Five Problems Financial Reform Doesn’t Fix

As I mentioned yesterday, the Senate approved the historic financial reform legislation, and sent it to President Obama for a signature. Many experts are questioning the affect this bill will have on Wall Street, and earlier today I came across this interesting article from NewsWeek.com on the five problems the new legislation will not fix. Check out a snippet of the article below, or head over to NewsWeek.com for the full text.

“We would have loved to have something like this for Lehman Brothers," said Hank Paulson with a sigh, in a recent New York Times story. "There’s no doubt about it.”

Paulson was talking about the financial-regulation bill that the Senate passed today. And he’s right: the next time there’s a financial crisis, regulators will say a quick prayer of thanks to Rep. Barney Frank for giving them the power and information to quickly figure out what’s happened and how to respond. The legislation ushers derivatives out of the darkness and onto exchanges and clearinghouses, gives regulators the power to oversee shadow banks and take failing firms apart, convenes a council of superregulators to watch the megafirms that pose a risk to the full financial system, and much else.

But the bill does more to help regulators detect and defuse the next financial crisis than to actually stop it from happening. In that way, it’s like the difference between improving public health and improving medicine: The bill focuses on helping the doctors who figure out when you’re sick and how to get you better rather than on the conditions (sewer systems and air quality and hygiene standards and so on) that contribute to whether you get sick in the first place.

That is to say, many of the weaknesses and imbalances that led to the financial crisis will survive our regulatory response, and it’s important to keep that in mind. So here are five we still have to watch out for:

1. The Global Glut of Savings: “One of the leading indicators of a financial crisis is when you have a sustained surge in money flowing into the country which makes borrowing cheaper and easier,” says Harvard economist Kenneth Rogoff. Our crisis was no different: Between 1987 and 1999, our current account deficit—the measure of how much money is coming in versus going out—fluctuated between 1 and 2 percent of gross domestic product. By 2006, it had hit 6 percent.

IRS Undeliverable Mail Costs Millions

From WebCPA:

The Internal Revenue Service's current method of sending notices and letters is costing taxpayers millions of dollars because it results in a large amount of undeliverable mail, according to a new government report.

The report, from the Treasury Office of the Treasury Inspector General for Tax Administration (TIGTA), found that the IRS sends out approximately 200 million notices and letters each year to individual and business taxpayers and their representatives at a cost of $141 million. In 2009, approximately 19.3 million of those mailings were returned to the IRS at an estimated cost of $57.9 million.

TIGTA assessed whether the IRS can reduce the volume of undeliverable mail. Its review of a random sample of 331 notices and letters returned to the IRS found that 37 percent were undeliverable because of invalid or nonexistent addresses; 35 percent had the wrong address; 24 percent were refused by the taxpayer or the taxpayer was not at home to receive the certified or registered mail; and four percent were returned for other reasons.

TIGTA recommended that the IRS allow taxpayers to submit a change of address over the telephone and improve its systems for identifying known bad addresses. TIGTA also recommended implementing a standardized procedure for processing undeliverable mail.

"The Internal Revenue Service needs to take advantage of the latest technologies and systems now available to cut down on undeliverable mail, thereby saving the taxpayers money," said TIGTA J. Russell George, the Treasury Inspector General for Tax Administration.

Retirement May Mean a Lifestyle Downgrade

With the baby boomers reaching retirement age, many of them are looking forward to settling into a nice, comfortable retirement. However, a new report from the Employee Benefit Research Institute suggests that more than half of these baby boomers are at risk of having insufficient funds to pay for the full extent of their retirement expenses.

Nearly half of older boomers -- those now aged 56 to 62 -- and some 44% of younger boomers -- aged 46 to 55 now -- are at risk of not having sufficient income to pay for basic retirement expenses and uninsured medical expenses, according to the study.

The study, which assumed that boomers would retire at age 65, also found that lower-income retirees are most likely to run out of money after 10 and certainly 20 years of retirement, while higher-income retirees are least likely to run out of money.

41% of those with the lowest income are likely to run short of money after 10 years of retirement, and 57% after 20 years. Meanwhile, just 5% of those in the highest income quartile will run out of money after 10 years, and 13% after 20 years.

