H&R Block? What The Hell For?

February 8, 2013
They say this as if proud of it.

They say this as if proud of it.

 

 

Meet Ana Maria Costanza, part of H&R Block’s attempt to show that tax preparers can be beautiful at any size. And with any face.

 

 

Ana Maria claims to have read all 900 pages of the ObamaCare Act, the single defining law that forever modifies the relationship between government and citizen to one of lord and serf. But without getting into the costs of a law that won’t do a thing to improve the average American’s health*, what about the law’s impact on your taxes, anyway? Ana Maria spent weeks figuring out the answer. Can we do it in a couple of hours?

Looking exclusively at the tax implications of the law, you’ll pay a 40% penalty for having an expensive health insurance plan. (The $4800 annual plan your non-smoking, teetotaling, drug-free, childless and physically fit blogger with no chronic illnesses nor birth defects has doesn’t count as “expensive” for these purposes, but enough digression.) Your individual medical expenses deduction might change. You won’t be allowed to contribute as much to your flexible spending account. Your 26-year-old child can still count as a dependent, which means Kevin Durant’s parents can keep him on their plan. And lots more.

So Ana Maria read the whole thing cover-to-cover. We’re impressed. What we’re not impressed with is the idea that she can do your taxes better than you can. Why? TurboTax, that’s why.

H&R Block management might be surprised by this, but the people at Intuit (makers of TurboTax) incorporate every year’s tax code changes into their software. So do their competitors, including TaxSlayer, TaxAct, etc.

NOTE: This is not a paid post, although it should be. We just hate the idea of you throwing your money away to use an obsolete in-person service that should have been rendered defunct by now.

But I like seeing the person who’s doing my taxes face-to-face.

Do you like the sound the needle makes when it hits the record, too? How about the unmitigated thrill of paying your bills with a checkbook, an envelope, a stamp and a trip to the mailbox? Hey, you know what else is awesome? Paying by the minute every time you want to communicate with someone who lives in a different country.

Formal tax preparers like H&R Block, Jackson Hewitt etc. had a nice long run, but it’s over. Put them on the rural landfill next to bookstores, music stores, and travel agencies. TurboTax isn’t just more efficient than a seasonally employed human preparer, it’s cheaper. The Deluxe version costs $30. You’ll pay an additional $37 if you’re one of the 82% of Americans who live in a state that levies its own income tax, plus you’ll have the pleasure of paying said income tax itself.

If your return is simple enough that you need a cheaper version of TurboTax than the Deluxe, you don’t need a cheaper version than the Deluxe. In that case you can calculate your taxes yourself, probably in less time than it’d take you to order the appropriate stripped-down version of TurboTax.

So is TurboTax for everyone? Not at all. In fact, hopefully it isn’t for you. How can we contradict ourselves within the space of one blog post and still have any credibility? Read on.

If you’ve taken the lessons in The Greatest Personal Finance Book Ever Written (Len Penzo’s words, not ours) to heart, you know that you’re never going to build wealth if you restrict yourself to the money that derives from a W-2. You need to start embracing those other sources of income:

  • from any limited liability company that you set up, funneled your personal income through and thus likely qualified for lower taxes on.
  • from any S-corporation you set up, same thing.
  • K-1s. Do you have a partnership requiring distributions to be handled on yet another form? If not, why not? Otherwise you’re stuck in your pathetic little tax bracket, at the whim of legislators who design the tax code specifically to keep you in its clutches. God, you really need to read our book. Especially Chapter 9, the one on taxes. Here’s the link again.
  • foreign income. Did you know you can get paid by people in other countries, too? Most people don’t, which is a contributing factor to why they’re still less rich than they could be. But yeah, keep contributing to that emergency fund.
  • trusts, private placement income, etc.

If you’ve got at least one of these, Ana Maria or her local equivalent will stare at you, stare at your documentation, cock her head at a 30º angle, open her mouth a little, and call for a supervisor who will then do the same things in the same order.

So if you’re deriving any kind of passive income, find a professional: a Certified Public Accountant who can find the complex deductions and credits that few mall tax preparers know the first thing about. You’ll pay considerably less, too.

Wait. A CPA charges less than an H&R Block preparer?

No, of course not. That’s absurd. They can charge 10 times as much, and should. And do. But that’s still just a fraction of what you’ll save in taxes.

From a taxpayer’s standpoint (that’s you), you either want to be safe on shore with TurboTax, or out past the breakers with a CPA who sends you Christmas cards and itemized bills. It’s in the middle, dealing with a preparer who barely knows more about taxes than a lay person does, where you get clobbered.

*But it will:

  • Regulate insurers’ business models, forbidding them from taking more than 15% of revenue as profit.
  • Phase out annual spending caps by next year.
  • Prohibit you from using a Health Savings Account to buy any over-the-counter drug other than insulin.
  • Designate domestic violence counseling as a medical treatment, for some reason.
  • Set caps on premia, the inevitable result of which will be the federal government becoming the default health insurance provider.
Filed Under: Taxes Tagged With: , , , , , ,

Ordinary Income. Extraordinary taxes.

