Just in time for another one to begin.

I am going to be emphatic here, and not everyone will like what I have to say, but nonetheless I am going to say it: our economic nightmare is not over, and if the U.S. government continues down the path it currently is on, we are going to see much worse in the future. Despite the positive press out there, I am going to point out why I think the situation today is dire, and becoming worse.

First, and most important, we have to remember why this downturn occurred. The George W. Bush administration, in promoting its “Ownership Society” propaganda, decided to encourage home ownership and “encouraged” lending institutions go to along with its program. There was money to be made, and everyone from the mortgage brokers to Wall Street brokerage houses jumped in.

For a while, the Kool-Aid seemed to work wonders. Americans refinanced their homes, some got rich in the ultra-hot real estate markets, and all of us sent the dollars overseas to buy whatever people who accept dollars could send us. People around the world, in response, purchased more and more U.S. government debt. Indeed, it was the Mother of All Toga Parties.

All good toga parties, however, must end sooner or later, as either the proprietors run out of booze or the partygoers run out of oxygen. In our case, it was a bit of both. It was evident that no matter how hard it tried, the government via the Federal Reserve System could not reflate the housing market. Members of OPEC, remembering that their product was denominated worldwide in U.S. dollars, started expressing alarm that maybe, just maybe, they were being paid in something akin to Monopoly money.

Second, when faced with the financial wreckage, what was a Fed chairman to do? In the early 1980s, Paul Volker, who had been appointed to his position in 1979 by then-President Jimmy Carter, decided that reflating the economy was not an option. Instead, Volker allowed interest rates to rise and did not flood the markets with near-unlimited credit.

The original adjustments were painful, but after the inflation-fed economic malinvestments were liquidated and the economy had recovered its fundamentals, then we saw a very long period of real economic growth. We actually had a period in modern American history in which private enterprise at least was given some benefit of the doubt, and when the Soviet Union broke up, people supposedly understood that socialism had failed and failed miserably.

That was then. In response to the inevitable financial meltdowns brought on by the Fed’s reckless policies, the Fed engaged in, well, more reckless policies. Recalling a false history of the Great Depression that never was true (that the Great Depression occurred because government did not spend enough money), Fed Chairman Ben Bernanke has thrown money everywhere, enabling the government to nationalize bankrupt companies and essentially take over the finance industry.

After doing this for more than a year, the economy has stopped its downslide. However, as I said at the beginning, that hardly is the end of it. We have to remember that the Bush administration and the Fed triggered the housing boom in order to deal with a recession that occurred in 2001 — which came about after the Fed-induced stock boom came crashing down. (Can anyone see a pattern here?)

In case people don’t recognize the pattern, let me refresh some memories. The long expansion of the 1980s ended in a recession at the end of the decade. Recovery was uneven until the last few years of the 1990s, as the Fed’s aggressive monetary expansion met the “New Economy” rhetoric, and out of it came yet another boom that would bust.

Here is the pattern: After Volcker permitted the economy to have a real recovery, subsequent recoveries were much more inflation-driven. While the boom of the late 1990s was something to behold, the recovery after the 2001 recession was not as robust, and I can assure the readers that this “recovery” will be even more anemic until it ends in real-live inflation and more unemployment.

Furthermore, the Obama administration’s extremely costly interventions from health care to environmental policies will be the weights that will restrict any meaningful recovery from happening. Right now, they have not kicked in, and when they do, future bouts of inflation will have almost no effect except to force up consumer and producer prices.

During the recession of 1982, the country’s economic fundamentals were put back in balance. Government interventions in this latest downturn, however, have guaranteed that massive amounts of resources will continue to be directed toward economic dry holes, and the rest of us will pay the price for things like the taxpayers propping up the United Auto Workers and the coming health care fiasco.

What does that mean in plain English? It means that the U.S. economy is going to have high unemployment into the foreseeable future, and investors are going to realize that the government’s hostility toward private enterprise is going to mean fewer and fewer opportunities for profit. Capital will flee our borders and the government, in revenge, will ramp up tax rates and become even more heavy-handed. I wish I had better news, but there it is. For those of you who “voted for change,” you will get that “change,” but it is not going to be what you expected.

