8/19/10

Featuring Bob Hoye, Managing Editor for Institutional Advisors- he called the Crash of ‘08.

Find out what he thinks now and discussion on Social Security “The Greatest Ponzi Scheme of All Time”.

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8/5/10

Featuring Peter Schiff, US Senate Repub Cand CT. He is credited w foretelling the US economic crisis years ago.

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Most important to remember is what banking transactions the new laws apply to and which transactions they do not. The new law does apply only to ATM transactions and one time debit card transactions (i.e. paying for your groceries with a debit card). The new law does NOT apply to checks written against your account, nor to recurring, typically monthly, charges such as for your car or mortgage.

Currently, if one uses more money than is in the account, the bank has the discretion to permit those charges to hit the account and the account owner is then assessed an overdraft charge of say $35. Now, for example, if 10 checks hit the account after it goes negative, the bank can assess $350 (10x$35) in overdraft charges. As stated above, writing checks or having monthly recurring charges can still result in these multiple overdraft fees.

Now there are new procedures for ATM or one time debit card transactions that can prevent those multiple overdraft fees. Here is how it works. Let’s say you’re pulling $300 out from your ATM. But by doing that it causes your balance to go negative.

If prior to that withdrawal you had told your bank that you did not want to “Opt-In” or affirmatively consent, to the institution’s overdraft service for ATM and one-time debit card transactions, then no overdraft charges would be assessed. One small thing, your request to withdraw $300 from your ATM would also be denied. The bank is not going to let you overdraw your account if they can’t assess charges. This same procedure applies if you were trying to pay your groceries and used your debit card. If by doing that your account would go negative, the bank would deny the withdrawal and no overdraft charge would be assessed.

Now if you chose to “Opt-In”, then the same rules apply as before and you’re subject to multiple overdraft charges as before.

How best to avoid overdraft charges? One should establish an overdraft protection account to be used when you inadvertently go negative. This way your withdrawal goes through on the ATM and you incur no overdraft charges. That is, of course, as long as you don’t blow through your overdraft coverage.

The mandatory compliance date is August 15, 2010 for existing banking customers to declare they want to “Opt-In” and July 1st, 2010 for new bank customers to declare if they want to embrace these new overdraft laws.

So at the end of the day, it is a lot of confusion with a little bit of consumer protection.

1)  Don’t take out more money from your account than what you have — this isn’t rocket science, just pay attention.

2)  Don’t Opt-In — Yes you could incur bounce check charges, but ATMs are for emergencies and you don’t want that option closed off.

3)  Get Overdraft Protection — This way should you slip the bank is there to catch you and you can avoid bounce check charges.

If New Jersey were to enact this solution, the State could save billions of dollars in debt service for years to come. The solution is for the State to form its own bank, whose purpose would be to pay off the $40 billion plus in debt it has accumulated. Instead of interest payments going to private investors, the payments will effectively go to the residents of the State. The State would save over $6 billion a YEAR in debt service.

Pouring money into the private banking system has fixed the economy only for bankers and the wealthy; it has not done much to address either the fundamental problem of unemployment or the debt trap so many Americans find themselves in.

President Obama’s $787 billion stimulus plan has so far failed to halt the growth of unemployment: it has now reached 10.2 percent nationally. If one adds those people who are too discouraged to look for work or those working part time because they couldn’t get a full time job, the unemployment rate was 17.5 percent in October. Our nation has not seen these numbers since the Great Depression.

In this dark firmament, however, one bright star shines. The sole state to actually gain jobs is an unlikely candidate for the distinction: North Dakota. North Dakota is also one of only two states expected to meet their budgets in 2010. (The other is Montana.) North Dakota is a sparsely populated state of less than 700,000 people, largely located in cold and isolated farming communities. Yet, since 2000, the state’s GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but this year it has a budget surplus of $1.3 billion, the largest it has ever had.

