According to Will Rogers the income tax system is excruciatingly simple: “If you make any money, the government shoves you in the creek once a year with it in your pockets, and all that don’t get wet you can keep.”  However, there are steps that can be taken to minimize the amount of money that gets “wet.”  I will elaborate on these steps in subsequent posts, but before I do that, I think a short description of how the income tax system works would be appropriate.
                First, Gross Income must be determined by computing “all income from whatever source derived,” less certain postponed and excluded items, such as gifts received, amounts contributed to 401(k) accounts, and proceeds from life insurance.  Second, above the line deductions must be taken to determine the Adjusted Gross Income.  Above the line deductions include (among other items): trade and business expenses of self-employed individuals, contributions to Individual Retirement Accounts, and contributions made by self-employed individuals to pension, profit-sharing, and annuity plans.  And third, below the line deductions, which will be either itemized deductions or the standard deduction, must be taken along with personal and dependent exemptions to finally arrive at Taxable Income.
                Also, it is important to bear in mind the difference between items excluded from gross income and above the line deductions on the one hand and below the line deductions on the other.  This distinction is critical for the reason that all items in the former will reduce Taxable Income, but the same cannot always be said of the latter.  This is because below the line deductions require the taxpayer to make a choice between two mutually exclusive alternatives: either receive the standard deduction or take itemized deductions.  In other words, a taxpayer will always be able to reduce his or her Taxable Income by amounts contributed to 401(k) accounts and Individual Retirement Accounts, but if he or she receives the standard deduction then itemized deductions must be foregone, or, alternatively, if he or she takes itemized deductions then the standard deduction will be unavailable.
                After Taxable Income has been calculated, then the taxpayer’s obligation is determined based upon calculations performed in accordance with the marginal rates.  However, even after this initial calculation of the tax amount, a taxpayer may still be able to lower his or her ultimate tax liability by subtracting credits.  Credits reduce tax on a dollar-for-dollar basis because they are applied directly against the tax due, as opposed to deductions and exemptions which are applied against the taxpayer’s income.  There are two main types of credits: non-refundable and refundable.  Non-refundable credits can reduce a taxpayer’s obligation to zero, but cannot reduce it below zero.  Refundable credits, on the other hand, can reduce a taxpayer’s obligation below zero, and, as a result, can cause a taxpayer to receive a refund.  Several of the more commonly used credits include the non-refundable credit for the elderly and the permanently and totally disabled, the partially refundable child tax credit, and the refundable credit for tax withheld on wages.
                And, in addition to the Federal income tax, Indiana imposes a State income tax of 3.4%, which is determined by reference to the taxpayer’s Federal adjusted gross income along with a few quirks.  Also, there is a county income tax due, the percentage of which varies depending upon the county of residence from .01% to 2.08%.

                Please join me next time for: How to Minimize Income Tax or I Wear a Barrel Because Uncle Sam Took My Slacks.

You Wouldn’t Use Sandbags to Stop a Tornado and You Wouldn’t Hide in the Basement to Escape Flooding, So Why Are You Using a Sole-Proprietorship or a General Partnership to Run Your Farm Instead of a imited Liability Company? 

            Indiana farmers in the central and southern parts of the state are struggling this season against flooding, and, as a result, farm profits are literally being “swept away.”  Although, what many Hoosier farmers do not realize is that while natural disasters may be costly, the government is second to none at sweeping away profits, and, much like acts of God, taxation cannot be avoided entirely, but its effects can certainly be mitigated through careful planning.

            Farms face numerous calamities: wild fires, swarming insect populations, floods, tornadoes, and the list goes on.  Similarly, farmers are subject to a number of different taxes: income and self-employment tax, property tax, gift and estate tax, and unfortunately this list goes on as well.  But fortunately there are tools for confronting almost every adversity faced by farmers, including taxes.  In this post I will summarize the various tools available for minimizing tax, and in future posts I will provide a more thorough explanation as to the way in which each technique is to be implemented.

            The amount of income tax due can be lowered by utilizing the most advantageous accounting method, postponing income, and taking all applicable exclusions, deductions, exemptions, and credits.  And as to the related topic of self-employment tax, the principal method for lowering this burden is to minimize the amount of net earnings from self-employment, which can be accomplished through intelligent business structuring.

