Social Security Maximization versus Optimization

It is important for CPAs and advisors to recognize the difference between Social Security maximization and optimization. The Social Security maximization decision is based on math to target the highest lifetime dollar amount of Social Security income that the government will pay you. This is essentially a calculation that is done in a vacuum. This maximization calculation does not consider other aspects of the client’s bigger picture financial situation, such as income taxes and how other assets or income streams impact the taxation of the Social Security income stream. On the other hand, Social Security income optimization considers the Social Security income election technique and timing and includes other aspects of retirement financial and tax planning to work with the client towards harvesting the client’s maximum net after tax (i.e. post Uncle Sam!) lifetime income.

Some Social Security claimants think their Social Security income is, or will be, tax-free. For many, this may not be the case. Up to 85% of Social Security income may be taxable due to what is called provisional income. Provisional income, according to Kevin McCormally of Kiplinger, is “… basically your adjusted gross income plus any tax-exempt interest, plus 50% of your Social Security benefits.” In the media and amongst professionals this is often referred to as the stealth tax, because the taxation of the Social Security income benefit tends to “sneak up” on both consumers and tax professionals.

Several sources of income can contribute toward triggering the provisional income taxation thresholds for a client. These income sources may impact the taxation of their Social Security income benefit. These income sources include, but are not limited to, distributions from your 401k or IRA account(s), wages, pension income, CD and bond interest, and stock/mutual fund dividends.

Of course, clients ought to be mindful and attempt to minimize taxation of the Social Security income benefit if possible, and this often requires advanced planning. Therefore, it is important to investigate and determine in which sequence clients might draw upon their retirement income stream and/or retirement asset account buckets. When and how clients take their Social Security income can significantly enhance or reduce the longevity of their retirement assets and income stream.

Questions clients ought to be asking their advisor(s) might include:

• Should I take Social Security early or later?

• Which Social Security income election strategy will give me the most lifetime net after tax income?

• Does it make sense for me to first draw upon my 401K and/or IRA account(s) and then claim Social Security later?

• Does it make sense to re-distribute some of my assets into other investment vehicles that minimize, or altogether possibly eliminate, the taxation of my Social Security benefit?

The timing and election of the Social Security benefit in conjunction with investment and taxation management can lead to potentially higher standards of living in retirement for our clients.

Read more on considerations for adding Social  Security planning to your practice.

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Marijuana’s Tax Paradox

These days, over half the country (32 states + DC) has some level of pot legalization, whether for medical or recreational use or both. Despite the way our founding fathers established states’ rights, when the federal government’s laws conflict with state laws – the Internal Revenue Code will follow federal law for U.S. income tax purposes.

The good news is, buried in the spending bill last December (Public Law No: 113-235), Congress included a provision to end federal drug enforcement raids on medical marijuana establishments. In effect, it legalized medical marijuana on a federal level.

This is an interesting opportunity for accountants and tax professionals to cater to a readily-identifiable niche market that can afford our fees…

Read the full article at

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The Ultimate Lean Budget

If you are willing to modify the reporting system, decision making, and organizational structure of a business, it is entirely possible to not only operate without a budget, but to thrive while doing so. Thus, the ultimate lean budget is to have no budget at all.

Operating without a Budget
In order to have a properly functioning organization that operates without a budget, it is necessary to make alterations in four areas. They are:

  •  Forecast. The forecast is a rolling forecast that is updated at frequent intervals, and especially when there is a significant event that changes the competitive environment of the business. The forecast is simply the expected outcome of the business in the near term, and is intended to be an early warning indicator of both threats and opportunities. It is completely detached from any compensation plans.
  • Capital budgeting. Requests for funds to buy fixed assets are accepted at all times of the year. Funding allocations are based on expected results and the needs of the requesting business unit. There is no formal once-a-year capital budgeting review.
  • Goal setting. Employees jointly set targets that are relative to the performance of other business units within the company, and against other benchmark organizations. If there is a bonus plan, it is based on these relative results.
  • Compensation. Bonuses and other compensation are based on the ability of the company as a whole to improve its performance relative to its competition or some other relevant performance baseline.

A key point is that the forecast and capital budget are not related to targets. By separating these processes from any corporate targets, there is no incentive for employees to fudge their forecasts or fixed asset funding applications in order to earn bonuses.

From the management perspective, it is critical that senior managers step away from the traditional budget based command-and-control system and replace it with a great deal of local autonomy. This means that local managers can make their own decisions as long as they stay within general guidelines imposed by senior management. The focus of the organization changes from short-term budgets to medium-term to long-term financial results. There is no emphasis on budget variances, since there is no budget.

