February 2011 Archives

This is my sixth year to coordinate the Internal Revenue Service Volunteer Income Tax Assistance Program (VITA) in my four-county service area of Cameron, Elk, McKean and Potter counties. In addition to training and monitoring volunteers, I also spend February, March and part of April interacting with clients on a one-to-one basis completing their federal and state income tax returns as well as rent and property tax rebate forms for those who are eligible. I use this opportunity to not only help them meet their legal obligations, but also as a teachable moment to help increase their financial literacy and skills.

Just yesterday I shared with a single mom of four that next spring, when she is filing the FAFSA (Free Application for Federal Student Aid) form for her first college-bound student, she could use information from her 2010 tax returns and later, once her 2011 return was completed she could go back and amend the information she inputted. There are various deadlines to filing the FAFSA, but folks have until April 15 to file their federal return and can also file an extension, making the return due in October. People who don't understand the system panic and may seek the services of a paid preparer in order to meet the FAFSA deadline. For many of the clients I see, tax preparation bills can exceed $200, money that could be better used to meet family obligations.

So the primary reason I got involved with VITA is that I don't believe you should have to pay someone else to help you meet your legal obligation of filing an annual income tax return. The tax system has become so complex and confusing, even calls to the IRS for assistance have been documented as resulting in receiving erroneous information. Additionally, beginning for the 2010 tax season, the IRS as well as Pennsylvania have foregone mailing income tax packages to taxpayers - forcing them to either use computers or seek the services of a paid preparer to get their forms. Many of the folks I interact with either don't have computers or lack the requisite skills to use them to prepare their returns. Many have disabilities or limited education and lack the sophistication to follow-through on their legal obligation.

Yesterday I had a retiree come for her VITA appointment, Her TOTAL 2010 income was $10,000 or so in social security retirement benefits, under $3,000 in pension benefits plus she had won $5,000 from the Pennsylvania Lottery (don't even get me started on that topic!) We ask that VITA clients bring last year's tax returns which sometimes provides additional information required for proper preparation of this year's return. She had seen a paid preparer last year who charged her $75 for their services. In reviewing that return I discovered her financial situation was the same as this year, except for no lottery winnings. Because of the sources and amounts of her income SHE WAS NOT REQUIRED TO FILE EITHER A FEDERAL OR STATE INCOME TAX RETURN. SHE PAID $75 UNNECESSARILY! Because she is under 65, her standard deduction is $5,700 and her personal exemption is $3,650 - added together, her first $9,350 is TAX-FREE - in this case her income was so low that her social security benefits didn't factor into her taxable income. Because her winnings were from the Pennsylvania Lottery, that is not taxable and Pennsylvania doesn't tax pensions or social security.

I didn't have the heart to tell her about the futility of her $75 spent on returns that weren't necessary - plus I also kept to myself that the paid preparer had reported her pension on her last year's state return. $75 may not sound like much to some people, but this was money she could ill afford to pay. What is done is done. I did explain to her the filing requirements and informed her that unless she returned to work, or the tax laws change, she would not have a filing requirement for either the federal or state.


Some things you don't miss until they're gone. Remembering what you've lost can sometimes be the hard part. Take the following steps today so in the event your wallet is lost or stolen, you can spring into action immediately and make a quick recovery.


1.     Remove your Social Security card from your wallet, memorize the number if you haven't already done so, and store in a safe place at home like a strong box or store in a bank safe deposit box.

2.    Remove everything remaining in your wallet and make photocopies of the front and back of each item important to your financial life. Put a date on this copy and store in your home file where you can easily retrieve it if/when you need it.

3.    Note on your calendar to perform the same procedure a year from now.

ACTION steps to take in the event your wallet is missing:

1.     Plan to immediately cancel all your credit and debit cards when your wallet is lost or stolen and request new cards as well as new account numbers.

2.    Report your missing wallet to the police to create an official record of the incident in the event that it was stolen.

3.    Report missing driver's license to your state's department of motor vehicles and request a new one.

4.     Alert the fraud departments of the three major credit reporting companies. They will place a fraud alert on your name and Social Security number, and you can request that they alert you before opening a line of credit in your name. (Equifax: 1-800-525-6285; Experian (formerly TRW): 1-888-397-3742; Trans Union: 1-800-680-7289)

5.    Wait about a month and then check your credit history with all three credit bureaus www.annualcreditreport.com to check for possible identity theft.

