I want to be as honest as I can about this.  I was always interested in martial arts.  As a young kid, I borrowed a book from the library about judo.  I sifted through a few pages, even flopped on the ground a few times trying to follow the pictures.  This initial foray didn’t last long.  Somewhat bruised from the hard floor I gave up and didn’t pursue it again for thirty years.  Here’s another of the honest parts: I wanted to learn martial arts to acquire the skills to beat the tar out of someone.  This exposes a kind of ying and yang in my personality because I am at heart a collaborative, peaceful, empathetic person.  But, somewhere inside, the house cat wanted to be a, well … bigger cat, at least.

 Anyway, fast forward several decades.  I’m working out in the old weight room of the Lake Forest Recreation Center.  Because I have a tendency to chat rather than work-out, I get to know my fellow sufferers.  One such wore white pants and a T-shirt.  It wasn’t long before I had introduced myself to the Chief Instructor of the recreation department’s karate program, Frank Chrzanowski.  I’m not sure what I expected a karate instructor to look like.  Frank was (and is) a friendly, exceedingly polite and thoughtful individual.  I suppose I envisioned a more steely eyed, threatening demeanor.  One thing did strike me, and I know now it wasn’t my imagination.  There’s a switch, of sorts, always ready to be flipped.  It’s not visible to the eye, but it’s there.  I knew I had met someone who could defend himself and I wanted to learn what he knew.

It’s been twenty some-odd years since.  In reflecting on those early days I realize I was a difficult student – nothing new here to which my first grade teacher couldn’t attest.  The teaching of Shotokan Karate requires the conveyance of a curriculum.  The Dojo is the classroom.  Students possess varying degrees of aptitudes, both physical and mental.  I just happened to be long on the first and short on the second.  I am of the opinion that girls learn best with positive reinforcement and encouragement, while boys are best suited to the swift end of a two by four (figuratively, of course).  And, applied to me, it’s how I got past the early years.  But, let me be clear, the right learning environment needs a deep well of patience on the part of the instructor and, from him, a genuine fondness and respect for his students. 

The Dojo is a no-nonsense place; your ego is left at the door.   When you enter, you are in the domain of the Sensei – the teacher.  When class begins you are expected to give complete attention and 100% effort.  Less than that will be called out.  And, there is no escaping the critical eye of the Sensei.  He sees all.

So, what have I learned?  First, is how little I knew of the mind-body connection.  It is truly the case that absent self-discipline, learning cannot progress.  I have seen this over and over, particularly among the teenagers.  Repetition aids learning.  Correcting errors requires discipline.  Those who advance with the greatest ease are those who control their minds and hence their behavior.  Each repetition of kata (a memorized sequence of punches, kicks and blocks) is an opportunity to learn and to correct errors.  The process of correcting errors (some of which, by the way, are behavioral or attitudinal) teaches discipline.  As for all matters in life, some students are better at it than others.  But, hard work pays-off.  Take me, as an example.  As I look at myself from the lofty perch of almost six decades I realize how little self-control I possessed as a youngster of 40.  I was all over the place.  I needed to learn how to focus.  One of the surprises of training in karate is that I did.  And, I needed to. Discipline and focus became the fertile ground for the learning that subsequently took place but would not have, absent it.

Here’s another of the big surprises: One of the first lessons of mental discipline is respect: respect for the teacher, for the Dojo, for other students and for yourself.  Mental discipline learned in karate can be extrapolated beyond the Dojo.  It applies to school, work, relationships, you name it: wherever unleashed emotions can inhibit good decision-making.

 Allow me to expand just a bit on this.  In the context of karate, as I’ve learned it, discipline involves facing one’s fears and, as we put it, “sacrificing our body” for the greater opportunity.  So, in a fight, we’re willing to take a punch in order to deliver one more devastating.  It’s a calculation, a risk we take, but one for which we have prepared.  Ultimately, all our training is focused on application or the act of self-defense.  Underlying the practical aspects of karate is an equally important lesson.  It’s the mental sequence implicit in self-defense.  Does this sound familiar?

  • Awareness of the situation
  • Assessment and analysis of response options
  • Decision as to the proper response
  • Implementation

 Indeed it is the core of the decision-making process used in business, law, science and virtually any other undertaking.  That it is so important in our curriculum is not a coincidence. 

So, I’ve told you a little about myself and how I see the study of martial arts.  Let me tell you about the children I’ve seen over the years.  For many (but, truthfully, not all) the study of karate has been transformative.  It’s altered the life path of these kids.  For some, those with cognitive or other disabilities, karate can be an activity in which they experience success without an asterisk.  Our classroom is not intended to make world champions.  It’s to teach self-defense.  Understanding what-it-takes is available to a broad spectrum of people.   Of course, some do it better than others.  The point is that even at the bottom of the spectrum there exists the possibility, in fact the high probability, the student will acquire the mind-body connection to resist the bad intentions of others.  That the physical skills learned will ever be used is unknown and, let’s hope, unlikely.  Not so the mental ones.  They are likely to be used every day.  As a beginner, invoking the lessons of karate is a conscious affair.  Over time, it comes out naturally.  The young teenagers who have been training for years, you can see it in their eyes. 