Also, senior management must trust its employees to spend money wisely. The expectation is that an employee is more likely to question the need for any expenditure, instead of automatically spending all funds granted under a budget allocation.

From a more general perspective, if a company abandons budgeting, how does it maintain any sort of direction? The answer depends upon the structure of the business and the environment within which it operates. Here are several examples of how to maintain a sense of direction:

  • Margin focus. If a business has a relatively consistent market share, but its product mix fluctuates over time, it may be easier to focus the attention of managers on the margins generated by the business, rather than on how they achieve those margins. This eliminates the structural rigidity of a budget, instead allowing managers to obtain revenues and incur expenses as they see fit, as long as they earn the net profit margin mandated by senior management.
  • Key value drivers. If senior management believes that the company will succeed if it closely adheres to specific value drivers, then it should have the company focus its attention on those specific items, and not hold managers to overly-precise revenue or profit goals. For example, the key to success in an industry may be an overwhelming amount of customer support; if so, focus the entire company on maximizing that one competitive advantage.
  • Few products and very competitive environment. If a business relies upon only a small number of products and is under constant competitive pressure, then decisions to change direction must be made quickly, and the organization must be capable of reorienting its direction in short order. This calls for a centralized management environment where a small team uses the latest information
    to reach decisions and rapidly drive change through the organization. In this case, a budget is not only unnecessary, but would interfere with making rapid changes. Thus, keeping employees focused on the operational direction given by senior management is vastly more important than meeting revenue or expense targets; taken to an extreme, employees may never even see the financial results of their areas of responsibility, because the focus is on operations, not financial results.

This article is an extract from Steven Bragg’s Lean Accounting Guidebook.

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National Social Security Advisor Training Goes Online with CPE Link

The Baby Boomer generation is a market of 70 million people with about 10,000 turning 65 every day. The number of individuals eligible for social security rises daily. And unfortunately, 90% of recipients are not maximizing their benefits due to a lack of information and guidance. Social Security benefits can be a vague mystery to both advisors and clients, as it is hard for both parties to find information.

To educate advisors in guiding their clients, Marc Kiner and Jim Blair of Premier Social Security Consulting now offer a Social Security training and certification program. A successful combination of Blair’s 35 years of experience in the Social Security administration and Kiner’s 30 years as a CPA make them the ideal choice for NSSA instructors. Together Kiner and Blair prepare CPAs, Enrolled Agents, Lawyers, Financial Advisors, Insurance Agents, Tax Professionals, and other professional advisors to add Social Security expertise to their list of qualifications.

The demand for Social Security advice continues to increase, and NSSA certified advisors will be able to act as a valuable retirement resource for their clients. In addition to offering this new service to clients, advisors will also be able to obtain a higher level of credibility as Social Security advisors in order to stand out from competing advisors in their field.

The National Social Security Advisor certification training is a completely new program, and many professional advisors have been greatly benefiting from its expert information and instruction. Kiner and Blair travel across the country to offer NSSA training seminars, but an increase in demand will now bring their classes online and available to a national audience. Kiner and Blair have partnered with online continuing education provider CPE Link to bring training for the NSSA Certification Program to CPE Link’s online webcast platform.

In this online training program, Kiner and Blair will cover topics including how benefits are calculated, how benefits are affected by the client’s age, Social Security options available to different marital demographics, and other relevant issues.

Upon completing the webcast training, attendees must pass an online certification test in order to become a National Social Security Advisor and receive their NSSA certificate from the National Social Security Association. The training program includes material filled with invaluable information, a full year of support from instructors, video recordings of the presentations, and exam and certification fees. The online training will make its first appearance on July 10 and August 12, 2013 at

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The New Controller Checklist

Anyone who has been hired into the controller position for the first time may feel overwhelmed, since the job description involves an enormous range of responsibilities. Where to begin? The answer is simpler than you may think. Always focus on the ability of the business to survive. Thus, if there is not enough cash on hand to pay the short-term obligations of the business, all other controller responsibilities are insignificant, because the company will no longer be in business. Thus, you should address the following issues first, and in the order presented:

1. Create a short-term cash forecast.
Develop a simple cash forecasting model on an electronic spreadsheet that tells you the expected cash balance at the end of each week for the next month. The initial results may not be that accurate, so compare actual to forecasted results, and adjust the forecast model to increase its accuracy over time.

