Even More Celebrity Tax Evasion

Just the other day, I posted this entry about three new celebrities who owe taxes either to the IRS or the state of California. Now, according to new reports, another handful of famous taxpayers can be added to the list of celebrities with tax problems.

Steve Austin

Retired wrestler Steve Austin, known as “Stone Cold” Steve Austin to his fans, reportedly owes the State of California over $22,000 in unpaid taxes. The state even filed a lien against his property last month. Austin’s agent could not be reached for comment, so the reason for his tax debt is still unknown.

David Brenner

Famed comedian David Brenner owes the IRS a staggering $68,222 in delinquent taxes. Brenner, who filed for bankruptcy in 2004, does not deny that he owes the taxes, and states that he has already negotiated a payment plan to pay his debts off over time. When asked how he incurred the debt, Brenner jokingly explained, "I lost a bet that President Bush would learn how to pronounce the word 'nuclear,'"

Anna Kournikova

Although her total tax debts are less than the rest of the celebrities on the list, I was especially surprised to see that tennis star Anna Kournikova has tax problems with the state of California. Just last week the filed a $6,381 tax lien against her for unpaid tax debts. When reached, the athlete’s agent could not comment as to where the tax debt came from.

Lea Thompson

Lea Thompson, famous for her role playing Marty McFly’s Mom in the popular “Back to the Future” films probably wishes she could go back to the future and pay her taxes correctly. Earlier in the week it was revealed the actress owes $8,691 in unpaid state taxes.

Housing Market Shows Some Signs Of Recovery

This week NPR posted an article with good news for the housing market. According to new studies home prices in cities like Boston, Chicago, San Francisco and Dallas were on the rise last month. Although in some parts of the country housing prices are stagnant or still on the decline, any increases in home values anywhere is a good sign. Yale University professor Robert Shiller even stated that "this is the first time in almost three years that we've seen price increases,"

What do Boston, Charlotte, Chicago, Cleveland, Dallas, Minneapolis and San Francisco have in common? They're cities where home prices rose recently.

That's according to the Standard & Poor's Case-Shiller Home Price Index, which shows that prices are actually starting to rise again in some parts of the country.

Other recent data show that there are some tentative signs that the real estate market may be starting to recover. The housing crisis helped propel the country into the worst recession in decades.

"This is the first time in almost three years that we've seen price increases," says Yale University professor Robert Shiller, who helped design the home price index. "So when we see a break in the downward trend that's definitely encouraging news."

For a long time Shiller was known as a pessimist about the housing market. And it turned out he was absolutely right.

But now, he's striking a different tone.

"Well, I think the worst is probably behind us — the worst pace of decline," he says. "We were going down at 2 percent a month for a number of months in a row nationally. That was really something. Now home prices relative to rents or construction costs are back at normal levels."

Shiller stresses that he doesn't think we're about to see another housing boom.

During this downturn, we've seen record drops in prices. And when it comes to new homes — it's been more than 50 years since we were building and selling so few of them.

But over the course of the spring, sales have been picking up.

Is The Ball In Obama’s Court? Health Care Bill May Affect 2010 NBA Drafts

Rising taxes for the wealthy combined with the expiration of the Bush tax cuts may affect the 2010 NBA more than some States would like to admit. For example, some teams like the Chicago Bulls may have more trouble drafting popular free agents like Dwayne Wade, due to much higher state income taxes. Checkout the story from NBA.com below.

Could, in the end, the biggest barrier to the Bulls attracting a major free agent next summer like Dwyane Wade be the health care legislation now being debated in Washington?

Let’s face it. The prize next summer is Wade. LeBron James seems almost certain to remain in Cleveland given the weak state of the New York Knicks’ roster and uncertainty regarding the moving plans of the New Jersey Nets, supposedly James’ two speculated destinations. And do you really want to give a maximum contract to Chris Bosh, who doesn’t seem to impact winning very much? It seemed to me Bosh's Toronto had a much better roster last season than Wade’s in Miami and yet the Heat was far better than the Raptors. And the reason why Wade could well move is that roster. There’s no way, given how much Wade had to do last season that he could hold up carrying a team like that. It’s why you figure Miami is so desperate to make a major move now and why Wade, seemingly, has challenged them to do so.

