Categories
Budgeting

Optimal Cost Structure and Effective Scale Economies

How do firms choose their cost structure? What is the nature and function of scales of operation? What are sources of functional and dysfunctional scales of operation? These policy questions relate to the optimal overhead of a business enterprise-the appropriate mix of expenditures that maximizes the return on investment and shareholders’ wealth while minimizing the cost of operations, simultaneously.

Clearly, effective economies of scale (MES-Minimum efficiency scale) are correlated with optimal cost structure and critical to sound business strategies designed to maximize the wealth producing capacity of the enterprise. In these series on effective expenditure management, we will focus on the pertinent strategic overhead questions and offer some operational guidance. The overriding purpose of this review is to highlight some basic cost theory, strategic expenditures relationships, and industry best practices. For specific financial management strategies please consult a competent professional.

As we have already established, the optimal cost structure and appropriate scale of operation for each firm differs markedly based on overall industry dynamic, market structure-degree of competition, height of entry/exit barriers, market contestability, stage of industry life cycle, and its market competitive position. Indeed, as with most market performance indicators, firm-specific cost structure position in insightful only in reference to the industry expected value (average) and generally accepted industry benchmarks and best practices.

One of the most important contributions of economic science to management science is the principle of optimality-derivative of Bellmann Equation-the dynamic programming method which breaks decision problem into smaller sub-problems and early applications in economics by Beckmann, Muth, Phelps and Merton, and the resultant Recursive model. In practice, any optimization problem has some objectives often referred to as the objective functions such as maximizing output, maximizing profit, maximizing utility, minimizing total cost, minimizing cycle time, minimizing distribution cost, minimizing transportation cost, etc.

Types of Cost Structure:

Cost Structures consist of a mix of fixed costs, variable costs and mixed costs. Fixed costs include costs that remain the same despite the volume of goods or services produced within current scale of production. Examples may include salaries, rents, and physical manufacturing facilities. A number of high capital-intensive businesses, such as airlines and manufacturing companies, are characterized by a high proportion of fixed costs which may constitute effective barriers to entry for new industry entrants. Please note that effective exit barriers are effective entry barriers. When firms cannot easily exit unprofitable markets due to high exit barriers, they should not enter such markets in the first place.

Variable costs vary proportionally with the volume of goods or services produced. Labor-intensive businesses focused on services such as banking and insurance are characterized by a high proportion of variable costs. In practice, variable costs frequently factor into profit projections and the calculation of break-even points for a business or project.

Mixed cost items have both fixed and variable components. For example, some management salaries typically do not vary with the number of units produced. However, if production falls dramatically or reaches zero, then attrition may result. This is evidence that all costs are variable in the long run.

Finally, a firm with a large number of variable expenses (compared to fixed expenses) may exhibit more consistent per-unit costs and hence more predictable per-unit profit margins than a company with fewer variable costs. However, a company with fewer variable costs (and hence a larger number of fixed costs) may magnify potential profits (and losses) because revenue increases (or decreases) are applied to a more constant cost level.

Most business enterprises define cost structure in terms of costs incurred in relation to a cost object or activity. And because some expenditures can be difficult to define, we often implement an activity-based project to more closely assign expenses to the cost structure of the cost activity or object in question and use activity-based accounting. Note that time required to complete any given activity is the critical factor in cost management. Therefore, to minimize the overhead of any activity or project it is critical to minimize the time required to complete the activity or project. The following are examples of key elements of the cost structures of various expenditure objects:

Product cost structure: Under this structure there are fixed costs which may include direct labor and manufacturing overhead; and Variable expenses which may include direct materials, production supplies, commissions, and piece rate wages. Service cost structure: Under this cost structure there are fixed expenses which may include administrative overhead; and Variables costs which may include staff wages, bonuses, payroll taxes, travel and entertainment.

Product line cost structure: Under this structure there are fixed costs which may include administrative overhead, manufacturing overhead, direct labor; and Variable costs which may include direct materials, commissions, production supplies; and Customer cost structure: Under this structure: Under this cost structure there are fixed costs there are administrative overhead for customer service, warranty claims; and Variable costs which may include costs of products and services sold to the customer, product returns, credits taken, early payment discounts.

The optimal Cost Structure is the combination of fixed and variable costs that minimizes the total operating overheads while maximizing net operating income simultaneously. The Cost Structure describes all costs-(fixed and variable) incurred to operate a business model. Further, Cost structure refers to the types and relative proportions of fixed and variable costs that a business enterprise incurs. In practice, the cost concept can be classified by region, product line, product item, customer group, department, or division, etc.

In cost-based pricing strategy, cost structure is used as a technique to determine effective prices, as well to identify areas in which expenses might potentially be reduced or at least subjected to better management control. Therefore, the cost structure concept is a useful management accounting tool that that has many financial accounting applications.

All business models have costs associated value creation- which occurs with the addition of actual or perceived value to a customer for a superior good or service; value delivery-creating and maintaining effective mutually beneficial and satisfying customer relationships; and value capture-which occurs through changes in the distribution of value in the good or service and production chain. The objective function is to minimize total operating expenditures. Such overheads can be calculated relatively easily after isolating cost drivers, key activities, key inputs; key resources, and strategic partnerships.

It is our experience that operating costs can be minimized in every business model. Additionally, low cost structures are more important to some business models than to others. Therefore it is useful to distinguish between two broad categories of business models: Cost-driven and Value-driven (many business models fall in between these two extreme categories).