During the past gubernatorial campaign, former Governor Corzine stated that if the people of New Jersey wanted to live in a low un-employment state they should move to North Dakota. Our point is that we can achieve low un-employment and have sound, fiscal government without moving to North Dakota.

Why is North Dakota doing so well, when other states are suffering the ravages of a deepening credit crisis? Its secret seems to be that it has its own credit machine. North Dakota is the only state in the Union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919, specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank’s stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota.

The Advantages of Owning Your Own Bank

So, how does owning a bank solve the state’s funding problems? Isn’t the state still limited to the money it has? The answer is no. Chartered banks are allowed to do something nobody else can do: They can create credit on their books simply with accounting entries, using the magic of “fractional reserve” lending. As the Federal Reserve Bank of Dallas explains on its web site:

“Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank… holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.”

How many times? Economists put this “multiplier effect” at eight to ten. But it hasn’t worked that way recently, because the books of private banks are impacted by bad derivatives bets, unmarketable collateralized debt obligations and mark-to-market accounting problems. In other words, the banks miscalculated the risks they undertook when they lent their money. For those who pursued the career of banking the old adage “those who can’t do, do banking” seems more relevant than ever.

The Bank of North Dakota (BND) is set up as a dba: “the State of North Dakota doing business as the Bank of North Dakota.” Technically, that makes the capital of the state the capital of the bank. When former Governor Corzine wanted to sell the state’s toll roads, they were valued at approximately $20 billion. Projecting the possibilities of just leveraging this asset alone by a factor of eight, that capital base could support nearly $160 billion in loans.

To get a bank charter, specific investments would probably need to be earmarked by the state as startup capital; but the startup capital required for a typical New Jersey bank is only about $20 million. This is small potatoes and the money would not actually be “spent.” It would just become bank equity, transmuting from one form of investment into another — and a lucrative investment at that. In the case of the BND, the bank’s return on equity is about 25 percent. It pays a hefty dividend to the state, which is expected to exceed $60 million this year. In the last decade, the BND has turned back a third of a billion dollars to the state’s general fund, offsetting taxes.

New Jersey could do substantially better than that. New Jersey pays $6 billion annually in debt service. If it had its own bank, the bank could refinance its debt and return that $6 billion to the state’s coffers; and it would make substantially more on money lent out.

Besides capital, a bank needs “reserves,” which it gets from deposits. For the BND, this too is no problem, since it has a captive deposit base. By law, the state and all its agencies must deposit their funds in the bank, which pays a competitive interest rate to the state treasurer. The bank also accepts deposits from other entities. These copious deposits can then be plowed back into the state in the form of loans.

Our nation has poured trillions into the banking system where funds have gone to shore up their losses and little has been lent back into the economy. Compounding the bank’s inability to lend, the expectations of ever higher tax rates has made most borrowers not willing to take on new borrowing risks. In fact a capital strike has begun in earnest.

Public Banking on the Central Bank Model

The BND’s populist organizers originally conceived of the bank as a credit union-like institution that would free farmers from predatory lenders, but conservative interests later took control and suppressed these commercial lending functions. The BND is now chiefly a “bankers’ bank.” It acts like a central bank, with functions similar to those of a branch of the Federal Reserve. It avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk and buy down the interest rate.

One of the BND’s functions is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. This function has helped the state to avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007. Before that, investors routinely bought securitized loans (CDOs) from the banks, making room on the banks’ books for more loans.

But these “shadow lenders” disappeared when they realized that the derivatives called “credit default swaps” supposedly protecting their CDOs were a highly unreliable form of insurance. In North Dakota, this secondary real estate market is provided by the BND, which has invested conservatively, avoiding the speculative derivatives debacle.

Other services the BND provides include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions and a well-funded disaster loan program. When the city of Fargo was struck by a massive flood recently, the disaster fund helped the city avoid the devastation suffered by New Orleans in similar circumstances; and when North Dakota failed to meet its state budget a few years ago, the BND met the shortfall.

The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself — a prudent move today, when the FDIC is verging on bankruptcy.

