Tax Cuts & Jobs Act creates winners and losers

The Tax Cuts And Jobs Act has created winners and losers - sometimes on the same team.  Take Sally Beauty Holdings (ticker: SBH).  This is a company whose 35% federal tax rate should fall to 21% under the new law.  This should boost SBH after-tax profits by roughly 22% or $48 million.  Since stocks are priced based on profits, it stands to reason the SBH stock should rise and handsomely benefit executive management that are rewarded with stock and stock options.

However, much of SBH’s rural sales reps will be on the losing side of the new tax law.  A typical SBH traveling sales rep might earn $60,000 per year, but could incur $20,000 in unreimbursed business travel expenses.  Thus, this rep really only earns $40,000 per year. 

Under the old tax code, the typical rural SBH sales rep could deduct the $20,000 of unreimbursed business travel expenses (stuff like 25,000 miles on their personal car and hotel and meals away from home) as a Miscellaneous Itemized Deduction on Schedule A via Form 2106 for Unreimbursed Employee Business Expenses.  So, the SBH rep that really only netted $40,000 from their job, only paid taxes on the $40,000.

However, the new tax law completely eliminated all Miscellaneous Itemized Deductions on Schedule A.  Now the SBH rep has to pay income taxes like they earned $60,000 even though they spent $20,000 to earn that paycheck.  This will result in roughly $4,000-$5,000 in higher taxes for the SBH traveling sales rep.

So, under the old tax law, the SBH sales rep that makes $60,000 in W-2 wages had a real net pay of $40,000, less $4,000 federal tax, less $4,500 in payroll taxes might have had $31,500 in spendable income.  Under the new tax law, that spendable income may fall 13-16% to around $28,000. 

Payroll Adjustment Calculator and Take Home Pay Estimator

It's tax season and many folks will realize they are getting a huge refund.  While this might be considered good news, it also means you've given the government an interest free loan all year.  Alternatively, perhaps you discover you underpaid your taxes during the year and find you even owe a penalty for underpaying during the year.  

Click here for a handy payroll adjustment calculator.  

Grab your latest pay stub and use this tool to help figure out what changes you need to make to your tax withholding.  If your pay stub does not include information about the allowances you are claiming, you may need to go to your company's payroll department and ask to see what your W-4 currently looks like.  

After using the above tool, fill out a new W-4 by clicking here.  Or, go back to your company's payroll department and ask to fill out a new W-4 to change your future tax withholdings. 

State of North Carolina's Budget (Tax Revenues and Expenditures)

Two cool pie charts outlining where North Carolina's money comes from and where it goes can be found by clicking here. 

Same-Sex Marriage and Tax Return Filing Status in North Carolina

The Internal Revenue Service (IRS) now allows same-sex married couples to file a "married filing jointly" tax return.  However, many states do not allow these couples to file using the "married filing jointly" status.  My home state of North Carolina recently released a directive for these couples outlining how to file.  You can read the full directive by clicking here. 

These couples will file their federal tax return using the "married filing jointly" tax status, but will also need to recalculate a separate "pro forma" federal tax return under the single status for each individual (or head of household as the case may be).  Both will need to file separately with North Carolina and attach a "pro forma" federal tax return to their state tax return.  

Thus, these couples will need to fill out a total of 5 income tax returns:

1 - Federal income tax return submitted to the IRS (Married)
2 - Federal income tax returns submitted to the North Carolina Department of Revenue (Single)
2 - State income tax returns submitted to the North Carolina Department of Revenue (Single)

Please feel free to send me your questions on this or any other topic at:  InvestorCookbooks(at)gmail.com

Apple's Effective Federal Tax Rate is NOT 25% - it's likely less than 10%

Apple Computer was in the news recently as their CEO Tim Cook took some heat while testifying in front of Congress about the US Federal Corporate Income Tax.  The controversy around Apple revolves around how it is that Apple's "effective tax rate" is roughly just 25% when the US Federal Corporate Income Tax Rate is supposed to be 35%.  What I find shocking, is that Apple is able to get away with claiming they pay an "effective tax rate" of 25% when it is actually closer to 9.5%.

On pages 36-37 of Apple's 2012 Annual Report (SEC Form 10-K) the company states:

"The Company’s effective tax rates were approximately 25.2%, 24.2%, and 24.4% for 2012, 2011, and 2010, respectively. The Company’s effective rates for these periods differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S."

The second sentence above attempts to imply

Did you know severance pay is tax deductible in North Carolina until 12/31/2013?

In North Carolina, if you've been laid off and received severance pay, you likely do not need to pay North Carolina State Income Tax on the severance amount up to $35,000.  The way it works is you enter your severance as a deduction on line 43 on page 3 of your Form D-400. 

 Check out the North Carolina Department of Revenue statement on the subject by clicking here.