Dr. William L. Anderson is an assistant professor of economics.  A native of Chattanooga, he received his bachelor’s degree in communications from the University of Tennessee, his master’s degree in economics from Clemson University and his Ph.D. in economics from Auburn University.

An accomplished writer, Anderson has written for national publications such as Reason Magazine.  He has served as a reporter and editorial writer on the staff of ETBJ for over 18 years.

“Banks used to be the principal source of funds to finance growth, seasonal working capital needs or temporary performance issues,” said Ray Anderson, regional group leader of Crowe’s restructuring advisory services group. “As banks have reduced or eliminated financing commitments, companies have had to look for other ways to maintain cash flow. Maintaining liquidity is critical for businesses to survive and prosper in the current economic environment, and cash flow is a key element of that liquidity.”

Anderson suggests that company officers and managers follow these steps to help maximize the liquidity within their organizations:

1. Maintain a well-defined cash management system and compare forecasted goals to actual results. One person in the organization, typically a CFO or controller, should be accountable for the organization’s efforts to maximize its liquidity.

2. Maximize liquidity by reducing excess inventories, focusing on accounts receivable collection and negotiating longer payment terms with vendors. According to Anderson, these changes can produce very quick improvements in a company’s cash flow.

3. Sell underused assets, such as excess equipment or real estate. Although this is typically a longer-term solution to liquidity issues, companies should continually examine their core businesses and sell or dispose of assets that are not productive. If a company is in deep financial distress, it may need to sell or dispose of all assets that are not critical to its core business.

4. Investigate tax refunds as a source of potential cash. A new provision, enacted as part of The Worker, Homeownership and Business Assistance Act of 2009, expands an earlier law from the American Recovery and Reinvestment Act that applied only to small businesses. Under this new law, business losses incurred in 2008 or 2009 by businesses of any size can now be used to recoup taxes paid in the prior five years. This law could provide benefits to a company with a recent history of losses and profits in prior years. If this new rule applies to a company’s situation, it may result in tax refunds that could come sometime in 2010.

5. Explore alternative financing. If current lenders are not willing to provide additional funds, companies should investigate alternative lenders or alternative types of financing. Although new financing for companies in deep financial distress is difficult to obtain in the current environment, an organization may increase liquidity by restructuring its debt or changing the type of duration of existing debt.

According to Anderson, the current economic crisis has forced numerous businesses to make difficult decisions about their business models.

“Layoffs and cost cutting have dominated the news,” said Anderson. “However, in the current financial market, adequate liquidity is critical to surviving the downturn and prospering over the competition.”

Don’t retire too early. It’s difficult to predict how long you will live, but longevity trends suggest the likelihood of longer life spans for current and future retirees. If you retire at age 62, you could live another 20 or 30 years. Not only do you need to think about how long your money will last, you should also consider the consequences for taking early withdrawals from your retirement nest egg. Also consider that if you choose to take Social Security early, you agree to receive a reduced amount each month for the privilege of potentially more years of the benefit. Your Social Security statement can help you determine the financial trade-offs of taking early benefits or postponing Social Security income for a few years.

Don’t rely on just one form of income. You probably realize that Social Security is unlikely to provide you with enough money to live on in retirement, and that you will need additional sources of income to live comfortably. Most retirees look to a number of sources to cobble together a retirement income. Even though you’re retired, you can still seek out growth investments, assuming you retain a good share of your savings in less risky ventures. Seek balance by diversifying or spreading your savings across a variety of investments with varying levels of risk. A financial advisor can help you select from available stocks and bonds to keep your money working for you and help generate investment income.

Beware of insurance gaps. Your insurance needs may change in retirement, but they won’t go away. You may need to replace employer-sponsored benefits such as life, health and dental insurance after you retire. Shop around for attractive price points and good quality plans. Even if your home is paid for, you should maintain an appropriate level of homeowners’ insurance in case of theft, fire or other incidences. Consider whether long-term care insurance for you and your spouse is something you want to help pay for things like long-term care in a nursing home.

