Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

  • Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 664 other followers

  • Blog Stats

    • 282,953 hits
  • Posts By Day

    February 2020
    M T W T F S S
    « Dec    
  • Subscribe

  • Special Pages

Why Claiming Social Security ASAP Makes the Most Sense

Posted by taxguru on February 1, 2020

From a recent email I sent to a client:

One of the most common questions I encounter is when is it best to make your initial claim to start drawing your benefits from Social Security (SSA).

When I notice that clients are over 62 and thus eligible to make an early claim for their Social Security benefits, I wonder if they have considered doing that or are waiting based on the promise of higher payments by deferring their initial claim.  There is a lot of misinformation floating around on this topic, which I have a lot of experience with, for ourselves as well as for clients. For several reasons, it has always been my belief that it’s the best strategy to claim SS as soon as possible rather than hold off for what may very likely be much less money several years down the road.

In spite of the big PR push by SSA and some supposed financial wizards, delaying when you officially request to start receiving your benefits is a very unwise move.  There are lots of seminars and fancy software designed to make the supposedly scientific calculations as to when the optimal date would be from a financial perspective.  Those kinds of pure math calculations are bogus for a number of very important and valid reasons.

1. Life Expectancy – The supposedly higher benefits promised for those who wait to make their claim only make financial sense if you are 100% positive that you will live well into your 90s, just to break even with what you would have from an early claim.  Since that kind of guarantee is an impossibility here in the real world, it’s ridiculous to accept that premise as a sure-fire payoff.

2.  No Real Money in Account – Unlike the perception many people have that the SS taxes paid in are sitting safely in a trust account in DC, nothing could be further from the truth. Unlike true non-government retirement accounts, such as IRAs, unreceived SS benefits are not assets that can be left to others after your passing.  A surviving spouse can possibly receive some part of your benefits, but combined with her own benefits, the total will be much lower than what you had been receiving while alive.

3.  Changes In The System – As has been known for a long time, the huge number of Baby Boomers cashing in on their SS is draining SSA’s reserves so quickly that drastic changes are going to be required soon.  As has happened in past years, our Rulers in DC can modify the details of the SS system at any time they choose.  Some of the serious proposals being discussed in DC include:

A.  Raising the benefit eligibility age to 70, 75 or later so that more people will pass away before making their claims.

B.  Reducing the payout of benefits across the board to something like 50% to 80% of the current payment structure.

C.  Means Testing, where people with income and/or net worth over an arbitrary level will receive reduced or zero SS benefits, regardless of what they had paid in during their working lives.

All of these proposed changes are expected to be only applicable for new SS claimants, and not for those who have already begun receiving their SS benefits.  Any reduction in payments to current SS recipients would be curtains for any Congress-critters who vote for that, which they well know.

Bottom line, the only smart play is to take the SS benefits as soon as you are allowed, which is currently at 62.  That’s what Sherry and I have done and what I have been advising clients for decades. The old cliché “A bird in the hand is worth two in the bush” fits perfectly here.

Verify Recorded Earnings – Here’s a tip for you, based on what I had to go through.  Check your official earnings statement with SSA and see if they have included everything you earned in salaries and self employment income over your lifetime.  Unearned (not service) income, such as interest, capital gains, rents and royalties, are not included in the income that counts towards SS benefits. If you see any large amounts missing, start an appeal with them ASAP.  You should still apply for your benefits before your 62nd birthday, even if the earnings history has some gaps.  It took them a year and a half to correct some missing income from my records, but in the meantime I received monthly payments and then a very large retroactive catch-up payment when they finally made the proper adjustments.

Penalty on Too Much Earned Income – As has long been the case, the SS system has a penalty for those people who receive more than a certain amount of earned income while drawing their benefits prior to their full retirement age (FRA), which is 66 years and two months for you.  For 2020, this limit is $18,240.  SS benefits for someone under his/her FRA are reduced by 50% of the earned income over that threshold amount.  While this often scares some people enough to delay their initial benefit claim, this is super easy to avoid if you can adjust your income sources to be unearned kinds of income, such as rents or royalties, instead of W-2 wages.   This is a much easier task to accomplish when you have control over the business you are working in than if you were working for a huge entity.

I wanted to pass this along and hope it gives you some food for thought.  I realize it is very different from the current “conventional wisdom” that is hyping the delay for higher future benefits propaganda. My take is based on real world analysis of things, which includes the fact that all of those delayed calculations are based on living to a very ripe old age.  While that is something we all wish to achieve, we all know of examples where lives have ended all too soon and without any warning.