Michael Beasley was at the USA Basketball mini-camp in Las Vegas Saturday hanging out in the media and family area after the scrimmage. He was the most obvious omission among the young players invited to try out for the Olympic team. Beasley couldn’t have been more gracious after the game staying around and signing autographs for everyone who asked. But he also was wearing his shorts so low you got way too much of a view of his underwear as he walked away. I know it was Vegas, but leave something to imagination. That streak of insouciance coupled with extreme immaturity suggests Miami has work to do with its roster to appease Wade.

And now comes the health care legislation, and you wonder what that has to do with anything?

The answer is taxes. The closest anyone seems to a plan now to pay for the changes is to tax the so-called rich. That would include just about every player in the NBA. I know we’re not supposed to feel sorry for rich people and assume they have so much that giving up more doesn’t matter. It does, just as comfortable people in the middle class with two cars and a nice health club membership don’t want to pay more taxes, either, even though they can afford to.

So I contacted a tax expert in Chicago, Noel Wilner, president of CBIZ MHM, an accounting and tax advisory company, and asked him to do some calculations. The assumption was single tax payer, the 2011 tax rates when the presumed five percent health care surtax would go into effect with the higher rates that year, salaries of $5.5 million, which is about the NBA average, and $17 million, which would be a high earner like Wade and no deductions.

Continue reading here…

Facing Budget Gaps, U.S. States Shuffle Tax Codes

From Reuters.com:

Caught with near-chronic budget shortfalls, U.S. states are scrambling to change their tax codes and bring in more revenues, the Tax Foundation said on Wednesday.

The foundation has compiled an annual index on 37 categories of states' taxing and spending since 1937. This is the first time that it has had to update the report in the middle of the year.

"Many states have started the new fiscal year with tax codes that are vastly different compared to just a few months ago," Tax Foundation President Scott Hodge said in a statement.

Hawaii, for example, has recently increased its top marginal tax rate to 11 percent, making it tied for first in the country with Oregon. New Jersey, New York, Wisconsin and Delaware also increased individual income taxes for high earners in recent months.

"It's a bit of a troubling trend to see," Mark Robyn, the foundation's staff economist, said on a conference call with reporters. "One of the problems we see with taxing high income individuals is that high-income individuals tend to have volatile incomes."

Their business and capital gains income fluctuate with the economy "even more than the average person's income," he said, adding they shy away from starting businesses in states with higher income tax rates.

On the other hand, Maine, North Dakota and Vermont have cut income taxes since January, the foundation found.

Ten states have pumped up their taxes on cigarettes, while four have increased sales taxes.

California raised its sales tax to 8.25 percent this year, the foundation said. The state, which finalized its budget this week after a drawn-out battle in Sacramento, also allows local governments to add to the sales tax.

In the Los Angeles area, five communities have sales taxes of 10 percent, according to the group.

California has also moved up one spot to No. 2 in the rankings of states with the highest gasoline taxes, as it has raised its levy to 39.9 cents per gallon from 35.3 cents. New York remains the state with the highest gas tax, with an increase to 42.5 cents per gallon from 41.3 cents in January.

According to the National Governors Association, U.S. states will likely face deficits totaling at least $200 billion over the next three years, and most are required to eliminate any gaps at the end of their fiscal years.

Newsweek Claims the “Recession is Over” – but Many, Including Obama, Disagree

In their latest issue, Newsweek magazine claims, “the recession is over, now what we need is a new kind of recovery.” However, dozens of experts have spoken out disagreeing with the publication and even President Obama expressed that he disagreed with the publication’s claims.

“I don't know whether you've seen the cover of the latest Newsweek magazine on the rack at the grocery store, but the cover says, 'The Recession is Over.'"