The DuPont model demonstrates that Return on Investment is calculated as the product of Profit Margin (Net Income/Sales) and Turnover Rate (Sales/Total Assets). DuPont analysis indicates that ROE is affected by three factors- Operating efficiency, which is measured by Profit Margin; Asset Use Efficiency, which is measured by Total Asset Turnover; and Financial Leverage, which is measured by the Equity Multiplier: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity).

Types of Business Models:

Cost-driven business model-Most Cost-driven business models focus on minimizing overheads wherever possible. This approach aims at standardization and least cost method by creating and sustaining the leanest possible Cost Structure, using low and dynamic price value propositions, maximum automation, and strategic outsourcing.

Value-driven business model– Under this business model most companies are often less concerned with the cost implications of a particular business model design, and instead their main focus is on value creation. Premium value propositions, customization and a high degree of personalized service often characterize value-driven business models.

Some Operational Guidance:

In practice, firms seeking to optimize cost management must optimize time management. One of the most significant revelations of Activity Based Accounting is the impact of time and activity in firms’ overall operating cost: Cost structure is activity driven and activity is time driven. Therefore, time is the most critical factor is effective cost management. Simply put, firms must reduce time required to execute specific activity to reduce cost associated with the specific activity, ceteris paribus.

Additionally, firms seeking to leverage and optimize scale economies must optimize cost savings derivative of specific scale of operation. Please note that scales of operation may be functional and log-run-cost reducing derivative of experience curve; learning effects; scope economies; division of labor; specialization; horizontal as well as vertical differentiation or dysfunctional and long-run-cost increasing derivative of reactive and entrenched management with musty and personality-driven vision; organizational inertia; adaptive and abusive supervision; increasing bureaucratic cost; lack of innovation; increasing internal and external transaction costs.

In sum, firms optimize cost structure through effective time management and optimizing scales of operation. Therefore, firms seeking to maximize the profit producing capacity of the enterprise must formulate and execute dominant efficient and effective cost management strategies based on appropriate combination of costs that maximizes the return on investment and shareholders’ wealth while minimizing the cost of operations, simultaneously. As we have already established, there is growing empirical evidence suggesting firms that opt for scale and volume tends to outperform those that opt for premium, ceteris paribus.

Categories
Taxes

Agricultural Cost Segregation Studies: Accelerated Depreciation for Tax Savings

Agricultural Cost Segregation Studies are a smart tax move for farmers and ranchers here in the Sacramento Valley, agricultural center of California. And it’s about time: Although cost segregation studies have been available for decades, they’ve only recently hit the mainstream. Agriculture business folks in Northern California are realizing what a great benefit these studies can be to their bottom line.

The general concept of Cost Segregation Studies, in which personal property-such as removable flooring, plumbing and electrical components connected to personal property-are segregated from the real property of foundations, walls and other structural components, works well for properties such as office complexes, apartment buildings, single-family rental units, manufacturing plants or shopping malls.

Agricultural Cost Segregation Studies, though, need a broader view. When preparing a Cost Segregation Study for farmers and ranchers, we need to look at far more than constructed buildings; we must also consider the ranch and farm land itself and all the improvements made to the property for the purposes of farming or ranching.

Of course, the land itself cannot be depreciated. But certain site improvements to the land can be: road coverings, for instance, if they’ve been privately built; pumps and wells; fences and gates; irrigation installations; and electrical wiring. And, in some cases, dams, ponds, and terraces. Most of the agricultural cost segregation study possibilities are spelled out clearly in IRS Publication 225, Farmer’s Tax Guide, which devotes nearly 3 full pages to Depreciation, Depletion, and Amortization.

The section “What Property Can Be Depreciated?” answers itself with 3 sub-heads:

  • Property You Own
  • Property Used in Your Business or Income-Producing Activity
  • Property Having a Determinable Useful Life

That last, the Determinable Useful Life, is where a recent Cost Segregation Study for a Yuba City rice farm got interesting. As anyone who owns a rice farm, works on a rice farm, has visited or even driven by a rice farm knows, a great deal of rice farming includes earthen dams and terraces. Sure would be nice if they could be depreciated, wouldn’t it? Here’s what the IRS says about such structures:

Dams, ponds, and terraces. In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determined useful life.

Well, when I see the phrase “in general, you cannot” that just makes me wonder when specifically you can. So I rolled up my sleeves and dug into the IRS publications pertaining to agricultural depreciation. Turns out that 26 CFR 1.175-2, Code of Federal Regulations – Title 26: Internal Revenue Service, which defines soil and water conservation expenditures, provides guidance for such depreciation:

More specifically, a farmer may deduct expenditures made for these purposes [soil and water conservation in respect of land used in farming, or for the prevention of erosion of land used in farming, but only if such expenditures are made in the furtherance of the business of farming] which are for (i) the treatment or moving of earth, (ii) the construction, control, and protection of diversion channels, drainage ditches, irrigation ditches, earthen dams, watercourses, outlets, and ponds, (iii) the eradication of brush, and (iv) the planting of windbreaks. Expenditures for the treatment or moving of earth include but are not limited to expenditures for leveling, conditioning, grading, terracing, contour furrowing, and restoration of soil fertility.

That’s the kind of information an agricultural cost segregation study specialist-especially one in the Sacramento Valley!-likes to uncover. With these specifics, we can help our rice farming cost segregation study client realize an increased tax savings by putting together a Quality Cost Segregation Study that includes accelerated depreciation not only for his office buildings, machinery facilities and storage silos, roads, pumps and wells, fences and gates, and electrical wiring, but also “diversion channels, drainage ditches, irrigation ditches, earthen dams, watercourses, outlets, and ponds.”

Categories
Taxes

What Is the Cost of a Living Trust in California?