The state could earn billions yearly on these loans, while saving hefty sums for consumers. It could also refinance its own debts and those of its municipal governments at very low interest rates. According to a German study, interest composes 30 percent to 50 percent of everything we buy.

For an ordinary State to initiate capitalizing a bank, it would be full speed ahead. However New Jersey wasn’t named “The Soprano State” for nothing. Explicitly stated in its by-laws and lending practices must be strict conservative guidelines that the borrower must have adequate assets and security exist to repay in the event of a default. Otherwise the politicians will, like Tony Soprano, be whacking up loans to their friends and contributors.

New Jersey is faced with an $8 billion dollar deficit. By forming a bank and buying out the bondholders, the State will not only go a long way towards solving the deficit problem but can begin to reinvigorate its ailing economy so that its residents find New Jersey an affordable state to live and work in again.

How to Save NJ Billions:

• New Jersey Form a State Bank
• Capitalize it with enough assets to pay off all State Loans
• Keep Tony Soprano away — Avoid having it become another money pit by establishing strict conservative guidelines in its by-laws and lending practices.
• If done right (see #1–#3) $6 billion in debt service expenses can be eliminated from the State’s operating budget, not just this year but each and every year.

Convert wages to reimbursed expenses for outside salespeople

Ex. Reimburse employee $10,000 for auto travel instead of paying salary. Employer saves $765 in matching employer payroll taxes plus lower workmen’s comp.

Buy a Hummer - In order to write off the purchase of a new SUV (now limited to $25k plus bonus depreciation) it must weigh at least 6,000 pounds. A Hummer weighs 6,001 pounds.

In honor of Earth day, we’re helping you save more Green!!

1) Hire a payroll service – spending hours figuring out what to withhold from your employees, risking paying your taxes late incurring penalties is not a good use of your time.

2) Knowing the Sales Tax Rules – Every state has bizarre guidelines for what is and is not taxable. You could be paying sales tax, incurring a 7% -8 % for items in your business unnecessarily.

3) Domestic Manufacturers’ Deduction - If you’re a traditional manufacturer or a software development, architecture, engineering or construction business you may be eligible for a tax deduction that could lower your effective tax rate by up to three percentage points.  There are 247 pages of instructions in the IRS “helpful” manual to explain the code.

Suffice to say that if you’re business is in one of the categories listed above, you may be due additional deductions going back every year to tax year 2007.

First-time homebuyers: If you bought a new home in 2008, and you have not previously owned a home in the last 3 years, you are entitled to receive a $7,500 refundable “credit” on your tax return. This “credit” is in fact a loan that needs to be repaid over 15 years, interest free, beginning in 2010.

However, if you were fortunate enough to have bought, or plan on buying in 2009, you get $8,000 no questions asked. This does not need to be paid back and you don’t have to wait until April 2010 to get the credit! Just amend your 2008 tax return and claim it today.

Tax Strategy: If you are engaged to someone who does not qualify as a first-time home buyer, amend your 2008 return before you tie the knot.

Kiddie tax extended: If you are planning on having children to shift income to lower tax rates, you should be aware that the rules have changed. For children under 19, or under 24 and a full-time student, any unearned income over $1,800 will be taxed at the parent’s tax rates. This is a change from 2007 where children under 18 with unearned income over $1,700 were taxed at their parent’s tax rates. (Prior to 2007, the emancipation age was 14!)

Tax Strategy: If your child earns more than 50% of their upkeep, even while being a full time student, they could file on their own for the lower tax rates (not as a dependent on your tax return).

Education Credit: One can obtain a tax credit (a credit is when the IRS gives you a reduction of your tax liability dollar for dollar) on the money spent for their own, or their child’s, college education. However, one must claim the child on their tax return in order to be eligible. This credit is subject to income limitations.

Claiming a child after divorce: Too often after a divorce occurs, the important detail of claiming a child is neglected. A typical arrangement is to can claim the children on the tax return every other year- should be documented in the divorce agreement. The loss of this deduction due to failure to fulfill financial obligations should also be included in the divorce agreement.