Not all the kids make black belt.  Most don’t.  And if they don’t, they are still successful if they take from karate what they can use.  Some make it all the way, a joyful event in the Dojo.  Every higher belt is called upon to teach every lower belt.  So, as an old black belt welcoming the newest, I am as aware of the contribution I’ve made to his or her education as I am of the lessons imparted to me by those who came before.  There’s a lot of teaching that goes on inside the Dojo.

It is a great honor to spar with the Sensei.  This afternoon was one of those occasions.   In a way, this is an “advanced class”.  Sensei is always teaching.  Although it appears to be free-form, there’s a protocol to which I must adhere.  Brawling is discouraged – anyone can do that.  As unlikely as it seems, I’ve discovered a tendency in my teacher’s defense I can exploit.  But, the opening doesn’t last long.  The Sensei is as eager to learn as I am.  We spend an hour exchanging punches and kicks, first using distance-timing strategy, then close-in fighting.  Each of us is able to simulate fighting without doing damage to the other.  This is the pinnacle of martial arts, what I’ve trained for and the highlight of my week.   I am engaged in an act of self-defense using skills learned over many years. And, although I’m sure to feel every muscle in the morning, I’ll be ready to go again if Sensei calls.


The Worst Job In The World

There are bad jobs and then there are bad jobs.  And I know I’m being a little dramatic.  But the worst job in the world is volunteer treasurer of a charitable organization.  Those of you who have had the occasion to fill that role are nodding your heads, trying not to laugh.  You know I’m right. 

The treasurer’s role is thankless.  The only thing you can do is screw it up.  I’ve had the pleasure to meet a number of outstanding treasurers.  They are priceless; the most valuable member of the Board.  To do the job properly, they put in countless hours.  All the “feel good” work is done by others.  And, given my profession, while financial statements generally turn me on and are essential to the proper operation of a charity, most people couldn’t care less.  The treasurer is only notable when the entity’s financial situation tanks and the rank and file are looking for a body to burn at the stake. 

There are a number of excellent non-financial road signs that tell the organization how it’s doing.  Unfortunately, there’s no replacement for an accurate, timely and adequately descriptive balance sheet and income statement.  While not everyone can divine from the numbers the direction the entity is headed, there are still plenty of folks who can.  Financial statements are irreplaceable (as are the people who can read them).

Here are some of the operational problems being a treasurer. 

The first is you really need to understand accounting and how to read a financial statement.  Some organizations are large enough to employ a bookkeeper or even an entire accounting department; some, not even a part-time bookkeeper.  Our clients fall somewhere in between. 

Unfortunately, even a rudimentary understanding of accounting is often inadequate to properly account for transactions that are unique to Not-For-Profits.  Such items as permanently and temporarily restricted accounts create a level of complexity way beyond the normal accounting for commercial enterprises. 

Our shop uses QuickBooks as an accounting platform.  Even if you understand the ins-and-outs of accounting, the next hurdle is figuring out how to use QuickBooks to accomplish your goals.

So, there are three obstacles your incoming treasurer needs to overcome:

  1. The debits and credits of accounting;
  2. The unique aspects of Not-For-Profit accounting, and
  3. The use of a computer-based accounting system to handle it all.

If your organization is large enough, you can hire someone like us to provide various levels of accounting assistance.  In addition to paying bills, invoicing and reconciling bank accounts, such services might also include collections (not a happy thing to do) and help with the annual budget (these days, also not a happy thing to do).  The outside services you acquire can range from bookkeeping all the way to audit support. 

The idea isn’t to eliminate the treasurer.  Rather, it’s to make the treasurer’s job realistic and reasonably palatable in view of the inherent miseries that go along with it.  The treasurer’s role in the scheme described above is to assure the work of outside contractors is properly performed in a timely manner.  More importantly, it’s to derive from the accounting system useful management information as to the financial condition of the entity.  Believe me, even without the bookkeeping, there’s enough work being the treasurer to fill a waking day.

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Charities – Deductible Contributions Only For Some

An ever vigilant client has asked which type of charity is eligible to receive taxpayer-deductible contributions.  Good question!  My first comment is that our children are nowhere on this list, despite their opinions to the contrary.  Feel free to refer them to me should their confusion persist.

Contributions of cash to the following types of tax-exempt organizations qualify for the maximum deduction of 50 percent of a taxpayer’s contribution base for the year.  The contribution base is usually your adjusted gross income.

(1) churches or conventions or associations of churches;
(2) educational institutions;
(3) hospitals or medical research organizations (not including home health care organizations, convalescent homes, homes for children or the aged, or vocational institutions that train handicapped individuals);
(4) endowment foundations in connection with a state college or university;
(5) state, federal or local government units, if the contribution is made for exclusively public purposes;
(6) Organizations such as corporation, trust, or community chest, fund or foundation normally receiving a substantial part of their support from the public or a governmental unit;
(7) private operating foundations;
(8) a private non-operating foundation that distributes all contributions received to public charities and private operating foundations (or makes certain other qualifying distributions) within 2 ½ months after the end of its tax year;
(9) private foundations that pool all contributions into a common fund and allow a substantial contributor to designate a recipient charity, where income from the pool is distributed within 2 ½ months after the tax year in which it was realized and corpus attributable to any donor’s contribution is distributed to a charity not later than one year after the death of the donor (or surviving spouse with the right to designate the recipients of the corpus);
(10) publicly supported organizations normally receiving (a) more than 1/3 of their support in each tax year from the public and organizations listed at (1)-(6), above, in the form of grants, gifts, contributions, or membership fees, and gross receipts from an activity that is not an unrelated trade or business (less certain receipts), and (b) not more than 1/3 of their support from gross investment income and unrelated business taxable income (less taxes); and
(11) certain supporting organizations.