So, what to make of this study?

Run out of lifestyle, not money

In reality, most Americans don't run out of money, they run out of lifestyle. As they age and spend down their assets, they typically reduce their living standard.

Continue reading at Market Watch.com…

May Job Openings Dip but Hiring Near 2-Year High

Although job openings slipped down in May, the hiring rate increased to the highest levels in 2 years. As this MSN News article explains, a number of these jobs were census workers, but the data still indicates an overall improvement for the U.S job market.

"The positive thing is job openings in general have been trending higher since February, even though they dipped in May. It confirms that the labor market has bottomed, there are some new jobs (being created)," said Harm Bandholz, chief US Economist at UniCredit Research in New York.

Job openings, a measure of labor demand, dipped to 3.21 million from 3.30 million in April, the Labor Department said in its monthly Job Openings and Labor Turnover Survey.

The job openings rate, a gauge of how many jobs were still open at the end of the month, eased to 2.4 percent from 2.5 percent in April.

But hirings rose to 4.50 million from 4.29 million, lifting the rate of hiring to 3.4 percent -- the highest since August 2008 -- from 3.3 percent in April.

Continue reading at MSN.com…

Wall Street Bill Clears Crucial Senate Hurdle

Despite many doubts, the historical financial reform bill passed a major hurdle in the Senate today. 60 Senators voted in favor of the legislation, which gave it enough support to overcome a filibuster. According to Retuers.com, President Obama intends to sign the bill into law next week.

Senate leaders set a series of final votes for 2 p.m., with passage looking assured. President Barack Obama, who proposed reforms more than a year ago, has said he wants to sign the measure into law next week.

Republicans who largely oppose the measure could delay a vote until Friday evening, though they are unlikely to do so.

The House of Representatives has already approved the bill, which tightens regulation across the financial industry in an effort to avoid a repeat of the 2007-2009 financial crisis.

'Too Big to Fail' Banks May Try to Get Smaller

From CNNMoney.com:

Wall Street appears to have beaten Washington to the punch.

While lawmakers enter the home stretch on regulatory reform with Thursday's Senate vote, the financial industry has already started to shake up how it does business ahead of the proposed new rules.

Just last week, Wells Fargo (WFC, Fortune 500) said it planned to shutter its more than 600 Wells Fargo Financial stores across the country and announced it was no longer going to make mortgage loans to people without stellar credit.

And on Tuesday, Citigroup (C, Fortune 500) said it had struck an agreement to transfer the management of part of its private equity business to outside parties StepStone Group and Lexington Partners.

Neither Wells nor Citigroup acknowledged that the moves were prompted by the proposed legislation which is expected to be signed into law by President Obama as early as next week.

Signs of the Stimulus

We have all seen those signs at road construction sites letting us know that are tax dollars are being put to use. Some of these signs are for your local taxes, and others promote the American Recovery and Reinvestment Act. What you may not realize is how much money is being spent on these signs, and who is really paying for it. Check out the following article from ABC News on the topic below.

As the midterm election season approaches, new road signs are popping up everywhere – millions of dollars worth of signs touting "The American Reinvestment and Recovery Act" and reminding passers-by that the program is "Putting America Back to Work."

On the road leading to Dulles Airport outside Washington, DC there's a 10' x 11' road sign touting a runway improvement project funded by the federal stimulus. The project cost nearly $15 million and has created 17 jobs, according to recovery.gov.

However, there's another number that caught the eye of ABC News: $10,000. That's how much money the Washington Airports Authority tells ABC News it spent to make and install the sign – a single sign – announcing that the project is "Funded by The American Reinvestment and Recovery Act" and is "Putting America Back to Work." The money for the sign was taken out of the budget for the runway improvement project.

ABC News has reached out to a number of states about spending on stimulus signs and learned the state of Illinois has spent $650,000 on about 950 signs and Pennsylvania has spent $157,000 on 70 signs. Other states, like Virginia, Vermont, and Arizona do not sanction any signs.