Different Living Trust Costs and Options

There are a variety of options when completing a California living trust. After some extensive research to determine the cost of a living trust in California, I’ve summarized my results into 2 categories:

* In-Office Consultation

* Online Living Trusts

In-Office Consultation

The In-Office Consultation is your traditional office visit with an attorney. You see these a lot of these listed in the yellow pages. They offer you a free one-hour consultation in the hopes of earning your business.

The typical charge is $2,500. The services provided will be a complete estate plan, which includes a living trust.

Lawyers in California are required to have you sign a fee agreement. This fee agreement will dictate the terms of payment, document delivery, etc. You will typically need to pay the $2,500 up front. This $2,500 will be deposited into the attorney’s trust account.

These types of contracts typically take 3-4 weeks to complete.

After interviewing several law firms, I found they typically include the following documents in their California estate plan:

* California Living Trust

* California Advance Health Care Directive (Living Will)

* California Power of Attorney for Finance

* California Pour-Over Will

The Advance Health Care Directive is important in case you are incapacitated because it allows you to appoint a health care agent who has the authority to make decisions based on your current wishes.

The Power of Attorney for Finance is needed in case you are incapacitated and need someone to take care of your finances (e.g. file your personal tax returns, etc.).

The Pour-Over Will essentially transfers everything to your living trust that was not formally transferred. Basically, you are naming your California living trust as the sole beneficiary of your property.

However, these $2,500 plans did not include some key elements:

* California Notary Fees

* California Transfer Grant Deeds

California Notary Fees

Notary fees in California run a maximum of $10 per signature (that’s the law). If you are single, there are four signatures or $40. Married couples will pay $80. If you use a mobile notary, their travel fees are excessive. Many banks offer a notary service for free.

California Transfer Grant Deeds

After you complete your living trust in California, you will need to transfer your home (and any rental properties) to your living trust. Essentially, you prepare a transfer grant deed to title the property in the name of your trust.

If you don’t complete these transfer grant deeds, the living trust is invalid.

It’s much simpler on your 401k and life insurance because it’s a simple matter of naming your trust as the beneficiary. However, you cannot name a beneficiary on real estate in California. The only way to name a beneficiary on real estate in California is to use a living trust.

After you notarize the trust and prepare your transfer grant deeds (each parcel requires a separate grant deed), you will need to record them. Each transfer grant deed is recorded at the County where the parcel is located. That transfer grant deed is also accompanied by a county change of ownership report. This county change of ownership report is a document required by all 58 California Counties and is used by the County Assessor to see if the property should be:

* Re-assessed

* Documentary transfer tax be applied

Since a living trust is EXEMPT from both of these taxes, you must be careful to complete that form properly.

Now that I’ve discussed in-office consultations, let’s examine online offerings.

Online Living Trusts

There were many options for online trusts as well, as this option was gaining popularity. The price for an online living trust ranges anywhere from $297 to $997, so it’s an avenue where you can save a lot of money.

We found, just like in the in-office version, that many did not include the transfer grant deed. In fact, one provider charged an additional $249 per transfer grant deed (if you owned four properties you would pay $249 x 4 or $996).

We also found there were extra hidden fees for other documents. For example, one provider charged another $40 each for both the advance health care directive AND power of attorney (x2 if you are married or domestic partners because separate ones are required for each or $160). Make sure you pay attention to the fine print.

In the in-office consultation, you pick your trust package up in person, but the online version is shipped, so be sure to verify if the shipping charge is included.

Summary

If you have a complicated estate needs, you’re probably best meeting with a local provider in their office. Whether you are using an online provider or in-office consultation, be sure to take this list with you and ask to ensure ALL of the documents are provided.

If you have more than one piece of real estate, make sure the transfer grant deeds are completed for ALL of the properties. Also make sure they include each preliminary change of ownership report and the recording instructions (separate ones required for each deed).

Lastly, make sure the notary fees are included because they will cost you another $40 (single) and $80 (married). You will also pay another $10 for each transfer grant deed ($20 each if married).

Categories
Taxes

Avoiding Tax Return Mistakes That Could Cost You

Did you know the average person spends approximately 12 hours preparing their income tax return? Have you started gathering all your information to prepare your 2018 return? Remember, if you spend all that time preparing your return, the last thing you want to do is make a mistake because you are in a rush. Mistakes, no matter how simple, can delay your refund. Below are some common mistakes that are made on tax returns and what you can do to avoid them.

Get Organized: If you don’t already have your tax information together you better start now. Missing information can have the potential of costing you unnecessary funds.

Improper Social Security # or incorrect ID: The SS# must match with what’s on your Social Security card because the IRS compares all returns with the Social Security Administration’s database. Also, it is easy to get to focused on the numbers that you forget to sign your return or even enter other necessary information. Even having the incorrect name can be a problem. These problems often happen after marriage or divorce, especially if you haven’t informed Social Security.

Filing Status Mistakes: There are five filing status options (Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow w/ dependent) that are used to determine your filing requirements (standard deduction, eligibility for credits, deductions and your correct tax. Choosing the best filing status for you is one of the initial steps in filing your return.

Math Errors and Miscalculations: With all those numbers you can enter on your tax forms, it is easy to make simple math mistakes. If the IRS finds those errors they may recalculate them for you but not to your advantage. So, it would be to your benefit to check your math before you send in your forms. In addition to possible math errors, there can be miscalculations linked to taxable income, withholdings, estimated tax payments, and misc. tax credits.

Incorrect Bank Account Numbers for Direct Deposit: It’s important to double check your bank’s routing number and your account number to ensure you receive your refund in a timely manner. Just as important is paying your tax on time to avoid possible penalties and interest.