Avoid tax mistakes with retirement distributions. Your sources of income in retirement may include Social Security, a company-sponsored pension plan, IRA, 401(k) or a profit sharing plan. How you access your savings in these various investment vehicles can have a profound affect on how long your money lasts. The IRS regulates how much you can take out of your retirement accounts each year and you can incur stiff tax penalties if you do not abide by the rules. Talk to your tax preparer and financial advisor about required minimum distributions from your retirement accounts and establish a schedule of withdrawals that satisfies requirements while preserving principal. At retirement, you are generally required to begin taking minimum distributions from qualified retirement plans by April 1 of the year after you turn 70½.

Don’t underestimate the impact of inflation. When you estimate how much you need in retirement, don’t forget to consider how inflation reduces the value of your savings over time. Your budget should factor in rising health care costs and other expenses that may grow disproportionately. In general, early retirees spend more on travel and hobbies while they are still active and healthy; these costs may go down as you get older.

Get professional advice. A knowledgeable financial advisor can help you analyze your retirement portfolio and recommend steps to help you make choices with your retirement assets. Talk to your advisor and tax professional to plan your distributions to help reduce your tax obligation. With careful planning, you can effectively manage your retirement assets — and relax and enjoy the golden years.

Holiday fun can be affordable

Traditionally, the holiday season is a time of indulgences.  Any combination of gifts, travel and entertaining can result in big end-of-year expenditures.  But this year — in light of declining investment portfolios, sinking house values and a shaky job market — many American consumers will be looking for ways to toast the season without breaking the bank.  If you, too, want to avoid over-spending, here are some tips to celebrate more frugally:

Set proper expectations
It helps to make sure everybody in your family is onboard with the cost-conscious approach.  If you are married, have a frank discussion with your spouse about spending limits.  If you have children, make sure they understand that your plans for the holidays will focus on fun that can be had without spending a lot of money. If your children are old enough, you may even use this as an opportunity to explain the fundamentals of household economics and involve them in setting holiday spending priorities for the family.

Plan ahead
Take time to write down a list of possible gifts you hope to purchase for family and friends.  Knowing what you want ahead of time may help you avoid making poor decisions and impulse purchases once you hit the stores.

Invest time to save money
The best deals can be found by shopping around.  Check out stores in your area and investigate what’s available online.  The emergence of online shopping has made it much easier to do your homework before you buy.  Web retailers will help you determine best prices for the products you are looking to purchase.

Track your spending
One of the best ways to keep spending under control is to set a limit.  Within your family, this can be on a per-person basis, or you can set a budget that dictates your maximum holiday spending.  Once this number is chosen, see if you can come in under budget.  Track all of your purchases and be certain to hold onto receipts.  You might also request gift receipts where available and tuck them inside cards or gift boxes.

Be smart about gift cards
Gift cards have become increasingly popular and more widely available.  Make sure you understand the terms of a gift card (such as expiration dates) before making a purchase.

Get a jump on the season
Given the forecast for below-average consumer spending, many retailers are cautious to avoid stockpiling large inventories this holiday season.  If you shop early, you will be more likely to find what you’re looking for at a reasonable price.  Conversely, last minute shopping could result in spending more than you planned, particularly if you are determined to buy specific items.

And finally…
These tips are about gift buying.  But rather than making gifts and packages the center of your holiday celebration, try putting more emphasis on spending quality time with family and friends.  Encourage games and conversation; you may be surprised to find how little you miss the excesses of years past. n

Many of the financial indicators are worse than they have been during my entire career. Not every business is declining. And the recession offers some opportunities. The point is, the old rules of tax planning cannot be blindly followed this year.

Conventional wisdom says to defer income and accelerate deductions to reduce your federal income tax. The theory is that in this way you will delay taxes and hopefully you will be in a lower tax bracket next year. Things are different this year for a lot of people in situations they’ve never been in before because of the economic times.

