Dangers of Online Tax Preparation and Banking

I've been what's called an "early adopter" with respect to personal computers since the seventies. I was one of the first people to develop a tax forecasting and planning software program for the very early personal computers. And I've been using the WWW and Internet since about 1994. The reason for making these statements is only to clarify that my refusal to use online tax software and online banking is not based on a lack of familiarity with computers.

Banks today go to great lengths to persuade us that their computer systems are ultra-secure and safe. And they may well be right.

But it doesn't make a dime's worth of difference if your own connection to the Internet is not equally secure. When you consider the cost of developing and maintaining a secure computer system by a bank, having an equally secure system on your home computer is not an option.

I've been hyper-sensitive to computer security for many years and probably have a fairly effective system for a home based business. But that gives me virtually no comfort with respect to whether my system is 100% secure.

Have you heard about "key stroke loggers"?

According to Wikipedia, "Keystroke logging (often called keylogging) is the action of tracking (or logging) the keys struck on a keyboard, typically in a covert manner so that the person using the keyboard is unaware that their actions are being monitored." These key logging programs can be inserted in a computer with a variety of worms or computer viruses.

Once a key stroke logger is on your computer, the people who put it there can then retrieve the data -- consisting of the history of your key strokes. Your key strokes clearly include any passwords that you enter to use your online banking and/or online tax preparation software. Other software used by the thief analyzes the data to reconstruct what is being done. Connections to various web sites are easy to identify. With the password and other data obtained from your computer, the thief has complete access to all of your online banking, investment and tax returns.

What can you do to protect yourself?

The safest solution is to not use online financial services, but that's becoming impractical in today's world.

The second safest solution is to have a separate computer that is used exclusively for online banking, investment management services and tax planning or preparation. That computer should be 100% off limits for any kind of email or web surfing that is not essential for the online financial services. If you have an IRA or 401k, you should be able to afford the cost of a separate computer to be used only to manage your investments, taxes and banking.

Even if you have a stand-alone computer for this purpose, you also need to avoid using public wireless connections such as those at airports, hotels or coffee shops.

One of the greatest dangers of getting some kind of malware onto your computer is the use of your computer by your children or by anyone else. If you can afford it, it's best to provide the kids with their own computers. If that's a bit too expensive for you, let them use the older computers that you have replaced with newer models. Failing that, you may want to simply prohibit the kids from using your computer at all.

And, as a last resort, you can simply not use any kind of online financial service.

Vern

Why the stock market has been doing well

The politicians and their followers are using gains in the stock market as evidence that the economy is recovering. While I'd like to believe it, I can't help being a bit nervous about putting more money into equity investments at this time.

The reason for the increase in the market value of stocks is because of the absurdly low interest rates on fixed income obligations like C.D.s, money market funds and short term treasury bills.

When interest rates on short term debt obligations are near zero, what choice does an investor have other than to invest in the stock market? Despite a weak economy and relatively high unemployment, the majority of people are still working and are trying to save more money. Ongoing contributions to various kinds of tax deferred retirement plans have to be invested somewhere. The real estate market is still dicey and fixed income investments offer near zero returns. So the money is going into the market.

I can't think of any way to accurately predict when or if the Fed will stop their "quantitative easing" (money creation) and let interest rates return to whatever the market dictates for various kinds of debt obligations. But until that happens, it's a little bit like living under the "Teeterin rock" in the Li'l Abner cartoons. Once interest rates return to normal, a lot of money will move out of the market.

At least that's the way it seems to me.

Vern
www.vernonjacobs.com

A Cure for Inflation?

Have you noticed that we talk about an increase in the price of gold, silver and various foreign currencies, instead of talking about a decrease in the value of the U.S. dollar?

As of about 10:30 am (central time) in the U.S., on November 15th, the spot price of gold was $1,338. If you bought some gold at $1,000 an ounce, have you made a profit of $338 (33.8%) or has the value of the dollar decreased by about 25%? If you invested in Euro's at 1.20 per dollar and sold out when the Euro was at 1.40 per dollar, have you made a profit of 16.7% or did the dollar fall by about 14%?

If the increase in the relative value of gold or other currencies versus the dollar is actually a decline in the purchasing value of the dollar, why do we have to pay taxes on the alleged gains in the value of gold, silver or other currencies?

One of the diverse suggestions for a way to curb inflation is to permit people to use gold or silver as a substitute for the dollar, but without eliminating the dollar. This would require that we do not impose a tax on any increase in the value of the competing currency in relation to the dollar. Many people would continue to use dollars to conduct business, but an increasing number would choose either gold or silver to establish the price of various products or services. This would be particularly attractive for transactions (such as loans) that expose one of the parties to a potential loss because of a decline in the value of the currency. But this would also put a lot of pressure on the Federal Reserve to stop inflating the currency.

Of course, that's simply a lot of wishful thinking on my part because there is no way the political and banking establishment would allow us to use any competing substitute for the declining dollar.

Vern

See The Tax Reform Alternative
http://www.offshorepress.com/taxreform2010.html

Cut Spending or increase Taxes?

Yesterday, Rand Paul was interviewed by a t.v. commentator and Paul stated that one of his goals as a Senator would be to persuade his colleagues to cut federal spending by $100 billion a year.

