Volume 10 Number 3

From The Corner Office By Mitchell Freedman, CPA/PFS

There's so much talk about a need for changes in Social Security. The debate has gotten quite political and the stakeholders have brought out their PR and lobbying machines to influence legislators and the public.

The Social Security program, established in 1935, is now 70 years old. I believe that it is in dire need of not only a transfusion, but a heart transplant. It will not be able to continue to keep the promises made, without running out of money, once the Baby Boom generation begins drawing their benefits Just evaluate these statistics:. In 1960 there were 8.6 workers paying into the system for each person receiving benefits. Currently, there are 3.3 people paying in for each person in payout. The numbers paying in for each drawing out are projected to drop to 2.2 by 2028 and 1.9 by 2062 respectively. You don't have to be a Nobel Prize winning economist to figure out that this trend just can't continue.

Social Security was originally established during the Great Depression as a safety net for our citizenry. It has, in my opinion, evolved into the largest Ponzi scheme ever foisted on the taxpayers of the United States. The benefits paid are not correlated actuarially to amounts recipients have paid into the system, nor adjusted to their life expectancies. The payments into the system by current workers essentially pay the benefits for the retired workers. Such a system can only be sustained when the working population continues to grow exponentially and it hasn't. Despite a bevy of legislators who wear blinders, "...the demographics are inexorable,..." exclaimed Federal Reserve Chairman Alan Greenspan on February 17, 2005.

Social Security includes a number of benefits, among them: retirement; Medicare; disability; and widow, widower, and survivor benefits. For every dollar paid in by an employee through withholding taxes the employer matches that payment and self-employed individuals pay both portions. For 2005 the combined employer's and employee's shares of the taxes total 15.3% of earnings up to $90,000, plus 2.9% for an unlimited amount of earnings above $90,000. For someone earning $90,000 in 2005 the total payments into the Social Security system will be $13,770.

What are the fixes? Tax increases, benefit cuts, increased retirement ages, and private accounts may all be part of the fix. They are all difficult choices, but Greenspan said that the government must take action before the Baby Boomers begin receiving their benefits in 2008. So, fix it we must. We have no choice.

Tips and Alerts Protect Your Home (and Your Pocketbook) By Janet Gardner

Do you own your own home or condo? Are you tired of paying for expensive repairs? There is some help out there that you may be unaware of: A home warranty policy. This insurance is relatively inexpensive and covers many items (e.g., plumbing, air conditioning, kitchen appliances, etc.) You pay an annual premium and a nominal service charge each time a technician is used for a repair. In the event your item cannot be repaired it will be replaced. Be aware that the replacement will be of comparable quality, although it may not be the same manufacturer as your item.

There are several companies that issue home warranty policies. Two of the larger companies specializing in this type of insurance are American Home Shield (ahswarranty.com) and Home Warranty of America (hwahomewarranty.com).

Tax Notes Tax Break for "Small" Films/TV By Tom Trent, EA

Taking a stand against "runaway production," the American Jobs Creation Act of 2004 includes a provision of special interest to independent filmmakers and others who make lower-budgeted films and television productions. The Act permits a taxpayer to immediately expense, rather than capitalize and amortize, the cost of certain productions commencing after October 22, 2004 and before January 1, 2009.

To qualify, 75% of the total compensation expense of the production must be for services performed in the United States by actors, directors, producers, and other relevant production personnel and the total production costs must not exceed $15,000,000. In the case of episodic television, the aggregate cost of only the first 44 episodes of a series are taken into account. This amount is increased to $20,000,000 if the costs are "significantly incurred" in certain designated low-income or distressed areas. If the production costs exceeds this amount, the production will not qualify: In other words, you have to capitalize the entire negative cost and amortize the full cost over the property's economic life.

As with most things involving taxes, there are many special rules, caveats, and traps for the unwary. If you would like to discuss these rules in further detail, please contact our office.

Is There a (Credit) Doctor in the House? By Kathleen Huse

All right, you've done it. The minimum payments you're making barely cover the interest charges, so your balances just keep getting higher. You've ignored good sense, all those lectures about responsibility, and even that nagging voice in the back of your head. Now you screen your calls in case it's a creditor asking for money. You feel as if you've reached the end of the line. Before things get any worse, you need to start fixing the situation. So, what do you do now?