November 28, 2012

 

Manna wasn’t legal tender, but that doesn’t mean the IRS wouldn’t have tallied it.

 

A couple of days ago we pointed out how money doesn’t care where it came from. Some people think that their regular salaries should go towards daily expenses, while windfalls (inheritances, stock appreciation, house appreciation, etc.) can go towards less vital stuff like vacations and ATVs.

That’s an idiotic perception. If you have an asset to buy, defining “asset” as we do here at CYC (something that’ll build wealth), buy it. With your paycheck, or with a handout from Grandma. Or even a loan from Grandma, depending on what interest she charges. Otherwise, it shouldn’t matter. Regardless of its origins, money goes where it goes.

Well, that’s not entirely true. The only entity that cares how you came by your money is the Internal Revenue Service. Receive money one way, it’s taxed at a certain rate. Receive it another way, it’s taxed at a higher rate. Seeing as the IRS has the power of deadly force*, soon for the crime of not doing your duty for the Motherland and buying health insurance, it makes sense for us peons to accede to the agency’s capricious demands.

As far as the IRS is concerned, there are 2 ways you can receive income:

  1. ordinary income and short-term capital gains
  2. long-term capital gains.

This is simplified, obviously. A full accounting of every exception would take us years to write about.

Ordinary income? That’s:

  • Wages, salaries, tips, commissions, bonuses
  • Interest, dividends, and net income from a business that you own a piece of
  • Gambling winnings
  • Royalties
  • Rents
  • Pensions, assuming you’re one of the few people who collects one.

Meanwhile, capital gains are:

  • Money from the sale of a “capital asset”, like shares of a publicly traded company, or a house that you sold. Unless you’re a land developer and the house is your stock in trade, that kind of thing. The difference between short- and long-term capital gains is arbitrary but defined: hold on to an asset for a year before selling, that’s long-term.

We’ll spare you the numbers, but regardless of what tax bracket you’re in, long-term capital gains are always taxed at a lower rate than short-term capital gains and ordinary income are. There’s a good reason for this, too. Ordinary income (and to a lesser extent, short-term capital gains) carries little risk. If you punch a clock, you’re legally entitled to wages and can sue if you don’t receive them. If you wait tables, society expects that customers will tip you as part of (if not the bulk of) your income.

Long-term capital gains involve tons of risk. There’s no guarantee that that stock you bought years ago might ever result in a payoff. Contrast that with the biweekly checks you get after entering into a standard work agreement. By taxing long-term capital gains at a lower rate than ordinary income (and short-term capital gains), the IRS encourages people to hold onto their investments. If all income was taxed at the same rate, there’d be no incentive for anyone to defer spending (synonyms for which are “save”, “invest”, and “build wealth”.) We’d only chop trees down, never planting any.

So is this just an accounting curiosity, something for you to pass the time reading about on a boring Wednesday? Heck and no. Control Your Cash don’t play that game. If it didn’t apply to your life, we wouldn’t be spending time on it.

The more of your income you can derive via long-term capital gains, the less you’ll have to fork over to the IRS. We devote an entire chapter of the book to this. Chapter IX, the longest and most detailed one. (By far. Although it’s still easy to read, certainly no more difficult than our posts.)

Unless you want to move to Antigua – and before you do, remember that it’s easy to go stir-crazy on a 109-square mile island – you’re going to have to play the IRS’s arbitrary game. Both Wonderland croquet and Calvinball have more consistent rules. This wasn’t always the way, but America’s descent from beacon of freedom to patchwork of statism is a topic for another day.

Maximizing your long-term capital gains is the inevitable result of buying assets and selling liabilities, our 2-pronged guaranteed way to wealth. It means purchasing vehicles for passive, non-sweat income, no matter how modest or expensive: a $25 mutual fund contribution here, a real estate investment trust there. Anything that creates an income stream for you, or that should appreciate (such as a house). Hold onto it for at least a year, and you’ll pay less in taxes that you would if you’d earned similar income via more direct means. Hold onto it indefinitely, and…

You can defer capital gains, too. Sometimes indefinitely. Methods for doing this include structured sales, charitable trusts and 1031 exchanges, which we touch on in the book and will expand upon in future posts. Really we will.

The point is, don’t go to H&R Block with your W-2s and say, “Fix this for me.” And really don’t get a refund anticipation loan. You’ve got a few months to make this work for 2012, and to figure out how to not get burned in future years. Do it now. (By “do” we mean “buy”, and by “it” we mean click the link above. Which is also this link.)

 

*This is not an exaggeration. To quote P.J. O’Rourke, “If you don’t pay your taxes, you get fined. If you don’t pay the fine, you get thrown in prison. If you try to escape from prison, they shoot you.”

Filed Under: Capitalism, Economics, Making Smart Choices, Taxes Tagged With: , , ,

Follow these steps for guaranteed wealth. Seriously.

September 16, 2011

 

Make fun of this guy and his fellow investment advisors all you want, but what they lack in sexy they more than make up for in forbearance.

