Kids Going to College – Better Have a Tax Plan

irs tax help 1

Finally ….. your son or daughter is off to college, a whole new stage of life begins. As the celebration fades and classes begin it’s time to start thinking about the tax planning and taking full advantage of all of your benefits and avoiding unnecessary tax burdens. It’s it just great that your loved one has received a huge scholarship and you have been socking money away in a 529 fund. Well you need to also understand there can be a tax consequence involved if you aren’t careful.

FACT: Scholarship amounts that exceed “qualified education expenses” are taxable as ordinary income and furthermore require the payment of “self-employment” tax to the person receiving the 1098-T, the student.

FACT: If the scholarship amount reduces your out of pocket costs of college it would interfere with you taking advantage of a huge tax break.

During the 2017 tax season (ending in April 2018) I saw a number of 1098-T (tax statements from college) that showed substantially more “Scholarship” income than Qualified Expenses. Somebody is paying tax on this income! Another example is scholarship or fellowship money that represents compensation, say a $20,000 teaching assistant fellowship went primarily to pay for tuition and books, that $20,000 would still be considered taxable income! Even if the scholarship amount is substantial, you could miss out on your tax break.

But there is some good news here also, beyond having your kid in college. There are various tax breaks including, if you qualify, the American Opportunity Tax Credit (AOTC). The AOTC can be worth up to $2,500 per undergraduate every year for 4 years, that’s $10,000 over 4 years. There are some income limits and the credit gets phased out as your modified adjusted gross income rises.  Different college-related credits and deductions have different rules, so it pays to look into which will work best for you.

The AOTC is calculated as 100% of the 1st $2,000 in qualified expenses and 25% of the next $2,000. So $4,000 is the maximum “qualified expenses” that apply. 

So, since you as a parent still claim the student as a dependent (you pay more than ½ of his/her total expenses) YOU can claim the AOTC on YOUR taxes! Kids away at college are deemed to be “temporarily gone” but still living with you. 

HOWEVER … if you scholarship income is more than the “qualified expenses”, there are no real “expenses” and therefore you, the parent won’t get the $2,500 American Opportunity Tax Credit.

So, there is a legal way around this that may not be apparent to many taxpayers.

Here is what you do:
Have the parents claim tuition, up to a max of $4,000 to get the full AOTC, then show the scholarship income on the students tax return with the balance of the expenses. The assumption is that the student will be in a much lower tax bracket than the parent. The parent will get the $2,500 tax credit. This credit in a higher tax bracket is much better that the lower taxes paid by the student. You can do this every year. In addition, there is a portion of the AOTC that is “refundable in 2018, up to $1,000. This means that if your tax bill was only say $1,500 and you applied the $2,500 tax credit, you would have a $0 tax bill PLUS get a $1,000 refund.

Also keep in mind that you can’t double-dip if you have a 529 plan. Therefore, before you write that first tuition check: You can’t use the same qualified college expenses to calculate both your tax-free withdrawal from a 529 college savings plan and the AOTC tax break. In other words, if you pay the entire college bill with an untaxed 529 plan withdrawal, you probably won’t be eligible for any college tax credit or deductions.

You can check IRS Publication 970 for qualified education expenses. In addition if you pay qualified expenses from “tax-free” funds like Pell grants etc. you can’t use these expenses in your calculations for the credit.

See what I mean, you may need a tax plan if you have kids in college. You may also need professional tax help to develop a plan.


Tax Planning in Retirement is Just as Important as Investment Planning


Many people either approaching or already in retirement spend a lot of time coming up with an investment strategy as they should but don’t have a tax avoidance strategy. Prior to retirement we are in the “accumulation” phase, we are accumulating wealth to be used later. Once we retire, the paychecks stop and we begin the “decumulate” or draw-down phase of our lives.