2. Understand receivables.
Review the accounts receivable aging report with the collections staff, to understand which customers pay on time (or not), and which receivables are likely to be delayed or uncollectible. Also, review all non-trade receivables to determine which ones are collectible, and when they are likely to be collected. Adjust the cash forecast based on this information.

3. Understand payables.
Review the accounts payable aging report with the accounts payable staff, to learn about the payment terms associated with each supplier, the relations with each one, and which supplier invoices are likely to arrive during the cash forecasting period. Adjust the cash forecast based on this information. Refer to the Accounts Payable Management chapter for more information.

4. Understand debt payments. Review the schedule of debt payments. These payments are sometimes taken out of the company’s bank account automatically by the bank (if it is the lender), so you can reliably estimate in the cash forecast when these cash deductions will occur.

5. Reconcile accounts. If no bank account reconciliations have been completed recently, do so now. This adjusts the company’s recorded cash balance for any bank fees and other adjustments imposed by the bank. Adjust the cash forecast based on the revised current cash balance.

The preceding steps allow you to generate a preliminary cash forecast almost immediately, and one that should rapidly increase in accuracy. Over the longer term, you might also consider reviewing any supplier contracts to see if there will be scheduled payments that should be included in the cash forecast. Also, talk to other departments to determine when they may want to purchase fixed assets, so that you can build these expenditures into the budget. Irrespective of these improvements, please note that the cash forecast will never be entirely accurate, even over a period of just a month, because cash inflows are subject to the whims of customers.

This excerpt was pulled from CPE Link’s instructor Steven Bragg’s course The New Controller Guidebook.

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The Disadvantages of Budgeting

Last week we went over the Advantages of Budgeting, yet we did not discuss the number of serious disadvantages. This week’s article gives an overview of the general issues, while the following sections address the particular problems associated with capital budgeting, as well as the use of budgets within a command and control management system.

  • Inaccuracy. A budget is based on a set of assumptions that are generally not too far distant from the operating conditions under which it was formulated. If the business environment changes to any significant degree, then the company’s revenues or cost structure may change so radically that actual results will rapidly depart from the expectations delineated in the budget. This condition is a particular problem when there is a sudden economic downturn, since the budget authorizes a certain level of spending that is no longer supportable under a suddenly reduced revenue level. Unless management acts quickly to override the budget, managers will continue to spend under their original budgetary authorizations, thereby rupturing any possibility of earning a profit. Other conditions that can also cause results to vary suddenly from budgeted expectations include changes in interest rates, currency exchange rates, and commodity prices. 
  • Rigid decision making. The budgeting process only focuses the attention of the management team on strategy during the budget formulation period near the end of the fiscal year. For the rest of the year, there is no procedural commitment to revisit strategy. Thus, if there is a fundamental shift in the market just after a budget has been completed, there is no system in place to formally review the situation and make changes, thereby placing a company at a considerable disadvantage to its more nimble competitors.
  • Time required. It can be very time-consuming to create a budget, especially in a poorly-organized environment where many iterations of the budget may be required. The time involved is lower if there is a well-designed budgeting procedure in place, employees are accustomed to the process, and the company uses budgeting software. The work required can be more extensive if business conditions are constantly changing, which calls for repeated iterations of the budget model.
  • Gaming the system. An experienced manager may attempt to introduce budgetary slack, which involves deliberately reducing revenue estimates and increasing expense estimates, so that he can easily achieve favorable variances against the budget. This can be a serious problem, and requires considerable oversight to spot and eliminate.
  • Blame for outcomes. If a department does not achieve its budgeted results, the department man ager may blame any other departments that provide services to it for not having adequately supported his department.
  • Expense allocations. The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those departments may take issue with the allocation methods used. This is a particular problem when departments are not allowed to substitute services provided from within the company for lower-cost services that are available else where.
  • Use it or lose it. If a department is allowed a certain amount of expenditures and it does not appear that the department will spend all of  the funds during the budget period, the department manager may authorize excessive expenditures at the last minute, on the grounds that his budget manager may authorize excessive expenditures at the last minute, on the grounds that his budget tends to make managers believe that they are entitled to a certain amount of funding each year, irrespective of their actual need for the funds.
  • Only considers financial outcomes. The nature of the budget is numeric, so it tends to focus management attention on the quantitative aspects of a business; this usually means an intent focus on improving or maintaining profitability. In reality, customers do not care about the profits of a business – they will only buy from the company as long as they are receiving good service and well-constructed products at a fair price. Unfortunately, it is quite difficult to build these concepts into a budget, since they are qualitative in nature. Thus, the budgeting concept does not necessarily support the needs of customers.