• Contact your creditors yourself - Most credit card companies will work with you: More than anything, they want their money. You may be able to negotiate a reduction of interest rate and/or payments. Of course, you will not be able to use your card while you're paying it down.

• Contact a credit counseling service - They act as an intermediary on your behalf with your creditors. They have agreements with the credit card companies that will reduce the finance charge to a rate that could be as low as zero percent. You will meet with a counselor, set-up a budget and decide how much you can reasonably afford to repay per month. Then you start making a single monthly payment to the service, and they make the payments on your credit cards. You will have to cancel your current credit cards and not open another until you have paid the bills in full.

• Bankruptcy - When you file for bankruptcy, you are asking for protection from your creditors. Depending on the type of bankruptcy for which you file, the court has two options: It either discharges the debt or your assets and/or income are used to pay at least a portion of it. A bankruptcy can stay on your credit report for seven to ten years. This is the option of last resort.

There are many debt management ads in the media these days, but you need to be very careful. Keep in mind it is expensive to advertise, especially on television. Who supplies that money? Their clients, that's who. Do not assume that they have your best interest at heart. Last year there was a report issued by the U.S. Senate Permanent Subcommittee on Investigations regarding abusive practices in the credit counseling industry. They found that some of these organizations are fronts for for-profit companies charging high fees and making their owners a lot of money. Going to a credit counseling service most likely will negatively impact your credit rating, so be wary of promises. If they sound too good to be true, most likely, they are.

One of the most common scams these bogus credit counseling services perpetrate is to have the client send them the first month's credit card payments - money that should be going to your creditors - and they keep it in full as a service fee. So, you have sent in your payment, usually at least several hundred dollars, thinking the money is going to your bills. But then you start getting phone calls from the credit card companies asking why you haven't paid this month. It is still your responsibility to pay your creditors, even if you sign up with a counseling service and they don't pay them.

After you pay-off your outstanding debts, it is important to re-establish credit. You can start by getting a secured credit card, which requires a deposit of the amount that will be your credit limit. But be very careful because overspending on this card can hurt your chances of getting an unsecured credit card. It is also vital that you clean-up your credit report. Get copies from each of the three major credit agencies, look for any errors, and report them to the credit agency. Keep checking, it may take several requests before it is corrected.

A good credit report along with a high credit score are among the most valuable assets you can have in today's world. They affect the rate you get on a car loan and even if you can get a mortgage to buy a home. Bad credit can also cause you to lose a job or prevent you from getting one. Instead of dwelling on the mistakes of the past, you need to repair your credit for the future. It is possible to improve your credit - it just takes time, patience, discipline, determination, and personal responsibility.

Heard in the Hall

The new face in our offices is that of Tad Jakes who joined our organizations as a professional in our personal financial planning and investment advisory practice in November of 2004.

On September 22 and December 8, 2004 Mitch Freedman attended meetings of the CalCPA Financial Literacy Committee in Burbank and Redwood City, respectively. On October 5th and December 2nd he attended CalCPA Personal Financial Planning Committee meetings in Oakland and Burbank, respectively. On October 19th Mitch presided over the CalCPA Communications Advisory Committee meeting in Redwood City. He also presided over the California Jump$tart Coalition Board of Directors meeting on the 20th of October. On October 24-26 Mitch attended the AICPA ElderCare/PrimePlus Conference in Las Vegas, where he gave two presentations, one on financial elder abuse and the other as a panelist regarding elders' investment portfolios. This conference was followed by an AICPA ElderCare/PrimePlus Task Force meeting on the 27th. On November 13th Mitch participated as a panelist for a CalCPA Dollars & Sense program for Assemblyman Lloyd Levine in Van Nuys. On December 1, 2004 he participated in a "Tax Hotline" call-in television show for KABC7. On December 7th Mitch gave a half-day presentation to the San Joaquin Chapter of CalCPA on ElderCare/PrimePlus services in Modesto. Mitch presided over California Jump$tart's first Orange County general meeting on December 9th.