We call these types of entities “501(c)(3)” organizations, which refers to the internal revenue code section where they are defined.  This is how the code section reads:

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

Note that the description specifically excludes political organizations.  No deduction for contributions to your favorite political party!

Hope this helps!

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The Hard Times of a Small Fish

My mother wound up in the hospital (she’s out and doing well, thank you).  I flew down to Miami as my sister flew up to Chicago for business.  Annie and I are sort of a “tag team”. 

The hospital is located on a few hundred yards of shoreline on Biscayne Bay.  If you have to be sick, I guess this is a good place to do it.  Over the three days I visited, a fair amount of time was spent in a hospital room.  On the other hand, I was frequently dismissed by either parent giving me a few hours of unsupervised time – not enough to get into serious trouble but certainly more than I could tolerate sitting around.  Remove the mosquitoes,  traffic and crime, the greater Miami area is actually quite attractive.  I spent the first few hours of intermission walking along the hospital’s sea wall.  At the far south end, the shore line curves to the west and a broad channel runs inland to residential areas of mixed single family homes and huge apartment complexes.   Peering into the water in search of marine life is a recreational habit.  I’m pretty good at spotting all manner of organisms swimming, floating or swaying.  Into the clear water I gazed, seeing flashes of silver that I know belonged to what are appropriately called “shiners”.  The more I looked, the more I saw.  There were vast fields of the silvery things swimming in loosely formed schools up and down the shoreline.  I remember thinking that there was a lot of biomass out there.  If the bigger fish that feed on them were about there’d be quite a commotion.  Rather, the gathering looked pretty calm for creatures put on earth to feed something larger.  I gathered the big cahunas hadn’t shown-up yet.

Later that same day, having been banished again, I decided to take a walk around the neighborhood.  “Neighborhood” is probably not an accurate description of the area.  There’s a busy four lane road that effectively separates the communities next to the bay from…well…everywhere else.  The road is one of those ideas that seemed reasonable seventy-five years ago, but today makes physical communication between the folks on either side impossible.  Even the squirrels have long ago gone their separate evolutionary ways due to the lethal consequence of crossing the road.  There’s a narrow sidewalk that offers pedestrians zero protection.  I noticed there were a few brave souls like me walking furtively along the side.  We know with clarity, given the least provocation, some crazed driver, drunk on orange blossom, would happily flatten us.  I smiled pleasantly at everyone passing by. 

Every hundred yards or so a turnoff takes you into the weird world of south Florida residential living.  I got the impression it was an affluent area, with big single family homes, expensive cars and lots of chrome and glass on tall, featureless buildings.  It was so bizarre.  Where I live everybody’s a neighborhood friend.  South Florida seems more like an armed camp with bars on the windows, portable basketball hoops chained to the driveway and few people on the street.   I’m sure years go by before some poor soul realizes he’s been living next to his sister all this time.  The big high-rises don’t help.

Unlike a wildebeest crossing a crocodile infested lagoon, humans have boats.  Boats give us humans a false sense of belonging.  Maybe we flop around in it a little, pretend it’s our “home”.  But when it comes down to it, we’re strangers.  When we gaze into the water and see a school of fish swim by we think, “Oh yeah, I understand that.”  It’s not true!  Most of us don’t have a clue. 

It is true, however, that fish have personality; a sense of self.  They certainly have fear which accounts for their desperate attempt to flee predators (and defeat the hook and line, I might add).  So when a roving school of predators catch up with their prey an ancient conflict ensues insuring life for one and death for the other.  Even the smallest fish, sensing the end is near, struggles to the last to save itself.  These are the currents of water-life that rivet me.

So back to my wandering.  I’m walking around this urban area next to the hospital, with asphalt and steel, telephone poles and belching automobiles.  The noise and presence of scurrying humans is unrelenting.  I turn onto a side street that runs next to a concrete encased seawall.  The canal, which it borders, moves west as far as I can see.  At the near corner is an expensive residence with a tall stockade fence next to the road.  Tied to its dock is a large boat.  From the sidewalk by the water I can see its presumptive owner lounging nearby in an unflatteringly small bathing suit.  One hand holds a cell phone below a thinning batch of slicked back hair.  The other keeps what looks like an alcoholic beverage close to his lips.  The boat is expensive and fast; the sort used to entertain “guests”.  It’s immediately obvious something’s going on in the water.  The surface erupts with fleeing fish and right behind them, their tormentors.  All this is going on right next to the seawall and in front of the guy’s boat.  The sound of fleeing fish and those attacking them is not dissimilar to that of a huge garden hose sporadically directed on a pool of water.  Geysers erupt, the fish flinging themselves into the air in a sort of aerial combat.  The guy didn’t even look up.