Decumulating type investments in a tax-efficient manner is a part of retirement planning that is often overlooked.  That’s probably because a $xx,000 reduction in after-tax wealth over several years due to a poor tax strategy is much less visible than an $xx,000 decline in your investment portfolio.

Here are some suggestions to help

  1. Delaying Social Security benefits (SSB) until the age 70 is a huge investment and tax decision. The delay from age 66 to 70 is a non-taxable 32% gain, 100% safe from any market conditions.
  2. During this delayed benefits time you can take advantage of the new tax rates and doubling of the Standard Deductions. Plan to live off cash and withdraws from a taxable brokerage account. The idea is pay $0 in Federal taxes while taking advantage both the 0% tax rate on up to $77,200 in Capital Gains and Qualified Dividends. Bundle into this “tax loss harvesting” and more cash can be raised.
  3. Beyond this you can look to max out the benefits of being in a low 0%, 10% or 12% tax brackets by converting IRA funds into your ROTH IRA account. Just a broad statement, the very best scenario is to have 100% of all investments in a ROTH account! For example, during this SSB delay period every year convert enough IRA stock/funds into your ROTH to just hit the $77,400 threshold. That’s when every extra dollar is taxed at 22% instead of 12%. Make sure you factor this into your calculations in #3 above.
  4. Keep in mind that the above strategies work best if done BEFORE taking Social Security Benefits at 70 and the need to take Required Minimum Distributions (RMD) at age 70 ½. Up to 85% of SSB benefits can be taxed as ordinary income, all RMD is taxed as ordinary income also.
  5. Once you are getting Social Security and RMD you will already be in a “fixed” tax situation, the question will become what additional income do you need beyond SSB and RMD? This additional income will become the new tax strategy. It is not at all uncommon that your RMD (including SSB) is much more than you need to live on, this is a tax burden, hence the discussion above about conversions from IRA to ROTH’s.
  6. If you need additional income beyond your SSB and RMD look again to the maximizing of the Capital Gains and Qualified Dividends from your taxable account.

These are just a few suggestions and each family has unique situations. However, one this is pretty constant, tax planning runs hand in hand with investment planning. The ideal situation is that you are putting this overall master plan into place while you are in your late 50’s, probably the peak of your “accumulation” phase. However, you can make some of these decisions even while in retirement.



REIT Investors get a new Tax Break!


As many of my followers know, I like to invest in real estate as part of my overall investment strategy. Unlike others, I’m just not into buying specific properties and replacing toilets. Instead I invest in REIT’s, Real Estate Investment Trusts, they buy and manage the properties and i just collect the dividends and watch my investments grow in value. My REIT’s are part of my “Cash Machine” portfolio.  

REIT’s are considered “pass through” businesses, they don’t pay Federal income tax themselves, they pass that tax on to us investors (similar to you owning rental property). This is not very complicated at all, prior to the new 2017 Trump Tax Law if you held REIT’s in a taxable account, you paid tax on all dividends as “ordinary income”. 

HOWEVER – REIT investors will pay less tax on their dividends under new tax law. It allows investors to deduct 20% of the dividend income, with the remainder of the income taxed at the tax payers ordinary income rate. It is available even if the taxpayer doesn’t itemize deductions.

Of course if you hold your REIT’s in a tax advantaged account like an IRA or a ROTH IRA you don’t pay taxes on the dividends, until you take money out.

I own the following REIT’s:

American Capital (AGNC) 11.32% yield   – Residential Mortgage’s
ARBOR Rlty (ABR) 9.12% yield  – Commercial
Annaly (NLY) 11.45% yield  –  Residential Mortgage’s
Blackstone Mortgage (BXMT) 7.60% yield – Senior Loans Commercial Mortgages
Iron Mountain (IRM) 6.40% yield – Data storage (not really a REIT?, but it is)
Ladder Capital (LADR) 8.09%   – Fixed & Floating Rate Commercial Mortgages
Realty Income Corp (O) 4.74% yield – Over 5,000 Net Leases, 575 straight monthly dividends paid
Stag Industrial (STAG) 5.14% yield – Industrial Buildings

REIT’s can be a valuable component to your investments, and now you may get a tax savings too!

