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August 2011


by Andrew D. Schwartz, CPA

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 higher taxes.

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 in 2011.

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.



by Andrew D. Schwartz, CPA

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 possible. 

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

Many U.S. 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 certification.

The Internal Revenue Service (IRS) procedure for requesting a certificate of residency (Form 6166) from the Philadelphia Accounts Management Center is the submission of Form 8802, Application for United States Residency Certification (PDF). Use of the Form 8802 is mandatory.

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.

Some additional 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.

User Fee

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.



by Our Friends At Strategies for College

A 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.

Our long time colleague, Tom McGrath had this image in his library, and it provided a clear answer…

We are 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 their assets.

The college search and financing process creates many challenges and problems. Here are just some of the main ones:

College – Total Cost of Attendance (TCOA)

College 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.

If you 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

Even 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 following example:

Harvard, Princeton and 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.

4.7% is 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.

And 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) …

The 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 …

Too 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

We have all heard this proverb: “He who fails to plan, plans to fail”

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 immense.

What leads to transfers, drop outs and late graduation?

A whole 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 table.”

College Debt

Total 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.

The 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 Statistics here.

Not understanding the college search process

We are 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.

Clearly thought out planning for college with cost, debt, “best fit”, academics and timely graduation is essential. And NOW is the time to start!

Our College Search GamePLAN program guides families (and professionals that have clients with college bound students) through this process in detail, step by step.  We offer a 7-day free trial so you can give it a test drive. Just click here.




Income Taxes

Saving and Investing





  • Returns on extension are no longer due 8/15th.  For 2011, you have until 10/17 to file returns put on extension
  • 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 December 31st.


2010 & 2011 TAX FACTS

  • 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 business expenses.
  • For 2010, the personal exemption is $3,650. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $106,800 for 2010 and 2011.
  • The standard mileage rate is $.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 contributions. 


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This Month's Topics

Inflation - The Tax Code's Secret Weapon

Traveling Abroad To Earn Some Extra Income?  If So, The IRS Now Has A New Form For That.

Strategies For College On MDTAXES.Com

The FICA Refund for Medical Residents 

2010 & 2011 Tax Facts

Tax and Financial Planning Calendar for August 2011


Browse our index of previous months' newsletter topics

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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.

For more information, go to our April 2010 Newsletter, our January 2009 Newsletter, or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.

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