Underreported Income: Don’t forget to add income from anything other than your place of employment. This includes interest income, savings dividends, rental income or funds from a second job. Make sure you total all your income statements (W-2s, 1099s, K-1s and 1098s). Remember, the IRS gets copies of all those forms as well.

Filing Late or even not at all: Many of us can get overcome with details and put off filing our returns on time or not at all. Sooner or later the IRS will discover your tardiness and you will get a bill for the interest and penalties for not following the rules. If you are unable to make the April 15th deadline, you can request a six-month extension and avoid these penalties if you pay any taxes due by the filing deadline.

Start Saving: Whether you owe the IRS or are expecting a refund it’s always good to be saving. Sometimes refunds get delayed so you can’t delay your bills waiting for your refund. Make sure you set aside a portion of your income now so you will be prepared to pay any unexpected payments.

Use your return sensibly: If you are expecting a return this year, make sure you use it wisely. Before you spend it, make sure you prioritize your financial needs and put the refund toward that.

My Tip To You: Make sure you prepare your tax return when you have fewer diversions. If you are interrupted or have annoying distractions, stop what you are doing and finish your return at a later time. A little extra time spent on your tax return will go along way to sending in an accurate return. By following these simple tips, you can safeguard you won’t get a letter from Uncle Sam letting you know you owe extra money.

Categories
Taxes

How Can I Deduct the Cost of Moving on My Federal Income Taxes?

Moving has to be one of the most annoying tasks on the planet. And God forbid you’ve been asked by a friend to help them move. Talk about a thankless job.

The days of walking off the street and landing a job at one of the Big 3 Auto companies and working until retirement is long gone. People find themselves moving numerous times to new places to take new employment positions.

So if we have to move, can we at least get paid for it or deduct it off our income taxes?

You may be able to deduct your moving expenses on your tax return, but there is a specific rule you must adhere to for qualification.

A moving expense deduction can be claimed if the distance from your old home to your new place of employment is more than 50 miles than the distance from your old home to your old place of employment.

A better way of explaining that last paragraph is if your new job is more than 101 miles away, you can take the deduction.

You also must actually work in the area you move to for at least 39 weeks of the year you get there. You do not have to work at the same job or for the same company the entire time.

If you’re self-employed, the moving test is tougher. Although the distance required to have moved is the same, you must work in the new area for 78 weeks out of the two years immediately following your move. And you must live there for two years to get the deduction.

If your employer reimbursed you for whatever expenses you incurred, you can’t turn around and claim those expenses at tax time.

Yes moving is inevitable and an annoyance, but for some, at least it can be written off your taxes.

Categories
Taxes

Examining the Cost of Lawsuit Funding

In the last article, we examined the historical pricing models in the lawsuit cash advance funding industry. We also discussed the business dynamics that often change pricing in any business which puts capital at risk for profit. Specifically, we mentioned how the settlement loan industry evolved from an enterprise charging as much as 10% per month as “interest” on lawsuit cash advances to a business where applicants are routinely “funded” for as little as 15% per six month period.

In this entry, we examine the costs associated with lawsuit funding and analyze them from the perspective of an applicant who is in dire need of cash for whatever reason. From this angle, we can more accurately assess the costs associated with this type of financial relief – only available for those who have a pending lawsuit.

Since every person’s circumstances are different, weighing the costs in obtaining a lawsuit loan or pre-settlement funding against the future proceeds of an individual’s pending case, can only be accomplished on a case by case basis. For this reason, perhaps the best way to illustrate the point, is to use a hypothetical example.

Lawsuit Funding Costs – Hypothetical Example

A 36 year old plaintiff in a lawsuit finds himself unable to work and support himself and his family due to injuries sustained due to the negligent driving of another individual. Since 2008, plaintiff has exhausted all other avenues for financial relief. He has borrowed money from his friends and family. He has taken a home equity loan against the value of his home. He has gone through his disability payments from work and the other “benefits” he receives do not cover his monthly expenses. He is currently 5 months in arrears on his mortgage and property tax payments.

Forced with an imminent foreclosure proceeding, this plaintiff’s options are limited. On the one hand, he can file bankruptcy, which could save his home but would ruin his credit rating for many years. He can hire an attorney for this but the attorney requires payment up front for his time and expertise.

Another option is to obtain lawsuit funding to help with his liquidity issues. Let us briefly delve a little deeper in the analysis.

Comparing Costs

We already discussed the costs associated with lawsuit cash advances. But what about the cost of not being able to pay bills on time, or at all? We may not be able to quantify the costs exactly, but we can at least identify some potential problems. For example, defaulting on a mortgage could result in the following “costs” for the homeowner.

1. Removal from the Dwelling. The defaulting party must then find shelter. Normally, a rental unit requires first and last month rent plus a security deposit. That is three months rent up front from the new tenant. Of course, if the person has three months rent, he would probably be able to at least delay the foreclosure process. So there is a liquidity problem on top of the existing problem. One can easily foresee multiple “costs” associated with being removed from a place of residence (e.g. moving costs, additional fuel expenditures, storage fees, etc.).

2. Destroyed Credit Scores. Like it or not, this country operates on debt. Who is indebted to whom is the oldest and arguably the most profitable game in history. Access to credit is an integral part of the game and are a function of credit scores. Obviously, a mortgage foreclosure would severely hamper a person’s access to credit for car loans, future home purchases, appliances or even credit cards. Further, even if credit is offered, the interest rates charged will be far more than otherwise would be required. Above are simply two “costs” facing the person in our example.