I need an investment policy? (yawn) Spare me, please. I just want to be rich.

An investment policy sounds like something that’s calibrated during long, torturous hours in someone’s corner office. Where you’re sitting across from a prim and effete financial advisor, fresh out of business school, all proud of his MBA and his new job and those reams of theoretical knowledge practically spilling out of his overcoiffed head. Do you seriously need that?

Almost certainly not. If you do, most likely you’re already rich and have better things to do than read a blog. In that case, you need an accountant, maybe a tax lawyer. A portfolio manager? Go away now.

Here’s a quiet truth about personal finance and many of the industries that have arisen surrounding it: there’s not a tremendous difference between the professionals and you. As a discipline, personal finance is similar to sociology and women’s studies in that there’s almost no hands-on knowledge involved. Unlike petroleum engineering, where you have to get oil on your fingers and have some physical representation of your data. Or medicine, where you have to treat real patients with ailments and sometimes risk their lives.  What separates a professional financial advisor from an amateur is little more than a few officially administered multiple-choice tests.

Learning the details of personal finance can be intensive and demanding, but the basics are available to anyone with opposable thumbs.

For starters, you don’t merely throw money into the stock market and hope for the best. You don’t even read financial statements, invest in the stock market and hope for the best. You’ve got to look at when you’re going to die, and what you’re going to do before then.

If that sounds morbid, that’s what a formal investment policy is, for the most part. The way the professionals formulate and administer an investment policy, a client is supposed to sit down and list rules that the person in charge of her money then adheres to. But it can’t just be “I want to maximize my return and minimize my risk”, which describes every investor in the history of the universe. You need to be more specific, with regard to:

1. How old you are. Obviously, the more life you have ahead of you, the less conservative you can afford to be and the less calamitous it is if you lose everything.

2. How liquid you need to be. Having cash on hand and being wealthy aren’t always the same thing. Your average meth dealer has plenty of money in his wallet, and probably sleeps in a room that you wouldn’t feel comfortable entering without wearing a surgical mask.

In a famous story from the 1980s, baseball pitcher Rick Sutcliffe loaned $500,000 to Bruce Springsteen so he could close on a house. The Boss was at his apex of popularity at the time. He obviously wasn’t poor, but his money was tied up in investments that he couldn’t immediately get out of and convert to cash without paying a big penalty. Even if you have a billion dollars socked away in inflation-protected securities, you still need a few readily available bucks for day-to-day living.

In the end a formal investment policy will begin with something like this, only written in legalese and incorporating a service fee that’ll eat up part of your principal:

  • I’m a 25-year old woman. I have no kids, and thus smaller expenses than a mother would. Also, I live with my boyfriend, so my expenses are even less than they’d be if I was living alone. We rent a townhome, while we’re waiting to build up equity to buy a house.
  • I make $40,000 in annual salary. After taxes and expenses, I can save around $10,000 a year.
  • My 401(k) is worth $2,500, but I don’t even know what it’s invested in and wouldn’t mind finding something a little more aggressive.
  • I live in Chicago, which means I’m paying a relatively high cost of living. We want to get married and move to Nebraska, where the people are friendlier and everything’s cheaper.
  • My job is unfulfilling but secure. It’s so secure that I know what I’ll be making for the next 5 years if I stay in it. I’m willing to invest in volatile stocks rather than super-safe T-bills if it means having a chance to reach my goals more quickly.
  • Oh yeah, my goals. I want my investments to clear $75,000 a year when I turn 65, tax-free, and continue to until I die.
  • I don’t have any dependents and won’t, so I don’t care about leaving a will.

You almost want to do this backwards, starting with the answer, and then work your way back to the questions. “I want a principal of $x, and an annual cash flow of $y. How much do I have to save, how hard to I have to work, what kind of return on my investments do I need to make this happen?”

You should be able to do this yourself – ask the right questions, and give yourself honest answers. And don’t limit yourself. Start big. Don’t designate the summer villa in Provençe as either achievable or unachievable – it’s simply a goal that you can devise a plan to reach, or not. The same goes for the 4 kids you want to have or the kitchen you want to renovate.

Let’s take the kitchen renovation. You shop around and figure that putting in new appliances, wall tiles, wooden floors with a decorative inlay and an island will cost you $10,000.

Sure, you could take it out of your available cash and pay for it today. But if you’re the woman from our example, you just wiped out your entire savings and had better hope that no unforeseen expense finds you.

If you’re willing to wait 9 months, you can invest $5,000 of that $10,000 in what you believe to be an undervalued stock. You can continue saving your salary at your current rate, which would net you another $7500. The stock might gain 20%, which means that the redone kitchen would make a far smaller dent in your nest egg then than it would now.

Some people choose to place such expenses on their credit cards and pay 19% interest on them until the end of time. Others like to do some calculations first. You can probably figure out which is the better idea.

**This article is featured in the Yakezie Carnival September 25, 2011**

Filed Under: Estate Planning, Personal Finance, Taxes Tagged With: , ,
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