I have attached a Short summary of the rules for Social_Security_and_Medicare, which you will be automatically enrolled into this year when you turn 65.  I will be as well, and I am not looking forward to doing the research for which Medigap policy to sign up for.

Let me know if you have any questions about any of this.

Posted in social security | Comments Off on Why Claiming Social Security ASAP Makes the Most Sense

IRS Mileage Rates For 2020

Posted by taxguru on December 31, 2019

A few weeks later than has usually been the case, IRS just today released its standard mileage rates for vehicle usage in 2020.  While these rates won’t be used on actual tax returns until more than a year from now, most businesses use the official IRS rates for charging customers and for reimbursing employees; so this is very relevant information for immediate use.

Beginning on January 1, 2020, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 57.5 cents per mile driven for business use, down one half of a cent from the rate for 2019,
  • 17 cents per mile driven for medical or moving purposes, down three cents from the rate for 2019, and
  • 14 cents per mile driven in service of charitable organizations.

IRS Press Release: IRS issues standard mileage rates for 2020

I long ago gave up on ever understanding why IRS and the tax writers in Congress believe that vehicles cost less to operate when used for charity, medical or moving.  Like many aspects of tax law, we just have to accept it as gospel because our Rulers in DC consider themselves to be so much wiser than we “normal” little people are.

Posted in IRS, Vehicles | Comments Off on IRS Mileage Rates For 2020

Liberty Tax Service Busted By Feds

Posted by taxguru on December 12, 2019

Since they cater to a completely different kind of clientele than we work with, I haven’t made much effort to keep up with the latest workings of the big assembly line tax prep services.

While the long held stereotype for H&R Block has been that they don’t work as hard to use all of the tricks of the trade to legally minimize taxes for their clients, I had no idea that the guys who pay people to stand on street corners in Statue of Liberty costumes have had an established corporate culture of preparing fraudulent tax returns, as described in this recent news release from the U.S. Dept of Justice:

Justice Department Announces Settlement With Liberty Tax Service

With this heavy scrutiny on their tax prep practices, we can only guess as to how much longer they can stay in business.

It will also be very interesting to see if any of the other big assembly line tax prep services mention these legal problems that Liberty has been having in their ads.  That market is very competitive, so it is entirely possible that one or more of the other companies will contrast themselves as being free of this kind of scandal and government investigation.



Posted in Fraud, preparers | Comments Off on Liberty Tax Service Busted By Feds

IRS Releases 2020 Inflation Adjustments

Posted by taxguru on November 6, 2019

IRS has done its official calculations of the adjustments that will be required for more than 60 tax provisions in the year 2020.

Their Press Release:  IRS provides tax inflation adjustments for tax year 2020

All of the juicy details are in this 28 page PDF of Revenue Procedure 2019-44

A handy one-page version of the changes compared to previous years from TheTaxBook: 2019-11-13_Inflation_Adjusted_Amounts_for_2020


Gifting Exclusion

The Number One question I constantly receive regarding these IRS inflation adjustments has to do with the annual exclusion from Gift Tax reporting because many people structure their estate plans based on gifting the maximum each year.  Unlike most of the other inflation adjusted provisions, which do increase every year, the amount of the annual Gift Tax exclusion is only allowed to increase when the cumulative inflation factor warrants an increase of a full $1,000.  This does make a lot of sense.  Otherwise, the exclusion amount would be very odd, not round, figures that would be very confusing to keep track of.  For 2020, there will be no increase in the annual Gift Tax exclusion.  It will remain at $15,000 per donor (giver) per donee (recipient).

Posted in inflation, IRS | Comments Off on IRS Releases 2020 Inflation Adjustments

Unfair, But Legal

Posted by taxguru on October 1, 2019

The Tax Code in this country is filled with stupid and unfair laws.  The new $10,000 limit on the deductibility of State And Local Taxes (SALT) on 1040s is just one of the many new idiotic rules included in TCJA.  However, that is the right of our elected officials in DC, to establish such insane limits.  As much as we need States to defend their rights against Federal encroachment, they don’t have a right to overturn Federal laws.

This recent case shot down such an attempt by four East Coast high tax states, whose residents have been hit by the new SALT limit.

Victory for Trump Tax Reform: Federal Court Upholds State, Local Deduction Limits

I would love to see this extremely unfair and ridiculous limit repealed, but unfortunately, it will have to be done by our imperial rulers in DC.