"I bet you found that news a little startling. I know I did. Now, it's true that we've stopped the free-fall. The market is up and the financial system is no longer on the verge of collapse. We're losing jobs at nearly half the rate we were when I took office six months ago.

"So, we may be seeing the beginning of the end of the recession. But that's little comfort if you're one of the folks who have lost their job, and haven't found another. Unemployment in North Carolina is over ten percent today. A lot of small businesses like Sara's are still struggling with falling revenues and rising costs. Health care premiums, for example, are rising twice as fast as wages, and much more for small businesses -- something I'll address in a minute.

"So, we know the tough times aren't over."

You can read Newsweek’s full story here, but after looking over the text it looks like their assertion that the recession is over was mostly an attention grabber. The main point of the story is that the worst part of the recession might be over technically, but that the country still has a long way to go.

“When economists proclaim a recession over, they're celebrating a technicality: they mean economic output has stopped contracting. And while that is good news, you might wait a while before adding Judy Garland's rendition of Happy Days Are Here Again to your iPod. GDP growth alone can't feed a family, or pay a mortgage. Cursed with a high national debt load and blessed with a dynamic, growing workforce, the U.S. economy needs annual growth of at least 1.5% just to feel like we're standing still.”

Sacramento County Facing Budget Deficit of $38 million

The State of California has been dealing with enough of their own budget problems, and now the state’s capitol – and my hometown – is beginning to have their own problems. New reports suggest that the Sacramento County is facing a budget deficit of nearly $38 million, and it could get worse soon. An article from the Sacramento Bee explains how this new revelation could affect all Californians.

Less than a month into the fiscal year and Sacramento County officials are already saying there's a near $38 million budget shortfall that could get even worse.

In addition to the $9.8 million in projected welfare costs the county chose not to fund in June, sales tax, property tax and other revenue projections made just months ago are already proving to be overly optimistic. Then there's the matter of the $10 million the supervisors have said they want to restore to the Sheriff's Department.

All of that means the county -- which laid off 243 employees and eliminated numerous contracts earlier this month in order to pass a "balanced" $2 billion general fund spending plan -- could be making more big cuts in a couple months.

The board will discuss the worsening budget situation at its meeting this afternoon. Originally the supervisors were going to talk about where they would cut $10 million from the budget in order to restore some funding to the Sheriff's Department and save 70 deputy jobs.

County Executive Terry Schutten's office, however, is recommending that "instead of a piecemeal approach...all these issues be dealt (with) at final budget hearings."

The Sheriff's Department has enough money in its budget to cover the cost of those 70 deputies until the fall when the board amends the spending plan it passed last month, according to Schutten's office.

The board will begin discussing the so-called "final budget" at a hearing Sept. 10.

The Latest on FICO’s Lawsuit and What it Means to Consumers

Earlier today the Wall Street Journal posted a new story on Fair Isaac, or as they refer to the company, the “keepers of your credit history.” For those of you who may not know, Fair Isaac maintains the FICO scores most lenders use to determine your eligibility for a loan and potential interest rates. The lawsuit surrounds the difference between what the company calls bono fide FICO scores, and non-FICO scores, sometimes called “FAKO” scores. Check out the following article on the development courtesy of the Wall Street Journal.

In a suit filed in October 2006, FICO alleged that Experian and TransUnion deliberately marketed VantageScore to customers as the bona fide FICO score, when they are actually purchasing access to Experian or TransUnion’s proprietary score.

There’s argument over how credit scoring played into the current financial crisis, but there’s little argument that credit scores have become a fundamental part of our consumer economy in the past decade. The FICO score is comprised of information submitted by all three major credit-reporting agencies, Experian, TransUnion and Equifax.

However, all three agencies sell additional products, like credit monitoring services and their own scores. Although some consumers like seeing these separate scores, these scores aren’t what most lenders consult when deciding whether to extend credit. Sometimes, these scores can be very different from a FICO score — which FICO says causes confusion and error should a consumer apply for a loan.