You could attempt to calculate your liabilities owed to each of the respective jurisdictions on your own. A better choice would be to hire a professional so you don’t miss out on taking all of the appropriate deductions that you are entitled to. It would help to choose an accountant that specializes in your line of business, since they would be able to provide you with a benchmark for your industry. They will also help ensure that your silent partners don’t get more than they deserve!

Don’t try this at home:

Tax returns should definitely not be a Do It Yourself (DIY) activity. Sure, anyone can type numbers into a tax return. But, not everyone knows how to apply correctly for earned income credits, education credits, and teacher deductions to name just a few. And there are no clear instructions for when to apply kiddie tax rates, or what the kiddie tax even is, for that matter! The average taxpayer would also not know when to claim head of household filing status and gain a more favorable tax bracket.
They also may not know what job related out of pocket expenses are deductible, when moving expenses are deductible, or when an IRA distribution is not subject to penalties. This is just the tip of the iceberg of our mammoth tax code, and not knowing the rules can result in thousands of tax dollars being overpaid to the government, and not staying in your pocket! So, unless you’re a single person over the age of 24 who is renting with no dependents and not in school, please seek out a tax professional to prepare your tax return.
For those DIYs choosing to ignore this tip, I will list some other tax tips to consider when preparing your tax return.

New Jersey is not just broke, we are dead broke. The state’s stated unemployment rate is 10.1 percent but that does not begin to reflect the economic suffering that is occurring in New Jersey. An additional 10 percent of the workforce reflects citizens who have either given up, or have chosen to remain in their job that has been downsized to part time from full time or those who can’t find full time employment and settle for part time status.

Further the unemployment rate does not reflect employees who have taken 10, 20 and 30 percent pay reductions in order to remain employed. Business revenue has dropped dramatically, and thousands of businesses that once were profitable are now struggling to survive.

This coming year’s budget contains an $11 billion deficit. There are no reserves to steal from, no more one shot source of federal government stimulus or tax amnesty programs to plunder.

I have a very straightforward approach to balance the budget. Cut spending 20% across the board (or $6 billion), eliminate the numerous authorities which serve only as patronage pits ($1–$3 billion), and form a State bank to pay off the state’s debt ($6 billion in debt service savings).

If this crisis is not addressed immediately and fixed, the result will be massive layoffs and cutbacks in all of the necessary services we have come to enjoy and expect. Teachers, policemen, firemen and every other essential service are all threatened.

One area targeted for elimination should be school superintendents. New York City with a population of 8 million people has one school superintendent, New Jersey has a population of 9 million, yet we have 611 school superintendents. These positions are the tip of an iceberg of fiscal waste so great that it makes the iceberg that the Titanic hit look like a popsicle.

Over the next three years we should phase out 585 school superintendents leaving one per county. The estimated savings is $250 million from this act. The problem is we do not have three years; we barely have three months.

The first step after the governor and legislature immediately reduce their pay 20%, will be to recommend that all state employees also take a 20 percent pay reduction, effective July 1. Unfortunately, these pay reductions will not be sufficient to eliminate the deficit.

Therefore, all local governments need to reduce the wages of employees by 20 percent, including those working in education. Anyone who receives a paycheck that is funded by taxpayer money will be asked to take a 20 percent pay reduction. That means teachers, administrators, policemen, firemen, anyone who draws a check from taxpayer money will need to take a pay cut.

By taking these wage sacrifices, the state will be able to avert massive firings and continue the fine level of civil and educational service New Jerseyans have come to expect. Now, this pay reduction cannot be imposed at the local level. However, the governor could use the leverage of withholding future funding increases for those towns who chose not to participate in the state wide sacrifice.

