Tax Tips for Teachers

With teachers headed back to school, we thought that it might be a good time to share some teacher-specific tax tips:

As an educator (defined as: teachers, counselors, principals, or aides who work at least 900 hours during a school year)  in the K-12 capacity, you can automatically deduct up to $250 that you spend for your classrooms with no limitation on your Federal return.

In addition, you can take a $100 credit on your Indiana return.

Of course, your need to actually spend your own money and have receipts to back it up in order to get this or any deduction.

If you spend quite a bit more than $250 for your classroom, then your might get an additional deduction if your itemize your tax return.  What is “quite a bit”?  “Quite a bit” is generally $1,000 to $2,000 depending on your situation and the income of your family.  That seems like alot of money, but once you consider that work-related mileage (at 54 cents/mile) and the work-related percentage of your cell phone bills count, then you might be closer than you think.  Keep track of all of your mileage related to purchasing supplies, going to an after-school activity that is away from your school, driving to a student’s home, etc.  The only miles that don’t count are the miles related to commuting back and forth from your home to your school.

Coaching a sport or leading an after-school activity can also create deductions.  You should track your mileage to and from the  location where the activities are held (…if the activities are not held at the same school where you regularly teach) as well as any equipment or supplies that you purchase for the activity.

Once you get to the end of the year, add up all of those miles and receipts and see where you stand.  You might get some benefit from all of that recordkeeping!

An extra $70,000 from Social Security

Currently, a worker gets a “full” Social Security retirement benefit at age 66.  They can start collecting at age 62 and receive 75% of their full monthly benefit each month or wait until age 70 and get about 132% of their full monthly benefit each month.

About half of Americans start collecting Social Security benefits as soon as they are allowed to at age 62.  Their decision to collect “early” is usually based to their need to access the funds to meet living needs.

For those Americans that don’t “need the money” to survive, there are several seldom-discussed planning strategies available.  They are easy enough to implement once you figure out which strategy is the right one.

Want an example?  Husband and wife are the same age and retire at the same time.  Reflexively, they both start collecting Social Security benefits at age 66 because “that is when they are supposed to”.  If they had put some thought into it, they would have learned that they could pull $70,000 more out of social security in their lifetimes if wife would have started to collect at age 62, husband would have collected a spousal benefit from age 66 to age 70, and then collect his full benefit at age 70.  They actually start to get money at age 62 and end up getting more than if they would have waited until age 66…wonderful!

Wonderful, but complicated.  Fortunately, we do this everyday and  can look at a couple’s earnings, age, and expected longetivity, calculate 14 different scenarios and let you know which one makes the most sense for you.  Usually the standard answer of waiting until age 66 to collect is not the best one for you.

Are you or your parents approaching 60 years of age…now is the time to talk.

Amazon’s Sales Tax War

Fortune magazine had a wonderful article this month about how has managed to avoid collecting state sales tax for so long.

Before the story, first some background:  A business is required to collect sales tax from customers in states where the business has a physical presence.  If a business in Indiana sells a widget to a customer, in lets say, California, the business will only need to collect and remit to California the sales tax on that sale if the business has employees, or a location in California.  Not surprisingly, most small businesses do not have a physical presence outside of their home state and so do not collect sales tax on sales made to customers in all of the other 49 states.

Starting out, only had a physical presence in their home state of Washington.  As they added distribution centers all over the country and relied on employees in the various states to do work for them, one would assume that the company was establishing a physical presence in the various states, and thus, would need to start collecting sales tax on sales to those various states.

But in reality, largeley avoided collecting tax outside of Washington by holding those distribution centers and employees in entities that were separate from the entity.  Thus, they argued, (the company that made the sale) itself did not have a physical presence in those states…the entity that held the distribution center had a physical presence, but that is OK because the distribution center doesn’t make sales and so does not need to collect sales tax anyway.  By following this structure, avoided a physical presence in the states and maintained that they did not need to collect sales tax on sales outside of Washington.

This legal maneuvering has been around for decades and helps businesses avoid collecting or paying all kinds of taxes.  Back when I worked for a large accounting firm with large clients, strategies like this were used every time the tax savings justified the extra hassle and professional fees needed to maintain these structures.  We created entities and legally shifted profit and sales to avoid Federal tax, foreign tax, sales tax, property tax, state income tax, employment taxes, etc.

How does this relate to your small business?

More and more businesses based in Indiana are selling products on the web.  This means that their employees are sitting at desks in Indiana and sending products to states in which they don’t have a physical presence.  In those instances, sales tax need not be collected.  But watch out…if the business employs someone, rents a location, contracts with a representative, sends a sales rep, or integrally relies on someone in a distant state, then that business might have created a physical presence and would need to now collect sales tax in that state.  …Send an employee on a trip to collect on an account in Utah? …Go to a trade show in Florida?  …Fix a broken product in New York?  …Have a remote employee working from home in California?  These simple everyday business occurrences can cause you to establish physical presence in a new state.

The laws vary from state to state as to what actions substantiate physical presence, so finding the answer may not be easy, but likely will be worthwhile.