Conclusion

When thinking about the above, it is helpful to weigh the long term effects of these events. The real problem is how to accurately assess the cost and compare them to obtaining a lawsuit cash advance funding against a case. Ultimately, the analysis depends on individual circumstances. Fortunately, the lawsuit funding business exists for those persons who make the analysis and choose lawsuit loans as a possible solution. Thousands of people make this choice each and every day. Thank you for your interest in the pre-settlement loan business.

Categories
Taxes

The Hidden Cost of Moving

There is a time for everything, a time to move in and a time to move out. Dread it or love it, for whatever reasons, a time will come when you will be faced with inevitable. Moving out from your parents’, starting a family, expanding a family, relocating to a different neighborhood or country, etc. Moving experiences can be very thrilling as it can be tasking. Most people are overwhelmed by the enormous time and money needed to change property that they budget for the standard moving checklist items overlook the always present, hidden moving cost.

For some, their moving cost is bankrolled by a corporate body so there have little to worry about but even with this group of people there are some hidden moving cost that there should be aware of beforehand in order to factor them into the bill or, there might have to fork out money for those overlooked items from their own pockets. For those that are under a budget, knowing the actual cost of moving is very necessary. Traditionally, people just think of packing their many years of accumulated junk into boxes and renting a truck to cart it away to a newer location, so, their moving budget is limited to packaging items, truck lease and man-power. We all know that it is easier said than done. There is more to it than that.

For starters, as common with all leasing contracts, although normal wear and tear is expected, you have to leave the property as you got in. This might mean fixing all the stuff that you have broken, discarding old furniture that you will not be moving with, cleaning, cancellation and/or relocation of utility, change of address charges for mails, taxes, insurance for rental truck and moving special items.

Yeah, there are professional movers that make the whole process a lot less cumbersome but before sign a contract with them to relocate your property to a new place, be aware! No matter where you are moving to/ from – an empty house to a furnished one and vice versa, there is the cost factor.

There is always hidden moving cost no matter the magnitude of your relocation. They vary on a case-to-case basis. Before you delve into this sometimes overwhelming task of moving, budget and plan every little detail ahead of time and count your cost. It might be worth the while.

Categories
Taxes

The True Cost of Government

I wonder if people realize how much tax they actually pay. A lot of the taxes we pay are carefully arranged so we don’t recognize their magnitude. For example, most people are thrilled to get a tax refund in April even though it was their money, all along – if we each had to write a single big income tax check each year, rather than have it automatically payroll-deducted, I suspect there would be more resistance to income taxation, but since we never see the money, we get used to not having the money, and we don’t miss the money. The few percent we pay in sales tax on individual purchases also seems like nothing, but when we add up all the purchases we make in a year, it becomes a sizeable chunk of our income.

I put together this study to highlight all of the insidious little taxes we pay in a year, and how they all add up. If I’ve forgotten any, please let me know!

Taxes change every year, so I’ve tried to find and use the 2012 rates. Many of the taxes we pay are progressive or are locale-specific, so for the purposes of this study, let’s assume an unmarried taxpayer living in Westchester County, NY, and for readability, we can call him “Joe.” According to Wikipedia, Joe’s 2010 median per capita income was $47,814, so to keep the math simple, we’ll just round up to $50,000, and away we go.

Like many of us, Joe has a W-2 job, wherein his employer withholds several taxes on the government’s behalf. The IRS employs a progressive income tax scale as follows:

Tax | On Taxable

Rate | Income Up To:

10% | $8,700

15% | $35,350

25% | $85,650

28% | $178,650

33% | $388,350

35% | Infinity

Not all of Joe’s income is taxable – the government allows most single filers to take a standard deduction of $5,950 and a personal exemption of $3,800 without any documentation or justification, and for many people, this is much easier (and more economical) than saving receipts and trying to account for every dollar and mile. So Joe pays 10% of the first $8,700 of his taxable income, which equals $870, plus 15% of the next $26,650, which equals $3,998, plus 25% of the remaining $4,900, which equals $1,225, for a total federal income tax of $6,093. Nominally, this is already more than one-ninth of his income. Incidentally, try to imagine how much of a disincentive it is to earn more than $388,350, when over one-third of it goes to pay just federal income tax.

The federal government also requires that Joe’s employer withhold a portion of Joe’s pay for Social Security and Medicare, and that they match his portion with payments of their own. For 2012, Joe’s employer withheld 1.45% of his pay ($725) for Medicare and company-matched that same percentage, and withheld 4.2% of his pay ($2,100) for Social Security and company-matched 6.2% ($3,100). Whereas the portions withheld are easily calculable and visible to Joe, the company-matched amounts are part of what the company believes Joe is worth, but he never sees that portion of what is effectively his total compensation package. To fairly account for those portions, we have to change the denominator – Joe’s income – so we must add the $725 and the $3,100 to Joe’s compensation of $50,000 to fairly calculate the percentage of tax he pays. Some might argue that Social Security and Medicare are insurance plans or retirement savings programs, so these withholdings are actually “premiums” or “contributions” rather than “taxes,” and that Joe may reap the benefits of these programs at a later time. However, from our perspective, all taxes are forced “contributions” to programs which Joe might or might not support, and in which he had no choice. There is no market competition and little-to-no opportunity for Joe to customize those programs for his specific insurance or retirement needs or concerns. He is simply compelled to pay what the government demands, and can only hope to reap some future return if he lives long enough and meets the ever-changing then-criteria.

The last of the federal taxes is Joe’s employer’s annual federal unemployment tax. They annually file an IRS form 940 to report and remit 0.6% of the first $7,000 they pay to each employee, which, in Joe’s case, is $42. This, like the company-matched Social Security and Medicare payments is part of Joe’s worth to the company, but is compensation he never sees, so we must add it to both the numerator and the denominator.

