Financial Frontlines ™

The following is from a MOAA member who works with the IRS as a member of the Taxpayer Advocacy Panel or TAP.  He provides useful information that may help if you find the going tough during this tax season.  Enjoy.

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By:  JOHN S.S. KIM, LtCol, USAF (Retired), TAP Representative from Hawaii

The IRS wants to help you.  IT’S TRUE!!  As we rapidly approach the IRS deadline to file last year’s income taxes, the IRS wants to know of any problems you may have experienced, issues that may have arisen, or suggestions that you may have for improving the process.  In fact, there is a whole staff of IRS employees and volunteers from every state (including the District of Columbia and Puerto Rico) whose purpose is to receive, research, and resolve tax issues and suggestions.  That organization, the TAXPAYER ADVOCACY PANEL (TAP), serves as focus groups for the IRS providing input on strategic initiatives and providing a venue for raising issues identified by citizens.

While TAP does not directly work issues related to or requiring legislative or statutory changes, it has dealt with hard to use forms, confusing instructions, errors in computer processing, and with numerous suggestions to make filing easier for all citizens.

For more information, you can go to the TAP website at  http://www.improveirs.org/ or call the national toll-free phone number: 1-888-912-1227.

If you are interested in serving as a TAP member from your state, TAP will be conducting a new recruiting cycle from March 15 to April 30.  Information about application procedures and timelines are available on the website as well.

TAP want to help the IRS improve the tax filing processes.  To do that, we need input from you.  As you go through this year’s filing season, keep notes about things that didn’t seem to work right, frustrations that you encountered, and suggestions that you may have thought of.  Then, communicate those notes to the TAP.  Even better—apply to become a member of this federal organization whose sole existence is to help American citizens.

As current or former military members and families, we have all previously dedicated ourselves to service our country.  We are willing to contribute resources to keep America strong and free—and that includes paying our fair share of taxes.  The TAP is ready, willing, and able to help make that process better.

Every tax season the email scammers take flight.

Phishing. The most common form of scam is called phishing (fishing). These are emails that look like official IRS correspondence and direct you to either take an action off the email or route you to an artificial IRS web site. The objective is collecting your personal information. Don’t be fooled. The IRS does not email anyone. For details of known tax scams check out this real IRS site.

“Net Disability Exclusion.” Lately we have seen and heard about an email floating around that explains how you can recalculate your taxes to gain additional tax benefits from tax-free disability payments. The subject of the email is about the “Net Disability Exclusion” for military retired pay. We highly suggest you consult with a tax attorney, CPA or other tax specialist before you try this procedure.

While we are not tax specialists here at MOAA, we have researched this “Net Disability Exclusion” and believe the procedure to be a misinterpretation of the tax code. We found a letter from the IRS detailing this procedure and how the IRS finds it questionable. From our review, the procedure appears to either claim a tax benefit for a disability twice or seeks to claim a tax benefit for a Service rated disability the member doesn’t have. In the later case, these are typically people who have a VA rating but not a Service rating. Be careful.

Lately I’ve been reading quite a bit about the new laws that apply to credit cards. Some articles are about how the credit cards companies still have loopholes to get us in other ways. Do these “reforms” really matter to most folks and is anyone really surprised by the fact that the credit card companies will find other ways to make money?

None of the legal reforms matter if you control your debt affairs properly. That’s the bottom line. You’re not at the mercy of the credit card companies and Uncle Sam is not your salvation. You have the control over your finances, always have and hopefully always will. Take back your power to control your destiny! These reforms mean more to those who use credit unwisely and the unwise will still get burned in the long run; reforms or no reforms. Laws can never compensate for questionable financial behavior.

Are you in debt in a bad way? I’m talking about where your debt never goes away and where debt is how you get by month to month because there is not enough money coming in to cover your life. There is a solution but it’s not easy and it takes supreme discipline. You’ve got to collect the financial data of your life and apply a structure to break debt’s hold on you. It’s hard because you want a higher life style than you can afford. You have to get a grip on the fact you can’t keep up with the Jones and won’t get everything you want. But you’ll get what you need—and you’ll be happy with that. The game plan…

First. Collect the data that indicates all the dollar outflows for your month. Group the outflows into categories like, rent, mortgage, car payments, credit card payments, food, clothes, cable TV, entertainment, on and on. Now put them in order of most important to least important. Now the hard part; discontinue those expenses that are the least important until you have more money coming in than goes out. Say good bye to all those luxuries. If it’s more than you can afford, it’s a luxury. In a worst case scenario, you may have to come to grips with the fact that your abode is more than you can afford requiring you to downsize.

