Talking Taxes When Clients Eye a Second Home

Arden Dale for the Wall St. Journal writes: A strengthening real-estate market has more wealthy people on the lookout for a second home or a piece of property to rent out.

When clients float the idea of buying a vacation home or becoming a landlord, the first thing their financial advisers bring up are taxes–both the benefits and pitfalls.

Advisers say a simple discussion with their clients can help them make the right decision on the best use for the property or whether they should buy the property at all.

For instance, a successful veterinarian recently learned this when he came to David L. Blain, a financial planner in New Bern, N.C., as a new client. Mr. Blain told the man he would likely keep losing money on a $200,000 single-family home he bought to rent out, thinking it would yield big tax write-offs.

Taxpayers are limited in how much they can deduct in losses on rental property they own. The most someone can deduct in losses is $25,000 a year in many circumstances. But for those with adjusted gross income over $100,000, the amount is phased out, dropping to zero at the $150,000 threshold. The veterinarian, who made over $1 million in 2012, didn’t know anything about this until Mr. Blain enlightened him. He would not have been able to deduct any losses until he sold the property.

“A lot of doctors fall for this,” Mr. Blain said. “They are told to get rental properties because they can take the losses.”

Several of his clients have bought second homes and investment properties recently. People feel more confident now that if they buy, for example, a beach house they have always wanted, it won’t lose its value anytime soon.

For advisers, a few probing questions at the outset can help uncover what kind of tax planning needs to be done. An adviser may ask a client whether their children are likely to want to inherit a piece of property. If so, a trust to pass the property to heirs to minimize gift and estate taxes may be in order.

Real estate in a recreational area, say, a ski cabin in Colorado, might be good as investment property. This carries a host of tax obligations, from reporting security deposits, expenses or advance rent paid by a tenant, to writing off depreciation, repairs and uncollected rents.

Chicago adviser Cicily Maton recommends clients–like the couple she works with who own a condominium in Panama that they rent out–use tax software to track expenses for their investment properties. “So people don’t have to spend the last part of March trying to gather everything,” said Ms. Maton, founder and partner in Aequus Wealth Management Resources.

When it comes to buying a second home, it’s key to know federal and state income tax rules. A lot of the same rules–including the mortgage-interest deduction–apply to both a primary residence and a second home.

But advance tax planning is key for anyone near retirement who’s thinking about buying a second home with an eye to moving in full-time at some point. Advisers see this a lot with so-called snowbirds who live in high-tax states most of the year but winter in Florida, which has no personal income tax.

The Internal Revenue Service and state tax authorities penalize those who report a home in one state as a primary residence when they are not residents there. Advisers can help lay the groundwork so that someone who moves isn’t questioned on this.

“They have to change where they are voting and document days,” said James J. Holtzman, a wealth manager at Legend Financial Advisors Inc. in Pittsburgh, with about $315 million under management. A new driver’s license is a key document needed to prove residency, he said.

In the past six months or so, clients have been more interested in real estate than in the last several years, according to Mr. Holtzman. Fortunately, he generally gets a word in before they pull the trigger.

“They usually ask me ‘Does it make sense? I’m thinking about doing it,’” he said.

IRS Fresh Start Program Helps Taxpayers Who Owe the IRS

The IRS Fresh Start program makes it easier for taxpayers to pay back taxes and avoid tax liens. Even small business taxpayers may benefit from Fresh Start. Here are three important features of the Fresh Start program:

• Tax Liens.  The Fresh Start program increased the amount that taxpayers can owe before the IRS generally will file a Notice of Federal Tax Lien. That amount is now $10,000. However, in some cases, the IRS may still file a lien notice on amounts less than $10,000.

When a taxpayer meets certain requirements and pays off their tax debt, the IRS may now withdraw a filed Notice of Federal Tax Lien. Taxpayers must request this in writing using Form 12277, Application for Withdrawal.

Some taxpayers may qualify to have their lien notice withdrawn if they are paying their tax debt through a Direct Debit installment agreement. Taxpayers also need to request this in writing by using Form 12277.

If a taxpayer defaults on the Direct Debit Installment Agreement, the IRS may file a new Notice of Federal Tax Lien and resume collection actions.

• Installment Agreements.  The Fresh Start program expanded access to streamlined installment agreements. Now, individual taxpayers who owe up to $50,000 can pay through monthly direct debit payments for up to 72 months (six years). While the IRS generally will not need a financial statement, they may need some financial information from the taxpayer. The easiest way to apply for a payment plan is to use the Online Payment Agreement tool at IRS.gov. If you don’t have Web access you may file Form 9465, Installment Agreement, to apply.  

Taxpayers in need of installment agreements for tax debts more than $50,000 or longer than six years still need to provide the IRS with a financial statement. In these cases, the IRS may ask for one of two forms: either Collection Information Statement, Form 433-A or Form 433-F.

• Offers in Compromise.  An Offer in Compromise is an agreement that allows taxpayers to settle their tax debt for less than the full amount. Fresh Start expanded and streamlined the OIC program. The IRS now has more flexibility when analyzing a taxpayer’s ability to pay. This makes the offer program available to a larger group of taxpayers.