To recap, based on Joe’s effective total compensation of $53,867, so far, he has had withheld $6,093 of federal income tax, $725 for Medicare, and $2,100 for Social Security, and his employer has paid another $725 for Medicare, $3,100 for Social Security, and $42 for federal unemployment insurance. This makes $12,785 in withholdings, which already totals 24% of his total compensation, and so far, we’ve only considered federal taxes.

Next, the state wants a cut. Joe lives in New York, so he pays New York State income tax, too. It works by the same arrangement as the IRS – his employer withholds it from his paycheck before he ever sees it. Also similar to the IRS, NYS employs a progressive income tax scale as follows:

Tax | On Taxable

Rate | Income Up To:

4.0% | $8,000

4.50% | $11,000

5.25% | $13,000

5.90% | $20,000

6.85% | $200,000

7.85% | $500,000

8.97% | Infinity

Like the IRS, the State gives Joe a standard deduction of $7,500, but they don’t allow a personal exemption – only dependent exemptions, of which Joe has none. So Joe pays 4% of the first $8,000 of his taxable income, which equals $320, plus 4.5% of the next $3,000, which equals $135, plus 5.25% of the next $2,000, which equals $105, plus 5.9% of the next $7,000, which equals $413, plus 6.85% of the remaining $22,500, which equals $1,541, for a total state income tax of $2,514. Joe is lucky he doesn’t live in New York City or the City of Yonkers, as each of them have additional local income taxes – NYC would have billed him another ~$1,500. Until recently, there was even a tax on NYC suburbanites who were assumed to reap a benefit from NYC having subways and buses.

New York State also has its own mandatory unemployment insurance, which, like the federal unemployment insurance is completely employer-paid. So again, this is compensation Joe never sees, but it is part of the total compensation package his company pays on his behalf. To make this calculation more complicated, the rate is not the same across the board; new employers start at a rate of 4.025%, and then it fluctuates from 1.425% to 9.825%, depending on each employer’s track record of contributions paid in versus benefits paid out. On top of that, every company pays 0.075% to a Re-employment Service Fund, which is somehow helps get the unemployed re-employed, but I’m not clear how. For this study, let’s conservatively treat each company’s “tax” as the minimum 1.5%, regarding anything higher as owing to their own personnel mismanagement, although I acknowledge that may not be completely fair to the companies. Any of these figures are only based on the first $8,500 of each employee’s annual compensation, so in Joe’s case, this is another $128 to be added to his numerator and denominator.

Employers are also mandated to provide worker’s compensation and disability insurance to their employees. I can’t speak for all companies out there, but assuming mine are typical rates, worker’s compensation insurance costs my company $229 per employee, and disability insurance costs my company $60 per employee. Of that, we bill 60¢ per week back to our employees for their disability insurance, so they pay $31.20 (which we’ll regard as a tax), and the company pays $257.80, which we’ll add to both the numerator and the denominator.

To recap, Joe’s federal effective total compensation was $53,867, and he had $12,785 paid or withheld. Now he has had another $2,514 of NYS income tax withheld and pays $31.20 for disability insurance, and his employer has paid another $257.80 for worker’s compensation and disability insurances and $128 for NYS unemployment insurance. This makes $15,715 in taxes and withholdings out of his $54,252 effective total compensation, which totals 29%, leaving Joe with the remaining 71% of his pay, $38,537, for his life, liberty, and pursuit of happiness.

Where should he start? Well, obviously, Joe is going to need a place to live. For this study, let’s make Joe a homeowner. If he was a renter, although he wouldn’t pay property taxes directly, his landlord would build them into the calculation of his rent, so it would still be there as a cost, but obfuscated.

Westchester County’s median property tax is $9,003, but to be fair, there are probably more two-income home-owning families. At a mere $38.5K of net income, Joe would be hard-pressed to maintain and pay taxes, insurance, a mortgage, and utilities for a median house. While property tax is ad valorum, or based a percentage of property value, rather than based on income, that same source indicates that County tax averages 8.1% of income, which is a much more believable number. Municipalities also collect property taxes for the schools and services they provide, and the Journal News reported that the total combined median tax bill was $10,000 in 2011. Keeping the same ratio, let’s regard Joe’s combined property tax obligations as 9% of his income, or $4,500.

New York Newsday reported that the median sale price of a single-family house in Westchester slid to $505,500 last quarter, but again, since those are probably mostly purchased by two-income families, let’s cut that in half for Joe, imagining it to be a $252,750 co-op. You may be wondering, “Why do we care how much Joe’s home costs?” We don’t, specifically, but if he’s going to need to borrow money to buy it, mortgages are taxable. Assuming he’s going to borrow the typical 80% of the purchase price, his mortgage tax will be based on $202,200. In Westchester, outside of Yonkers, the mortgage tax is 1.3%, or $2,629. Technically, Joe pays 1.05% and his lender pays 0.25%, but since they’ll build this into his interest rate, points, or closing costs, we’ll regard it as effectively paid by Joe. The average person lives in a home for ~10 years, so we can allocate his mortgage tax as $263 per year.

To recap, Joe’s total effective compensation after mandated federal and state programs was $54,252, out of which he had $15,715 paid or withheld. His property tax is $4,500 per year, and the annualization of his mortgage tax comes to $263. This makes $20,478 in taxes and withholdings, which totals 38% of his income.

After his home, Joe’s next biggest expenses may be related to his vehicle. The IRS allows businesses five years of depreciation on a vehicle, so for our calculations let’s assume Joe keeps his cars each for five years. Each time he buys a car, he’ll pay the State $25 for plates (unless he transfers them), $50 for title, plus the appropriate sales tax on the vehicle. Most of Westchester (outside the cities) collects 7.375% sales tax, and on his salary, let’s just assume a $7,500 car. So adding the $25 and $50 fees to the $553 of sales tax costs Joe $628 in taxes and fees, or $126 per year, allocated over the five years he’ll own the car.

