Nobody knows what's really happening to American households better than a CPA at tax time. I heard from one, who started his email like this:

"I am a CPA, CFP who specializes in individual income taxes for affluent Americans. I am shocked by the bad and deteriorating financial condition of many of my clients."

I suspected that this CPA , who will remain nameless for obvious reasons, was referring mostly to high interest expenses as home equity balances rise. I was only partially right. In a follow-up, he wrote:

"The underlying cause that is apparent to me is years of unrestrained/uncontrolled spending beyond one's means. This is now catching up with many.

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"It is not so much slower income growth or the jump in interest expense .

The problem has progressed through the following stages:

"First: The careless tapping of home equity.

"Second: Extensive use of credit cards while paying the minimum (if lucky); getting killed on interest and the monthly late payment fees.

"Third: To pay bills now due, many are tapping their 401(k)s and or IRAs, taking premature withdrawals (not periodic). The big problem here has been that many have only 20 percent tax withheld when the burden is closer to 50 percent, with the U.S. Tax, a 10 percent penalty and the state tax.

"Two of my clients had to sell their homes last spring to cover their 2005 liabilities; some BIG numbers. These clients had adjusted gross incomes in excess of $200,000. At least they were lucky because the housing market was firmer a year ago!

"Another individual I know (though not a tax client) refinanced to an ARM to lower her monthly payments. Her payments jumped in December by about 20 percent, which she can't handle. I recently learned that this person opted not to have her real estate taxes paid monthly via escrow. The reason: She couldn't afford the monthly payment when she refinanced.

"WHAT are these people thinking?? They never come for advice before they get themselves in a hole!

"I am afraid that what I have been seeing is just the tip of the iceberg."

He's not alone in that thought. If you're a CPA who has similar stories to tell, and has noticed a change over the years, I'd like to hear from you. E-mail me at hgreenberg@marketwatch.com.

Copyright (c) 2006 MarketWatch, Inc.

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