Generally, the IRS will accept an offer if it represents the most the agency can expect to collect within a reasonable period of time. The IRS will not accept an offer if it believes that the taxpayer can pay the amount owed in full as a lump sum or through a payment agreement. The IRS looks at several factors, including the taxpayer’s income and assets, to make a decision regarding the taxpayer’s ability to pay. Use the Offer in Compromise Pre-Qualifier tool on IRS.gov to see if you may be eligible for an OIC.

Additional IRS Resources:

• Online Payment Agreement tool
• Fresh Start Notice of Federal Tax Liens
• Form 12277, Application for Withdrawal
• Understanding a Federal Tax Lien
• Offer in Compromise Pre-Qualifier tool
• Offer in Compromise
• Electronic Payment Options Home Page
• Payments (payment options)

Using marginal income tax rates may be a flawed approach

Steven Savant and Ken Davis for Producersweb.com write: Tax rates are useful in evaluating proposed financial transactions. But before we consider the best way to do that, lets define what we mean by "tax rates" as used in this article: 

Marginal income tax rate: The amount of tax paid on an additional dollar of income. The marginal income tax rate is taken from the highest tax bracket a taxpayer would be required to use to compute their income taxes before the proposed transaction is made. 

Effective income tax rate: The average rate at which income is taxed. An effective tax rate is calculated by dividing total tax expense by taxable income. The authors’ opinion is that the effective income tax rate is not a useful metric for evaluating the purchase of a financial asset. 

Effective marginal income tax rate: This is a hybrid of the prior two calculations. We take the taxes caused by the marginal income tax rate and add any additional taxes the transaction creates to come up with the total taxes caused by the transaction. This sum is then divided by the total taxable income to derive the effective marginal income tax rate. 

An example of using only the marginal income tax rate: Weigh the net after tax results of purchasing taxable bonds versus municipal bonds. Consider a taxable bond paying 5 percent with the same duration and quality rating as a municipal bond paying 3.75 percent. Which is the best choice for federal income tax purposes? 

Well, if your marginal income tax bracket is less than 25 percent, then the taxable bond is the best bet. We derive that by subtracting 25 percent of the interest rate to arrive at 3.75 percent. If it was 20 percent, the after-tax interest rate would be 4 percent and therefore greater than the municipal bond net after tax interest rate. 

In this example 25 percent is the “crossover” point where higher tax rates would cause the municipal bonds to be the superior choice. 

However, the transaction may trigger other parts of the income tax law that increase the overall tax impact. If you’re buying a municipal bond that will provide “so-called” tax-free income, then you may also be required to include a portion, or all, of your Social Security income in taxable income. Municipal bond income is included in provisional income. This is the amount that determines if your Social Security income is taxable. Thus, additional tax rules like this may cause the marginal effective income tax rate to be substantially higher than the marginal income tax rate.

But wait, there is more! What if you buy a piece of raw land with no current taxable income? You purchase the land and five years later you sell it for a very nice profit of $10,000. This is classified as a long-term capital gain (LTCG). Let’s say your marginal LTCG rate is only 15 percent and creates $1,500 in additional taxes. You may very well be patting yourself on the back for deferring taxes and then getting a low tax rate. But are there other correlated tax consequences you’ve missed? 

Take a look at the form 1040 federal income tax return. Your LTCG will be reported on Schedule D. Assuming this is the only capital gain or loss you have, that amount flows to page one. It then travels down to the bottom line on page one. That is called adjusted gross income (AGI). And now an unexpected tax effect may kick in. This is subtle but important. The capital gain income has been included at 100 percent, or $10,000 in our example, not 15 percent or $1,500. 

How can that be? The tax rate is applied to the LTCG, but the full amount of the capital gain travels through the tax return and impacts the AGI. The higher AGI may affect the taxation of things like the inclusion of Social Security income, alternative minimum tax calculations and many other deductions, credits and exemptions that may be phased out at higher AGI levels. All of these favorable tax items are limited if the AGI is too high. And to add to the confusion, they all have different formulas for limitation. 

Now back to your land deal. We make $10,000 in LTCG. That causes $8,500 in additional Social Security income, in our example, to be included in our tax return. At a marginal income tax bracket of 25 percent, that increases our taxes on the capital gain by $2,125 (.25 times $8,500). That is a net effective percentage income tax rate of over 21 percent on our $10,000 gain. This is then added to our 15 percent capital gains tax. So, instead of paying only 15 percent on the capital gain, we end up paying a total of $3,700 or a 37 percent effective tax rate. 

And who knows, the increase in AGI or modified adjusted gross income (MAGI) may cause other tax issues to arise as well. The only good way of evaluating the tax impact of a transaction is to use a tax projection software package to look at the before and after tax cost on new income. The software considers all the various tax law elements to find the end result on a before and after basis. It is virtually impossible to give a quick, off-the-cuff estimate of taxes on a proposed transaction. 

Now that you see the problem, how can we help our clients? Take a look at the article, “How can line 20(b) help you sell more annuities?" located on the ProducersWEB site. This article demonstrates how a combination annuity strategy can reduce adjusted gross income and thereby reduce or eliminate some of the alternative tax impacts on additional income. 