The discussion of budgeting has cast serious doubts on the need for a detailed and rigorously-enforced budgeting system, especially one that integrates the budget model with bonus plans. Nonetheless, the decision to install a budget is up to the reader. In Budgeting: The Comprehensive Guide, Steven Bragg shows how to create a budget, whether there are variations on the traditional budgeting concept that may work better, and how to operate without any budget at all. The discussion also covers capital budgeting, flexible budgeting, zero-base budgeting, and all of the procedures, controls, and reports needed for a functioning budget system.


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The Advantages of Budgeting

A budget is a document that forecasts the financial results and financial position of a business for one or more future periods. At a minimum, a budget contains an estimated income statement that describes anticipated financial results. A more complex budget also contains an estimated balance sheet, which contains the entity’s anticipated assets, liabilities, and equity positions at various points in time in the future.

A prime use of the budget is to serve as a performance baseline for the measurement of actual results. Budgets may also be linked to bonus plans in order to direct the activities of various company employees. A budget may also be used for both tax planning and treasury planning. Despite these valid uses, there are also a number of problems with budgeting that have given rise to a movement dedicated to the elimination of budgets.

The Advantages of Budgeting
Budgeting has been with us a long time, and is used by nearly every large company. They would not do so if there were not some perceived advantages to budgeting. These advantages include:

  • Planning orientation. The process of creating a budget takes management away from its short-term, day-to-day management of a business and forces it to think longer-term. This is the chief goal of budgeting, even if management does not succeed in meeting its goals as outlined in the budget – at least it is thinking about the company’s competitive and financial position and how to improve it.
  • Model scenarios. If a company is faced with a number of possible paths down which it can travel, you can create a set of budgets, each based on different scenarios, to estimate the financial results of each strategic direction.
  • Profitability review. It is easy to lose sight of where a company is making most of its money, during the scramble of day-to-day management. A properly structured budget points out which aspects of a business generate cash and which ones use it, which forces management to consider whether it should drop some parts of the business or expand in others. However, this advantage only applies to a budget sufficiently detailed to describe profits at the product, product line, or business unit level.
  • Assumptions review. The budgeting process forces management to think about why the company is in business, as well as its key assumptions about its business environment. A periodic re-evaluation of these issues may result in altered assumptions, which may in turn alter the way in which management decides to operate the business.
  • Performance evaluations. Senior management can tie bonuses or other incentives to how employees perform in comparison to the budget. The accounting department then creates budget versus actual reports to give employees feedback regarding how they are progressing toward their goals. This approach is most common with financial goals, though operational goals (such as reducing the scrap rate) can also be added. We will address a countervailing argument in the Command and Control System section later in this chapter.
  • Predict cash flows. Companies that are growing rapidly, have seasonal sales, or which have irregular sales patterns have a difficult time estimating how much cash they are likely to require in the near term, which results in periodic cash-related crises. A budget is useful for predicting cash flows in the short term, but yields increasingly unreliable results further into the future.
  • Cash allocation. There is only a limited amount of cash available to invest in fixed assets and working capital, and the budgeting process forces management to decide which assets are most worth investing in.
  • Cost reduction analysis. A company that has a strong system in place for continual cost reduction can use a budget to designate cost reduction targets that it wishes to pursue.
  • Shareholder communications. Large investors may want a benchmark against which they can measure the company’s progress. Even if a company chooses not to lend much credence to its own budget, it may still be valuable to construct a conservative budget to share with investors. The same argument holds true for lenders, who may want to see a budget versus actual results comparison from time to time.

These advantages may appear to be persuasive ones, and indeed have been sufficient for most companies to implement budgeting processes. However, there are also serious problems with budgets.

This article is an excerpt from Steven Bragg’s Budgeting: The Comprehensive Guide. To learn about budgeting, visit his course or join us for next week’s blog The Disadvantages of Budgeting.

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Wage and Hour Law – Protect Yourself from Litigation

The Fair Labor Standards Act (effective August 23, 2004) guarantees overtime protection to salaried employees earning less than $23,660 per year–thereby strengthening overtime rights for millions of American workers.

Since the enactment of these standards, wage-and-hour lawsuits have been on the rise with over 7,000 lawsuits filed in federal courts in the past year. Don’t be caught in the middle of one of today’s hottest litigation areas.

How well do you do your wage and hour law?

After you take the quiz, check your answers at the end of this post.