Continue reading at ABC News.com…

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Mid-Year Tax Planning: The Perfect Summertime Activity

The year is now half over and although most Americans wait until next April to think about taxes, I highly recommend tax planning throughout the year. The summer is a great time to review your finances since you will still have six months to make any changes to your withholdings, or take action to lower your tax liability.

Mid-Year Tax Projection

Since the year is half way finished, you can easily estimate what your total income for the year will be. Unless you anticipate a new job or are self-employed and unsure of your earnings for the rest of the year, you can simply add up your wages from January through June and double it. Using the 2010 income tax brackets you can then calculate your total federal tax rate. Look to see what you have already paid in federal taxes, and if your total taxes paid is less than half of your yearly tax liability then you might want to consider adjusting your withholdings or making an estimated tax payment.

Review your Withholdings

If you are underpaying on your federal taxes, you might want to adjust your withholdings. For wage earning employees, you can simply ask your employer for a new IRS Form W4. Either change your allowances or have an additional dollar amount withheld from your paychecks. If you have been overpaying the IRS, you might want to change your withholdings to have less taken out of your paychecks. Although you might not get as large of a refund in April, you will have more money in your wallet each month!

Estimated Tax Payments

If you are self-employed or have decent capital gains throughout the year, it is especially smart to calculate your 2010 tax liability. The IRS will asses a penalty if you underpay your taxes, so it might be a good idea to make an estimated tax payment. The most recent quarterly tax payment due date was June 15^th, but you can always make a late payment. The next payment is due Sept. 15. To learn more about estimated tax payments check out this entry on the Roni Deutch Tax Center – Tax Help Blog.

Organize your Files

When you have a few hours free, it might be a good idea to look over your financial records and tax related documents. Make sure you have documentation for any tax deductions or credits you plan to claim: all of your pay stubs, and receipts for any business or travel expenses you intend to write off. If you are missing any receipts you should try looking for documentation via your credit card or bank statements. This will be easier to do now, instead of six months from now when you might not exactly remember what day it was you took that client out to lunch or where you went.

Retirement Accounts

Depending on your unique financial situation you might want to consider opening a retirement account this summer. If you have a little extra money after your summer vacation why not use it to setup an IRA or 401(k). Some retirement plans – such as traditional IRAs – have significant tax implications and can lower your total tax liability.

Give to Charity

Another great way to lower your tax liability is to make charitable contributions. You could donate your winter clothing, as you will not need it in the hot summer weather, or any other household items you no longer need. Additionally, as the BP oil leak continues to spew oil into the Gulf you could make a monetary donation to a group working on the cleanup such as the National Wildlife Foundation.

Haiti Donations: $1.3 Billion

Relief organizations in the U.S. have raised an estimated $1.3 billion for Haiti relief, but experts are warning that more support will be needed to continue dislocated Haitians throughout hurricane season. Philanthropist Stacy Palmer says that while the money donated has provided food, water and shelter to many, the temporary homes most Haitians are living in are not suitable to withstand hurricane weather.

The donations have been enough to provide basic necessities such as food and water, according to Stacy Palmer, editor of the Chronicle of Philanthropy. But now homeless Haitians also need help fending off tropical storms.

"That's potentially worrisome with the hurricane season about to begin," she said. "The kind of shelters that people are in right now are tarps and things that would not necessarily be able to withstand a hurricane. The goal is to get sturdier kind of housing."

Palmer said that $1.3 billion is an impressive tally, coming close to the $1.6 billion that was raised in the wake of the 2004 tsunami in the South Pacific.

Continue reading at CNN.com…

Hawaii's Tax Revenue Slips In Recent Fiscal Year

Despite hopes that this would be a year of recovery, the state of Hawaii saw a drop in tax revenue this past fiscal year. Some officials believe this may be an inaccurate calculation, because some tax returns were withheld until the new fiscal year, so not all data has been collected.

According to the Associated Press individual income tax collections rose 14.5 percent in the fiscal year that ended June 30, compared with the same period a year earlier. Similarly, corporate income levy receipts increased 10.2 percent.

Moreover, the state's hotel tax collections rose 6.4 percent in fiscal year 2010.