I hid behind a stone wall on the other side of the canal.  If you can see the fish, they can see you.  I lowered my profile as best I could.  Peering over the side rail into the clear water, I could see the melee playing out in this small corner of the canal.  Scores of finger mullet ran haphazard followed closely by Jack Crevalle.  The “Jack” as it’s known, looks somewhat like a tuna, but much smaller.  They’re aggressive fish that typically run in large schools.  This batch looked to be in the one to three pound range.  They must have followed the smaller fish in from the ocean   

I looked over at the lounging property owner.  It was impossible for him not to see or hear the commotion.  He was oblivious.  Maybe he’s seen it too many times, or more likely, acts of nature get the same attention as the health department’s advocating safe sex.  Not on his radar.  In the meantime, frantic prey, corralled by hoards of Jack, desperately seek their freedom.  In one remarkable sequence, a finger mullet leaped clear of the water in a broad arc, heading towards the sea wall where I stood only a few feet away.  Behind it I could clearly see three Jack giving chase.  The mullet had nowhere to go; it was trapped against the wall, penned in by the three pursuing Jack.  There ensued a horrific struggle with the Jack slamming the defenseless mullet into the wall.  It leaped vertically in the air several times in its attempt to escape.  Each time it landed amongst the three larger fish until finally it could run no more, was captured and devoured.

As violent was the pursuit, the aftermath a disconcerting peace.  The image of struggle and desperation is seared in my memory.  That small fish fought valiantly.  One life lost; one life made, a universal cycle.  It is an extraordinary event, this taking of life.  Do we rejoice in the taking or mourn it?  I suppose it depends on where you stand.

And there I stood until the fishes, predator and prey, ebbed away from this urban battle ground.  It had been a great slaughter; nature at its best.  Aided and abetted by human structures or despite them?  The water and land are meeting places, its creatures belonging to either but not both.  Each has battlefields largely invisible to the other.  And here, amongst the highest form of human presence we humans were treated to the most wondrous and fearsome of fish displays. 

The lounge guy kept up the talk and his drink was never far at hand.  I’m sure he saw me crouching by the water.  I’ll bet he thought I was a nut, then shrugged and never gave it another thought.  I can only shake my head and wonder, how many more like him are out there?

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Women in Divorce – Disengaging From The Conflict

I suppose I’m not surprised that many of my clients are divorced or about to be.  I heard a statistic that 50% of marriages in America end in divorce.  That’s terribly sad, especially when you consider the effect on children.  Even adult or semi-adult children can be scarred for many years.  I don’t know why so many people decide they can’t live with one another.  Maybe it’s just too easy to go your own way.  Whatever the reason, when I meet the children sometimes there’s a sadness I see that they can’t seem to shake.  It’s a shame.

I’m fortunate to represent mostly women.  Women need the most help.  They are more likely the keepers of the household and caregivers to the children.  Mostly, they rely on the man to take care of finances, taxes and the like.  Even women who are the primary earners share this trait.  It means that when the man is out of the household and no longer a partner in the affairs of life, there is more than just an emotional void to fill.

The women who are most successful in dealing with divorce are those who can put their bitterness aside.  It doesn’t matter whether she’s rich or poor.  Revenge is never sweet; it’s expensive and unsatisfying.  It’s a thirst that can’t be quenched. 

I don’t know what I can prescribe to help the bitterness go away.  Some women figure it out.  Maybe they do it for the kids.  Maybe they have a vision of a better future.  They follow it like a beacon through the morass until they emerge on the other side.  It doesn’t mean the hurt is gone, because, I’ll bet there are feelings of abandonment, shame and uncertainty that won’t fade easily.  There’s something in their core which says through the tears “move on!” and they do.

Unfortunately, life being what it is, I mostly encounter women who want to inflict hurt on their opposite.  Believe me, I understand.  But, it’s another of the sadnesses.  The decisions these women make are tainted by revenge.  And I can tell you, it makes for some really bad decision-making. 

My view is that once the divorce decree has been written and signed, it’s time to work on the implementation.  I regret to say, the divorce decrees I’ve seen fail to fully take into account all the variables that can affect the couple.  Because my emphasis is tax, the items that stand out tend to be tax matters.  Believe me, you do not want to rely on the IRS to make a bad agreement good.  It won’t happen.  Justice (if there is any) will be found in the realm of the divorce decree.

Look, I’m not naïve.  Even the best crafted decree is of little value if one or both fail to follow it.  However, it’s at this juncture where ego gets involved.  Emotions bubble to the surface.  Where an attorney should be consulted, actions are taken out of anger.  Suddenly, the problems become more tangled than line on a fishing reel.

I think the best course of action calls for disengagement.  The sooner it can be accomplished the better.  I try hard to avoid being a tool to punish the ex.  I want fair treatment for my client.  I believe that can only be achieved if it’s fair for all.  I want my client’s attorney to work diligently and intelligently in her behalf.  Ultimately, I want her to be comfortable with the outcome.  It’s just that the outcome can’t involve an emotional bloodying of her ex.  Not only does it make no sense, it’s unlikely to be satisfying and difficult and expensive to achieve. 