And of course the seasoned insurance professional will also realize that there are many other tax strategies employing both life insurance and annuities that can favorably impact the clients’ taxes. Deferral is king right now. It provides the richest variety of opportunities we have to help our clients build their wealth.

IRA Cap Gives Rise to New Funding Strategies / President’s proposal comes with silver linings for shrewd advisors

John Sullivan for AdvisorOne writes: “President Barack Obama’s proposal to cap tax-deferred retirement contributions at $3.4 million is raising a lot of questions among financial planners,” Kelly Greene understatedly wrote on The Wall Street Journal’sTotal Return blog on Monday.

Full-fledged freak-out is more accurate.

“Curbing the growth of retirement plans in a nation where 91% have less than $100k saved is insanely ignorant,” financial planner, author and speaker Rick Kahler tweeted upon news of the plan, summing the sentiment of many in the advisor industry.  

Criticism of the overall budget was bipartisan, with Joe Lieber of Washington Analysis noting that “liberals are especially concerned about the president’s inclusion of chained CPI," a different measure of the consumer price index, "as a cost savings measure.”

But as with the Whac-A-Mole carnival game, new regulation often means new opportunity, and Greene pointed to two new funding strategies already making the rounds in social media forums.

The president’s budget proposal includes a lifetime cap on savings in individual retirement accounts and other tax-deferred savings vehicles, including 401(k) plans and profit-sharing plans.

“The reasoning is that a worker’s total account balance would be limited to the amount needed by a 62-year-old to buy an annuity generating an annual payment of $205,000,” she explained.

She said she heard from “dozens” of financial planners, estate-planning lawyers and savers themselves whose savings “hover close to that level” and are asking questions about how it would work.”

They include:

• How would this be administered when you have hit the cap, but then the market value dips and you’re below it and can contribute again?
• Would public employees face the same upper limit on their pensions? If they already have reached the $205,000 limit, could we stop making contributions for them? Or could they stop getting pension raises?
•  What if you have a pension and other tax-deferred accounts? Who is responsible for aggregating the information? Who will pay that administrative cost?
• How many people will be voting on this who have a pension greater than $205,000 a year?

Two strategies she says are being mulled.

“Advising your children to fund Roth IRA accounts, on which tax is paid upfront and withdrawals are generally tax-free after meeting holding requirements, early in life till they reach the cap, giving their investments more time to grow beyond the cap.”

The second is setting up a Roth IRA trust to follow another provision of the budget proposal, “emptying inherited accounts within five years of the IRA owner’s death. The IRA could be emptied into the trust, and then you could still require your heirs to take withdrawals over a longer period of time, if you’d rather them do that than be hit with a one-time windfall.”

7 tips to avoid annuity headaches / The potential problem of running out of money during retirement is a real one. This concern brings with it a tremendous amount of anxiety and worry.

Melody Juge for MarketWatch.com writes:  If planned properly, the right annuity product selection can provide an income that cannot be outlived, thus making for a more emotionally comfortable retirement by taking the worry and concern out of running out of money in your lifetime.

Be cautious, however, while exploring the possible use of income annuities to fund your fixed-income and lifestyle-income requirements during retirement; the wrong choice can be unforgiving.

7 tips to stay out of annuity trouble:

1. Recognize trade-offs

If you are thinking about purchasing an income annuity, the money has to come from somewhere. Be sure that you explore and understand all aspects of the trade-off you will be making if you are moving money from your CDs, 401(k)s, IRAs and other investments into an annuity and that making the switch is in your best interest.

2. Understand the contract

There are many moving parts within an income annuity contract: caps, participation rates, guarantee rates, the offering of various riders such as cost of living adjustment, nursing home, accelerated death benefit and the charges associated with them plus many more contractual restrictions.

Here are some particularly complicated areas in an annuity contract that can be difficult to comprehend that you need to be aware of and thoroughly understand before signing on the dotted line: Length and amount of surrender charges, fine print of the monthly/annual percentage that will be paid to you during the receiving of income — the exact percentage and how it is calculated and all the details of what happens if you stop the flow or want to postpone receiving income once you have started to collect. Also be sure to check if penalty free withdrawals are allowed, if so what percentage and how often.

Most annuity contracts are extremely cumbersome with a great deal of legal language. Moreover, many of the insurance salespeople who sell annuities have never read an annuity contract nor do they understand the products they are offering to you. Be careful who you choose to work with.

3. Consider smaller contracts

In today's annuity market placing a large sum of money in one annuity contract may not be the best choice. Why? You will have more flexibility if you request smaller contracts.

Here is an example: Let's say you have purchased an annuity with a premium of $200,000. Request two $100,000 contracts. This request has to be done prior to the contract being issued. However, if you have just purchased an annuity that is within its 15-to-30-day free look period, then you can send the contract back and request that it be reissued in smaller increments.

When it comes time to turn on your income benefit you can turn on both annuity contracts for the full amount you originally planned for or if your circumstances have changed you may choose to delay starting the income flow from the second contract. This suggestion will help aid in the quest for maximum flexibility in manipulating your contracts to give you more control over your money.