“There’s been some confusion in the marketplace,” said FICO CEO Mark Greene. (Anyone who has seen one of those freecreditreport.com ads knows this.) Credit score ads online have proven particularly problematic, he says.

It poses a company challenge for FICO, which has to work with credit reporting agencies Experian and TransUnion to gather information from credit reports to formulate its scores.

Fraudulent Homebuyer Tax Credits Being Eyed by the IRS, Fines “Steep”

From Inman News:

The Internal Revenue Service says a Jacksonville, Fla.-based tax preparer is the first to be convicted of fraud related to the federal first-time homebuyer tax credit.

James Otto Price III, 47, pleaded guilty on July 23 to falsely claiming the first-time homebuyer credit on a client’s federal tax return, the IRS said. He faces up to three years in jail and a fine of up to $250,000 when he is sentenced.

Price was indicted in May on 35 tax-fraud counts, including 15 involving the first-time homebuyer tax credit, The Florida Times-Union reported. Most of Price's clients were unaware he was claiming the credit on their behalf and paying himself a $1,000 fee from their electronic refunds, a prosecutor told the paper.

In announcing Price's conviction, the IRS claimed to have "a number of sophisticated computer screening tools" to identify tax returns that may contain fraudulent claims for the tax credit. The IRS says it has executed seven search warrants and currently has 24 open criminal investigations of potential instances of fraud involving the credit.

Cosmetic Surgery Tax Talk

While reading my favorite tax blogs, I came across this entry from Don’t Mess with Taxes on the newest suggestion to help pay for health care reform: taxing cosmetic surgery.

To be precise, they {congress} want the beautiful people who got their good looks thanks to plastic surgery to pay.

According to the Drudge Report (via Tax Policy Blog), Senate Finance Committee members have discussed imposing a 10 percent excise tax on cosmetic surgery deemed unnecessary for medical purposes.

Personally, I plan to continue to age gracefully, mainly because my pain threshold is markedly lower than my vanity threshold, so this proposed tax wouldn't affect me. But I still think it's a bad idea.

It singles out a group of taxpayers who, for the most part, already foot these types of medical bills on their own since tax law doesn't allow for purely cosmetic surgery costs to be counted as deductible expenses.

Moreover, it makes the implicit assumption that folks getting face-lifts or tummy tucks or various enhancements are wealthy. That's not necessarily true.

Newest Celebrity Tax Evaders

It seems like every day there is a new celebrity making headlines for tax problems. Over the past week, there have been three different famous faces that got added to the list of stars who mishandled their taxes. Check out the following explanations of each celebrity’s tax debts, or to learn more about other celebrities with tax problems check out this list of the 10 most famous tax evaders of all time.

Sean “P. Diddy” Combs

Yesterday it was announced that P. Diddy’s Atlanta based “Justin's Restaurant” reportedly owes the IRS $7,373 in unpaid back taxes. According to Detroit News, the IRS filed tax lien against the restaurant on May 18^th in the New York Department of State. Combs’ spokesman blamed the tax debt on a series of errors, and claimed that a check has already been mailed out to the IRS.

"{The restaurant’s} new address was on file with the IRS, so it is surprising this happened," the spokesman said.

Chris Tucker

Another surprising recent celebrity tax evader is none other than Rush Hour star Chris Tucker, who’s problems are much more serious then Combs’. According to AllHeadlineNews.com Tucker owes a whopping $3 million to the state of California. Reports suggest that the problems stem from the years 2001-2002 and 2004-2007.

Stephen Baldwin

Stephen Baldwin, who has appeared in numerous reality television programs, filed Chapter 11 bankruptcy protection with his wife earlier in the week. The Baldwin’s owe the IRS $749,974.03 for unpaid taxes between 1999 and 2008. They also owe withholding taxes in the amount of $139,288.30 for a company, Predestined Pictures.

Stephen, 43, is the brother of fellow actors Alec, Daniel and William Baldwin. His movies include “The Young Riders,” “Last Exit to Brooklyn,” “The Usual Suspects” and “Mrs. Parker and the Vicious Circle.” More recently, he has appeared on reality TV series such as “The Celebrity Apprentice” and “I’m a Celebrity … Get Me Out of Here.”