At the same time, however, general excise tax receipts fell 4.4 percent, an indicator that consumer spending is still lagging.

Collectively, the state's general fund revenue dropped 0.5 percent for the fiscal year, the tax department reported.

The agency cautioned, though, that some tax refunds that normally would have been paid by June 30 were held back until the start of the new fiscal year, a moneysaving move instituted by Gov. Linda Lingle.

Two Senators Propose Reinstating Estate Tax

From Reuters.com:

Two senators, a Democrat and a Republican, have reintroduced a proposal to reinstate the estate tax, which lapsed this year amid a row among lawmakers over taxing the wealthy when they die.

Democratic Senator Blanche Lincoln and Republican Senator Jon Kyl late on Tuesday reintroduced a plan to tax estates over $5 million at a rate of 35 percent. The estate tax that expired last year had taxed estates at a rate of 45 percent, above an exemption of $3.5 million for individuals and above $7 million for couples.

There is no estate tax in 2010 because lawmakers last year failed to reach a deal to extend the tax. The House of Representatives last year had passed an extension of the 2009 rates, but senators clashed over the level of the tax.

Without action, under current law the tax will rise to 55 percent, with an exemption level of $1 million.

Several billionaires have died this year, escaping the estate tax, including former New York Yankees owner George Steinbrenner.

IRS: Opening Times, Addresses for July 17 Special Assistance Day for Oil Spill Victims

In a new press release, the IRS announced the opening times and locations of taxpayer assistance centers in 7 Gulf cities for Gulf oil spill victims, on July 17th.

The following locations will be open from 9 a.m. to 2 p.m. Central Time:

• 1110 Montlimar Drive, Mobile, Ala.
• 651-F West 14th St., Panama City, Fla.
• 7180 9th Ave. North, Pensacola, Fla.
• 2600 Citiplace Centre, Baton Rouge, La.
• 423 Lafayette St., Houma, La.
• 1555 Poydras Street, New Orleans, La.
• 11309 Old Highway 49, Gulfport, Miss.

Individuals who have questions about the tax treatment of BP claims payments or who are experiencing filing or payment hardships because of the oil spill will be able to work directly with IRS personnel at any of these locations on Saturday.

Last week, the IRS announced the opening of a dedicated phone line for victims of the Gulf oil spill –– 866-562-5227. This special toll-free line is open weekdays from 7 a.m. to 10 p.m. and will also be open to callers on Saturday, July 17 from 9 a.m. to 2 p.m. Central Time.

Wall Street Bill Moves Toward Final Test in Congress

Senator Harry Reid is expected to bring up the historical financial reform bill in Congress today, but the votes necessary for it to pass by the end of the week are not there to support it. While there are still Senators who have not decided how they will vote, experts are worried Reid may fall short of the 60 votes needed to clear an expected filibuster by Republicans.

Reid picked up the support of three Republican moderates on Monday, but Democratic Senator Ben Nelson said he still had questions about the bill. In addition, the seat of the late Senator Robert Byrd is likely to remain vacant until next week, depriving Democrats of another vote.

Analysts expect the bill to ultimately pass the Senate, giving Obama and his fellow Democrats an important legislative victory ahead of the November congressional elections.

Continue reading at Reuters.com…

Veterans And Taxes

My YouTube team shot another great tax tips video. In this new episode, host Edward Lester offers tax tips for Veterans. Check out the embedded video below, and be sure to check out my YouTube channel to see all of my other useful tax videos, and subscribe to stay updated on future videos.

More Americans' Credit Scores Sink to New Lows

From ABCNews.com:

The credit scores of millions more Americans are sinking to new lows.

Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.

"I don't get paid for loan applications, I get paid for closings," said Ritch Workman, a Melbourne, Fla., mortgage broker. "I have plenty of business, but I'm struggling to stay open."

FICO's latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO's 300-to-850 scale weren't as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on Myfico.com.

Tax Deduction of the Week: Casualty Losses

The Roni Deutch Tax Center – Tax Help Blog posted another great tax deduction of the week, this time taking on casualty and theft losses as well as how to calculate the deduction you may qualify for if you suffer a significant loss. I have included a section of the article below or head on over to the Tax Help Blog for more great tax advice.