4. Don’t forget your emergency fund

Be very careful about how much of your investment dollars you are allotting to an annuity and be certain you have explored and thought through all the reasons why you are making this purchase.

I continue to read and hear horror stories about people who are disgruntled because they placed ALL their 401(k) or IRA money in an annuity and then their situation changed and they needed something different from what they originally purchased. They feel stuck with what they have. Well, they are stuck.

Although retirement income requirements are evaluated on a case-by-case basis generally speaking, it is important to have cash on hand as well as investible assets that are structured for growth. Ultimately this strategy may help you in a severe inflationary environment. And, of course, it is very important to have an emergency fund. Emergency funds should be held in cash, after all they are set asides for an emergency.

5. Annuities can be treacherous

There is a big difference between annuities being sold for all the “bells and whistles” that are promised or annuities that have been carefully chosen and are placed in a portfolio to fund a specific need for a specific period where some of the bells and whistles actually turn into usable features and benefits.

Here are a couple of examples of annuity usage:

A.) You may need guaranteed supplemental income for a few years to tide you over until you can collect your maximum Social Security benefit. To avoid having to pull money out of an investment account at the wrong time to supplement your income during a wildly fluctuating market, you may find that it makes more sense to purchase a five to seven-year income annuity to tide you over.

B.) Your particular circumstances may require additional monthly life income to supplement your social security benefit and/or pension. Review what makes sense for you as it relates to your income needs as well as the potential growth of your portfolio.

6. Work with a pro

Be sure you are working with someone who is licensed and experienced not only in annuities, which are insurance products, but also in general investments, which are securities products which require different licensing.

In addition, the monthly income that you may be counting on from an annuity is only as good as the financial strength of the insurance company you are receiving it from. Be aware of the ratings of the insurance carrier you are considering. Check with the Insurance Guaranty Corporation in the state where you are purchasing the annuity.

The Guaranty Corporation is a not-for-profit corporation whose members consist of all life insurance companies licensed to do business in a particular state. In the event that a member insurer is found to be insolvent and is ordered to be liquidated by a court, the Guaranty Corporation provides protection to the policyholders of that member up to certain limits set by the state.

7. Don’t get caught up in the hype

Annuities are either thoughtfully placed in an investment portfolio for a specific purpose or they are simply sold. The dinner seminar is a good example of being in a hyped environment, getting caught in the whirlwind of “fabulous annuity benefits and hearing the angels sing” and then finding out sometime later, well after you made your purchase, that you made the wrong decision for all the wrong reasons for your long-term situation.

This product category definitely offers some outstanding features and benefits and a variety of uses to supplement retirement income and to create life income and may be an excellent choice for some people.

Nonetheless, annuities are not right for everyone.

( Required Minimum Distribution ) RMD: A sensible systematic withdrawal plan / easy-to-maintain retirement income planning strategy

Robert Klein for MarketWatch.com writes: Let me state up front that I don't subscribe to the traditional retirement systematic withdrawal planning strategy.  The approach to which I'm referring is the application of a fixed percentage, e.g., 4%, to an investment portfolio on the date of retirement to determine the annual withdrawal amount for the rest of your life. There are variations on this theme where the calculated amount may be adjusted for inflation and/or investment performance, however, the basic concept is the same.

Why I don't recommend traditional systematic withdrawal plans

There are three reasons why I don't use this methodology in my practice since it:

1. Typically doesn't take into consideration other non-portfolio sources of income, e.g., annuities and Social Security.

2. Usually doesn't adjust for income tax consequences of different types of investment accounts, e.g., IRA's vs. nonretirement accounts.

3. Generally doesn't allow for unusual onetime or difficult-to-plan-for expenses such as home improvement projects or long-term care expenses.

In summary, these plans are too rigid and generally aren't easy to maintain year after year for most individuals. More importantly, they don't reflect real-life needs of most retirees. People don't live on percentages; they require dollars. In addition, the dollar amounts need to be flexible.

Also see: The ‘4%’ retirement myth

The required minimum distribution plan

There's one systematic withdrawal plan, however, of which I'm a big fan. Believe it or not, it was created and is overseen by the IRS. It's known as the required minimum distribution, or "RMD," plan.

If you own qualified retirement accounts such as 401(k) plans, 457 plans, IRAs, or SEP-IRAs, you're required to take annual minimum lifetime distributions from these accounts beginning by April 1 of the year following the year that you turn 70 1/2. The amount of your distributions, or RMD's, are calculated by dividing the value of your account on Dec. 31 of the previous year by a factor from an IRS table based on your attained age during the current year.

What I particularly like about RMD plans as a retirement income planner is that the IRS table factor goes to age 115. This results in preservation of assets for unforeseen events or for a potential legacy assuming that significant distributions in excess of RMD's aren't taken.

RMD plan example
Let's look at a simple example of a hypothetical SEP-IRA account with a value of $600,000 at age 70, an average rate of return of 3%, and annual withdrawals on Jan. 1 of each year equal to RMD's. Per the spreadsheet, the initial withdrawal amount at age 71 is just under $23,000, or 3.8% of the value of the IRA. The RMD at age 80 is approximately $28,000, or 5.3% of the value of the account. RMD's exceed $30,000 and approach 7% of the account value beginning at age 85.

