By: Angel Y. Dayan, EA, ABA, CPA (213)-365-1040
Let me start today’s writing with an aside first for a little while if you will not mind. Now that Thanksgiving Day was over, Christmas (Jesus’ birth) will be the next big celebration to look forward to. It will be a much more busier time for us. As a testament to my own world, only very rarely would clients be concerned about what I do in the office daily around this time of the year, unless there is an urgent need. A case in point would be a client with a tax levy, a wage garnishment or an audit. The rest are being dismissed for now to wait until after the holidays are over. There is also that New Year celebration full of fun, excitement, and the promises of a new year. If you are in business, I hope that your record-keeping has been up to date all year ‘round, otherwise, this will be a worry that may be submerged with the merriment of the holidays. You should take care of your tax paperwork problem even now and before greeting the future, a happy new year. Shamefully, we are also closing the year with an early “bang” in the halls of the Philippine Congress, echoing once more our barbaric/sinful tendencies. I do not recall in recent history of a U.S. Congressman, or Senator or Mayor being killed in office. In the United States, only Presidents and those running for this office do get assassinated. And in contrast, in the Philippines, where we could not even impeach a corrupt President, we have just freed an ex-con President from jail lately. Our own republic now may not be that brutal after all, (saving Presidents) even as I should talk to the family members of fallen Philippine journalists. God help/redeem us govern ourselves well so that we may not find our people clawing the “surface income” in foreign shores to feed their family. And as “random or un-structured” and corrupt as we are in our ways, I am trying daily to find more of our strengths while living in a foreign country rather than dwell on our known weaknesses. The good in us (the Kingboxer) will help me raise my forehead with pride “taas noo kahit kanino” and avoid a “mea maximma culpa” before my peers. People with seared conscience like an ex-con have no more shame, or ultimately the fear of God. So much of this aside for this article, and let me get to business.
I have been curious lately to probe the honesty and forthrightness of our people pre-selling real estate property in the Philippines. My subject has been the purchase of the least expensive unit, a studio condominium. The mortgage interest expense of this unit could still be tax-deductible to Filipino-Americans if they could meet certain tests. After an exchange of emailed information, I found out that the interest rate over the term of the loan starts at 17%, and that is just the start. There are at least twenty (20) different convoluted options to choose from on Philippine “purchase financing,” or deemed “financial arrangements” on downs and discounts that are so treacherous, with conditions so covertly hidden (unless asked) that when unraveled in the end the only consolation would be the real estate value appreciation over the long haul. This values unfortunately are not readily measurable from the get go. Dig these offers deep in a foreign financial world and find the numbers that speak clearly before you write a check or sign the agreement. I could also tell you how you could write-off the mortgage interest payments. Take note, the interest rate is twice the average of the U.S. mortgage loan market. It is like borrowing from the credit card companies, perhaps even worst. It is a foreign world.
At home, some thirty (30) million Americans will eventually be subject to the Alternative Minimum Tax for the high-income earners (over $200,000 dollars a year). There are over four (4) million taxpayers right now who are paying this tax. This “altmin tax” is getting inevitable every year to many Americans joining in the ranks of “the rich” for whom this tax was originally intended. This tax is the “alternate/parallel income tax” that first gives you some tax exemptions, some tax deductions, and then eventually removes these all or phases them out as your income grows. It is fast replacing the graduated income tax rate structure that starts at ten (10%) percent. Could people avoid this tax? The answer is “yes” for some who are in business. Its demise from the tax code has been the subject of political rhetoric in recent days. And in my opinion, they should put this tax on the ballot. But it may not even disappear. It has grown into a monster now on the menu that more Americans eat every year. It is at best insidious like a disease that the system has not yet found a breakthrough. It has gone above the “waterline” and Americans are drowning. It is as complex as Darwinian evolution but it should be simple as Biblical creation of Intelligent Design, with a capital “I”. What do you think?
It is one thing to save for ones retirement and then make this long-term investment grow, but it is quite another when it is time to pass it on to your love ones in the family. This is the other fifty (50%) percent in the tax planning process. The rules are complex, and most people do not pay attention ahead of time, thinking they will withdraw it themselves anyway. But what if that day of withdrawal never came, will it make a difference? I tell you, surely it will. The question is, what do you do now before retirement withdrawal comes? First, you will need a good tax planning advisor on exit and/or transfer strategies. This is important, take it from me.
There is a relatively new item of tax deduction on line 35 of the Form-1040. It is called “domestic production activities deduction” with a complex computation for those in business. It is computed at six (6%) percent of taxable income, or half of what the business has paid for wages, whichever was lower. This deduction does not reduce self-employment tax but could substantially reduce income tax. Ask your accountant if you could avail of this deduction.
Finally, for today, I have to tell you that the cost of college education for children is increasing at the rate of eight (8%) percent per year, almost three times the rate of inflation. At the rate this is going, tuition fees double every nine (9) years. There are two (2) tax planning alternatives that partly offsets/allows to reduce taxes so you could save and deal with the effects of this yearly tuition increase. Another of course is to burn the midnight oil and save more from after-tax dollars. There are still many from our people who need lecture about planning for their children’s education. Why is that? Many children are left to fend on their own, who will also do the same to their children. This cycle will continue but you could stop it with yours.
(Angel Y. Dayan, EA, ABA, ATA, CPA, a Tax Resolution Services Specialist, is an Enrolled Agent, an Accredited Business Accountant-Advisor, Accredited Tax Advisor, and a Certified Public Accountant admitted in the State of Texas and the Philippines. He completed a Masters Course of study in Tax Defense Representation. He is a Tax Consultant admitted to practice in California and in 50 States. He is a Graduate Fellow of the National Tax Practice Institute and a Competent Member of the American Academy of Tax Practice. He is an active member of the American Institute of Certified Public Accountants (AICPA). His office is at 150 East Olive Ave., Suite-116 in Burbank, California, 91502. He could be reached for appointment at (213)-365-1040. His email address is at angel@taxwork.com.)