For many people who have seen their family incomes slashed, this may be the year to go against conventional wisdom. Here are the possible tax implications of scenarios created by the ailing economy:

Home foreclosure:

Generally, if you owe a debt to someone and they cancel or forgive that debt, the canceled amount may be taxable. However, the government offers a tax break to help homeowners who lost their home to foreclosure. Under the law, a taxpayer whose principal residence was foreclosed on does not have to claim the amount of debt canceled as income. Debt reduced through a loan modification also is exempt. A loan modification makes mortgage payments more affordable by reducing the interest rate or lengthening the term of a mortgage. Up to $2 million of forgiven debt is eligible for this exclusion; the limit is $1 million for married couples filing separate tax returns. The provision applies to debt forgiven in 2007 through 2012.

Job loss

If you’ve been laid off, your taxable income could well be significantly lower when you start taking into account exclusions and dependency deductions. That could leave you in a situation where your tax deductions exceed your income.

If your deductions exceed your income and you need money, you could tap your retirement plan if you’re over age 59 ½. In those cases, the tax paid on the withdrawals will be largely offset by your deductions.

If you’re younger than 59 ½ and make withdrawals from your retirement plan, you’d have to pay a 10 percent penalty on top of the tax owed. That’s why you should tap your retirement funds only as a last resort. If you’ve been collecting unemployment, know that for 2009, the first $2,400 of unemployment compensation is excluded from tax. All unemployment compensation beyond the first $2,400 is taxable.

If you’re hunting for a job, keep track of the miles you drive, fees you pay for parking or tolls, employment agency fees, résumé preparation fees, long-distance calls and other costs associated with your search. You may be able to claim these expenses as a miscellaneous deduction on your tax return.

If you are one of the lucky ones who did not feel the bite of the recession, here are some ways to save on your taxes.

Sales tax

If you buy a new vehicle by Dec. 31, you can deduct state and local sales taxes paid on up to $49,500 of the purchase price, whether you itemize or not. The tax break starts to phase out if your modified adjusted gross income is $125,000 or more for single taxpayers and $250,000 or more for joint filers.

Homebuyer’s credit

New legislation, the Worker, Homeownership and Business Assistance Act of 2009, which was signed into law on Nov. 6, 2009, extends and expands the first-time homebuyer credit allowed by previous Acts. The new law:

• Extends deadlines for purchasing and closing on a home.

• Authorizes the credit for long-time homeowners buying a replacement principal residence.

• Raises the income limitations for homeowners claiming the credit.

Under the new law, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.

For the first time, long-time homeowners who buy a replacement principal residence may also claim a homebuyer credit of up to $6,500 (up to $3,250 for a married individual filing separately). They must have lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the replacement home is purchased.

People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after Nov. 6, 2009. The credit phases out for individual taxpayers with modified adjusted gross income (MAGI) between $125,000 and $145,000 or between $225,000 and $245,000 for joint filers. The existing MAGI phase-outs of $75,000 to $95,000 or $150,000 to $170,000 for joint filers still apply to purchases on or before Nov. 6, 2009.

Several new restrictions apply to homes purchased after Nov. 6, 2009. Purchasers must attach a properly executed settlement statement to their return. Imagine the government’s surprise that some people claimed the $8,000 tax credit without actually buying a new house. No credit is available if the purchase price of the home exceeds $800,000.

The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement. You would not believe how many five-year-old children bought their first house last year and let their parents live with them. A dependent is not eligible for the credit.

The new law gives the IRS broader authority to deny first-time homebuyer credit claims, without having to first audit a taxpayer’s return. Known as math error authority, this authority applies, retroactively, to credits claimed on original and amended 2008 returns, as well as to claims yet to be filed.

Additionally, there are new benefits for members of the military and certain other federal employees:

Members of the uniformed services, members of the Foreign Service and employees of the intelligence community serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit.

In many cases, the credit repayment (recapture) requirement is waived for members of the uniformed services, members of the Foreign Service and employees of the intelligence community.

More information on these new benefits for the military, Foreign Service and intelligence community serving outside the U.S. is available at irs.gov.

General information

Homebuyers who purchased a home in 2008, 2009 or 2010 may be able to take advantage of the first-time homebuyer credit. The credit:

• Applies only to homes used as a taxpayer’s principal residence.

• Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar.

• Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed. The credit is claimed using Form 5405, which you file with your original or amended tax return.