6.    Request a replacement Social Security card (If you failed to follow step 1 above) and avoid carrying it in your wallet in the future.

7.    Replace your health insurance cards by either contacting your employer's HR department or the health insurance company. Contact the Social Security Administration to replace your lost Medicare card.

8.    Contact any other companies whose cards you may have lost. Refer to your master copy that you photocopied and stored at home to easily remember what you lost and who to notify.



Another tax return preparation season is upon us and this is my sixth year of involvement with the IRS sponsored VITA (Volunteer Income Tax Assistance) program. I use tax preparation as a teachable moment to individualize education to families based on their unique set of financial circumstances. I help them understand the income tax code, but also develop strategies to reduce debt and save toward goals such as retirement, home purchase or post-secondary education. In addition to preparing federal and state income tax returns, the software also enables us to prepare Pennsylvania's Rent and Property Tax Rebate forms.

On Thursday, I assisted an elderly couple with preparing their rebate forms. They showed me a solicitation letter they received in the mail that, while not a scam per se, was very deceiving. Starting with a Harrisburg Address - while the letterhead also indicated they were a non-governmental agency, the letter looked very official including a client number. It also indicated they could be eligible for $975 rebate - this is only in effect for larger cities such as Philadelphia and Pittsburgh. In red lettering it indicated the need for action by March 18. In reality, the deadline for filing this form is June 30 and for the past few years the deadline has been extended to December 30. The kicker for me was, they were going to charge $39 if paying by check or $41 if paying by credit card to prepare the forms. AND clients were to prepay before any work was done!

Not only can seniors get these forms completed for FREE at VITA sites like mine, TCE (Taxpayer Counseling for the Elderly - another IRS program)sites and even state representative and senator office employees can assist in preparing the forms... again for FREE!

I called Representative Matt Gabler's office and they too had seen the solicitation letter. Mention of it was made in the newsletter they create.

They thought they made a good financial decision. "Why not pay off the car and truck loan with our savings? We will be debt free, won't have to remember to make monthly payments and we'll avoid paying interest on those loans! After all, popular financial gurus advocate being debt free, how could we go wrong? "

 Had they used funds from a savings or checking account, cashed in a CD or taken a distribution from a Roth IRA to pay off these debts there wouldn't have been a problem and I wouldn't be writing this article. Instead this retired couple took a distribution from their tax-sheltered accounts (pensions, 401K or Traditional IRA's.) Upon taking the money from their accounts - the previously tax-sheltered funds were now subject to taxation.

 What follows is a brief explanation of income taxation for retirees. Add up all income excluding Social Security - interest, dividends, rental income, and distributions from IRA have and pensions etc. These are all "subject" to taxation. Continuing with our example - add up Social Security payments. Now add half of Social Security to other types of income. Any amount in excess of $32,000 is also subject to taxation. Up to 85% of social security benefits can be subject to taxation based on other income. From the amount that is subject to taxation - subtract $13,600 which is the standard deduction for a married filing jointly couple who are both aged 65 or older. Subtract another $7,300 which is for two personal exemptions. In other words, of the amount that is subject to taxation - the first $20,900 is tax-free - the remainder is your actual taxable income.

 For our couple under discussion, $9,200 was subject to 10% tax rate resulting in a federal income tax bill of $920. The distribution also increased their income that is used in calculating eligibility for Pennsylvania's Property Tax Rebate Program so they were not eligible for the $250 rebate they would have received had they not taken the large distribution. Added together the $920 and $250 equals a $1,170 mistake.

 As it turns out, the decision to become debt free was much more expensive than paying a few more months of interest. This might be considered a case of being penny wise and pound foolish.

 How can you avoid making a similar mistake? Become more familiar with various savings and investment vehicles and pay attention to how they are treated for tax purposes. Learn more about your personal income tax situation. Even if you pay someone to prepare your tax return, review it to understand how the calculations are performed. Think about putting money in taxable accounts like savings accounts, tax-deferred accounts such as IRA's and 401K's and tax-free accounts such as Roth IRA's (you pay taxes when you invest!) As you pay for expenses in retirement you can control to a certain extent how much tax you pay based on which accounts you draw your funds from.

April 2011

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