Where Does All Our Money Go?

This weekend, I had two things to accomplish; get my tax return in order and begin to shop for a new truck. Given that this is a very busy time of the year for me, I decided to quietly shop on-line for that new pickup while she got all of her tax documents together.

Since I am the financial professional of the household, I decided to make preparing our return and buying a new truck a simple two-step process.

Step one: Review our gross income to begin tax preparation while getting a better handle on our finances. Step two: Convince my wife that there was still time this afternoon to go kick a few tires. Surely, given our income level, a new truck is affordable.

Step one started on a high note, both of our W-2 forms showed that we earned more money than we had in 2016. Should I get the white or the black, 5.7L 4×4 Toyota Tundra?

Step two was about to begin when my wife, who is not an accountant, asked a very simple question, “Why doesn’t it feel like we make this much money?” Followed by the second more difficult question, “Where does all of our money go?”

Being an accountant, I thought I would summarize our gross income, reduce it by our taxes withheld and then detail our household expenses to best illustrate how we spend our money.

My project got cut short when we began reviewing the difference between gross and net pay. I felt the purse strings start to tighten, and rationalized that a gently treated preowned Tundra might be just as good. Thanks to the Current Tax Payment Act of 1943, this upper-middle income family had 47% of our income taken off the top for Federal, State, Social Security and Medicare taxes. Tax withholdings aside, that still left us with plenty for a used truck, right?

Slowly my wife crossed her arms and asked about our 401(k) deductions. I reviewed with her the benefits that I was sure that she already knew about and explained that that too can directly off the top. Given the dollars that come directly from our gross pay, she suggested that it might be wise if we budget our expenses for the new year.

I am a CPA; I could surely whip up a budget before the dealership closed. We proceeded to draft our 2018 budget, while I closely monitored the time.

With 53% of our after tax and retirement savings left to budget, the numbers quickly unfolded; deduct 18% for housing, 8% for auto, 7% for food, 6% for healthcare, 5% to charity, 5% to savings, that left 4% for everything else. I thought we were done; I’ll take the 2014 black 4×4 Tundra please. “Did you budget for our after tax season trip to the Bahamas?” she asked.

It was then that I realized, my 2007 Toyota worked just fine.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.

Making The Most of Your Nonprofit’s Internal Audit Function

The key role of a not-for-profit’s internal auditors was once limited largely to testing financial and compliance controls and reporting their findings to the organization’s leadership. But today, with their cross-departmental perspective, internal audit staff (whether employees or outside consultants) can help anticipate and mitigate a variety of risks, improve processes — and even help evaluate your nonprofit’s strategies.

Core job

On its most basic level, the internal audit function provides independent assurance of compliance with a nonprofit’s internal controls and their effectiveness in mitigating financial and operational risk. Potential risks include fraud, insufficient funds to support programming and reputational damage.

Internal auditors start by identifying a nonprofit’s vulnerabilities and prioritizing them from high to low. Through testing and other methods, they then assess the effectiveness of internal controls. Auditors document their results in reports that include recommended improvements.

Internal auditors further evaluate compliance with laws, regulations and contracts. They follow up on management’s remediation actions to eliminate identified risks and assist external auditors, when applicable.

The effectiveness of the internal audit function hinges on auditor independence. Auditors should be independent from management and all areas they review to avoid bias or a conflict of interest. Auditors should report directly to the board of directors or its audit committee.

Expanded function

Although the internal audit function is often viewed mainly through the prism of compliance and internal controls, it has a lot to offer beyond risk assessments and audit plans. Savvy nonprofits have begun to tap internal audit for strategic purposes.

Auditors may serve as internal consultants, providing insights gathered while performing compliance and assessment work. For example, while reviewing invoices, internal auditors may discover a way to streamline invoice processing.

The internal audit function’s familiarity with the organization’s inner workings also affords it an unusual perspective for evaluating strategic opportunities. Does your nonprofit have a financial weakness that could undermine plans for continuing current programs or launching new ones? Your internal auditor probably knows the answer.

Ask for more

Increased public scrutiny of how nonprofits are governed and held accountable makes an effective internal audit function a must. But internal auditors can offer your nonprofit more than financial and compliance oversight. To ensure you’re making the most of this function, contact our audit team at 207-873-1603.  Ask for Gary Smith, CPA or Danielle Martin, CPA.

© 2018

2018 – 02/09

There’s never a shortage of misconceptions about taxes and tax refunds.

With the 2018 filing season in full swing, the IRS offers basic tips to help clear up some common misbeliefs. For example: Many people believe that all refunds will be delayed, but 9 out of 10 refunds will be delivered within 21 days. Also, 80% of filers will get their refunds faster using e-file and direct deposit. And the IRS won’t call, email or text you about your refund. (These are signs of a scam.) For more common misbeliefs about taxes, visit http://bit.ly/2EqRmXy or contact us at 207-873-1603. We’re happy to help! 

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Mortgage Interest Tax Deduction: It’s not what it used to be.

Per the US Census Bureau, over half of U.S. homes are occupied by the owner. Of those homeowners, over half have a mortgage that they pay interest on. For most, having a mortgage is part of owning a home and people often spend a significant portion of their life making payments on their mortgage. Before the recent change the US Tax Code section 163 specifically provided for a deduction for mortgage interest and home equity interest as an itemized deduction. This deduction has allowed taxpayers that can itemize to save tax dollars while they pay down their debt.

With the recent passing of the Tax Cuts and Jobs Act, the deduction for mortgage interest has undergone two significant changes that will impact many.

Here is what will change in 2018:

Under the prior law, taxpayers have been allowed to deduct interest on home equity indebtedness up to $100,000. In 2018, this deduction is eliminated and there will no longer be a tax benefit for interest paid on an equity loan.

The second significant change is that taxpayers were allowed to deduct mortgage interest on mortgages up to $1,000,000. The Tax Cuts and Jobs Act now allows taxpayers to deduct interest on mortgages up to $750,000 for all mortgages originated after December 14, 2017.

What happens if your refinance? Taxpayers will be allowed to keep their higher threshold of $1,000,000 if they refinance a loan that was established before December 14, 2017 as long as the new debt doesn’t exceed the amount refinanced. In other words, you will fall under the new rules if you refinance your mortgage and increase the loan amount.

While there are only a small percentage of taxpayers that have a mortgage over $750,000 in the State of Maine, there are a lot of taxpayers that have been deducting the interest on their home equity loans. If these taxpayers still itemize deductions in 2018, they will no longer be able to take advantage of the equity interest deduction.

It is important to understand that the law continues to allow the mortgage interest on a second home. This law has not changed from previous years and taxpayers may benefit from a deduction of mortgage interest on their first and second home, provided that the total indebtedness does not exceed the $750,000 threshold.

I encourage everyone to take some time and read or speak to a tax advisor about the changes under the new tax law and how it will impact you specifically.

“An investment in knowledge pays the best interest.” -Benjamin Franklin

Alison Royall, CPA is a Director at Perry, Fitts, Boulette& Fitton CPAs. She works with people and businesses to prepare tax returns and help them plan their short and long-term goals. She is a multi-state tax specialist, with clients in many other states including international clients. She works with the audit department and prepares compiled and reviewed financial statements for businesses, as well as personal financial statements for high net worth individuals. She can be reached at alison@pfbf.com or 873-1603.