Posted in SALT | Comments Off on Unfair, But Legal

Adjusting Costs For Inflation When Computing Cap Gain Taxes?

Posted by taxguru on July 31, 2019

One of the many extremely unfair aspects of the tax system in this country that I have long railed against is the fact that, when assets that have been owned for several years are sold, the taxable gain is based on the original cost, with no adjustment for the fact that the dollars being recovered are worth much less today than what was paid out those many years ago.  Current year tax rates are literally assessed on inflation.

Over the past three decades, there have been some feeble attempts to remedy this injustice by allowing people to adjust their cost bases by the changes in the cost of living.  I have written and spoken about this in great detail since 1992, when it seemed to have some momentum, only to fizzle out under the wimpy gutless leadership of both Bush presidents.

Some historical references on this issue:

My article from the 1990s on this topic has been on my main website ever since then: Indexing Gains For Inflation

The Wall Street Journal article addressed to Pres. George H.W. Bush from 8/31/92 that got a lot of us excited at the time: An Act of Leadership

A similar press release from the National Taxpayer Union on 1/23/08 addressed to Pres. George W. Bush: Bush Can Bolster Economy by Ordering Inflation-Indexed Cap Gains Taxes, Legal Brief Says

The actual report from August 1992 that is discussed in the above articles, describing the authority that the Treasury Dept. has to define Cost Basis as being inflation adjusted: 96 page PDF


The reason I am bringing this issue back up for discussion is the following very encouraging news from the U.S Senate:

Cruz Pushes Mnuchin for Quick Action on Capital Gains Tax Break

I doubt that I am alone in thinking that things are very different nowadays in terms of the odds of such a change finally being made.  As was illustrated, both Presidents Bush were extremely wimpy and utterly scared to death to do anything that would offend the media and the Dims, such as authorizing anything that would be propagandized by them as a boondoggle for the evil rich at the expense of the poor working slobs.  Both of them were too scared to do the right thing and implement this change in policy to allow the cost basis of capital assets to be adjusted for inflation.  Now that we have someone in the White House who seems to relish taking on the status quo and cares not a whit about offending the Dims and their media cohorts, we should finally have a much better chance of seeing this long overdue change enacted.

Posted in CapGains, inflation | Comments Off on Adjusting Costs For Inflation When Computing Cap Gain Taxes?

Effects of SALT Deduction Limit are Kicking In

Posted by taxguru on June 20, 2019

Back when the 2017 Tax Cuts & Jobs Act (TCJA) was being finalized and signed into law, many people were decrying one of its most ridiculous and unfair provisions, a cap of $10,000 on the Federal Schedule A deduction for State and Local income and property Taxes (SALT).  Rulers in states with higher than average tax rates, such as the Peoples Republic of California (PRC), New York and New Jersey, correctly predicted that this new limitation on the deductibility of SALT would increase the effective pain level of their taxation schemes for their citizens. Some attempted to get around this limit with ridiculous scams to recharacterize the tax payments as charitable contributions.  Those have been shot down; rightfully so.   

Now that many 2018 1040s have been prepared and taxpayers in the high tax States have been able to see the real world cost of this SALT limit, some are finally deciding that they have reached their tolerance level for how much they are willing to be fiscally raped by their State and local rulers, and are relocating to States with lower taxes.  As is the typical mindset for leftist rulers, their response to this exodus of their golden geese will be to increase the tax hits on those who stay behind.  As most clear thinking people can predict, this will just exacerbate the problem, pushing more and more fiscal rape victims beyond their breaking point. 

From FoxBusiness:

New York, California high-tax state exodus just beginning, expert warns

Low-tax states ramp up efforts to recruit unhappy SALT cap victims

Financial firms fleeing high-tax northeast for billionaire-packed Florida county

Taxes drive New Yorkers to Florida by the truckload in just a decade


From NY Post: Wealthy New Yorkers are ditching city’s high taxes for Miami


As proponents of free market economics understand, these high tax states could reduce the outflow of tax paying people, and even encourage higher income people to move in, by lowering their tax rates.  However, this concept flies in the face of their mantra of “fairness,” which in their convoluted minds equates to punishing those they decree as “evil rich” by confiscating and redistributing their wealth.


Double Taxation
Because some people have classified this new limit on SALT deductions as being a form of “Double Taxation,” this would be as good a time as any for me to explain what that means.  In the income tax “game,” with all of its myriad of interconnected components, one of the most critical calculations is that of the actual Taxable Income that will be subjected to the various tax rates. 

