Why are they being bailed out?

The Treasury Department has submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability. The ideas is that this program will address the root cause of our financial system's stresses by removing distressed assets from the financial system.

What are the distressed assets going to be ... the things that your bank's banker invested in, and these are primarily composed of securities backed by what you and others thought you merely owed to your bank.

How did it get this far?

Well you got a loan from a bank or mortgage company. Your loan was sold, so now you owed someone else. Now this bank, let's call it "Freddie," although it could be one of many different banks has dozens, if not hundreds of these loans they have bought. But Freddie want s to make more money than they can by just waiting for you to pay interest, so they bundle your loan, along with several more and create something they call a "mortgage backed security."
Hoo boy, it gets better.

Now that they've created this really sound investment (Okay, I'm kidding.), they sell shares of this package to other investors. So now, instead of owning a loan that may be good, or may be bad, someone owns a part of a whole bunch of loans where some may be good and some may be bad.

Now comes the good part. Putting a current market value on the package.
Well, normally you would think that is simple, right? What are the odds of each loan being good or bad, multiplied by the face value of that particular loan and then all those projected values added up to create the value of the package.

Uh uh. Not so fast. Step back a bit and look at what you've got. You've got a bundle of loans, each with its own value, owned by individual investor banks, each with its own agenda.
What if one bank wants to write the value down to market, but another doesn't? What if one bank wants to sell its share, because it needs some cash to meet its obligations? What price can it ask or get if there isn't any agreement between the owners as to the value of the shares of this security?

And, because these securities are concentrated in the hands of the banks that lend to your bank, and no one has any idea of what these securities are worth, is why the US Treasury has just spent $3,600 for every man, woman and child in the United States. If your bankers' bank won't lend money to your bank, then they can't lend to you, and we're in a deep pile, and it's not just a deep pile of debt.

It doesn't matter who caused this mess, and there is enough blame for everybody, except maybe you and me, it seems that with banks being so interdependent and their investments being so convoluted, there isn't any other way out of this mess. Let's just hope the Fed can recoup their investment, and it doesn't become a big tax debt we have to pay. Jeez, what a mess.

Remember to Backup your Data

Most people think about backing up data about 10 minutes after it's too late to do any good. My hard drive recently crashed.....total failure. I was lucky/smart enough to have duplicate backups of my critical files so it was more of an annoyance than anything, but it could have been a disaster. Are you prepared to lose your e-mail address book (and all your messages)? What would you do if your entire collection of digital photos disappeared tomorrow in a puff of electrons? Do you have backup copies of your electronically-filed tax return or your crucial financial records?
Fortunately, backing up your essential files is neither difficult nor time-consuming. In fact, the whole process can take as little as 10 minutes a week, and you can let Windows XP do most of the work.

Remember, backup your files at least weekly and you'll be protected in case of either mechanical or electronic failure.

Tax Deductions - Are you getting them all?

I am always impressed by the creativity of people during tax season. For example, a businessman who hired an arsonist to destroy his store attempted to take a business deduction for a $10,000 arsonist fee. The IRS rejected that claim.

An individual taxpayer built a fallout shelter for fear of a nuclear attack and attempted to deduct the costs as a preventative medical expense. That one didn't fly either.

Under IRS rules, there are many common business expenses which are allowed such as:

*Business tools
*Dues and Membership costs for professional associations
*Training & Continuing Education
*Expenses incurred during a job search
*Business trips not reimbursed by your company.
*Dry cleaning of work uniforms
*A home office (certain rules apply)

Remember, for the expense to be deductible, the first rule is the expense needs to be ordinary and necessary in the operation of the business.

There are many other deductible expenses even if you do not own your own business.

*Mortgage interest
*Premimums paid for health insurance (needs to exceed 7.5% of your AGI)
*Student Loan interest
*Upto $250 of unreimbursed expenses for teachers
*Charitable donations including non-cash items
*Job related moving expenses

It is essential lto be aware of what you can and cannot deduct. If you are unsure if you qualify for a certain deduction you should consult with a tax professional such as an Enrolled Agent. The laws can be tricky. An "adult performer' successfully deducted the price of breast implants since they were vital to her job. However, a male model attempted to write off his entire designer wardrobe as he was required to always look his best. Since they wren't official compnay clothes, the deduction was disallowed.

