It is already July, and I wrote about  a week ago did not end up passing.  Now California is starting to issue IOUs for many of its obligations.  These IOUs are actually called “registered warrants”, and they will yield a 3.75% annual interest rate.  The state plans to repay them in October.  So what happens if you receive one?

Apparently many IOUs would be sent to residents who are still owed a tax refund.  Many small businesses that sell to the state will also receive them.  A full list of the various agencies and groups that will be paid. Right now the large banks such as Bank of America, Chase, and Wells Fargo are willing to cash the IOUs for customers.  However, this only lasts until July 10th, so this means that if you need the money now you better hope that you receive your IOU before then and get it to the bank.

It is also possible to sell the IOU to other lenders and investors.  Afterall, whoever holds the IOU at the time of maturity will collect the interest accrued. There is a risk of default from the state, but I can see some people getting into the business of buying up IOUs from people who need the cash.  Most likely these folks will pay less than the value of the IOU since they want to make a profit.

If you do not need the cash right away it might be best just to hold on to the IOU because the interest accrued is not taxable.  3.75% tax free is a lot better than any CDs and bank accounts out there now, but it really means nothing if you need to pay your bills right now.

I hope that the state gets its act together by July 10th because otherwise many people may have to resort to less safe venues to cashing their IOUs.   Small businesses may not even be able to survive without the ability to keep the lights on and making payroll.  Needless to say, this is a complete debacle, and I hope it does not cause too much damage.  Additionally, this round of IOUs for those who have a tax refund is further proof that it is better to owe the government money.  If you are in this group it is probably a good idea to withhold less from your checks.

I have found that I like the LA Times’ reporting a lot more than the SF Chronicle’s.  Today on Sacramento’s plan on how to balance the state budget, and some of it is truly hilarious.  Here is a short summary.

• State workers’ June paycheck would be paid on July 1st, thus pushing $1.2 billion of expenses into the next fiscal year.  Umm… this saves money how?
• $1.7 billion of school funding would be delayed until the next fiscal year.  Once again, this is another paper fix
• Withhold 10% more taxes from every working Californian starting Jan 1st 2010.  This is essentially an attempt to collect almost $2 billion in taxes in advance.  What prevents people from changing their withholdings and owe the state money even with a 10% increase?
• 3% tax withholding on payments to independent contractors.  This is another gimmick to advance tax payments, but the independent contractors could get the money back if they don’t owe 3%.
• $1 billion proposed money grab on local gasoline tax revenues.  This is already being fought by the League of California Cities with a lawsuit.
• $1.50 per pack extra taxes on cigarettes.  When New York imposed a huge hike of taxes on each pack of cigarettes some simply bought cigarettes with lower taxes from other states and imported them to New York and made a profit by selling them at the tax inclusive rate.  I’m guessing some Nevadans or Oregonians will be into this business in California now.
• Illegal immigrants in prisons are being sent to immigration to be deported.  They really should have done this years ago.  Isn’t this really common sense?

A lot of these attempts to delay or advance payments really add nothing to the bottom line.  In fact, I think some of them would backfire.  For example, if you usually get a state tax refund now, perhaps it is time to change your withholdings so that you end up owing money at the end of the year because the state is trying to milk more money out of you this year anyway.  Also we all know that the state delayed refund payments for months and months this year so why should they receive your money early?  Chances are this would happen again if they do not change the fundamentals of how they are operating.    If enough people change their withholding strategy then this advance grab of tax dollars would not work at all.  If you calculate your withholdings correctly it is possible to owe just enough to not have to pay a penalty.

I’m kind of annoyed to see that a lot of the original proposed cuts on some social programs are gone and all of these gimmicks are going on.  So they are pushing one month’s salary into the next year, what will they do the next year?  Push the salaries again?  Soon enough state worker’s will be getting their pay budgeted for years into the future.  That’s pretty pointless.

I really do not mind paying taxes if it is being used responsibly, but it does not seem like the government knows how to manage money properly.  Add that to the fact that Californians themselves control the law making proposition system you just get a complete mess.   Of course noone wants to cut education, healthcare, and freebies, and of course noone wants to increase taxes.  So what you have left over is a very dysfunctional state and another reason to hate California.

The Silicon Valley is a fairly liberal place that has generally supported many of the Obama Administration’s moves, but yesterday  many about Obama’s proposal to effectively raise taxes on foreign income by billions of dollars.

Currently, U.S. based companies can defer corporate taxes on foreign income as long as they keep the income in another country.  Additionally, U.S. companies can deduct the foreign taxes and costs  they already paid against their income.  The Obama administration argues that this ships jobs overseas.  The problem with that argument  is that many U.S. based companies actually make more than 50% of their income from citizens of other countries.  Imagine if you are selling 1000000 units of something here in the United States, and you are selling 1000000 units of the same thing to the rest of the world, then you would absolutely need staff and offices in the rest of the world.  There is a Walmart in my hometown in China, and sure, it is staffed by Chinese people, but it also earns money from Chinese people.  Does the Obama administration think that taxing this Walmart more will bring those jobs to America?  That is absolutely ridiculous.  What it will do is that it would cut the profit margin of the Walmart in China, and the Chinese will have to suffer higher prices and they will probably just shop elsewhere.  This will reduce the competitiveness of American companies in other countries because other stores have to pay only the local taxes.