Hopefully, I’m not the only advocate for peaceful disengagement among my client’s advisors.  If the client surrounds herself with attorneys and others who allow the bile to rise she’s in for a tough ride.  Eventually, over a long period, the rancor will subside and the combatants retreat to their corners.  But, this isn’t a boxing match.  The winner isn’t the one left standing.  It’s not how many punches have landed.  It’s how many have been avoided.

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Small Business Jobs Act of 2010

Health Insurance for the Self-Employed

Health insurance for the self-employed became a little more valuable, albeit only for 2010.  A provision in the recently enacted Small Business Jobs Act of 2010 allows health insurance costs for self-employed individuals (Schedule C filers) to be deducted against income for purposes of computing self-employment tax (Social Security and Medicare).  At least for 2010, health insurance for the self-employed will reduce payroll tax.  Every little bit helps!

More Paperwork for Those Who Rent Real Estate

This is confusing so stay with me.  Here’s the rule:

The new law applies If you rent real estate (let’s say a single family home, apartments, commercial property and, so on) AND you make payments totaling $600 or more in any tax year to a person OR a corporation who provides goods or services to your rental operation.  Under the circumstance described, you must file an annual information return with the government and provide the payee with a copy showing the amount paid for the year.

The new rule starts with respect to payments made AFTER 2010.  Presumably, Form 1099-MISC will be used.  Actual reporting will start in 2012 for 2011 payments.  Therefore, spruce up your record-keeping because there are penalties for failure to comply.  Using a computer-based program, such as Quicken or QuickBooks, to write checks is the way to go.  Payments can be easily totaled for any one payee.  QuickBooks has the ability to prepare Form 1099-MISC which will help too.

Walking Away From a Home and Its Mortgage

If you borrow $100 and the lender requires that you pay back only $50 you’ve got Cancellation of Debt Income or CODI.  The housing mess of the last few years has raised the profile of this potentially harmful outcome.  Those who bought residences at or near the top of the market saw their home values plummet below the mortgage amount.  Add to the brew a loss of income and suddenly a vast ocean of taxpayers was unable to pay their home loans.  The term “short sale” became a common phrase in American households.  I never thought I’d have to become an expert in CODI.  Unfortunately, it has impacted every strata of our society.  So, for those of you who are wondering, here’s the short course.

You’ll be happy to know that just because you have CODI doesn’t mean it’s taxable.  There is an exclusion amount of $1,000,000 for those filing single and $2,000,000 for joint filers.  The exclusion applies to CODI arising from any mortgage incurred to buy, build or improve your principal residence.  CODI is the excess of the mortgage balance over the fair market value of the property at the time of foreclosure.  The amount of the CODI that is taxable is that which exceeds the exclusion amount.  Here’s a simplified example:

Joe, who is single, has a principal residence mortgaged by a loan with an outstanding balance of $1,000,000 all of which is attributable to the purchase of the home.  At the time of foreclosure, the fair market value is $750,000.  He has CODI of $250,000.  Assuming there has been no refinancing of the original loan (a potentially complicating factor) Joe can use his $1,000,000 exclusion to eliminate the entire CODI.

The exclusion is available through 2012.

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Stay Calm If You Can

My most recent wilderness trip took me a couple of hundred miles north of Thunderbay, Ontario to the Wabakimi Provincial Park.  I knew it’d be a little colder than previous trips.  Heck!  We were up near the Arctic Circle and it was already mid-September.  What I hadn’t counted on was the wind.  It’s easy to forget when the days are in the 80’s and evenings in the 70’s.  But, lop-off 30 or 40 degrees and you face an entirely different animal.  And, it’s not only the air temperature.  After a few weeks with temperatures dipping into the 30’s the water becomes, shall we say, “Brisk”?

So, into this world we inserted ourselves.  I remember thinking how little lies between the lake and the gunwale of the canoe.  It doesn’t take much chop for water to slop in. 

Our first day was uneventful.  The lake lay quiet, almost submissive.  This, friends, was false advertising.  Several days later and many miles from anywhere, we had the first reminder of how miserable our lives could be.  The weather had shifted, the skies became gray and overcast and the wind blew with a steady relentlessness.  While we were able to fish protected shorelines there was no way we could advance into the Park.  Still, we had many days ahead of us and canoe packs filled with food.

Such was not the case a week later.  Our retreat started with less than eight hours of sunlight remaining.  While the winds were moderate with blue skies above, there had been a shift in the weather that, later in the day, became ominous.  Following seas made travel difficult.  The light was fading as we turned the final corner into protected waters.  Our final campsite was, blessedly, unoccupied.  The tents went up in the dark.

We huddled around the campfire exhausted.  The wind had picked-up a decibel.  It was hard to avoid the conclusion that things were about to change; probably not for the better.  I was awakened at one or two in the morning by the howling of the wind.  It was a bad one.  I knew, in the pit of my stomach, we weren’t leaving the island for home.  Little did I know how utterly miserable it would become.

