduction: The Tax Reform Act of 1986
capped the mortgage interest you can deduct to $1.1 million of mortgage debt
on your primary
residence and a second home, including $100k for equity loans. Since this threshold hasn't increased in
25 years, the maximum allowable inflation-adjusted mortgage interest deduction continues to
fall. To keep pace with
inflation, the mortgage debt ceiling would have to be increased to $2,266,000
Rental Losses: The Tax Reform Act of 1986
also introduced limits to the annual rental losses that could be claimed
each year. Under the existing rules that haven't changed since first being
introduced twenty-five years ago, deductible rental
losses are capped at $25,000. Factor in 25 years of inflation, and the
maximum rental loss of $25,000 falls to an inflation-adjusted $12,150.
Another part of the 1986 Tax Act limits the rental losses you can claim once
your income exceeds $100,000, and then disallows any current year losses
once your income exceeds $150,000. Since these thresholds haven't been
increased for inflation since 1986, the phase-out range of $100,000 to
$150,000 is now equivalent to just $48,500 to $72,800. For this tax
break to have remained equivalent to rental losses allowed in 1986, the
maximum annual rental losses would need to increase to $51,500, and the
phase-out would need to be adjusted to $206k - $309k.
Student Loan Interest: While the Tax
Reform Act of 1986 eliminated the student loan interest deduction, Congress
re-instated this deduction back in 1997. Since 2001, the maximum student loan
interest deduction has been stuck at $2,500. Based on 11 years with no
increases, the $2,500 student loan interest deduction has eroded to be worth only
$1,960 this year.
Capital Losses: Each year, you're allowed
to claim your capital losses against your capital gains, and then can claim
up to $3,000 in additional capital losses to offset you wages and other
income. Any excess losses will be carried forward to your next year's
return. Sounds like a pretty good deal, right? Unfortunately,
the $3,000 capital loss limit hasn't changed for at least 25 years. Due to
inflation, the maximum capital losses you can claim is now worth just
$1,450 in inflation-adjusted dollars. For this tax break to have remained
equivalent to the $3,000 allowed in 1986, the allowable capital losses would
need to jump to $6,180.
Roth Contributions: Yes, the amount you
can contribute to a Roth IRA each year has increased since these tax-free
investment opportunities were first introduced in 1998. The problem is
that the income limitations haven't kept up with inflation during these 14 years. To
qualify to contribute to a Roth IRA in 2011, your income can't exceed $120,000 if
single or $179,000 if married. Over these 14 years, the
thresholds have actually decreased to an inflation-adjusted $86,600 for single
taxpayers and $129,200 for married couples, down from $110,000 for single
individuals and $150,000 for married couples as originally set in 1998.
No Increases = Big Decreases
Since many of your tax breaks are indexed for
inflation, it doesn't make sense that the items listed above haven't
increased at all over the years. But until such time that Congress
decides to bump up these tax breaks, inflation will continue to make a
fibber of anyone serving in the executive or legislative branches who brags
about no new taxes.
Recently, I've had a
handful of clients send me e-mails that include this request
from foreign businesses that they will be working with:
As we have previously informed you, you will be receiving
honorarium for your lectures. To pay you the full amount, we will be needing you
to give us certificates of residence the IRS will issue. This document will be
necessary to avoid double taxation. It may take more than a month to obtain
this document, so we would like you to make your application as soon as
After doing some research, we
determined that the taxpayer is being asked to obtain a Form 6166, Certificate
of Residency, from the IRS. In order to get the IRS to prepare a Form
6166, you need to complete and submit a Form 8802.
Here is information provided by the
IRS about the Certificate of Residency:
Form 6166 - Certification of U.S. Tax Residency
Information on Completing the Form
8802, Application for United States Residency Certification
treaty partners require the IRS to certify that the person claiming treaty
benefits is a resident of the United States for federal tax purposes. The IRS
provides this residency certification on Form 6166, a letter of U.S. residency
Form 6166 is a
letter printed on U.S. Department of Treasury stationery certifying that the
individuals or entities listed are residents of the United States for purposes
of the income tax laws of the United States. You may use this form to claim
income tax treaty benefits and certain other tax benefits in foreign countries.
Please refer to the instructions for Form 8802.
information will also be required in order to obtain certification under the new
procedures. This information is generally set forth in the
Instructions to Form 8802
(PDF). As the IRS gains experience with processing applications using Form 8802,
it may update the Form and Instructions accordingly.
A user fee will
be charged to process all Forms 8802 received with a postmark date on or after
November 1, 2006.
Since it appears that many foreign
business are now looking for you to provide them with a Form 6166, and it takes
at least a month to obtain this form, make sure to submit the Form 8802 with the
IRS as soon as you know that you'll be heading abroad to earn some income. If you need help
completing this form, please let us know.
financial planner asked us recently why our Friends
at Strategies for College created the College Search
GamePLAN teaching platform for college search,
admissions and funding.
time colleague, Tom McGrath had this image in his
library, and it provided a clear answer…
like the grizzly old guy trying desperately to stop
that woodpecker making more and more holes and
sinking the ark with all its passengers. In our case
we are trying to help students and families achieve
a successful college career while preventing them
sinking in an ocean of debt. The reason old Noah’s
having such a hard time swatting that bird is that
it is so fast and attacks so many different areas
(as you can see). And that is what we confront when
providing guidance and planning to families with
college bound students, and to financial planners
who are responsible for helping families protect
college search and financing process creates many
challenges and problems. Here are just some of the
College – Total Cost of Attendance (TCOA)
affordability is an ever increasing challenge.