1. Which of the following terms is used to describe an employee whose minimum wage and overtime rights are not guaranteed under the Fair Labor Standards Act?

A. Exempt
B. Blue-Collar
C. Executive
D. Management

2. The modified FLSA laws that went into effect on August 23, 2004 are referred to by the Department of Labor as which of the following?

A. The Fair Pay Rules
B. Duties Test
C. White Collar Test
D. Blue Collar Rules

3. The Fair Pay rules guarantee overtime protection to all employees earning less than how much salary per week?

A. $155
B. $262
C. $393
D. $455

4. The principal, main, major, or most important duty that the exempt employee performs is defined as which of the following?

A. Executive duty
B. Management duty
C. Primary duty
D. Exempt duty

5. An exempt executive employee must customarily and regularly direct the work of at least how many other full-time employees?

A. One or more
B. Two or more

6. Under the FLSA, a workweek begins on?

A. Saturday
B. Sunday
C. Monday
D. Any day of the week

7. The Fair Labor Standards Act does NOT regulate which of the following?

A. Record retention
B. Agricultural jobs
C. Vacation or holiday pay
D. Employment of minors

8. Employees NOT protected by FLSA (or “exempt”) mostly include what type employees?

A. Administrative, executive, and professional employees
B. Manufacturing employees
C. Employees paid on a piece rate basis
D. Waitresses and Bartenders

9. Which of the following may bring suit for back wages?

A. Secretary of Labor
B. Wage and Hour Division
C. Securities and Exchange Commission
D. Internal Revenue Service

Answers: 1A, 2A, 3D, 4C, 5B, 6D, 7C, 8A, 9A

Review questions courtesy of Colleen Neuharth McClain from her self-study course on Wage and Hour Law.

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What’s the ‘Happiness Factor’ of Your Business?

Gearing up for Fall? Now is the perfect time to sit back, take a deep breath, and re-evaluate your tax business and how it’s performing for you.

CPE Link instructor Dominique Molina points out, “They say an apple a day keeps the doctor away,” and adds that a critical reassessment of the health of your tax business is just the apple you need for good financial health.

Molina points out just a few of the key questions practitioners should ask themselves:
• Do you know the value of a client?
• Do you have a dashboard to stay in touch with your business from anywhere?
• Have you created an individual, tailor-made business model?

Molina, co-founder and president of the American Institute of Certified Tax Coaches and an author and frequent lecturer, also urges practitioners to look below the surface at the “happiness factor” of their business.

That factor, she says, is made up of a range of variables that include “relationships, meaningful and important work, progress toward goals, and connecting to something larger than yourself.”

In the more nuts and bolts area of running a successful and satisfying business, Molina says practitioners should consider whether they “offer real value” and also whether the values of their customers have changed over time.

She urges practitioners to be more eclectic, broaden their scope and offer an array of services so that they serve varying needs of their clients.

And she says that to keep your financial house in order, make sure you always have a clear view of which of your services and products are the most popular.

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Leveraging Facebook, Twitter for Professional Growth

If your experience with Facebook is limited to viewing pictures of your co-worker’s cats and snooping into your son’s party plans, you’re missing out on a major professional tool.

So says CPE Link instructor Garrett Wasny, a web productivity consultant who advises financial professionals on Internet discovery and social media.

“With so much of our professional and personal lives spent online,” Wasny says, “this knowledge is beyond relevant. It is the absolute core of how we gather information, make decisions and live our lives in today’s digital age.”

In fact, Wasny says, a thorough understanding of social media such as Facebook and micro-blogging site Twitter can be used to build your practice, network and career.

Facebook counts more than half the U.S. population among its users, and Wasny says there’s a lot to consider: How to register and control privacy, how accounting organizations use its services across the globe, and how to leverage its tools to boost online productivity, workflow, communication and collaboration.

Twitter is a free micro-blogging service that allows users to send and receive “tweets” — text-based posts of up to 140 characters. Those tweets can seem like the height of self-involvement (@kittykat Im goin to make that soup u talked about #whatieatfordinner).

However, Wasny points out that since its rollout in 2006, Twitter “has been embraced by everyone from Senator John McCain to Britney Spears and grabbed headlines all over the world.”

But with financial professionals “already overwhelmed with e-mails, overloaded with websites, and swamped with Facebook friends, do they really need one more Internet service in their professional and personal lives?” Wasny says the service can be used for business research, network building, marketing, recruitment, reputation management, idea sharing, regulation monitoring and much more.

Turns out social media isn’t just about how much beer your kid drank last night and what kittykat is having for dinner.

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