This is a remarkable, easy-to-maintain systematic withdrawal plan by any standards. With a relatively low average rate of return of 3%, over the course of 15 years:

• The annual distribution amount has increased by 33%, going from approximately $23,000 at age 71 to approximately $30,000 at age 85.
• The annual withdrawal as a percentage of the account value has increased by almost 80%, going from 3.8% at age 71 to 6.8% at age 85.
• Total withdrawals equal $400,000, or an average of just under $27,000 per year.
• There's still an account value of $429,000 remaining at age 85.

Since this is a SEP-IRA account and all withdrawals are taxable as ordinary income, the annual withdrawals need to be reduced by income tax liability attributable to the withdrawals to calculate the amount available for spending.

This plan by itself probably wouldn't be an effective retirement income planning solution for most people. Nonetheless, the after-tax withdrawal amounts combined with after-tax Social Security benefits could provide a nice retirement income floor.

In this example, a traditional systematic withdrawal plan approach wouldn't work. For one thing, the withdrawal percentage, assuming that it's 4%, would be less than the actual withdrawal percentages in all but the first three of 15 years. In addition, the withdrawal amounts would be less than the RMD in most years. To the extent that this occurs, a 50% penalty would be assessed by IRS on the amount not withdrawn.

Although not a traditional systematic withdrawal plan, RMD's are a sensible, easy-to-maintain retirement income planning strategy that can be used in conjunction with other income sources to provide a solid retirement income floor in many situations, preserve assets for unforeseen events, and provide for a potential legacy.

Four Reasons Why It'll Be Almost Impossible To Reform The Tax Code

Daniel J Mitchell for the Daily Caller / Business Insider writes: Is tax reform impossible? That’s a depressing topic to address on Tax Day, particularly since I’ve spent the past 20 years pushing for tax reform.

I hate to think that my life has been wasted, but let’s consider several reasons why it’s become more difficult to scrap the Internal Revenue Code and implement a simple and fair system such as the flat tax.

1. The barnacle effect — Our tax code is now a 74,000-page monstrosity, and it seems that politicians make the system more convoluted every year with new credits, deductions, exemptions, preferences, exclusions, and other special provisions.

Every new layer of complexity is akin to more barnacles on a ship, undermining performance. In theory, it makes sense to scrape off these barnacles and restore the ship, but that requires some degree of long-run thinking.

Our political system, though, is dominated by lawmakers who tend not to think past the next election cycle. That makes it difficult to convince them to undertake a big project, even if they’re sympathetic to tax reform.

2. The redistribution effect — I’ve never agreed with the deterministic political analysis about “makers” vs “takers,” but there’s little doubt that a growing number of Americans now see tax returns as a vehicle for getting money from the government.

I’m not talking about the fiscal illusion that results when some people over-pay their taxes and then are happy to get a refund. Those people should get dunked in cold water until they realize it doesn’t make sense to give politicians an interest-free loan.

But I’m talking about a different crowd. There are now millions of Americans who benefit from redistribution programs that are laundered through the tax code. The “earned income credit” is the best-known example. Simply stated, “refundable” credits allow people to get checks from the government even if they didn’t pay any tax.

Needless to say, those people don’t have much incentive to oppose the current system.

3. The corruption effect — The metropolitan DC area is now the wealthiest region of the nation; it includes 10 of America’s 15 richest counties. But most of this prosperity is the result of “rent-seeking,” which is a dorky term economists use to describe what happens when people use the coercive power of government to obtain unearned wealth.

One of the main sources of that unearned — and undeserved — prosperity is the tax code, which takes money from the economy’s productive sector and gives it to DC-based bureaucracies.

But the real problem (at least in terms of fixing the tax code) is that Washington is a boomtown in part because so many people make big bucks manipulating the tax code. Lobbyists obviously would hate a simple and fair flat tax, but there are also pervasively corrupt segments of the economy, such as the ethanol industry, that rely on favoritism in the tax code. And you better believe those folks never wander too far from the corridors of power.

Many of these insiders are former politicians and former Capitol Hill staffers — particularly those that worked on the tax-writing committees. They make big bucks, and the current staffers look forward to the day when they can cash in on their “government service” and start “earning” huge salaries. Needless to say, these people are not exactly advocates of reform.

4. The anti-tax competition effect — Beginning with the Reagan and Thatcher tax cuts, the world experienced a virtuous period of tax competition that lasted for about 30 years. Even politicians in statist nations such as France and Germany felt compelled to lower tax rates because of fear that jobs and capital would migrate to jurisdictions with better policy. The trend was boosted by globalization.

In recent years, however, high-tax nations and left-wing international bureaucracies such as the Paris-based Organization for Economic Cooperation and Development have worked to undermine tax competition and make it easier for politicians to impose class-warfare tax policy. They first went after so-called tax havens in order to make it easier for them to track and tax flight capital.

Now the OECD has a new plan to go after multinational companies and significantly boost their tax burdens, presumably through the creation of a global tax return and a policy called “formula apportionment.” This system would cripple corporate tax competition and reverse the positive trend to lower corporate tax rates.