My Kind of Checklist Guy – Heads New Healthcare Program


Meet Dr. Atul Gawande, a highly experienced surgeon, writer and Harvard professor, who starts this week as the CEO of a new health-care initiative formed by Amazon, Berkshire Hathaway  and JPMorgan Chase. 

So why do I like Dr. Gawande? Well he wrote one of the very best books I ever read, The Checklist Manifesto: How to Get Things Right.  I have already written on how this book influenced me and Boeing, check out that story here. Over the years I bought copies of this book for dozens of my employees, friends and customers. It will truly change your life, and it’s an easy read!

As I read the announcement of Dr. Gawande, I just know he’ll be successful in his new endeavor. I’ll bet that over time he will revolutionize the way Amazon, Berkshire Hathaway and JPMorgan implement healthcare in their businesses. 

“We said at the outset that the degree of difficulty is high and success is going to require an expert’s knowledge, a beginner’s mind, and a long-term orientation,” Amazon Chief Executive Jeff Bezos said in the press release. “Atul embodies all three, and we’re starting strong as we move forward in this challenging and worthwhile endeavor.”

Atul is also well known for a 2009 New Yorker magazine article, “The Cost Conundrum,” that found excessive care was being used in a Texas town, on Medicare’s dime. It’s one of the most influential magazine article of the past decade on the topic of Medicare. Not only was it shocking but Gawande reported, years later that costs had dramatically dropped in the town, saving taxpayers about half a billion dollars! The story goes that Charlie Munger from Berkshire sent $20,000 to him via The New Yorker since he was so impressed by the article. Dr. Gawande donated the money to a charity.

Good luck Dr. Atul Gawande!

The Truth about Social Security & a Simple Fix


The headlines read that Social Security is going broke and will run out of money. How bad is it really? Do you want the truth, “you can’t handle the truth”!


  1. Social Security is going broke and in will be in debt. But so what, the entire country is in DEBT.
  2. Hello! News flash, since 2010 Social Security has paid out more in benefits than collecting in taxes.
  3. Until 2018 the annual Social Security payments were less than the interest on the roughly $3 trillion of “non-marketable” US government bonds held by the SS trust fund. Starting in 2018 payments are exceeding taxes and interest.
  4. No doubt about it, using simple math by some time in the 2030’s the trust fund will be down to $0. So what!
  5. However Social Security benefits paid vs trust and taxes only has a 1.5% of GDP deficit!
  6. The Social Security Trust Fund is an accounting gimmick.
  7. Read below, what does this actually mean and here’s how to fix it.

I won’t bore you with all of the numbers other than to say the entire US economy has been successfully living in a debt environment for many, many years. It works fine so long as you can keep it under control. Social Security trustees calculate that projecting all SS benefit payments less the trust balance, interest and current taxes leaves a running deficit of 1.5% of annual GDP. Of course long range projections of GDP over 20-40 years can be off by a trillion or so. The SS trust uses census calculations, projects births, immigration predictions, GDP, expected interest rates, etc. A lot of black magic!

The general model is that future employees will be paying for the monthly SS benefits for us retirees, and so on and so forth. The SS trust fund is an accounting gimmick. The fund is made up entirely by “special issue” Treasury bonds, with special interest rates. Oh, but wait, the Treasury prints money and sells bonds to investors worldwide. SS however buys “special bonds”. All of this money still resides within the US government. If the Treasury wants to, they can just increase the interest rate they pay to the SS trust on these “special bonds”.

The entire issue has little to do with the Social Security trust fund itself! How solvent is the entire US government, forget about just the Social Security piece! The government finds a way to live in debt to pay for Medicare (it too has a “trust fund” running out of money), Medicaid, defense, and salaries for the jillions of federal workers who produce NOTHING. This is nothing more than a general US economy  and debt situation. 