Swiss, U.S. Seen Needing Time to Ink UBS Tax Deal

The August 3^rd deadline for a settlement between Switzerland and the U.S. on the UBS case seems unlikely, according to several sources close to the case. Alibaba.com recently published a great article on the topic, explaining why a settlement is so hard to reach, and what the outcome is likely to be. You can read a segment of the story below.

Talks between Switzerland and the United States to end a tax row targeting UBS could stretch beyond an Aug. 3 deadline to allow more time for a detailed settlement, a source familiar with the situation said on Friday.

U.S. tax authorities are seeking to force Swiss wealth management giant UBS to disclose the identity of an estimated 52,000 U.S. holders of secret Swiss accounts suspected of dodging taxes even though this breaches Swiss bank secrecy laws.

A trial against UBS was scheduled to start in Miami on July 13 but presiding judge Alan Gold agreed to delay it until Aug. 3 to allow time for a settlement.

A status call between Gold and lawyers from UBS and the U.S. Internal Revenue Service on July 29 could be an opportunity for an announcement of a delay. A meeting between Swiss Finance Minister Micheline Calmy-Rey and U.S. Secretary of State Hillary Clinton is also scheduled on July 31.

"I would not be surprised if during the July 29 call or at the weekend there may be another request for a delay," a source familiar with the situation told Reuters.

Many investors believe the judge will again postpone the trial as the tax talks are complex and working out a deal that without further weakening bank secrecy requires time.

"Nothing will happen on Wednesday. The parties will agree to postpone the deadline until September to reach an agreement," a Swiss-based trader told Reuters.

Two Swiss-based sources familiar with the situation said a deal was unlikely to come before July 29.

Senators Near Bipartisan Health Deal

Earlier today, I came across a new entry on the Huffington Post asserting that a bipartisan group of Senators are nearing a compromise on health care reform. The compromise is said to exclude several key democratic priorities, but is low on costs, which they are hoping will generate support for the bill. But with a month long recess only a few days away, will these last minute negotiations be successful?

The fiscally conservative Blue Dogs were at odds with the leadership over how to pay providers in a government-run health plan that would compete with private insurance. The House bill models the payments based on Medicare, but the so-called Blue Dogs want a negotiated rate similar to private insurance. Other issues remain sticking points for the Democrats.

"We're not ready to support a bill yet," said Rep. Baron Hill, D-Ind., a member of the Blue Dog group, who added: "We'll get there. We are going to pass a health care bill, whether it's now or in the fall remains to be seen."

Without the backing of the 52-member Blue Dogs, it would be difficult for Democratic leaders to pass a bill, especially since no Republican supports the legislation.

"I think there's still a bit of daylight between the positions," said Rep. Earl Pomeroy, D-N.D. "I think the bottom line of Blue Dogs has not been met as of this time."

Continue reading here…

CA Gives Nearly $68M in Hollywood Tax Credits

From Mercury News:

California on Monday announced the first batch of movie and TV productions to qualify for tax credits under a film incentive program that former "Terminator" actor Gov. Arnold Schwarzenegger pushed through the Legislature and signed into law in February.

So far, 25 productions have qualified for $67.5 million in state tax credits, most of which would have relocated elsewhere if the state money hadn't been in place, said California Film Commission Director Amy Lemisch.

"On most of these productions, they were indeed location-scouting and budgeting in other areas outside of California," she said.

The Walt Disney Co.'s "Beverly Hills Chihuahua 2," was slated for filming in Vancouver had the funding not come through, and "Christmas in Beverly Hills" by Fast Lane Productions LLC might have become "Christmas in Arizona" if it had not qualified for state credits, she said.

One TV series, Comedy Central's "Important Things with Dmitri Martin," will likely hire 100 staffers based in California, she said.