The Obama administration, unsurprisingly, has been working with Europe’s decrepit welfare states in favor of these misguided policies. And every time they make progress, politicians feel less pressure to lower tax rates and reform tax systems. Why bother improving the tax code, after all, if you think that taxpayers have no choice but to submit?

So what’s the takeaway from this depressing list? Well, the answer to my question almost surely is yes. It’s more difficult than ever to reform our tax system.

But that’s not an argument for capitulation. It’s simply sober-minded analysis.

To close on a positive note, the fact that we now face more obstacles to tax reform means that the benefits of tax reform are even larger.

Tax Internet Sales, Stimulate Growth / States can cut their income-tax rates if Web vendors collect the sales taxes that are legally due.

Arthur B Laffer for the Wall St. Journal writes: Reinvigorating the economy should be priority No. 1 for federal and state leaders. After enjoying an average growth rate above 3.5% per year between 1960 and 1999, Americans have had to make do with less than one-half that pace since 2000.

The consequences are already dramatic and will become even more so over time. Overall we are 20% poorer today than we would be had the pre-2000 growth rate persisted. All other things being equal, less national income also means federal and state fiscal problems are more intractable.

At the state level, there are reforms that can alleviate the problems associated with declining sales-tax bases and, at the same time, allow the states to move closer to a pro-growth tax system. One such reform would be to have Internet sellers collect the sales taxes that are owed by in-state consumers when they purchase goods over the Web.

So-called e-fairness legislation addresses the inequitable treatment of retailers based on whether they are located in-state (either a traditional brick-and-mortar store or an Internet retailer with a physical presence in the state) or out of state (again as a brick-and-mortar establishment or on the Internet).

In-state retailers collect sales taxes at the time of purchase. When residents purchase from retailers out of state (including over the Internet) they are supposed to report these purchases and pay the sales taxes owed—which are typically referred to as a "use tax." As you can imagine, few people do.

The result is to narrow a state's sales-tax base. It also leads to several inefficiencies that, on net, diminish potential job and economic growth.

Exempting Internet purchases from the sales tax naturally encourages consumers to buy goods over the Web; worse, the exemption incentivizes consumers to use in-state retailers as a showroom before they do so. This increases in-state retailers' overall costs and reduces their overall productivity.

The exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes.

Therefore—as with any pro-growth tax reform—the sales tax base in the states should be broadened by treating Internet retailers similarly to in-state retailers, and the marginal income-tax rate should be reduced such that the total static revenue collected by the state government is held constant.

One difficulty in imposing an Internet sales tax is the existence of dozens, if not hundreds, of sales-tax jurisdictions in many states, often with the tax rates and tax classification of the same goods varying by jurisdiction. It is overly burdensome to task companies with remitting sales taxes to more than 9,500 such tax jurisdictions. Instead, each state should set up a single sales-tax system, making compliance as easy as possible for today's modern sellers.

Addressing e-fairness from a pro-growth perspective creates several benefits for the economy. A gross inequity is addressed—all retailers would be treated equally under state law. It also provides states with the opportunity to make their tax systems more efficient and better aligned toward economic growth, as well as improve the productivity of local retailers.

The principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation's fiscal problems. Properly addressing the problem of e-fairness on the state level is a small, but important, step toward achieving this goal.

Money Conversations: What We Hear Versus What Was Said

Carl Richards for Fool.com and the New York Times writes: What I'm about to relate is a story I suspect many of you have experienced at least once if you're in a relationship.

My wife mentioned that her friend had recently redone her kitchen. As she explained all of the renovations, I started doing mental arithmetic that quickly added up to big dollars, dollars we couldn't afford. Instead of engaging in a fun conversation about why my wife liked the kitchen and what she thought was cool about it, I responded with my typical "We can't afford that."

Of course, when she heard my response, my wife gave me a confused look and said, "What are you talking about?"

Clearly, after 15 years of marriage, I haven't fully learned the lesson that just because my wife is talking about a new kitchen, she's not implying that she wants to remodel her kitchen. She was only discussing something of interest to her and what she thought might be of interest to me.

So why did I make the leap and start to feel tension in my shoulders? After all, my wife is no stranger to money. Her undergraduate degree is in finance, and she served as the chief financial officer of a small development company. More recently she's taken over as our family CFO, which leads me to wonder why I'm assuming she's talking about money when in reality she's just talking about life.

This conversation isn't the first time that I've made the leap to money based on things my wife tells me. For example, every time she mentioned someone she knew that was planning a family trip to Hawaii, I immediately started calculating how much such a trip would cost. Even something as simple as talking about where friends plan to send their children to college makes me start thinking about money.

The reality is that my brain is wired to think differently when it comes to money. Based on my experience, and the stories others have related, it's clear that men and women can have completely different approaches to how they talk about money. What I took as code for "I want a new kitchen" was just my wife talking about something she enjoyed. How many times has this happened between you and your spouse?

Even if it happens a lot, this is not a question of who's right and who's wrong. Rather, it's an opportunity for us to recognize that when we're dealing with people whom we care about, we can't impose our money language and expectations on them.