The real issue is that we should be concerned about our ability to manage the entire US debt, one way is by growing GDP and let taxes rebalance the equation. Here is an analogy, a family of 4 earns $100,000 a year. They have debt, including a mortgage, car payment and a small student loan. If their annual debt payment is say $20,000 a year are they in trouble? No, of course not. But if that debt payment is $60,000 a year, wow, that’s a real problem. Let’s say the same family has set aside an investment account for the kid’s education and add money to it each month (the equivalent of the SS trust). Nobody would consider the education fund as being completely separate from the parents overall spending and debt issues, right! If that same family with $60,000 in debt has a $250,000 annual income, they’d be fine (increase GDP example)!

Simple Fixes for Social Security:

Social Security is just another government funded program, like ALL government programs it runs on tax dollars. The SS trust is only as good and sound as the entire US economy over time. The US economy is only as sound as US businesses and US worker productivity (the definition of GDP).

Here are some simple things to do to completely FIX the problem:
1. Eliminate the taxable earnings cap over say the next 10 years. Right now SS deductions are capped at reaching $128,400.

2. Gradually raise the Social Security “full retirement age” FRA. Take it from the current 67 to 68, maybe a month at a time.

3. Raise SS taxes from 6.2% to 7.2% over a 10 year time frame.

4. Optional additional steps – suspend Social Security payments to any family earning more than say $2-3 million a year. Maybe even eliminate Social Security for families with over $10 million in liquid net worth.

These above items would not only completely fund the Social Security program for the next 50-100 years but it would also provide a surplus to increase payouts to the poor who get minimal Social Security benefits.


Rules for my Cash Machine Income Plan


I am retired and 70 years old, my investment goals have changed. I’m now in the “distribution” phase of my financial plan, I no longer have a paycheck. I use my Cash Machine IRA account to “fill the gap” between our Income and Expenses. My goal is a reliable, reasonable monthly cash flow. Our Income includes Social Security (I waited till 70 to build its value) and pensions. My Expenses includes a comfortable life style that my wife and I chose and enjoy, financial help for family members and charitable contributions. It just so happens that my “fill the gap” requirement is almost the same as my IRA Required Minimum Distribution. I withdrawal about half of my Cash Machine dividends to “fill the gap”, the other half or so gets reinvested in more of the same dividend stocks. I will never add any new cash to the Cash Machine account, won’t need to. The final balance of my Cash Machine will go into my Estate Plan when I pass away.

I developed some rules that I continually reference so that I don’t get side tracked by watching CNBC or the “noise” of the days to day stock market. This plan takes a lot of discipline for sure. I want to sleep well at night and not have money worries.

My Cash Machine Rules:

  1. Portfolio value, capital gains and % yield are not my goals, highly predictable monthly income is my goal.
  2. I only look at my monthly cash flow, I don’t watch the portfolio value.
  3. I only buy and hold stocks (minor adjustments are OK), I don’t trim shares for income, only add as I wish.
  4. I only invest in higher yielding stocks or ETF’s that pay 3%+ in dividends. I own equity and debt(bonds, loans).
  5. I diversify to spread my risks.
  6. The principle value of the Cash Machine account should never be much less than it is today in my 25 year plan. It may actually grow substantially.
  7. In an up market or with stocks that outperform, I will add more. Known as the “beat and raise” concept.
  8. In a down market when my portfolio value drops I’ll switch to “buy on the dips”.
  9. I try and remember that market changes do not take away my shares or income, just “perceived value”.
  10. The higher the yield, the lower the growth rate, overall growth is not a goal, monthly income is.

This Cash Machine portfolio and plan has been at least 5 years in the making, it took a complete change in mindset and a lot of patience. It consists of 32 stock, divided up among sectors I’m familiar with. I don’t invest in anything I don’t understand. 