Casualty Losses

If you suffer the loss of property (including damage and/or destruction) because of a sudden event, then you may qualify for a casualty loss deduction. These events need to be unexpected, such as an earthquake, fire, flood, shipwreck, storm, tornado, vandalism, etc. However, there are a few situations that are not tax-deductible including accidental breaking, pet-related accidents, accidents resulting from willful neglect, or progressive deterioration.

Theft Losses

Losses of property due to theft may also be tax deductible. As the IRS explains, “a theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent.” Therefore if you are the victim of a burglary, embezzlement, extortion, ransom, robbery, etc. then you may be able to claim a theft loss deduction.

Calculating the Deduction

According to IRS regulations your casualty losses are deductible to the extent that they exceed $100 per event, and the extent that they exceed 10% of your adjusted gross income (AGI). Therefore, if you suffer an $8,000 loss due to a flood, and your AGI is $40,000 then your total deduction will be $3,900 ($8,000 - $100 – {$40,000 x 10%}).

Questions for the Tax Lady: July 12th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Is it possible to have federal taxes withheld from my unemployment check?

Yes. To have taxes withheld from your unemployment compensation you will need to file IRS Form W-4V, Voluntary Withholding Request.

Question #2: What are the differences between traditional and Roth IRAs?

The largest difference between traditional and Roth IRAs are their tax implications. When you have a Roth IRA contributions are made from income that has already been taxed. These contributions are not tax deductible, but future withdrawals are not subject to an income tax. On the other hand, traditional IRA contributions are tax deductible, but you will have to pay income taxes on future withdrawals.

Why it's Time to Tax Internet Sales

From PC World.com:

Buying an $800 couch or television via the tax-free Internet can be nearly $80 cheaper than a purchase made in a high-sales-tax city like San Francisco -- such a deal. But the free ride is costing states and cities billions of dollars a year, and it damages local businesses that find it hard to compete.

The Main Street Fairness Act, introduced this month by Rep. Bill Delahunt (D-Mass.), would end the exemption for big Web retailers like Amazon.com and eBay that fear the change would be a body blow to their business. The Web sales tax issue has been debated and litigated for years, and it is hardly a popular cause, but with state and local governments deeply in debt, the chance to add a massive revenue stream may outweigh the political risks.

The seven-term Delahunt will not be running for re-election, but it would be unfair to see the timing as opportunistic. Delahunt sponsored a similar bill in 2008. I don't enjoy paying taxes any more than the next guy, but Delahunt was right then and he's right now. The Internet is no longer a baby that needs to be cosseted and protected from the real world, and favoring Internet business over brick-and-mortar ones via a tax exemption is not fair.

The budget hole provides the necessary opening for equal taxation

If you want government services, someone has to pay for them. The amount of money governments are losing due to the exemption is staggering. Uncollected use taxes (a use tax is pretty much the equivalent of a sales tax) for the six-year period ending in 2012 will range from $52 billion to $56 billion nationally, according to a 2009 study by economists at the University of Tennessee. New York City alone will lose at least $390.6 million in 2012; Chicago $229 million, they predict.

How Much Did Florida Tax Laws Factor Into LeBron James' Decision?

Although two-time MVP LeBron James has been praised by supporters for taking less money in pursuit of winning championships, as this article from AOL News explains, he actually stands to save money by moving to Florida. Why? Because the state of Florida does not have a personal income tax.

James looks to make an estimated $17 million next season by signing with the Miami Heat. Factor in endorsement deals with companies including Nike, Sprint and McDonald's totaling approximately $40 million, and James may find himself saving an estimated $25 million in state taxes over the next five years in Miami. Compare this with New York, where even if James signed a contract with the Knicks for an additional $1.5 million, he would be required to pay almost $1.7 million in state taxes, all on top of the additional income tax taken out of his endorsements.

Although the extra money alone was certainly not the only reason James is moving on from Cleveland -- he does have two friends named Bosh and Wade who will also live and work in the area -- public icons taking state income tax into account is actually nothing new to celebrity culture.