For 2008 home purchases

The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers that can be worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.

For 2009 home purchases

The American Recovery and Reinvestment Act of 2009 expanded the first-time homebuyer credit by increasing the credit amount to $8,000 for purchases made in 2009 before Dec. 1. However, the new Worker, Homeownership and Business Assistance Act of 2009 has extended the deadline. Now, taxpayers who have a binding contract to purchase a home before May 1, 2010, are eligible for the credit. Buyers must close on the home before July 1, 2010. (Added Nov. 12, 2009.) For home purchased in 2009, the credit does not have to be paid back unless the home ceases to be the taxpayer’s main residence within a three-year period following the purchase.

First-time homebuyers who purchase a home in 2009 can claim the credit on either a 2008 tax return, due April 15, 2009, or a 2009 tax return, due April 15, 2010. The credit may not be claimed before the closing date. But, if the closing occurs after April 15, 2009, a taxpayer can still claim it on a 2008 tax return by requesting an extension of time to file or by filing an amended return. News release 2009-27 has more information on these options.

Retirement contributions

You can make tax deductible retirement contributions that will lower your taxable income.

• Maximize 401k contributions. Calculate how much you have left under your 2009 401k contribution limits and determine if you can increase your contribution through work. This can be a great move if you can work it into your budget.

• Traditional IRA contributions. You can deduct up to $5,000 if you qualify. Here is more information about 2009 IRA contribution limits.

Self employed retirement plan contributions

Several self-employed retirement plans are tax deductible, including SEP IRA, Solo 401k, SIMPLE Plan, and Keogh Plan.

Of these plans, you can contribute to the Traditional IRA, SEP IRA, SIMPLE Plan or Solo 401k after January 1. So you should focus your contributions toward maxing out your retirement plans that must be funded by the end of the year, such as your 401k, 403b, Thrift Savings Plan (TSP), or similar retirement plans. Then focus your retirement contributions on any retirement plans that allow you to max out your retirement contributions in the following calendar year. Here are more year-end planning tips.

Buy an energy star appliance.

This year there are special rebates for Energy Star rated appliances. These programs are federally funded, but the money and rebates are being handled by the states, so the details may vary. Eligible appliances include heat pumps, furnaces, central and window air conditioners, refrigerators, freezers, dishwashers, washing machines and water heaters.

The amount of the rebates varies between $50 to $200 per item, and you do not have to turn in an old appliance like one had to turn in an old car with the Cash for Clunkers program.

Business deductions

If you own a business, you may be able to deduct eligible expenses. If you haven’t been categorizing your expenses, now is a good time to go through your receipts and categorize them based on type of expenditure. You can also look at your expense forecast to see if there are any purchases you can make before the year end to increase the amount of deductions you can take. You should also look at depreciation schedules, some of which have changed for this tax year. This is an area where hiring an accountant can really pay off.

Other year end tax deductions and tips

Harvest tax losses. You can write off investment losses.

Donations. You can make tax-deductible donations to eligible charities and non-profit organizations. Be sure to avoid charity scams and determine which charities are legitimate before giving your hard earned money.

Avoid capital gains taxes. Wait until after the New Year to sell investments for gains — postponing your taxes for a full calendar year. Remember, however, that capital gains tax rates will increase from 15 to 20 percent as of January 1, 2011. So don’t delay harvesting gains too long.

Every tax situation is unique

The focus of this article is to share a few ways you can prepare for your taxes before December 31 rolls around. This article isn’t designed to be a full blueprint for tax planning as it only covers a small percentage of the available tax deductions. You may also consider meeting with a tax professional for more advanced tax planning.

Year-end tax planning always makes sense, but this year it’s especially vital.

I offer a “mini consultation” for employers and provide them with some free handouts they can share with their employees in order to help them with their tax planning in a cost and time effective manner. The consultation includes offering a deep discount on tax preparation for both employer and employees, who often spend far more on tax preparation with companies such as H&R Block than I charge.

Because tax laws have become so complex, using a CPA can save employers and their employees a great deal of expense, avoid costly mistakes and prevent IRS audits. For more information on the mini consultation service, contact my office at (423)648-6240.