I go with the higher yield investments, 3% or more, and the dividends that do get reinvested are generating more income. This method will generate more overall consistent income than a “dividend growth” strategy where say a 1-2% yielding company  might have 20% dividend growth. If that company can sustain the dividend growth for a number of years then it may work out, but I’ll still be ahead because I will still be adding to higher yielding companies. The math of compounding dividends is quite significant. In recent years the entire value of this portfolio has grown nicely.

I can also sleep at night, knowing that when (not if) we have a market down cycle and my portfolio value decreases, my dividends will be coming my way every month. This  will add balance and actually prevent my portfolio value from dropping as low as the market does. The more dividends you have coming in every month, the more balance that is being added to your account. Some of my stocks have been paying uninterrupted dividends for over 10 years.

So far my experience has been that the longer I’ve owned this Cash Machine the fewer positions I have, 30 or so positions is enough. Over time I have companies that perform very well and some that don’t, and I have found that owning more of what is working is better than owning less and having that money tied up in non-performing companies. So I sell weakness and buy strength. It often takes time to determine strength from weakness. I never feel under pressure to make all my changes at once. I try and stick with my plan and build on it. Patience is difficult.

Further disclosure. In addition to my Cash Machine account I have a taxable account that I view as my legacy account. I started this account in my 20’s and have consistently added to it. In that account I hold high growth stocks, most of which don’t pay dividends. This account is the core of our Estate Plan that will someday pass to my family and charities. In addition, we maintain ROTH accounts and a cash emergency reserve of about 3 years. My goal in retirement is to carefully plan and enjoy my volunteer work. Giving back to the world for all of my blessings is important while I still have my health. 

Building a Cash Machine is not difficult. You might want to try it. 

My Cash Machine investments are shown below.


Here is What a Good Economy Looks Like!

The most hated bull market ever! Sit back and just enjoy it!



  1. The overall global economy is good. Corporate revenues and profits are strong.
  2. Worldwide events have caused spikes in volatility but the market keeps climbing.
  3. Tax reductions have yet to be really felt yet.
  4. Trump has been good for business and the market.
  5. Everyone benefits in one way or another as the “pie” gets bigger.

This bull stock market has been the most hated ever! The above chart shows the S&P 500 Index plotted against a measure of anxiety. The anxiety measurement is the VIX index divided by the 10 year treasury yield. Notice the spikes, or lack of spikes for geopolitical events that have taken place. 

So even with the background noise of the 10 year treasury rising above 3%, North Korea, inflation, Trump tariff’s, China and other distractions we are all making money if we have invested wisely.

The reason for this is simple, the economy is pretty strong AND corporate profits are rising. See the chart below for corporate profits.



Forget It – You Just Aren’t Getting a Raise


Due to long term conditions in the workforce, you just are never going to get a raise. After reading this you’ll understand why and what choices you have if you want to make substantially more money.

Why No Raises:
Most Americans improve their economic status based on their salary at work, not through their investments or any social programs. Going back to the 1970’s wages, adjusted for inflation, for the typical worker have been flat as a pancake, rising only .2% a year. That’s not 2% but .2%, as in an increase of $100 a year for a $50,000 salary!

Have all worker’s been effected? Absolutely not. Since the late 1970’s large salary increases have been distributed to the workers at the top of the salary scale, whereas the bottom workers have seen a loss or at least stagnation. Better educated workers have seen their rate of increase improve over lesser educated workers.

The economy has grown substantially, the stock market has skyrocketed. The Dow Jones Industrial Average was $4,931 in January 1970, in 2018 it hit $26,000! Your retirement plan has benefited just not you real earnings.

So why haven’t real wages increased over the last several decades? There are a whole list of reasons.