            Property tax has been a source of enmity in the Hoosier state for the last several years, and the debate has lost none of its initial virulence.  While a challenge to the assessed value of property is a possibility, the first line of attack should be diligence in assuring that all applicable credits and deductions are received.

            Gift and estate taxes can be a significant hurdle for family farmers who wish to provide for the continuing involvement of their children.  But there are methods for successfully transferring management and ownership of the family farm from the present generation on to the next.  These include: special use valuation, installment payments, creation of conservation easements, implementation of various types of trusts, life-time gifting, organization of limited liability companies, and execution of buy-sell agreements.

            Please join me next time for: A Short Explanation of the Income Tax System or A Day Trip Through Dante’s Inferno.

            Indiana State Senator Dennis Kruse, R-Auburn, found out the hard way that speaking on a cell phone can be a distraction while driving when he lost control of his own vehicle while talking on his phone and ended up in a ditch.  That experience caused him to author Senate Bill No. 119, which proposes to make it a Class D infraction for a person less than 18 years of age to drive while using a hand-held mobile phone.  He hopes that once the bill gets a hearing that it can be expanded to include older drivers. 

            Even more disturbing, there is evidence that a huge percentage of drivers, especially young ones, are blending the tasks of driving and text messaging.  A recent Zogby poll revealed that 66 percent of drivers in the 18 to 24 age range confessed that they use their phones to text while driving.  Currently, only two states (Washington and New Jersey) have passed statutes prohibiting driving while texting.  Hopefully, Indiana will take the lead in eliminating this class of distracted drivers from our highways so that potential auto-related tragedies might be avoided.

            Cost conscious Americans in waves are downsizing to smaller vehicles.  The good news is that they are saving money on fuel costs and are reducing emissions.  The bad news is that they  may be switching to a vehicle that is less safe to drive, and as a result their auto insurance premiums are going up (“Downsizing: Switching to a Small Car Can Increase Your Insurance Bill.” 

www.insure.com/articles/carinsurance/small-car.html.  16July2008.) 

            Small cars are simply not as safe as larger cars and trucks.  They tend to get in more accidents than larger vehicles, which creates higher repair costs and more litigation costs resulting from personal injuries.  The size of the vehicle is not the only factor that causes more and larger insurance claims.  Because smaller cars tend to be less expensive they are driven by younger, higher-risk drivers.

            Automobile insurance companies and lawyers who represent insured people in Indiana have long battled over what amount might be presented at trial as the medical expenses caused by a motor vehicle collision.    Plaintiff’s counsel (those who represent the injured person) has always advocated the position that the full amount of medical bills incurred was the relevant measure of the damages caused by the negligent driver.  Defense counsel (those who represent the drivers who caused the collision) has always maintained that the only amount presented at trial should be the amount paid not the amount billed.  They wanted the at-fault motorist to receive the benefit of any write-offs received by the injured person  that were negotiated by his own insurance company.  Obviously, this tactic could produce significantly lower recoveries by injured motorists by reducing the amount of the medical bills attributed to the injuries sustained in the accident. 

            Until recently Indiana law was unsettled in this area.  The Indiana Court of Appeals, Stanley vs. Walker, 888 N.E. 2d 222 (Ind.App. June 3, 2008),  recently made a finding that injured parties are allowed to present the full amount of medical expenses incurred as a measure of damages to a jury for verdict consideration.   

http://www.in.gov/judiciary/opinions/pdf/06030803cld.pdf

 Visit www.sunherald.com/business/story/675669.html to see the top 5 offenders on the list (including State Farm at #4).

Allstate and State Farm sell a huge share of auto insurance policies in Northern Indiana, including many drivers in Kosciusko County.   Given the massive profits reported by these two insurance giants you would think that they could afford to be cooperative in resolving personal injury claims and protecting their own insureds.  Not so.   Judges, mediators, medical providers, and accident attorneys throughout our area have experienced extreme frustration in dealing with claims for injuries involving these two insurance companies.  Unfortunately, when injured people are hurting and need help the most, they are finding that they are in a war with their own auto insurance company.