For Every Action, There’s A Reaction

I was skimming over the dead tree version of the AARP’s April Bulletin, and there is a picture of an Oklahoma couple who are whining that they can’t afford to replace their (what appears to be relatively new) pickup because the interest rate on their CDs is only 2.6% instead of the 8% they had been previously earning.

This is just one example of how what is great for most people (low interest rates), isn’t as well received by others. Life isn’t always a zero sum game; but it often resembles one. Take low oil prices. Great for users; but bad for producers. You just can’t please all of the people all of the time.

KMK

Deducting Diet Costs

I could literally spend all of my time pointing out errors in how the media report tax and financial stories. I have already seen & heard numerous mistakes involving today’s “big news” about IRS allowing a deduction for diet costs by overweight people. I was listening to a radio newscast and the airhead newsreader actually went through the entire story calling them the “International Revenue Service.” I kept waiting for her or anyone else to catch her mistake; but no such luck.

The headline for this story on FoxNews.com actually says “Slim Down, Fatten Wallets.” The article itself is quite accurate. My problem is with the completely misleading headline, which is all that most people will read, as they browse the stories. It implies that you can actually earn money by spending money on diet programs. This is so wrong, on at least two counts.

First, no tax deduction of any kind actually makes anyone money. A deduction only reduces taxes by the person’s tax rate. For example, a normal $1,000 deduction for someone in the 30% tax bracket will reduce that person’s income tax by $300. That means s/he will still be out of pocket $700.

However, medical deductions are not normal and in fact aren’t even available to most people. For decades, our rulers in DC have rigged the tax code so that very few people qualify to deduct any medical costs. In order to claim any medical costs on an individual income tax return, s/he must itemize on Schedule A. Even then, only the medical expenses that exceed 7.5% of AGI (adjusted gross income) are counted. As I tell my clients who moan about not being able to receive any actual medical expense deduction: “you really don’t want to be that sick.”

One way to enable a deduction for 100% of all medical costs is to set up a C corporation and establish a full medical expense plan for all employees. This doesn’t work for S corporations because tax law does not allow such lucrative tax free benefits for anyone who owns 2% or more of the corporate stock. This is just one of many pitfalls to using an S instead of a C.

KMK

LLP Protection

I’m frequently asked why my firm isn’t set up as an LLP or LLC, as are all of the Big 5 (soon to be 4) CPA firms. If they are doing that, it must be the way to go. It’s a simple apples & oranges scenario. A world-wide organization with literally thousands of partners is a completely different entity than a small local practice. Without a special form of liability protection, the actions of one partner could actually cause every partner to lose their life savings and everything they own. This happened in the early 1980s, when lawsuits from crumbling savings & loans and real estate projects destroyed several CPA firms and the personal finances of their partners. LLPs and LLCs were created and became popular after that.

With Arthur Andersen imploding, the partners are going to lose their capital in the firm. However, they will also get the chance to see if the LLP structure will be able to do its job and protect their other assets from seizure. Today’s Wall Street Journal has a good explanation of this situation.

KMK

Politics of Resentment

If this survey is accurate (which I seriously doubt), in which 80% of people say they aren’t happy with the recent tax cuts because other people benefited more than they do, it’s just another of many indicators of how effective and pervasive the politics of envy and resentment are in this country. People are literally trained to hate successful people because they are taught that every dime a rich person has is a dime out of their pocket. Our socialist rulers in DC and their Fellow Travelers in the media have done an excellent job brainwashing America to consider it horrible for Washington to be deprived of a single cent that otherwise ends up in the pocket of the evil rich. It’s sickening.

KMK