NYS charges a registration fee based on the weight of the vehicle, starting at a minimum of $32.50 every two years, and topping out at $140 for the heaviest vans and SUVs. We’ll estimate it at $50, or $25/year. On behalf of Westchester County, the NYS DMV also collects a vehicle “use tax” of $30-60 every two years, depending on vehicle weight, and a “Supplemental MCTD Fee” of $50 every two years. For our purposes, let’s average and add these to $120 every two years, or $60 per year, bringing his vehicle-related taxes and fees to $186 per year.

It’s a good thing Joe doesn’t live in NYC, because the NYC parking tax is a double-digit percentage of its high cost. Here in Westchester, he probably has an assigned parking space or some free on-street parking. Even so, Joe is up to $20,664 in taxes and government fees, which is 38% of his $54,252 effective compensation, leaving him a tad over $33,500 to spend as he sees fit.

Based on previous numbers, and assuming a 4% 30-year loan, his mortgage payments will probably cost him close to $1,000 per month, and his car payments at 0% financing will total $1,500 per year, leaving him just over $20,000.

He’s going to need a cell phone, so let’s go with Verizon’s typical $100 2GB plan. Verizon will pass on a bunch of surcharges, including a Federal Universal Service Charge, Regulatory Charge, Administrative Charge, and Gross Receipts Surcharge, and will collect various direct taxes and governmental surcharges and fees, including NY Public Safety Communication Surcharge, Westchester County 911 Surcharge, NYS sales tax, Westchester County sales tax, and NY Local McTd sales tax (whatever that is), which will collectively add about another $15 to the monthly bill, or $180 annually. This will leave him with $18,709, and he has paid $20,844 in taxes and fees.

Several providers have been competing to provide television, Internet, and VoIP phone service. If Joe goes with Optimum’s “Triple Play” package, he’ll pay $84.95 per month for the first year, plus $3.90 in TV taxes & fees, plus 50¢ for NY intrastate excise taxes for his VoIP line. This leaves Joe with $17,636, and he has paid $20,897 in taxes and fees.

Let’s assume a ~$100 monthly utility bill. The delivery portion will include ~$2.85 in System Benefits Charge/Renewable Portfolio Standard charges to fund NYS renewable energy, environmental, and other related public policy programs, ~$2.34 in temporary NY State Surcharge, and ~$1.73 in Gross Receipts Taxes and other tax surcharges. Sales tax will apply to both the supply and delivery portions, at 3%, which will account for $2.91 of the bill. Joe has remaining $16,436, and has paid $21,015 in taxes and fees.

If he drives a typical 10,000 miles at ~33 mpg (which may be a generous figure), he’ll go through about 300 gallons of gas. The NYS tax on gas is 25.8¢/gal plus 0.35¢/gal for petroleum test fee and spill fee, so he’ll have paid $78.45 in taxes there (for a total of $21,093), and at a total cost of ~$3.75/gal, he’ll have $15,311 of disposable income remaining.

Assuming ~$4,000 then goes to tax-exempt groceries, ~$1,000 goes to tax-exempt clothing, and ~$500 goes to tax-exempt prescriptions and medical co-payments, Joe will likely enjoy the last ~$9,800 of his pay on taxable meals, entertainment, household goods, cosmetics, etc., upon which he’ll likely pay the Westchester sales tax rate of 7.375%, which amounts to another $724 in tax. In total, he’ll have paid $21,816.54 in taxes and government-mandated fees & surcharges on an effective total compensation of $54,252.30, which amounts to over 40% of his income going to pay for government and government-mandated programs.

What have I left out? Bridge and highway tolls? Parking taxes and municipal parking? Airfare taxes, surcharges, and security fees? Municipal water & sewer? Vehicle inspections? Passport fees? Tire disposal fees? Traffic court surcharges? Small claims court fees? Building permits? The cost of the accountants and/or the opportunity cost of the time spent collecting receipts, researching new tax code, and preparing these numerous tax returns?

Joe is an end consumer of just about everything he buys, but how much tax did the producers of those goods pay, that contributes to the price Joe pays for those things? For instance, Joe pays sales tax on his movie tickets, but part of the cost of the movie tickets also pays for the theatre’s property and payroll taxes, and whatever required inspections and permits may be required to operate a commercial building. Part of the cost of his movie ticket goes to pay the talent’s and contractors’ payroll taxes, the sales tax on the props, and the property taxes on the soundstages, studios, and editing facilities. All of the intermediaries involved in making, editing, and bringing the movie to Joe also pay taxes on their business-related utilities and cell phones, and on the fuel for their vehicles, and the price of Joe’s ticket has to cover his share of that, too. All of these other entities also hire tax accountants and/or curtail their own productive efforts to prepare their own tax returns, and Joe pays a portion of that. Lastly, all of these entities also buy goods and services from other entities who set their prices in consideration of the taxes they have to pay. Ultimately, we probably need calculus to determine the true cost of all these taxes.

When we take all of this into consideration, it would appear that we are already living in a country where about half of our productive effort is appropriated by our government – effectively, we are slaves for half of the year.