At some point it started raining.  As the early morning progressed the intensity of the rain followed.  The wind whipped the rain against the tent in a machine-gun staccato.  The temperature had dropped into the 30’s.  Peeking outside the tent, it was an easy guess the wind was blowing a constant 40 mph.  There were long hours I’m sure it had gathered to a full 50 mph.  The rain was horizontal.  Daylight never progressed beyond a dull shadow.  Leaving the tent was completely miserable.  Returning to the tent, equally so as water-soaked rain gear made uncomfortable tent conditions even worse.

I slept off and on throughout the day, leaving the tent only once as nature’s calling left me no choice.  My buddy Mark threw a couple Cliff Bars into the tent and we had a bottle of water to round things off.  Late in the afternoon I began to dwell more seriously on our situation.  As the crow flies, we weren’t far from our exit point.  However, lake conditions were more than treacherous; they were fatal.  We had some provisions, but frankly, were scraping the bottom of the pack.  Water wasn’t a problem, of course.  We were well prepared for the cold.  I estimated we could safely remain on the island for at least another couple of days.  Reduced rations wouldn’t kill us.  All this my rational mind understood.  But, the other part of my brain was shouting loudly.  It was scared as hell and not pleased to find itself trapped and held hostage by the weather on this remote island. 

What little light we had was fading fast.  The rain had moderated but the wind continued to howl.  I had fallen into a half-stupor when my friend and tent-mate Doug announced he’d had enough of the tent.  It was time for action.  Doug was fighting back!  I heard commotion in the campsite.  An hour later I was summoned from the tent.  Doug and Mark had moved the fire pit to the lee side of the island.  They’d rigged one of the torn tarps behind the fire to help moderate the wind and create a little shelter.  One of the canoes was also lying by the fire to reflect the heat inwards.  It was uncomfortable but we were out of the tents and warm.  The mood had changed.  Mark had cooked-up a thick vegetable soup from the dregs of the food pack.  It was mighty good!  The panicked voice inside my head subsided.  There was a palpable moderation of the wind.  Hope!  No doubt about it.  There was change in the air.

I set my alarm for daybreak.  If there was even a slight chance we could escape the island I wanted to make sure we took advantage of it.  No one objected when I roused them from their sleeping bags.  We were a determined group.  The wind had dropped precipitously.  We packed our gear for the last time, loaded the canoes and never looked back.  A few hours later the familiar shoreline came into view.  We’d made it!

In our day-to-day lives what we are truly made of, our inner tensile strength, is rarely revealed or tested.  Maybe in sports or in business we offer a glimpse of whom and what we are.  I met a young man yesterday who served in the wars in Iraq and Afghanistan.  I’ll bet he’s come face-to-face with himself more than once.  And, I suppose in times of great personal turmoil, such as the illness or death of a loved one, there is a certain confrontation one has with oneself that is revealing.  Sometimes we do ourselves proud, sometimes not.  How we react in these circumstances is a lesson; a self-teaching opportunity on how to do it better the next time (and, there WILL be a next time!).  I know the character of my friend Mark because I’ve been camping with him many times.  This was my first trip with Doug.  His reaction and Mark’s to debilitating conditions was to stand up and fight.  I was really impressed and thankful too.  They had elevated by spirits through their own actions and, thereby re-ignited my active participation in the functioning of the group.

Permit me one more observation.  My experiences in the wilderness point clearly to the most dangerous animal we encounter – that is, of course, ourselves.  Our own actions and those of others in the group are the greatest hazard.  In the events I’ve described, we were never threatened by wild creatures.  However, had we allowed fear to overshadow rational thought we would have been in great peril.  Planning and experience are the best tools to combat bad decision-making in the wild.  However, there is no substitute for the character of those who join us on the trip.

Go safely, friends!!    

Posted in FISHBYTES | Comments Off on Stay Calm If You Can

The New 3.8% Medicare Tax on High Income

Jeez!  This is going to be boring.  Sorry in advance!  I really enjoy matters of taxation.  I know some will doubt this, but those who write tax laws are very bright people.  You might not like what they write, but the manner in which they construct it is always of great interest to me.  Admittedly, there are areas so obtuse even I get a little hostile.  But, I digress.

My good friend Frank commented on a particular aspect of the new healthcare law, this being part of the Health Care and Education Reconciliation Act of 2010.  There is an additional 3.8% Medicare contribution tax on certain unearned income.  There has been a recurrent chorus of misinformation about the law, describing it as a sort of “home sales tax”.  It does have some complexity and there is an element of truth that a part of the gain on the sale of a personal residence may be subject to the tax.  However, the truth is that the tax, if there is one, will be imposed only on those with significant income.  Furthermore, the tax will be imposed only on that income that exceeds a threshold amount.

Feel free to ignore the remainder of the article and give me a call instead.  Otherwise, strap yourself in for the detailed explanation.  I’m going to try to simplify this, so bear with me.  Please call if I haven’t described your situation.