Lemisch said the projects are budgeted to spend $347 million on basic production in California, and are expected to spend 30 percent to 40 percent more on actors, directors, producers and other creative talent and rights.

Back to School Sales Tax Holidays

As you may already know, every year various states and local government agencies have designated “sales tax free” holiday weeks or weekends. Some states feature these holidays before storm season, but many of them do it to help parents cut down on back to school costs. The first round of sales tax free weekends actually begin later this week, so to help my readers find out if their state is participating, I have organized the following list of sales tax holidays based on when they begin.

This Weekend (July 31 – August 2)

Georgia

Kicking off the back to school holiday, Georgia’s tax-free weekend begins this Thursday morning and runs through Sunday night. Any school supplies priced under $20 are exempt from the state’s sales tax, as well as clothing under $100, and computer equipment under $1,500. The rules on clothing purchases are somewhat specific and exclude most accessories. For more information check out the Georgia Department of Revenue’s website.

Mississippi

This Friday (July 31) and Saturday (August 1) in Mississippi all clothing and shoes under $100 will be exempt the state’s 7 percent sales tax. Unfortunately, the holiday does not include school supplies and this has angered many retailers. However, the legislature has no plans to make any changes to the current tax-free weekend. For more information, check with the Mississippi State Tax Commission.

Next Weekend (August 7 – August 9)

Iowa and Oklahoma

I decided to lump these two states together because they both have essentially the same tax free holiday on August 7^th and 8^th. Both states waive the sales tax on an all items of clothing valued at under $100. Unfortunately, the program only applies to clothing and not additional back to school supplies. For more information be sure to check the following links: Oklahoma and Iowa.

Alabama

If you buy any of the following items in Alabama either next Friday or Sunday then you will not have to pay the state’s sales tax rates. Items of clothing under $100, computers costing under $750, random school supplies under $50, and books under $30. Click here to find out exactly what purchases are included and which are excluded.

Louisiana

The sales tax holiday that takes place in Louisiana next weekend seems to be pretty general. According to Louisiana Department of Revenue, nearly all purchases of personal, tangible property valued at under $2,500 are excluded from the states sales tax. This does not include vehicles or items for business use.

Missouri, New Mexico, North Carolina, South Carolina, Tennessee, and Virginia

I’ve lumped these last six states participating in a sales tax free holiday next weekend together because they all have similar rules. The exclusion runs from Friday the 7^th, through the night of Sunday the 9^th. Although each state’s specific item limits vary widely, they each include clothing, school supplies, and computers. To see each state’s individual rules and limitations check out the following links: Missouri, New Mexico, North Carolina, South Carolina, Tennessee, and Virginia.

Future Holidays

Connecticut

If you purchase qualifying clothing and footwear in Connecticut between August 16^th and the 22^nd then you will not need to pay their sales tax. Unlike other states, their limit on clothing expenses is $300, but to learn more about their specific rules check out this link.

Texas

The final tax-free holiday of the back to school season occurs in Texas between August 21^st and 23^rd. According to their Window on State Government, all qualifying clothing, backpack, and school supplies valued at under $100 are eligible for the holiday.

While I was researching this article, I also came across this great article on About.com by Apryl Duncan with a handful of tax-free holiday shopping tips. If you live in one of the states mentioned above and are thinking of going out this weekend then I definitely recommend you check out Apryl’s article.

Ask the Tax Lady: July 27th, 2009

Every Monday I am going to post a set of answers to tax questions I’ve received over the past week. Additionally, I also seek out a few general tax questions from other users in the social communities I am active in. If you have a question you would like to ask me then check out the following links to my profiles. You can send me either a direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Hey Roni, I am thinking about moving to Oregon as property values are lower there. I am hoping my income tax and property tax situation will be better as well as my business. I have one part time employee, and costs here in California are killing me! Would Oregon be better for me personal and/or business-wise?

This is tricky question as there are a lot of things you are going to want to consider in making your decision. First of all, I am going to assume that you have a business that can easily be moved to Oregon without suffering any reduction in revenue. Depending on where you move to you might find a property in Oregon cheaper then the average home in California. However, according to Wikipedia, the minimum wage in Oregon is actually 40 cents higher then in California.