I will probably continue to do mental arithmetic when I'm chatting with my wife, but if I remember that 99% of the time she's simply talking about subjects that interest her, I can reduce my anxiety over money. How we were raised to view money (let alone all the other influences of gender, experience, and education) plays a role in how we talk and think about money. So it's healthy to recognize that we all bring baggage to these conversations. Hopefully it won't take me another 15 years to put it into practice.

Wealth Management Outsourcing: Vendor Landscape

Bobsguide.com writes: Outsourcing in wealth management is a relatively recent phenomenon. However, it has been gaining momentum in last four to five years and is expected to continue, according to the new report, Wealth Management Outsourcing: Vendor Landscape, from Celent, an international financial research and consulting firm.

Key findings of the report include:

• Wealth management firms continue to confront the lasting effects of the financial crisis. Lackluster market conditions, erosion in assets and client base, stringent regulations, increased client demands, and an increased focus on risk are having adverse impact on firms' revenues and costs. Many firms are choosing to outsource significant parts of their operation to be able to focus only on the core business.

• This report provides an overview of the vendor market. Fifteen industry vendors are included: Advent Software, Cognizant Technology Solutions (CTS), FIS, Genpact, HCL Technologies, iGATE, Infosys, Miles Software, MphasiS, Polaris Financial Technology Limited, SEI, State Street, SunGard, Tata Consultancy Services (TCS), and WNS. This list is not exhaustive but provides a good representation of different types of market players.

• Celent finds that the offerings by most vendors are broadly similar. All of them have developed strong expertise in mid/back office functionalities. Support for front office is relatively less developed in general. This is due to the fact that wealth managers are still reluctant to outsource front office functionalities. However, things are changing as firms look to outsource more front office functions. It needs to be mentioned that wealth management outsourcing is still a niche area compared to many of these vendors' overall suite of offerings, and many have recently started to offer it as a full service. As the market evolves and vendors build on their expertise over the next 18 to 24 months, the differences in their offerings will become clearer.

• Cost cutting remains the primary driver behind adoption of outsourcing, which typically can save 20% to 30% of costs over a 3 to 5 year period. Secondly, outsourcing also offers easy scalability options; this is more relevant now as firms are either cutting down or closing operations in certain markets, while looking to expand in others - all in a short period of time. Time to market has therefore become critical. Data management, especially in large organizations offering multiple services, is another aspect that firms are looking to outsource.

• It is expected that the focus will slowly shift from IT outsourcing to business process outsourcing. A number of vendors are already witnessing rapid growth in their BPO services revenue, even though IT services growth remains modest. This trend is occurring in overall offerings, and the wealth management segment is likely to follow the same direction.

• In terms of functionalities, the trend is likely to shift towards front office outsourcing, as wealth managers, primarily in the US, take a more aggressive approach. In the future wealth managers will increasingly engage outsourcing providers in the areas of client-facing technology, advisor- / relationship manager-facing technology, channels, data management, CRM, client reporting, providing mobile presence, portfolio management / order management for execution services, and seamless integration of channels for various products and services delivery.

• Consolidation of vendor relationships is likely to continue. Firms will engage with two to three vendors as their strategic partners. This is likely to have an impact on the vendor landscape. Large vendors will look to add to their existing solution to offer an end-to-end wealth management offering. On the other hand, small and medium-size vendors, which do not have resources and scale, will look to focus on niche areas and look to serve the Tier II and Tier III segments of the market.

All Things Appy: Top 5 Chrome Finance Apps

Patrick Nelson for TechNewsWorld.com writes: Now that tax time is behind us, it's time to get serious about money management -- before that whopping refund that's coming is spent, or before another year slips by and another ugly tax bill presents itself. If you're a fan of the Chrome browser, there are lots of add-ons available to help make you smarter about money. Financial Calculator, Google Finance, Zoho Invoice, Cash Organizer and Vuru are the best of the bunch.

It's mid-April, and spring is in the air -- that time of year when a young man's or young lady's thoughts turn to money. Conveniently for us all, the Web browser is a fine place to organize finances, whether you want to get the process over with as fast as possible, or enjoy it in king-is-in-the-counting-house mode.

Google's Chrome Web browser is resplendent with numerous add-ons fit for the purpose.

In this, TechNewsWorld's regular best-of apps column, we take a look at the top five must-have apps or add-ons in the finance category.

About Google's Chrome Web Browser

This environment features three types of add-on: Web apps, themes and extensions. All can be obtained from the Chrome Web Store.

Select the Chrome Web Store link in the lower right corner of a new tab in the browser. Then search by entering the add-on name in the search text box.

No. 1: Financial Calculator

Financial Calculator from financial-calculator.appspot.com has 3+ stars out of a possible 5 from 49 reviewers in the Chrome Web Store. The app has 58,465 users.

This app does what it says it does. It's a browser-based financial calculator with a simple interface. Calculators include Mortgage, EMI, Loan Term, Loan Amount, Interest, Time Deposit, Recurring Deposit, Stocks, Yield to Maturity, Bonds, IRR, APR and ROI.

No. 2: Google Finance

Google Finance has 4 stars out of a possible 5 from 428 reviewers in the Chrome Web Store. The app has 318,319 users.