  1. The additional Medicare tax is imposed on certain income realized starting in 2013 (not for another two years!).
  2. The tax is 3.8% of the LESSER of:
    1. Net investment income, or
    2. Modified adjusted gross income (MAGI) over the threshold amount
      1. MAGI (simplified) : Wages, salaries, dividends and interest, business income, capital gains
      2. The threshold amount is $200,000 for a single taxpayer and $250,000 for married filing joint.
      3. NOTE: If MAGI over the threshold amount is zero or negative, then NO tax.
  3. Here are four examples:
    1.  The Smiths, a married couple, earn a combined salary of $100,000 a year. They sell their principal residence for $400,000, and net a capital gain of $140,000. Their MAGI in the year of the sale is $100,000 (their salary). Because their MAGI is less than the $250,000 threshold, they do not pay the unearned income Medicare tax. Even if the sold residence was a second home, the result would be the same because their MAGI would be $240,000, which would still be below the $250,000 threshold.
    2. The Greens, a married couple, also earn a combined salary of $100,000. They sell their principal residence for $700,000, and net a gain of $640,000. Their MAGI in the year of the sale is $240,000 (salary plus $140,000 gain above $500,000 exclusion). Because their MAGI is less than the $250,000 threshold, they do not pay the unearned income Medicare tax.
    3. The Donovans, a married couple, earn a combined salary of $260,000. They sell their principal residence for $1.2 million, and net a gain of $700,000. Their MAGI in the year of the sale is $460,000 (salary plus $200,000 gain above $500,000 exclusion). Because there MAGI is more than the $250,000 threshold, they will have to pay the unearned income Medicare tax. The tax is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount. Their net investment income is $200,000 ($700,000 minus $500,000) and the excess of their MAGI over the threshold is $210,000 ($460,000 minus $250,000). Their tax therefore is 3.8% of $200,000 or $7,600.
    4. The Clarks, a married couple, earn a combined salary of $2 million. They sell their principal residence for $1.2 million, and net a gain of $700,000. Their MAGI in the year of the sale is $2.2 million (salary plus $200,000 gain above $500,000 exclusion). Because their MAGI is more than the $250,000 threshold, they will have to pay the unearned income Medicare tax. The tax is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount. Their net investment income is $200,000 ($700,000 minus $500,000) and the excess of their MAGI over the threshold is $1.95 million ($2.2 million minus $250,000). Their tax therefore is 3.8% of $200,000 or $7,600.

 I’m available for questions.  Please give me a call.

Posted in TAXBYTES | Comments Off on The New 3.8% Medicare Tax on High Income

Helping Elderly Friends Gain Control of Their Financial Life

My wife Kathleen and I have elderly friends with a problem that’s common across America.  Our friends, a married couple both in their eighties, are symptomatic of the perils of “suddenly” growing old.  If the first partner to die or lose competency is the one who handles the money, the family is financially adrift.  Bad decisions, motivated by fear and exacerbated by a lack of understanding, become commonplace.  What’s sorely needed is an understanding of our friends’ current and future financial condition and how that will impact their ability to live in a manner that is least disruptive to their lives.

Our friends’ plight is not unusual.  As such, an approach to resolving the crisis is broadly applicable.   

This article is my attempt to organize how I intend to help and to provide a template for others as well.

But first, let’s understand that the results of our efforts are hypothetical.  We’re going to make many, many assumptions that wind-up inaccurate or plain incorrect.  Don’t let that stop you!  This isn’t a formal financial plan.  And, it’s impractical to spend an inordinate amount of time on it.  My view is it’s better to address the issue using common sense as a guide along with information easily obtained than do nothing.  Keep in mind that the objective is to raise a red flag calling for additional investigation and planning OR to provide comfort to our friends that their situation is not as dire as they fear. 

Job number one is to get a handle on the financial assets of the couple.  Here’s a list of financial assets to begin the search:

  • Stocks
  • Bonds
  • Checking and savings accounts
  • Gold coins, bars and certificates
  • Publicly traded partnerships

It’s unlikely you’ll find actual certificates of ownership.  Instead, look for monthly statements from companies that hold the assets.  Consider looking at a recent tax return.  Interest and dividend income, as well as income or loss from the sale of securities will be reported.  Track back to the issuers of statements reporting the income for the tax return to find out where assets are held.  Differentiate between “taxable” and “non-taxable” accounts.  Non-taxable accounts include 401(k)s and IRAs.  Next, determine the amount of pension income the couple receives (this will also be reported in a tax return).  Include social security and annuity income.  I would make sure to understand the duration of the cash in-flow and the tax consequences that arise.  For instance, if the asset is an annuity, does it terminate in the future?  If so, when?  To what extent is the amount taxable (for instance, might some of it be a return of capital)?  How is the amount taxable (for instance, as capital gains or ordinary income)?

Next, I’d like to understand the couple’s periodic costs and other cash outflows.  Look for surprises!  Our friends have committed to nursing care for the husband’s sister.  Remember to give consideration for needs not present at the moment (particularly long-term care).  Similarly, some cash-outflows may change markedly over time (such as residential costs if a personal residence is sold and replaced with a less expensive alternative).   Such costs might include:

  • Auto expense
  • Auto payments
  • Care for children or other family members
  • Food and clothing
  • Income tax
  • Insurance: Health care
  • Insurance: Other types including:
    • Auto
    • Home
    • Life
    • Long-term care
  • Mortgage
  • Nursing and long-term care costs (current and anticipated).
  • Pet care
  • Real estate tax
  • Recreation
  • Travel
  • Unreimbursed medical expenses
  • Utilities


Also, I wouldn’t forget to ask about insurance that provides coverage for some of these expenses, such as long-term care.  It’s helpful to obtain the actual insurance policy and, if necessary, speak with the agent or representative to get clarification.