Pulling money out of your retirement?

If you are under age 59 1/2 and you need money now, you may be tempted to pull it from retirement funds (401K, IRA).  I get it – the money is there just waiting for you to use it.  But it is an EXPENSIVE source of money.  For the typical middle class family with kids, about 1/2 of the money is lost to taxes when you pull it out.  You pay Fed tax, IN tax, the 10% Fed penalty….but the extra income also typically causes you to lose a child tax credit, phase you out of a refundable credit, make you phase out of deductions, etc…all causing you to pay more taxes than you expect and end up with 1/2 of the money that you pull out.

I don’t have any bright ideas on where you are going to get the money that you need to live, but keep this in mind the next time you wonder about accessing this easy money.

Now That the Election is Long Over, Who Are the 47%

Who pays taxes and why?  There was a lot of talk during the election about the “47%” of Americans who pay no Federal income taxes.  Now that the inauguration date has passed, let me give you some detail on that figure.  The breakdown of the 47% of Americans that pay no tax is (based on 2010 and 2011 figures):

  • 22% – Americans over age 65
  • 17% – Students, disabled, or long-term unemployed Americans
  • 50% – Americans who earn less than the standard deduction and exemption amounts (incomes basically under $20,000/year)

This accounts for 89% of the 47%.

That leaves 11% of the 47% as those Americans that take advantage of the refundable earned income tax credits and refundable child tax credits, the daycare credit, etc….basically those credits designed to “motivate” the working poor to actually work or to give the working poor a break.

With 3 Trillion of projected Federal budget deficits to close over the next 10 years, we Americans wonder who should be picking up the tab?  Do we ask this 47% to pay more than $0?

Keep in mind that this group of Americans, like the rest of us, likely pay (or have paid, if retired) Social Security taxes, Medicare taxes, state taxes, property taxes, sales tax, fuel tax, excise taxes built in to products that they purchase, etc.

I have been following individual tax law since 2000.  The 2010 and 2011 overall average Federal tax rates were the lowest I had ever seen.  Other organizations that I follow said that the current tax rates were the lowest (measured broadly) that we had seen in the last 60 years.

The bottom line is that all of us paid the lowest Federal tax that we ever would in 2010 and 2011. 2012 wasn’t too bad either.  2013’s rates are only slightly higher (maybe 3% higher overall, mainly due to the repeal of the 2% social security tax cut) for the average family earning under $150,000.  I expect average Federal tax rates to go up in 2014 and beyond…so enjoy it while it lasts.

Most of this information was gleaned from the Center on Budget and Policy Priorities, which is one of the lobbying groups (left and right) that I follow.  Regardless of what slant that you put on the numbers, numbers are numbers…you can put your own slant on them.

What if your return is suspect?

Did you make the mistake of going to a national tax preparation firm in 2009, 2010, or 2011?  Our experience tells us that you might want us to review that return.  We don’t keep any accurate statistics on this matter, but roughly speaking, those returns that we review are wrong about 20% of the time.  How can this be?  Well that is a long story that requires some understanding of how those places operate.  Nevertheless, you might have a 20% chance of hitting the lottery by bringing that return to us to review.  We might find that you paid too much tax in one or all of those years.  If you did, you have until at least 4/15/2013 to amend those returns to get some of that tax back.

Common areas where they err:  college credits, self-employment income and deductions, health insurance deductions, daycare credits, farm income, clergy income, S-Corp tax returns, capital-loss carryforwards, Indiana 529 credits…the list goes on and on.

We don’t charge to review your return…why not give it a shot?

The Expiring 2% Payroll Tax Cut

Congress and the President decided to cut the Social Security tax that workers pay by 2% in 2011 and 2012.  The law originally was designed to last for 2011, but at the end of 2011, Congress decided to extend it for 2012.  Will Congress decide to extend it for 2013…I am guessing that they won’t.  How much will this law change cost you?  The math is fairly easy…but here is a calculator that will help you more accurately calculate the impact to you:

The Fiscal Cliff – What will Congress Do?

I hear this question everyday.  What will Congress do?  Will tax rates rise?  Of course, I don’t know the answer, but my past experience tells me that Congress will do something before it comes time to file your tax return.

See, the situation that we are hearing about in the news isn’t new.  Congress has gotten in the bad habit of passing laws that are effective for one year only.  That means that the taxpayers don’t know the laws that apply to the year until the year is about over.  Of course, this doesn’t make sense in any logical sense.  How can you plan when you dont know the rules that you are playing by?

Why does Congress pass laws that are effective for only one year…and then often pass them at the end of the year in which they are effective?  Many insiders think they do this so that they can get lobbying attention each and every year.  Why pass a law that lasts forever and lose power over that issue when you can have domain over that issue each and every year.

I am not going to prognosticate on what Congress will do.  But I will venture to guess that this isn’t the last year that Congress will wait until the last minute to make up their mind on the tax law until the end of the year.  I have seen this consistently happen for at least the last 8 years…I bet that it will continue to happen.