One guiding general principle has long been that you are only taxed on the income that you have been able to keep.  For a business, this means net profit, which is the gross revenues minus the allowable deductions incurred in order to earn that income.  That’s fairly straight forward and generally includes most kinds of business expenses, except those explicitly prohibited by our imperial rulers in DC, such as Entertainment expenses and half of business meals.

For individuals, the calculation of taxable income is controlled by the whims of our rulers.  However, they have long allowed reductions from taxable income for many kinds of payments that reduce the amount of money you are keeping for yourself.  Some of the more common of these have included money donated to charities and payments of most kinds of State and Local Taxes (SALT). There has never been a deduction allowed from Federal taxable income for Federal income taxes.  So, to summarize the effect of this new SALT cap, if you paid $80,000 in SALT during the year, as was the case for some of our clients in the PRC, they are now forced to pay Federal income taxes on $70,000 of money that they were not actually allowed to keep because it was remitted to the State and their local Counties. 

Whether that is “fair” or not obviously depends on your definition of “fairness.”   In my opinion, this is not in the least fair.  And in an ironic twist, this new unfair tax on taxes paid really isn’t the fault of the rulers in those high tax states.  It is the product of the lunacy of the GOP Congress Critters who slapped together the crazy quilt called TCJA. I have no idea how involved President Trump was in the design of the details of TCJA, so I don’t know how much of this mess can be blamed on him.        


The Marriage Penalty
With all of the discussions about TCJA, which will never end, considering how insane and convoluted a piece of legislation it was, I haven’t seen anyone mention its effect on the “Marriage Penalty” that is built into the income tax system in our country. The fact that there are several provisions in the tax code that force married couples to pay more income taxes than would be the case if they were able to file as two single people, has been around since well before I started in the tax preparation profession back in 1975.  It has occasionally been addressed and somewhat reduced on a few occasions over the past decades.

However, when I was reviewing the details of TCJA back in December 2017, I couldn’t help but notice that most of the many new complicated limitations and phase-outs had exacerbated the penalty for married couples.  For example, the SALT limit is $10,000 for a couple filing jointly (MFJ) and also $10,000 for a Single taxpayer.  Thus, two single persons could deduct a total of $20,000 in SALT.  As has long been the case, it’s not possible for married couples to get around this by filing separate returns (MFS) because that filing status has several penalties built into it.  In this case, each spouse would only be able to deduct $5,000 of SALT on their 1040.

There are dozens of examples of this marriage penalty in our Tax Code.  Another example that has been around forever is the deductibility of capital losses against other kinds of income.  The limit is $3,000 on an MFJ 1040, $3,000 on a Single 1040 and just $1,500 on an MFS 1040.  TCJA has added a ton of new phase-outs for various credits and deductions that are based on the tax return’s Adjusted Gross Income (AGI).  In many of those cases, the MFJ phase-out limits are well below double the amounts for Single taxpayers.  Two single returns would have a much higher combined AGI limit before losing their eligibility for those credits and deductions than they would have on a MFJ return.  I admit that each of these Marriage Penalty items doesn’t increase the tax bill by a huge amount on its own.  However, all of them combined frequently add up to several thousands of dollars in extra taxes compared to the same income spread across two Single 1040s.

Back in the 1970s, 80, and 90s, I had done a lot of work with clients involving marriages and divorces in order to minimize the marriage penalties on their tax returns.  Before the big change to the Section 121 exclusion of gains on primary residence sales, which widened the exclusion from just $125,000 per person or per married couple to $250,000 per person and $500,000 per married couple, that one issue was the incentive for a lot of tax divorces in order to qualify for double the exclusion, $250,000 per couple versus $125,000.  In recent months, I have actually been contacted by some clients who have already noticed the TCJA increase in their marriage tax penalties and have inquired about the pros and cons of getting divorced for tax saving purposes.  Tax pros should be ready to help their clients analyze this aspect of tax planning because there is slim to zero chance of our rulers in DC doing the right thing and eliminating the Marriage Penalty in the Tax Code.

Posted in Deductions, marriage | Comments Off on Effects of SALT Deduction Limit are Kicking In

Blast From the Past

Posted by taxguru on June 9, 2019

From Episode 34 (Season3, Ep 4) of the Beatles Saturday morning cartoon show. Originally aired on Saturday, October 7, 1967.

For those unfamiliar with this show, the speaking voices were not by the actual Beatles, but the singing voices were theirs.