Google's own finance product, within its browser environment, comes feature-packed.

Real-time stocks, quotes, charts and financial news tie in with a customizable watch list that you can share. All of the fiscal watch tools that you would expect are in this much-liked product.

It also offers some analytical Google-ese, like comparing stocks across a variety of criteria, industry trends and technical indicators.

No. 3: Zoho Invoice

Zoho Invoice has 4 stars out of a possible 5 from 43 reviewers in the Chrome Web Store. The app has 36,863 users.

Online integration in this app means that you can invoice clients across devices, including Google's Android smartphones. This means you don't have to be pushing paper back at base to get paid. When you add automation, Zoho reduces time spent invoicing too.

This app features time-tracking, expenses, reports and an all-important follow-up on payments.

Upgrade to more elaborate Zoho Books should you outgrow Zoho Invoice.

No. 4: Cash Organizer

Cash Organizer has 3 1/2 stars out of a possible 5 from 98 reviewers in the Chrome Web Store. The app has 46,056 users.

This Intuit Quicken-substitute small office and home finance organizer lets you control budgets by producing graphical and textual reports based on what you spend.

Transactions are classified, and account balances, including those from individual banks or currencies are maintained. The whole thing is protected with 256-bit security encryption at all times.

No. 5: Vuru

Vuru, a stock analyzer, has 4 stars out of a possible 5 from 54 reviewers in the Chrome Web Store. The app has 43,075 users.

If you're using any of Google's products, in this case Google's Chrome Web browser, it's possible you're into analytics and the deep research that Google thrives on. If so, Vuru may be for you.

This app is a great example of a browser add-on. It runs automated analysis on stocks and creates reports for investors that can help throw light on investment decisions. Four U.S. exchanges are covered, and the analysis is totally automated, so it should be unbiased.

Want to Suggest an Apps Collection?

Is there a batch of apps you'd like to suggest for review? Remember, they must all be for the same platform, and they must all be geared toward the same general purpose. Please send the names of five or more apps to me, and I'll consider them for a future All Things Appy column.

Business Accounting Goes Mobile

Curt Finch, CEO of Journyx writes According to research firm Strategy Analytics, the number of active smartphones topped one billion in 2012, and they estimate that this number will double by 2015. Mobile devices arecompact and convenient, and users increasingly rely on them for the majority of basic tasks, including professional usage. The most effective accounting software offers accessible, real-time reporting of employee work and related costs. But the definition of “accessible” is changing; soon it won’t be enough for users to access information only on company desktops. Information has to be available on-demand – by which I mean, on mobile devices. 

Several top companies already offer mobile applications for smartphones and tablets. QuickBooks, the top accounting software solution among small businesses, offers QuickBooks Mobile for the iPad, iPhone, and Android. This application allows users to easily view customer information, send professional invoices, and mark invoices as paid. The data on Mobile QuickBooks syncs back with QuickBooks on the desktop, and visa versa. 

Microsoft Office offers a similar application for the Windows Phone, allowing users to create, open, and edit Excel workbooks. And Microsoft Dynamics offers a mobile application for Dynamics CRM. 

So, how useful are these applications? First of all, it has become clear that mobile integration has its limitations. For example, Excel Mobile doesn’t support all of the functions of Microsoft Excel. Unsupported content cannot be displayed or edited, potentially limiting the application’s usability. There’s also the intrinsic limitations imposed by the smartphone’s smaller screen size, which makes viewing and editing large documents difficult and unwieldy. 

To minimize these problems, companies can center their application building on the most popular features. Most users don’t need smartphones to do complex configurations of their accounting software. Instead, the vast majority of user activity is devoted to entering employee time, approving time entered, and running reports. These basic activities can be specifically tailored for smartphones. 

Cross-platform integration is another area of consideration. For example, Microsoft Office is currently only available on the Windows Phone. Rumors have been circulating for years about Microsoft’s plans to release Office versions for other platforms, but they have yet to make an official announcement on this front. 

Similarly, QuickBooks Mobile is available on iOS and Android, but it discontinued its version for Blackberry in 2011. While QuickBooks might have thought that this was a practical decision, considering that the Android and iPhone currently make up nearly 90 percent of the U.S. smartphone market, they didn’t account for possible fluctuations in the market. With the recent debut of the Blackberry Z10 and the upcoming release of the Blackberry Q10, customers might just be returning to the platform in large numbers. 

Looking forward, it will most likely take these companies a while to work through the limitations and problems associated with mobile integration. For example, Microsoft Dynamics released its mobile application for CRM but has yet to offer mobile versions for GP, ERP, or AX. 

As the world becomes increasingly mobile, will accounting software companies that fail to release mobile applications be left behind? 

I don’t think so, at least not for the foreseeable future. Business software is usually extremely well integrated into a company’s systems, and switching to another software provider is a huge hassle. Mobile integration isn’t a looming issue for accounting software companies the way it is for other companies. 

But mobile integration cannot be ignored forever. Everyday, there are new and exciting innovations in the mobile sphere. In fact, mobile devices may soon replace wallets with “e-wallets” through NFC technology. Business accounting software companies would be well advised to start developing mobile innovations of their own.