Our database now shows 99 schools with a total cost
of attendance of $50,000+ per year (and some closer
to 60K). There were 8 schools at that level in 2009.
are a parent of an elementary or middle school
student, what do you think you will be facing a few
years from now? Or do you not want to think about it
(remember the ostrich with its head in the sand?)?
And if you are a professional with clients that have
college bound children, how will you help them
confront this financial challenge? And don’t
believe for a moment that there are many schools
with much lower costs. Today, very few are in the
lower $20,000 range.
Not understanding academic competition
excellent students can find themselves on the
margins of acceptance at many colleges, and not just
because of fierce academic competition. The odds are
stacked against them. Take a look at the
Yale, certainly three of the most highly
selective universities announced that they received
a combined 89,345 applications for a paltry 4,286
“open” seats, which implies that only 4.7% of those
applicants will enter the Class of 2015.
pretty skimpy (it would seem) but, in reality, even
this number is inflated. The fact is
that after those schools have accepted their legacy
students, international, minority, geographic,
athletes, musicians, etc., there are probably fewer
than the 4,286 “real” open seats available for the
“average” qualified student.
don’t think for a second that this process is
limited to those three icons. Many excellent
students are limiting their opportunities by
applying for early admission and/or applying only to
their “dream school” (or just going through the
motions with regard to back-up applications) …
result: Many experience the deep disappointment of
rejection or being waitlisted (which is pretty close
to rejection). There are many excellent “best
fit” colleges out there. You just have to know how
to search and identify them.
Flawed college search
Following on from the last topic …
many students are choosing a college before
understanding their financial options. This is a
recipe for disaster – putting families in situations
where financial offers from some highly visible
colleges, make attending their student’s “Dream
School” a financial nightmare. The myth of “Choose
first, pay later” is just that, a myth. It’s
imperative for families to learn what their
financial options are. Make sure you have a
sound financial strategy in place before beginning
the college search.
College drop outs/transfers/late graduation
all heard this proverb: “He who fails to plan, plans
According to which study you read, first year
college drop out/transfer rates hover around the
28-33% mark or even higher. Average graduation
rates range from 5 to 6 years (for a four year
degree). With annual college costs ranging
from $25,000 to $50,000+, the financial impact is
leads to transfers, drop outs and late graduation?
range of factors come into play here. But the core
lies in lack of planning and lack of awareness of
how the college admissions process works. The
frequent result is typically a large financial hole
filled with monetary and personal “costs” as well as
a number of non-transferable credits left “on the
student loan debt in the U.S. is expected to reach
$1 trillion in 2011. That’s more than the nation’s
total credit-card debt.
college graduates of today, who used loans to pay
for college, will graduate with an average of nearly
$24,000 in federal direct loans. That’s not even
touching upon those who got into the private loan
market or parental debt. See the scary trends
compiled by the National Center for Education
Not understanding the college search process
only scratching the surface here. When we
drill down deeper into the process, there are many
challenges, obstacles and distractions that derail
the quest for the right school.
thought out planning for college with cost, debt,
“best fit”, academics and timely graduation is
essential. And NOW is the time to start!
Returns on extension are no longer due 8/15th. For
2011, you have until 10/17 to file returns put on
If you participated in the NIH LRP during 2010, you only
have until 9/30/11 to submit the paperwork to get back any additional taxes
owed to you by the NIH. One of the
MDTAXES CPAs can help you with this paperwork
Consider rolling your old retirement accounts held at a
previous employer into your current employer's 401(k) or
403(b) plan to consolidate your finances
If your income will be too high for 2011 to contribute to a
Roth IRA this year, consider making a non-deductible
contribution to an IRA to convert to a Roth before
For 2010, the standard deduction for a single individual is $5,700 and
for a married couple is $11,400. A person will benefit by itemizing once
allowable deductions exceed the applicable standard deduction. Itemized
deductions include state and local income taxes (or sales taxes), real estate
taxes, mortgage interest, charitable contributions, and unreimbursed employee
For 2010, the personal exemption is $3,650.
Individuals will claim a personal deduction for themselves, their spouse, and
The maximum earnings subject tosocial security taxes is $106,800
for 2010 and 2011.
The standard mileage rateis $.51 per business mile as of
January 1, 2011, increasing to $.555 per mile as of July 1, 2011.
The maximum annual contribution into a 401(k) plan or a
403(b) plan is $16,500 in 2010 and 2011. And if you'll be 50 or
older by December 31st, you can contribute an extra $5,500 into your 401(k) or
403(b) account that year.
The maximum annual contribution to your IRA is $5,000 for 2011. And if you turn 50 by December 31st, you can contribute an extra
$1,000 that year. You have until April 15, 2012 to make your 2011 IRA
In a shocking development, the IRS recently
announced that they will be honoring the FICA tax refunds submitted by
residency programs and individual doctors. The catch is that only FICA
taxes paid prior to 4/1/05 qualify.