YouTube blocked me from posting this on my channel there. However, I was able to add some more cover versions of the TaxMan song to my YouTube Playlist.


Posted in Beatles, Music, TaxMan, video | Comments Off on Blast From the Past

Warning to High-Tax Refugees…

Posted by taxguru on May 15, 2019

Just as the antebellum plantation owners didn’t just roll over and allow their slaves to escape without attempting to bring them back, the rulers of the high tax states do often go after their escaping taxpayers for tax money, as in these recent articles about New York.  Making it even more difficult to defend against these kinds of attacks from your previous State’s tax agency is the fact that, as a non-voter in that state, you have no recourse through your elected officials.

New York, California get ‘aggressive’ when residents try to flee high taxes (FoxBusiness)

Tax collectors chase rich New Yorkers moving to low-tax states  (CNBC)

As residents flee New York’s high taxes, state uses intrusive audits to get cash from defectors (FoxNews)



None of these tactics  by New York should be news to listeners of the Rush Limbaugh show.  Rush constantly complains about being audited every year by the New York tax authorities, even though he relocated to Florida in 1996.  He is forced to document by several different means where he was working every single day of the year in order to prove that he didn’t earn any money inside the State of New York. 

Just as with the IRS and Federal tax issues, the burden of proof in State tax disputes lies with the taxpayer.  All it takes is for the IRS or State tax agency to accuse you of owing taxes and you are presumed to be guilty.  The tax agencies do not have to provide any substantiation for their claims.  The accused taxpayers have to come up with the evidence to prove that they don’t owe the money.

This isn’t a new issue in the tax world.  I have been dealing with the matter of the proper tax homes of clients for decades, especially in California, where clients have relocated their tax homes to tax free states, such as Nevada, Washington and Texas. I can also remember discussing the subject in many of my live tax seminars back in the 80s and 90s, with the example of George H. W. Bush.  While he and Barbara spent most of their non-DC time at their estate in Kennebunkport in Maine, they had established Texas as their official tax home so that none of their income was subject to income tax by Maine.  Their Texas residence was a hotel room.  

Avoiding taxes in high-tax states, especially Calif, used to be even harder to do for retired people.  Calif used to take the position that pensions were earned while working inside that state and even if the person retired to another state or country, Calif was entitled to its taxes on all of the pension benefits.  I can recall fighting with FTB over several of those kinds of cases.  Luckily, a law was passed a number of years ago preventing Calif and other tax-greedy states from taxing the retirement benefits of former residents.

As I have always made very clear, I am a huge proponent of people arranging their affairs, including where they live, to minimize the amount of their wealth that is confiscated by the various levels of government.  Relocating to a state with lower or zero taxes is still a very savvy tax savings strategy, especially with the new ridiculous $10,000 annual limit on the Schedule A deduction for State And Local Taxes (SALT) that should be the breaking point for more people to want to escape the clutches of the high tax jurisdictions.

Anyone who is planning to make such a move should definitely work with a professional tax advisor who can help them do it properly in such as way as to be able to defend against their former States’ tax agencies. 


Posted in StateTaxes | Comments Off on Warning to High-Tax Refugees…

Satire is more Accurate & Believable than Fake News

Posted by taxguru on April 20, 2019

We are definitely in strange times, where almost all of the conventional sources of information have abandoned any pretense of objective journalism and become vicious propagandists in support of their Marxist agenda.   Finding practitioners of good old fashioned true objective and skeptical journalism is a tough task.  A good philosophy has long been to consider the source when reading, seeing or hearing some bit of information.  What has been their past record for unbiased accuracy?  As anyone who has followed the mainstream media should realize, that record has been abysmal; which means that we need to start from the assumption that anything they say is wrong, aka Fake News, until proven by reliable unbiased sources to be accurate.   

Even more ironic than the realization that our news media cannot be trusted to give us anything resembling the truth, is the fact that websites that openly proclaim themselves to be satirical are often publishing material that is much more accurate than anything from the mainstream media. 

For example, these recent pieces from the amazingly creative team at The Babylon Bee are much more accurate and believable than anything from the mainstream, aka Drive-By, media.

Poll Finds Most People OK With Raising Taxes On Other People

IRS Still Waiting For Liberals To Voluntarily Mail Their Refund Checks Back

Everyone Who Attended Bernie Sanders’ Town Hall Has Reported Their Wallet Missing

Bernie Sanders Vows To Be More Generous With Your Money In The Future

Posted in BabylonBee, parody | Comments Off on Satire is more Accurate & Believable than Fake News