  1. Wages typically increase as overall worker productivity also increases. Except for the time period around 200 – 2004, real worker productivity has been stagnate. All the computers and technology is already in place, workers are no longer more productive.
  2. Up until just recently minimum wages have been flat for many, many years. For example the current Federal minimum wage of $7.25 has been in place since 2009! State minimum wages haven’t done much better.
  3. Our good old fashion manufacturing jobs are a small percentage of the overall workforce. These jobs were exported to other countries. Unions no longer carry the weight of prior years. Today’s heavy industry is being dominated my robots and technology. We gave up manufacturing for a services economy.
  4. People no longer are mobile, they won’t take a risk of leaving their current job for a new job, even for a raise. In addition, people no longer relocate geographically as a means to earn more money.
  5. The 2007 recession forced management to reduce expenses and they haven’t lost that mindset 10 years later. With little or no real inflation, there is no reason to increase wages.

How to Get a Higher Salary:
It’s pretty simple, to get a higher wage, become more valuable to someone who is interested in profits. Businesses pay people more money when they can directly align the employee’s performance to an improvement in the bottom line. If you work for the government, school system or a not for profit, this just won’t work.


  1. Learn a new skill that is worth more than your current skill, even in your existing business. Your company pays more as you advance up the “value chain”.
  2. Become the strongest supporter of the company, the best employee, the hardest worker. You get the idea, a business pays more for these people.
  3. Go into sales or become billable. Sales and billable people can get paid based on their contribution to profits. Sales has always carried a negative connotation, however professional sales is a very important and rewarding experience.
  4. Take a job that includes travel if you can. These employees are more valuable and get paid more.
  5. Work for companies that are growth oriented or have high profit margins. Technology and healthcare come to mind. Also profitable businesses like mid-large size law firms can afford to pay well. Low margin and small businesses just might not be able to pay more.
  6. Become a manager and keep moving up in your business or another one. If you have leadership skills use them at work. Most businesses thrive on leadership skills.
  7. Always be competitive, if you don’t tell your boss or company how valuable you are and what you contribute no one else will tell them either.
  8. If none of these appeal to you consider starting your own business, maybe part-time at first. Many small businesses are what I call “job replacement” businesses.

If none of the above work for you, just be happy to have a job and don’t expect a raise anytime soon!




A Simpler Option for a Guaranteed Income – Low Income Workers


Although I don’t believe in providing a “guaranteed wage” as a social program, I do believe there is a simple way to increase the income of lower wage WORKERS! Expand the Earned Income Tax Credit program. Reward those that work and file taxes as a way to reduce poverty. EITC actually encourages working, the higher your income the more EITC you get within various ranges.

I usually don’t write about this topic but as we end tax season some things have become pretty apparent to me. There are many lower income workers that are struggling to make ends meet. These are couples with small families and single mom’s, they struggle to provide a living and a better future for their children. These are workers that are stuck in the lower paying jobs, many under $15/hr. Even workers making $15/hr, about $30,000 a year (about 2,080 work hours per year), find it quite difficult to cover healthcare, rent, food, transportation and basic essentials.

There is however a potential answer to help along these lower wage earners, a system that is somewhat already in place. Our new tax law taking effect in 2018 provides low wage earners with additional increases in valuable tax credits like Child Tax Credit (CTC) and Earned Income Tax Credit (EITC). As valuable as these tax credits are they can be enhance and distributed in a far more meaningful way. I’ll explain the distribution after this example.

Example: A single mother, we’ll call her Mary, has one dependent and is filing her 2017 tax return as Head of Household. Mary earned $26,000 (about $13/hr) in 2017. After standard deductions, 2 exemptions and the Child Tax Credit, Mary would currently owe NO Federal taxes. She would be entitled to about $2,100 in Earned Income Tax Credit and an additional $100 in additional CTC. A $2,200 refundable credit PLUS the withholding tax taken from her paycheck, let’s assume 10%. This refund to Mary of $4.600 is a major event in her life. Under the new 2018 tax law she would get a slightly bigger refund. By the way, the EIC encourages workers to earn more money, not less. This is not food stamps or welfare, you need to work to get these credits.