The interviewer asked if Paul didn't think that increasing taxes was also essential to help reduce the deficit. The way the question was posed clearly implied that the answer to the question was that taxes had to be increased -- particularly on the upper income taxpayers.

But Rep. Paul stated emphatically that the problem is not inadequate or insufficient tax revenues. The problem is entirely about excessive spending. He then trotted out some compelling data about the rate of increase in federal spending since 2008 and suggested that just getting back to the 2008 level would reduce spending by far more than $100 billion.

According to the Washington Post, federal spending went up by 16% in 2009 to $3.2 trillion. That represents an increase of some $475 billion, which is far more than Paul's modest proposal to cut spending.

Nonetheless, the mantra from the left is that we can't cut spending without cutting essential programs. When given some examples of popular things that would have to be cut if Paul's proposal became law, Paul replied that the left always trots out the most popular programs and insists that these are the only programs that can be cut. This is the same tactic as threatening to cut police or fire services or funds for education when there are demands to cut spending at the local level.

As for the argument by the left that continuing the Bush tax cuts will cause a loss of federal revenue, Paul rightly points out that the 2001 tax cuts are the law today and that letting them expire would be the largest tax increase in recent memory.

Vern

http://www.offshorepress.com/taxreform2010.html

The Conservatives Don't Have a Plan

Lately, the Democrats have been making the argument that the Conservatives are just being negative and they don't have a plan to solve the numerous problems we face.

That' a little bit like asking, "When was the last time you beat your wife?".

The question presumes it is necessary to have "a plan". The Progressives and most Democrats apparently believe that smart people in government can solve every kind of problem with central planning.

Conservatives believe that central planning is the problem rather than the solution. The Conservative "plan" is to quit trying to micro-manage the unmanageable. The plan is to get rid of most of the regulatory agencies and their stifling regulations. The plan is to stop trying to manage the environment, the economy and every aspect of business. The plan is to let the citizens work out these problems with a minimum of government interference. The plan is to downsize as much as possible. The plan is to have an honest currency rather than one that depreciates as much as 75% in 50 years (with 3 percent inflation). The plan is to let the magic of competition drive down the cost and improve the quality of health care for everyone. The plan is to shift most Federal activities to the states, as required by the Constitution.

Vern

Roth Conversion for Retirees

Making a decision about whether to convert a regular IRA to a Roth IRA can be extremely confusing. An often overlooked issue that adds to the confusion is the potential impact on whether future Social Security benefits might be subject to income tax.

One of the somewhat obscure tax traps that can hit Social Security (SS) recipients who have other income is the income tax on SS benefits. Depending on your income level and whether you are single (or are married and filing a joint return), you may have to include as much as 85% of your SS benefits in your taxable income.

So what does this have to do with a conversion of a regular IRA to a Roth IRA?

After making a conversion the income earned by the IRA and any distributions from the IRA would not be taxable. This could reduce the amount of SS benefits that is otherwise subject to income tax.

But bear in mind that the conversion results in adding the full amount of the IRA to your income over a two year period in 2010 and 2011. That is likely to push you into a top tax rate. For those already in or near the top rate, that might not make a difference. In any event, the government is eager to get more taxes now, rather than waiting until you retire and that's the main reason why this tax break was offered.

The conversion option is not available after this year.

For information on the income tax on SS benefits see http://www.ssa.gov/pubs/10035.html

For some information about Roth conversions see
http://www.money-zine.com/Financial-Planning/Retirement/Disadvantages-of-Roth-Conversions/

Your IRA trustee may also be able to help you with this decision.

Vern

Prospects for Real Tax Reform

The income tax and the inflation tax have provided the liberal politicians with the ability to extract an unlimited amount of money from the public. Most previous administrations and Congress's have exercised at least some restraint in using that ability. The current Congress and White House seem to have no regard for the consequences of their insane spending programs.

Many of my clients and some of my professional colleagues have concluded that the only way out for them is to give up their citizenship and to seek opportunity or retirement somewhere else. Although there are only a relative handful of people who are included on the government list of tax expatriates, my private sources tell me that there are long waiting lists at the embassies in major cities -- of Americans who want to renounce their citizenship now.

The U.S. has become a magnet for immigrants not because of freedom of opportunity, but because of our extremely generous social safety net. As we attract more poor people with limited education and skills, we are also beginning to lose our entrepreneurs and people with capital. Carry that forward five or ten years and then think about the impact on our economy. Then recall the incredible trillions of unfunded entitlements that will be demanded by millions of retiring baby boomers.

Can this madness be stopped? Perhaps, but I fear we have reached the "tipping point" or the point of no return where the number of people who are dependent on the federal government exceed the number who are not. Who will vote for radical change to restore the U.S. to the kind of representative democracy that is described by our Constitution rather than by the judges who have redefined it to permit the creation of a welfare state? We need to get rid of the income tax by repealing the 16th Amendment and generating federal revenues with some kind of consumption tax, and by either repealing the Federal Reserve Act or somehow restricting the ability of the Fed to create new money without limit.

I hate to be a pessimist but I believe we will need a LOT more pain before there are enough voters who are willing to return us to a land of opportunity and to give up the illusion of a land of free goodies.

Consequently, I anticipate that we will see a substantial increase in the number of U.S. citizens and green card holders who choose to move somewhere that is believed to be less hostile to those with capital or business talent.

Vern

See The Tax Reform Alternative
http://www.offshorepress.com/taxreform2010.html