Tax Credits for Efficient Air Conditioners, Furnaces and Water Heaters

You can get a US Federal Tax Credit up to $500 if you purchased an energy efficient central air conditioning unit, furnace, or water heater.  You can find the details for what qualifies by clicking here, but here is a quick summary:

• Central Air Conditioning or Heat Pump Systems - $300 for systems with a SEER rating of at least 16 for split systems or 14 for package systems.
• Furnaces - $150 for systems with AFUE of 95 or higher.
• Water Heater - $300 for systems with an energy factor of at least 0.82 or thermal efficiency of 90%.

All these credits are limited to a lifetime total of $500 going back to 2005.  So, if you've received credits in the past, you might not be eligible.  You will need to file IRS Form 5695 for Residential Energy Credits with your 2012 tax return to receive the credit.

AMT = Additional Mandatory Tax

It's that time of year again when we all start calculating out our tax return here in the US.  I've discovered there is some confusion about the AMT.  AMT stands for "Alternative Minimum Tax" but that name can confuse folks.  AMT would be less confusing if it stood for "Additional Mandatory Tax."

AMT is NOT an "alternative" tax in that it is NOT an "option."  The AMT is an "additional" tax added to your federal tax for some tax payers that earn more than a certain threshold and have Itemized Deductions that are deemed too large.  That is when the AMT kicks in to force these unlucky tax payers to pay a higher amount of federal tax.  The threshold where you might be subject to AMT is $78,750 for married couples and $50,600 for individuals.

I've discovered many folks believe the Alternative Minimum Tax is an alternative way to calculate tax and that the tax payer could "choose" to pay either the normal way or the "alternative" method.  AMT is NOT an option.  The AMT is mandatory.  Thus, when you see AMT, think Additional Mandatory Tax.

Click here to learn more about AMT on the Internal Revenue Service website IRS.gov

Everyone in the USA should watch this video of David Walker

David Walker from the Comeback America Initiative ran the Government Accountability Office (GAO) as the US Comptroller General for 10 years under Presidents Clinton and Bush (1998-2008). This is a video of his presentation at Dartmouth University. Hear his SOLUTIONS to most problems in government.  If you care at all about our nation's fiscal health you will be fascinated by this video.  Be sure to watch even the questions and answers at the end.  

If you have time to watch Survivor, Dancing with the Stars, Downton Abbey, Duck Dynasty or Honey Boo Boo every week, you have time to watch this video, once.

US National Debt

If you want to learn about the US National Debt and deficit watch the documentary "Ten Trillion and Counting" (<--click there) from my favorite TV show Frontline on PBS (Tuesdays at 10 PM in the Raleigh area).  You can watch the episode on your computer at the link above or on your TV if you subscribe to NetFlix.

2012 Tax Brackets and How They Could Change in 2013

I found this very handy 2-page 2012 federal tax rate summary information on the internet.
  
(If the link above stops working, just send me an email to InvestorCookbooks(at)gmail.com and I will send you the pdf file)

And you can find your state tax brackets by clicking here.

A lot of folks are curious about how tax rates might change in 2013 as part of the "Fiscal Cliff."  Certain tax cuts passed years ago will "expire" in January 2013 unless Congress agrees to extend the cuts.  Here are the main changes set to take place:

How to Minimize Your Taxes: 1040 Good Buddy!

If I made enough money writing my books and this blog to afford a lawyer, she'd likely advise me to issue a disclaimer of some sort.

So here we go!

WARNING: This is not meant to be specific tax advice. Please consult a tax professional (CPA if you're lazy or TurboTax if you're not!) for your specific situation. Certain side affects that have been observed when reading this blog are similar to Viagra and include head ache, blurred vision,  and delayed back pain (likely due to sitting on a fatter wallet). 

With 2011 now in the books, it's time to start thinking about income taxes (and how to minimize them!).  Here's an article about a few tax changes for 2011. 

One of the most important changes relates to capital gain reporting on the sale of investments. In the past, your broker or mutual fund company only reported sales amounts to the IRS.  It was up to you to determine and report your cost basis and thus your capital gain (or loss).  Starting with 2011 brokers and mutual funds will report the cost basis to the Internal Revenue Service (IRS) on new Form 8949.  This should make our lives easier when filling out Schedule D (Capital Gains and Losses) for our Form 1040.  I don't know how many times I had to dig through years of old files to figure out my cost basis of a stock or fund I sold.  The IRS even had the foresight to add a place where you can adjust the broker reported cost basis just in case your broker made a mistake. Click here for IRS instructions for reporting Capital Gains and Losses and click here for IRS instructions for Form 1040.

One vitally important item NOT mentioned in the article above was:

Year-End Tax Tips

Click here for a list of year-end tax planning tips provided by Bogleheads.