Next. Rank order all the debts from the one with the highest interest rate to the one with the lowest interest rate. Pay the minimum payment on all the debts except the one with the highest interest rate. Pay the minimum plus add an amount to it that you can pay every month until the debt is eliminated. For example, if the minimum payment is $30, add another $50 to it and make the $80 payment religiously every month until the top debt is eliminated. When it’s gone, add the $80 to the minimum payment of the next debt’s minimum payment. For example, the second debt’s minimum payment is $25 and you add the $80 from the eliminated first debt for a $105 monthly payment. Continue this “snowball” process until your debts are eliminated. The key here is paying more than the minimum payment. Only paying the minimum each month ensures you will never get out of debt.

Finally. With the money you were using to pay down debt, keep the money out of your pocket by setting up a direct deposit plan from your pay check to a savings account. By this time, you are used to not having the money as it was paying the debt. Stay accustomed to the money staying out of pocket by having it deducted from your pay check.

Your financial health is dependent on you living below your means. If you don’t like your standard of living, fix it by doing things necessary to raise your standard of living. Change jobs, go to school, get training, seek out special expertise or new responsibilities on the job, get certified, do anything but use credit. Using credit does not raise your standard of living; it puts you in a hole and gives you a false sense of accomplishment. Credit is faking it and only hurts you. Take back the power.

Attitude has a huge influence on our decision-making.  Whether we are trusting or dubious, optimistic or pessimistic determines the issues and questions we judge to be important in the process.

A good example is buying a car. We have different attitudes when considering a new car than we do when looking at used cars.  With new cars we are distracted by the – well, newness – all shiny and fresh and with that new car smell.  With used cars we notice the scratches and road dings and that funny odor when you turn on the air conditioner.

With used cars we wonder why the owner wants to sell – is he hiding something that is wrong with the car?  We are, in a word, skeptical. 

Buying a stock is very much like buying a used car.  In virtually all cases (except for initial public offerings) the stock you buy is being sold by someone else.  You are buying a used stock.

So it pays to be just as skeptical when buying a used stock as when buying a used car.  In fact, you should ask the same questions: “Why does the owner want to sell – is he is hiding something that is wrong with the stock?”

If you think that’s silly, how would you feel if you knew you were buying the same stock Warren Buffett was selling?

Medicare.We are receiving many calls from retirees about their Social Security retirement payments decreasing. This payment decrease can be traced back to the increase in Medicare Part B premiums. Medicare Part B premium increases apply to higher income beneficiaries with a modified adjusted gross income greater than $85,000 for individuals and $170,000 for couples in 2008. The Part B premium increases also apply to new enrollees in Medicare-Social Security but you obviously don’t notice an premium increase since this is your going-in rate. If you don’t see a premium increase and the resulting decrease in your Social Security payment, you are one of the 75% of Medicare enrollees unaffected by this change because you didn’t meet the income requirement.

Retired Pay. The decrease in military retired pay for some continues to be a popular topic. This is due to the 2009 Stimulus Plan expiring. Last year retirees received a break (decrease) in your federal withholding tax in military retired pay. The withholding tax reduction expired for 2010 so the withholding taxes went back up. For most, this is around $17. That’s the cause of the decrease in retired pay. Chances are you didn’t see a change if you submitted a specific amount of withholding tax to your pay agent (DFAS for most) on an IRS form W-4. The increased withholding taxes are in the tax tables under the categories like “single” or “married filing jointly.” When you stipulate a category, your withholding is determined by the tax tables that changed due to the Stimulus Plan expiring.

Military Eligible for Income Tax Filing Extensions. If you serve outside the U.S. or in a combat zone, you qualify for extensions in filing your income taxes. For outside the U.S., you qualify for an extension if you are outside the U.S. on the due date of the return. You can receive a 2 month extension. If you want more time, file an IRS Form 4868 and check block 8 for out of the country for 4 more months. If you’re in a combat zone, you have an extension for the time served in the combat zone plus up to 180 days starting the day you leave the zone. You could qualify for a longer extension depending on when you left for the combat zone. Assessment and collection deadlines will be extended and you will not be charged interest or penalties attributable to the extension period. The deadline extensions also apply to individuals serving in the combat zone in support of the U.S. Armed Forces, such as merchant marines serving aboard vessels under the operational control of the Department of Defense, Red Cross personnel, accredited correspondents, and civilian personnel acting under the direction of the U.S. Armed Forces in support of those forces. Members of the U.S. Armed Forces who perform military service in an area outside a combat zone qualify for the extension of time provisions if their service is in direct support of military operations in the combat zone, and they receive special pay for duty subject to hostile fire or imminent danger as certified by the Department of Defense. You are able to notify IRS directly of your request for combat zone relief for extensions of deadlines through a special e-mail address: combatzone@irs.gov. For more info on these tax filing extensions see this IRS page.