I really think this plan to enact protectionism via the tax code is really short sighted.  America has 5% of the world’s population, and a lot of the large multinational corporations have little room to expand in this country.  Just think of how many iPods and McDonalds you see everyday and you would understand that the United States is absolutely saturated with a lot of products and services and the growth rate for a company that stayed exclusively in the United States would not be as large as a company that sells to the rest of the world.  So why would the United States government punish corporations for making money from the rest of the 95% of the world?

Another consequence of this initiative that was not mentioned by the administration is that this will affect the stock prices of the bluest blue chips.  When you see those earnings per share numbers, they do include foreign earnings.  For example, Johnson and Johnson is a company that gets more than 50% of its earnings from foreign countries.  So imagine that half of its earnings suddenly had a tax of 30% compared to 2% the year before.  This will cut into the earnings per share significantly.  The result would be lower stock prices, and the further erosion of 401ks and pension funds.  What a great way to destroy more retirements.

The worst consequence is that large corporations could just pack up and leave the United States completely.  Just imagine all of the Silicon Valley greats like Oracle, Google, and Cisco reincorporating in another country with more favorable corporate tax systems and taking away tens of thousands of jobs permanently.  That would be a huge blow to the United States economy, and it may be irreparable.

So far, the reception to this plan has been somewhat hostile from many industry groups and foreign nations.  The Register in the UK states that for its low business taxes.  In some ways, that is true.  U.S. based companies employ millions of people in foreign countries, and if the administration specifically targets foreign taxes, it is essentially targeting the livelihoods of these people.  It is also ridiculous to think that laying off foreign workers is good for America, because as the living standards of everyone else improves, they also purchase American goods.  If you take away those good paying jobs around the world, it is really worse for everyone.  The plan will supposedly raise $210 billion for the Treasury in the next decade, but at what cost to the global economy and America?

Yes I know there is only one week left, but it is not my fault that I am not done with my taxes.  It is really due to my ex-employer, and here is why.

Basically, I exercised my vested stock options when I left my last company.  Since the “market value” of the stock was more than my strike price I thought I might as well buy my shares.  This was all fine and dandy.  In the middle of last year the company issued a cash dividend on its shares, so I got a check for my shares.  That was also pretty awesome since the dividends covered about 1/3rd of the price I paid for the stock.

Now, since there was a dividend, the company issued a 1099-DIV for my taxes.  However, the funny thing is that they sent the 1099 with a letter that said that they OVERPAID dividends so there may be a corrected 1099-DIV coming in April.  I actually have never heard of this before.  So now my ex-coworkers and I are all waiting for this phantom 1099.

I am actually not quite sure what happens when a company overpays dividends.  They have not asked for any money back, but it seems that they have to account for the dividends a little differently on the 1099.  Does anyone know what is supposed to happen?

Anyway, since I do not have a tax refund, I am willing to submit my tax return as late as possible, but some ex-coworkers who are expecting returns are not so happy  about what is happening.  Private company stocks are really mysterious things, and I cannot find too much information. It is possible that I will just have to file and send in an amended return later, but it sure is annoying.

The last two weeks have been incredibly busy for me because the entire engineering team was working on an important major release of our software. We all worked multiple weekends and nights and finally the software is out! As a reward we got to have five days floating holidays for the extra time we worked. I am taking one of those days off today just to unwind a bit, and also work on our dreaded taxes.

I already entered our W-2s and 1099s into the tax software and it looks like we owe quite a bit of money. The reason is that we adjusted our W-4 from single to married at the end of 2007. Strangely enough, this made our paychecks bigger for the duration of 2008, but we actually owe more taxes than when we were single because of the marriage tax penalty. Basically, we withheld less, and we owe more. So we may owe $4000 to $6000 for last year. This is not that bad because we actually needed the cash during the year to complete the home purchase. We also have the cash to pay for the taxes so it is not a dire situation. From my calculations we should be fine with the same W-4 status this year because our mortgage interest deduction will be around $6000 for the year and it will basically be a wash. Last year we only made two mortgage payments and a couple months of property taxes so the deductions are not very large.  I think the optimal thing to do is to owe a little bit of money every year in case the government needs to give out an IOU.

Nevertheless, paying taxes is always pretty depressing. I did a bit of math yesterday and our biggest monthly expense is actually our taxes and that is pretty sad. In fact, the amount we are required to spend on taxes every month is more than our rent and food money. Ironically, all of this money is mostly wasted by the government on bailouts upon bailouts.

Additionally, I am not a citizen, but a  permanent resident of this country, but the IRS states that I should be taxed like any other citizen working here.  I am fine with that since I have the same work opportunities as citizens, but for me it is truly taxation without representation.

Anyway, I should pull out all my various tax statements now and start working.  This is quite depressing indeed.