Get all the deductions you deserve.

Should Congress license paid tax preparers?

My opinion is YES ABSOLUTELY!! You need a license to cut hair, but not to reconcile and prepare taxes? Consider what you're handing over to your tax preparer: your social security number, your bank account numbers, your salary, your mortgage, number of children, investment information, etc. Then consider that anyone can start up a tax preparation business without training or regulation. That's a recipe for disaster.

Some tax preparers are licensed because they're also public accountants or attorneys. The IRS also designates tax preparers after rigorous testing as Enrolled Agents. Enrolled Agents are the only tax preparers who must demonstrate their competence directly to the IRS.

Too many people don't know how to evaluate a tax preparer. If you're working with a CPA or Attorney, ask if they specialize in taxes and what types of tax. When you choose to work with an Enrolled Agent, know you are working with an individual who has already proven his/her knowledge and is mandated to complete continuing education in the areas of tax.

Amazon.com sues NYS

New York State and Amazon are battling the new sales tax law. A new law requres out-of-state online companies to collect NYS sales tax from shoppers in New York. Amazon is challenging the constitutionality of the new law. New York claims the law closes a "tax loophole".

Tom Bergin for the NYS Department of Taxation and Finance has a point, "Everyone in New York state either pays sales tax on articles that they buy or is required to pay sales tax on articles that they buy. This is not a new law, this is just amending the law to bring some of the new technology into compliance."

Amazon argues the new law is overly broad and vague, and violates the commerce clause of the constitution because it imposes tax-collection obligations on out-of-state businesses.

For years, NY residents who did not pay sales tax on their purchases have been required to pay the use tax on their annual income tax returns.

Amendment XVI

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration. " - The sixteenth Amendment to the U.S. Constitution - Ratified 1913.

Congress passed a new income tax law with rates ranging between 1 - 7% for taxpayers with income in excess of $500,000 in 1913. At the time, this meant less than 1% of the population actually paid income tax. Form 1040 was introduced and although changed over the years, is still in use today.

Prior to the enactment of the income tax, most citizens were able to pursue their endevors without the direct knowledge of the government. Wages and profits were earned with little or no government involvement. In 1916, after the passage of the income tax, congress realized the invasiveness of the income tax and pass the requirement that tax returns be kept confidential.

Prior to the income tax, the government relied on excise taxes and and tariffs for its funding.

Three years for Snipes!

Often I hear the question "What happens if I just don't file?" Well, here is a good example. Wesley Snipes has just been sentenced to three years imprisonment. According to the New York Times, Snipes dodged approximatly $15 million in tax by concealing millions in offshore accounts and bombarding IRS employees with frivolous correspondence; claiming that taxation was unlawful. I guess he didn't get the memo. You MUST pay your share of Taxes.

A few other famous tax evasion cases:

Richard Hatch of Survivor fame was convicted in 2006 and sentenced to 51 months in prison for his failure to pay tax on his $1 million prize.

Richard Pryor served 10 days in a county jail in 1974 for tax evasion. He said he forgot to pay. :)

In 1990 Willie Nelson was hit with a $16.7 million bill in back taxes. The IRS seized and auctioned off his assets.

Chuck Berry served 4 months in prison after pleading guilty in 1979 of failing to pay tax on gigs he was paid in cash for.

My personal favorite, Al Capone once said the tax laws were a joke because "the government can't collect legal taxes on illegal money." Capone was sentenced to 11 years in jail and an $80,000 fine in 1931 for failure to pay four years taxes.

Heidi Fleiss must have been following Mr. Capone's logic before she was convicted in 1997 under tax evasion, pandering, and money laundering charges. Guess what folks. Illegal money IS taxable.

If you think IRS employees are exempt, think again. In 1952, then IRS commissioner Joseph Nunan was caught for evading taxes on an $1,800 bet he had won that Harry Truman would win the presidential election. He failed to report his winnings. OOPS!