So, how can this process be enhanced to better accommodate low income workers like Mary and her family?

A Simple Solution:

  1. Allow all employer’s to identify their low income employees with family members and change the IRS withholding tables to allow for $0 Federal tax withholdings. As in Mary’s example, she won’t owe Federal tax anyhow. Her monthly cash flow would improve by over $200!
  2. Allow the same employers to advance fund the Earned Income Credit to employees like Mary in her paycheck. This might sound difficult, but it may be simple. We’ll assume that the employer is already making quarterly withholding payments (form 941) along with Social Security and Medicare. There should be plenty of cash here to pre-fund employees like Mary’s EITC.
  3. We’ll assume Mary would prefer to have an extra $400/mo in cash instead of a one-time refund check a year later.
  4. Congress should further improve the Earned Income Tax Credit calculations maybe even double it.
  5. We need to plug the gap where a single wage earner, working full-time, year round at the federal minimum wage currently does not qualify for EITC.
  6. More individual states should adopt an EITC at the state level. Currently 29 states and the District of Columbia have EITC’s. However, a few of these states make their EITC “not refundable”. Meaning that you can only apply their EITC against actual state taxes.
  7. It was estimated that in 2016, 20% of eligible workers did NOT claim their EITC.

Moving the working poor out of poverty makes sense for all of us. It’s hard to cheat this system.


Bitcoin Mining – May not be Profitable for most of Us

You’ve probably heard the stories of how a friend is “mining” bitcoins and making money. The bitcoin market is quickly changing both in the value of the coins and the ability to “mine” them at a profit. Recent reports have indicated that mining profits are currently less than half what they were in December 2017. So before you invest a few thousand in that mining rig, you might want to look deeper. Of course, the fact that the bitcoin itself is down to about $8,600 today (Coinbase) doesn’t help.

Today new bitcoins are created/earned through an energy-intensive “mining” process that uses high computing power to solve a complex mathematical equation. As a matter of fact, the equation is so complex that it is best processed not by a traditional computer CPU chip but by a multiple number of computer graphic chips (GPU’s). Graphic chips can do complex math because math is just a series of calculations that can be done in parallel, there is no “logic” type statements like a CPU handles (for example: if this, then this task). Therefore a current bitcoin rig is actually a simple computer motherboard, and a series of high level graphic cards with massive cooling. These are computer gaming cards strung together in a single “rig”. These rigs can then be slipped into large rack systems and become huge data centers. This complex math is called a “hash”, think of it as figuring a combination to a lock.

As time goes by there is a pre-established formula as to how many bitcoins will be rewarded for completing blocks. These reward rates are cut in half every 4 years, until all bitcoins have been used up. In addition, the more miners the more competition.

An 8 GPU mining rig.

A crypto mining data center.

The mining process help proves an anonymous miner used the process the network agreed upon to build a “blockchain” record of transactions. The successful miner who does all of this first then get a small fee and a tiny piece of a bitcoin as a reward for successfully completing the equation.

The average transaction fee mentioned above has fallen below 50 cents from as high as $34 in late December, according to If you are mining other currencies other than bitcoin the fee portion may be pennies.

If you want to make money mining Bitcoin or another crypto currency you need to compete with the big data centers. A bitcoin miner in China has very cheap electricity produced by hydropower. The rule of thumb to be able to compete with Chinese miners is to have electricity costs of 4 cents or less per kilowatt hour. Chinese miners also have an incentive to produce bitcoins regardless of cost because it allows them to send money overseas and evade the government’s capital controls. Four out of the five largest bitcoin “mining pools” in the world are Chinese, according

So before you go out and buy your bitcoin rig from Amazon:

You might want to consider your electric bill, it will be huge and since you won’t be the first to solve the math equation, you probably won’t make any money after buying all of this equipment. If you are still interested you can Google search on various calculators to see estimates of income you can generate.