Further, all state delivered benefits will also be reduced by 20 percent. Simply anyone who receives benefits or compensation from taxpayer funds will need to take less. These cuts are not a judgment about the compensation one earns or the value of benefits delivered. They simply reflect all the State of New Jersey can afford to pay. The smoke has blown away and the mirrors are cracked.

Bringing our house under sound fiscal management is a first step, but it will not be enough to entice businesses to stay, or to attract new businesses to set up shop in New Jersey. The regulations imposed on anyone trying to operate in this state are what has caused so many to flee.

There is no better example than the COAH (Council On Affordable Housing) regulations passed to help create more affordable housing. A Carnegie Mellon University study on the impact of the COAH rules found that since 2005, when the latest regulations were passed, our state’s housing starts declined more than 300 percent when compared to neighboring New York, and fell 20 percent compared to Pennsylvania.

These declines mean that millions and millions of dollars in business revenue, wages, and state income were lost due to inept and counter productive government regulations. The result of the COAH regulations was to add citizens to those eligible for low income housing recipients.

These regulations, that have created a tide of businesses fleeing New Jersey, need to be aggressively eliminated.

Finally, the New Jersey needs to form a State Bank for the purpose paying off whopping $51 billion debt while eliminating the mammoth $6 billion in annual debt payments.

While there are regulatory issues to work out concerning the types of capital needed to capitalize a State Bank, the crucial point is that such a bank would enable us to pay off our mammoth debt.

The working people of New Jersey have been and continue to make sacrifices in this economic downturn. The solutions offered are what businesses and families are doing to survive, it is long overdue that our government initiate those same sacrifices.

1)  Everyone Gets a Pay Cut — All employees who derive their income from taxpayer money need to take a 20 percent pay cut.

2)  Consolidate School Superintendent Positions — Eliminate 585 school superintendent positions to one per county saving $250 million.

3)  Consolidate Authorities — They are nothing more than patronage pits.

4) Form a State Bank — Capitalize bank to pay off State’s $51 billion debt and thereby eliminate $6 billion in annual debt service.

Brian Greenberg and Associates is a Marlton, NJ CPA firm providing tax and financial planning services. We specialize in helping small business owners retire on their own terms. Follow this link for more on how we can help you.

Brian C. Greenberg & Assocs
1 Eves Drive, Suite 111
Marlton, NJ 08053
856-596-7800

Don’t miss out on home expenses

Now that you’re self-employed and your only office is your apartment or a portion of your house, you are entitled to a business deduction for a portion of the expenses paid to maintain your workspace.

Financial tip: Keep track of all money spent maintaining your home, including, but not limited to, utilities, maintenance, and rent.

Don’t run out and incorporate

If you’re newly self-employed, don’t jump to the conclusion that forming a corporation is the way to go. If you work in New Jersey, for example, and your business receives over a million dollars in revenue, as a corporation you would owe $2,000 to the state. (If your business made nothing, you would still owe the state $500!). In addition, you would be required to set yourself up as an employee, where you would pay approximately $1,500 into an unemployment fund that you would never be eligible to collect from. Different states have different minimums—know these costs before you take the leap and form a corporation.

Financial tip: Consult an attorney to help determine if it would be best to incorporate or form a Limited Liability Company.

This week: Basic Bookkeeping Principles

Set up a separate bank account for your business

Don’t mix your business income and expenses with your personal accounts. You want to make it as easy as possible to track what’s going on in your business, and you don’t want to open up your personal assets to government review.

Financial tip: Get pre-printed checks that interface with Quickbooks software. This enables you to automatically record your bills paid in Quickbooks, which saves time…and time is money.

Develop a system to track business expenses paid in cash

Otherwise, you could end up overpaying your tax obligations. If you lose paper receipts and forget to record cash spent, you risk not accounting for all of your business deductions.

Financial tip: Create a folder that you put your cash receipts in. At least once a month, prepare an expense report summarizing your cash payments. If you’re not sure how to set it up, you can buy pre-printed forms at an office supply store. Then write a check (using Quickbooks) for the total amount spent, and record each expense appropriately.