When Libertarians talk about cutting taxes and cutting government, the first issue most opponents raise is “Who’s going to pave the roads?” Seeing as how we’re already paying for them anyway, surely roads could be privatized and operated competitively, using something like E-Z Pass to bill users for distance traveled. When government is asked to cut itself back, typically they try to make it painfully-visible to constituents by threatening to close fire houses or reduce trash pickups, but since we’re already paying for those things anyway, surely they could be privatized, too. Your home insurance carrier could demand a paid receipt from whatever competitive fire service you selected, and Consumer Reports could rate them on performance. You could choose whichever competitive waste disposal company you preferred, selecting your own pickup schedule, and deciding whether you wanted to sort your own trash or have them do it for you – heck, a creative company could even return your cans and bottles for you, to reduce your bill.

Taxpayers fear that they’d end up paying for things that they presently get for “free,” but that’s not exactly true – they’d be using money which is actually insidiously taken from them to pay for those “free” things, but they could be more selective and frugal in a competitive market. Based on the government costing us half of our productive effort, a country devoid of government would give us double our current effective income with which to provide these services for ourselves. Before people misread that and jump all over me, I’m not suggesting we strive to be an anarchist nation – I’m suggesting we head back in the direction of the minimal government our founding fathers gave us, and we stop looking to government to solve so many of our problems – they’re notoriously bad at it, and they crowd out the competition from giving us better choices.

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Insurance

Cost Of Tuberous Breast Correction: Is It Affordable?

Quite a number of aspects will determine the cost of tuberous breast correction. When you get a better understanding of how these aspects affect the cost of treatment, you will be better placed to select the best option.

Important Aspects That Determine Cost of Surgery

One key aspect that will influence the cost of treatment is the surgeon you select. Obviously, when you seek a highly qualified and very skilled surgeon, you are sure to have a higher bill compared to any other surgeon who has much less expertise. However, the surgeon’s skill and expertise is more than likely to make up for the higher cost. Going for a cheaper option might mean that you won’t get as good a result as you would with the expert surgeon.

Indeed, surgery would involve several other personnel, apart from the cosmetic surgeon. This would include such professionals as anaesthetists. Hence, just as with the surgeon, the quality of service you expect to get from these other personnel would also go hand-in-hand with the overall cost of treatment.

As you may already know, surgical operations to correct tuberous breasts would require a wide range of advanced equipment and treatment techniques. This means that the facility from which you opt to receive treatment should be fully furnished with the best equipment for the purpose. Moreover, this too would be a key factor that determines the cost of treatment.

All these aspects, including medical practitioner’s fees and facility costs, are largely fixed costs. However, there are certain aspects that would bring in some variable costs in any surgical operation. The reality is that different patients have varying severity of tuberous deformities. Hence, the more severe cases would require even more extensive care as compared to the less severe cases.

Actually, someone who only has a type I deformity could easily go through surgery within one day; whereas, someone with a more severe case would have to take a one- or two-day hospital stay. This obviously means that you may have to cater for additional costs even beyond the surgical operation itself. Besides, surgery would definitely be more costly if it would take longer than one day.

When you consult your surgeon concerning the operation, he/ she will assess your particular situation and give you a clear outline of what your procedure will cost. You should also take note that a proficient surgeon would ensure that the initial surgery is carried out in the best way possible, in order to avoid any cases of relapse in future. This will further reduce the chances of incurring more medical costs even after you undergo your treatment.

Is It Covered by Medicare?

The Private Health Insurance Ombudsman clearly indicates that Medicare does not cover clinically unnecessary hospital and medical services. This means that surgical operations meant only for cosmetic reasons wouldn’t be covered.

Concerning tuberous breast deformity in particular, you’re not likely to receive Medicare rebates for milder forms of the condition. However, you can actually receive rebates on a number of costs related to more extensive cases of the condition. You can also get some level of insurance cover, from some private health insurers.

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Insurance

Cheap Car Insurance – How to Reduce the Cost of Owning a Car

Car insurance is insurance that is purchased for cars, trucks, motorcycles and other vehicles. The primary aim of a car insurance is to provide financial protection against any physical damage and/or injury to people that may be caused due to a traffic collision and also against liabilities that might arise from them. It is mandatory for cars and it adds up to the cost of owning a car. So it has now become a necessity to get a cheap insurance especially when the cost of owning a car has been on the rise.

Cheap Insurance is something that many insurance companies might boast of. But it is a known fact that not all insurance companies are the same. With loads of companies willing to provide you with cheap car insurance, the first step would be to collect insurance quotes from as many insurance companies as possible. Compare the quotes along with the claim procedures and the conditions of the insurance companies before you decide on the company who is going to provide you with cheap car insurance.

The cost of your car insurance is determined by the type of car you drive. Cars that are prone to theft and certain makes and models cost more to insure. If you are looking for cheap insurance, then be wary about the car model you have. Safer cars will help you get cheap insurance. If safety equipment and anti theft device are fitted on to your car, the chances of theft is reduced and this can help you in getting them cheap. Make sure that the company is wary of the fact that you have safety equipment on your car to strike a good deal for cheap insurance. The deductible amount is the amount that you will pay first out of a claim. This has direct impact on the cost of your policy. To get a cheap deal you can increase the deductible provided you are confident of your driving and are prepared to take the risk. If you are having a relationship with an insurance company, you can bargain for good discounts and thereby landing up with a good deal. The companies do offer good discounts for multiple policies. The internet is a great resource to find an online broker who is giving out good discounts. Above all, drive carefully – How you drive also determines the cost of your car insurance. Cheap car insurance is easier for a safe driver as there are good safe driver discounts that are on offer from the insurance companies.

If you are looking for cheap car insurance, then be prepared to spend some time for it. Get comparable quotes from various companies and analyze them before you make up your mind. The tips mentioned above will help you get the best deals from the top insurance companies, so just go ahead and start looking out for the best cheap insurance for your car.