As far as taxes, Oregon has no state sales tax while California levies a hefty 8% sales tax (the highest in the country). According to reports, business tax rates are lower in Oregon then they are in most places in the country. However, the type of taxes you are going to pay will depend on the type of business structure you have (sole proprietorship, corporation, etc). With regard to income taxes, California has a very progressive income tax range of between 1% and 10.3%. California’s 9% tax rate is only for taxpayers making between $47,056 and $1,000,000 per year, and the 10.3% rate is only for those making over a million dollars a year. On the other hand, Oregon’s income tax rates are much less progressive. The top tax rate is 9%, but it’s assessed on all taxpayers making $7,601 or more per year.

No matter what, moving to a different state is a big decision. To better understand if it would be a good financial move, I would recommend researching tax rates and property values in cities you are thinking about moving to.

Question #2: What are the tax and legal complications of either short selling or a foreclosure? Do I have to claim to the difference from sales price to loan amount as income on my taxes?

No. Whether you go with a short sale or foreclosure, you will not need to claim the difference between the sales price and new value as income. Unlike forgiven credit card debt, the Mortgage Debt Relief Act of 2007 prevents the IRS from taxing you on forgiven mortgage debt. If you do get a 1099 next January from your mortgage company then you will simply need to file Form 982 with the IRS to exclude the debt from your taxable income.

Question #3: Food blog tax deduction question… Someone told me they write off all their grocery expenses because they blog - is that possible?

Probably not. Moreover, the person could actually get in trouble with the IRS for writing off all of their grocery expenses.

People often make the mistake of assuming that just because they do something for a little extra income means then can deduct all kinds of unrelated expenses. Although your friend might be able to deduct certain qualifying expenses related to their blogging (if they are in fact earning income), they must be able to verify the expenses claimed were ordinary and necessary for the type of business he or she was in. An ordinary expense is one that is common and accepted in the industry. A necessary expense is one that is helpful and appropriate for the trade or business. An expense does not have to be indispensable to be considered necessary. Thus, if your friend blogs about food or cooking as a source of income, then he or she may be able to claim the grocery bills.

It is important to note that the IRS auditors are very aggressive with the self-employed and independent contractors when it comes to claiming business expenses. So, your friend should definitely seek professional advice if he or she plans on deducting any expenses related to his or her blog.

Jury Indicts IRS Officer in Mortgage Refinance Scheme

According to Web CPA a federal grand jury indicted Mark Claybrooks on charges of fraud last week. Claybrooks is an IRS revenue officer who has been accused of his position to pressure taxpayers who were in debt with the IRS to refinance their mortgages with a company he was associated with.

Mark Claybrooks, 41, was charged with three counts of “acts affecting a personal financial interest” and two counts of fraud for using IRS computers without authorization. He allegedly contacted overdue taxpayers and tried to steer them toward Faith Mortgage Group in Antioch, Calif., where he worked from 2003 to 2005. He received over $20,000 from the mortgage company in exchange for his referrals.

The Contra Costa Times also ran a story about the development and notes that Claybrooks could not be reached for comment but that he is scheduled to make an initial appearance 10 a.m. this Thursday in U.S. District Court. They also found that the phone number for Faith Mortgage in Antioch had been disconnected.

The Tax Implications of Gambling

Last week the Roni Deutch Tax Center – Tax Help Blog posted a new article explaining the tax implications of gambling. As many of you may already know, all winnings from gambling are viewed as taxable income by the IRS. To help anyone confused on how to report these winnings, check out the following article courtesy of the Tax Help Blog.

Get the Form

Whenever you win a “qualifying amount” at a casino, they are legally required to report it to the IRS. Therefore, they will collect your social security number and send you an IRS Form W-2G. As such you want to make sure to report these winnings on your tax returns because the IRS obviously already knows about them. Do not make the mistake of trying to avoid the taxes by giving the casino incorrect information as this is very illegal and could get you into a lot of trouble.