As long as I’m thinking about it, you might consider confirming that important bills have been paid.  Here’s a short list in no particular order:

  • Property tax
  • Home mortgage
  • Life and long-term care insurance
  • Health insurance

Now, I’d begin thinking about the fair market value of assets.   This isn’t the best time to sell.  From stocks to real estate to art, the value of broad asset classes has taken a hit over the last few years.  Never-the-less, unencumbered assets may need to be liquidated — preferably in an orderly fashion — to maximize yield.  The process I’m outlining here will help accomplish that as it will provide long lead-times between now and when funds are needed.  Here’s a sample list of non-financial assets:

  • Antiques
  • Boats and airplanes
  • Classic autos
  • Fine art
  • Jewelry (especially gold!!)
  • Personal residence
  • Vacation home (or time-share)

Assign a preliminary value to each.  Be conservative!  And don’t delay!  Fine-tune the asset values later on.

Okay!  I think we’re ready to take a hard look at our friends’ current and future financial condition.  Our assembling of information is the hard part.  The actual analysis is easy.  Here’s the basic outline:

Income and other cash inflows
  Less expenses and other cash outflows
Equals Excess Cash Flow or Deficit

Excesses are good; deficits are bad.  The presence of a deficit must be covered with the sale of financial assets such as stocks, bonds and savings accounts or the liquidation of non-financial assets.  Unfortunately, excess cash flow tends to turn to a deficit as time goes on.  Hopefully, asset values will recover, but I wouldn’t stake my life on it.

Set-up three columns: Year 1, Year 2 and Year 3

Let’s create our best estimates for the twelve months ending in one year, two years and three years.  Eyeball the information for each category of income, cash-inflow, expense and cash-outflow.  Increase or decrease the category over time as you see fit – this is where judgment comes into play.  When you finish filling-in the spaces, net the inflows against the outflows, sit back and evaluate the results, including trends.  If, as I suspect, the trend is towards a narrowing of cash inflows over outflows, how long is it before you’ll need to liquidate assets?

Next, what do you think about the results of your analysis?  Is there an immediate cash flow deficit?  If so, I’d say it’s a call to action.  If not, does there appear to be a turning point any time in the future?  If there is, I’d suggest you count back twelve months and put a tickler in your calendar for follow-up.

What sorts of actions can you take when it seems your friends are headed for trouble?  Not all your options include a liquidation of assets.  For instance, a home with little debt and plenty of equity can be used as collateral for a home equity loan.  Banks are looking long and hard at borrowers these days.  However, an elderly couple with little debt, some cash inflow from, say a pension and social security, and additional assets such as stocks and bonds, may be viewed as a pretty good risk.  A home equity loan requires relatively small monthly payments.  It offers excellent flexibility and a source of cash on an as-needed basis.  Later on, if cash becomes available, the home equity loan can be repaid and if un-funded needs arise again, can be dipped-into without disturbing investments or other assets. 

However, if necessary, and with enough warning, assets can be liquidated.  Financial assets are the first to turn to.  However, their liquidation may give rise to income tax consequences.  It’s a good idea to immediately organize the sale of traditional big-ticket items, such as houses, autos and the like.  The more difficult sales (art and antiques, for example) will take longer.  There are reputable dealers who can help (finding one is the subject of another blog).   I can’t emphasize enough the importance of “lead-time”.  The more time you give yourself to sell assets the better the result.  And remember: Just because you’ve put something up for sale doesn’t mean you’re obligated to sell it! 

I’m in the business of figuring-out these sorts of problems.  However, if you follow my blueprint I think you’ll find the solution to be intuitive rather than mysterious.  It’s all about knowing what the needs of your friends are, their sources of cash in-flow and out-flow, and the nature and value of assets.  For the most part, there’s no element of the solution that, at some point you haven’t previously come across.  The most complicated math is addition and subtraction!  But, if you need a little assistance, even if only as a morale booster, there are plenty of folks out there who can help.

Good luck!  You’re doing the right thing!

Posted in PERSONALBYTES | Comments Off on Helping Elderly Friends Gain Control of Their Financial Life

Tax Law Changes

Here is a quick look at several tax law changes that produce tangible changes for taxpayers.  Some of the changes are positive; some are not.  They arise from the recently enacted Small Business Jobs Act of 2010.

  1. For payments made after December 31, 2010 the new law requires persons RECEIVING rental income from real property to file information returns with the IRS indicating the name and identification number of the payer and the amount paid.  The IRS will establish the dollar limitations.  More to follow.  I presume this applies to vacation rentals.
  2. Currently, self-employment income is not reduced by any amount representing the cost of health insurance for the self-employed.  Starting in 2010, self-employed individuals will be able to deduct the cost of health insurance in calculating self-employment income.  Unfortunately, the law applies only to 2010!
  3. For those of you who started businesses in 2010, the law allows you to deduct $10,000 of start-up expenses, as compared to only $5,000 in previous years.  Once again, the law applies only to start-ups in 2010.
Posted in TAXBYTES | Comments Off on Tax Law Changes