What Qualifies?

According to the IRS, a casino will need to report your winnings to the IRS if you win: $600 or more at a casino or horse track, $1,200 or more at bingo game, or $1,500 or more in a game of keno. Depending on your winnings the casino may even withhold taxes from your payout.

Smaller Fortunes

Although smaller winnings will not be automatically reported to the IRS, it is still your legal duty to report them. While the IRS may not catch you in the act if you do not report these smaller winnings once or twice, they may get suspicious if you report gambling winnings often, but only those that are verified by a W-2G Form.

On the 1040

You must report your gambling winnings, prizes, or non-cash prizes on your Form 1040 come tax season. They will need to be put on line 21, with "other income". 1040EZ forms cannot be used to report gambling winnings.

Gambling Losses

In addition to reporting your gambling winnings, you will also want to deduct your gambling losses. However, you cannot report gambling losses that exceed your total gambling winnings. When you deduct the losses, do so on Schedule A of the IRS Form 1040 as an itemized deduction.

Continue reading at RDTC.com…

A Bid to Tax Health Plans of Executives

From NY Times.com:

Goldman Sachs is one of the nation’s richest banks, and hundreds of top Goldman employees have a health care package to match — one of the “gold-plated Cadillac” plans cited by those involved in the health care debate in Washington.

Goldman’s 400 or so managing directors and its top executive officers participate in the bank’s executive medical and dental program as part of their benefits, according to documents filed with the Securities and Exchange Commission. The program generally costs the bank $40,543 in premiums annually for each participant’s family.

Those taking part in the plan include the company’s chief executive, Lloyd C. Blankfein, and four other top officers, as well as managing directors, whose base salary is $600,000.

Goldman’s medical coverage entered the health care discussion on Sunday when David Axelrod, senior adviser to President Obama, cited the Goldman program as an example of the expensive benefits the administration might consider taxing to help pay for its health care program.

“The president actually was asked this the other day by Jim Lehrer, and what he said was that this was an intriguing idea to put an excise tax on high-end health care policies like the ones that the executives at Goldman Sachs have, the $40,000 policies,” Mr. Axelrod said.

How to Stay Charitable During the Recession

Although the recession is affecting each of us in some way – commonly through declining home values or job losses – charities and non-profit organizations are being hit the hardest. However, even as everyone is tightening their personal budgets, being charitable is still your best interest as a U.S. taxpayer. In addition to the feeling of knowing you have done something good for a fellow American, you will be able to deduct your donations come tax season.

One of the biggest reasons charities are suffering so much is the obvious decline in donations. As Americans across the country make a greater effort to save money, many are choosing to decrease – and frequently halt – regular donations to their favorite charities. In addition to less personal donations, giant corporations that used to donate millions of dollars per year are being forced to make cuts. Likewise, dozens of small business owners and sole proprietors that also used to make large charitable contributions are cutting back. In fact, the Red Cross is reportedly seeing a reduction in donations by around 30% this year.

As if a decline in donations was not enough, due to massive job losses and home losses, the country has a greater need for charity now then it has in decades. Homeless shelters in some cities are becoming so crowded that they are turning people away. At the same time, those overcrowded homeless shelters are struggling to stay open because of a decline in donations and financial support. The same can be said for food aid programs, blood drive programs, or just about any charitable or non-profit organization you can think of.

As the recession continues more and more charitable groups are struggling. However, even if your income has gone down there are still plenty of ways to remain charitable.

1. Do NOT Spread it Out

A lot of people who are used to donating to multiple charities – but can no longer afford to make large monetary contributions – are hoping to simply make much smaller donations to each charity or non-profit. However, charity organizers say that while making small donations are always appreciated; donating a larger amount to one or two charities will often make a much larger impact.

2. Volunteer your Time

If you cannot afford to help out a non-profit by donating money, then you can volunteer your time. You could deliver foods for a local "Meals on Wheels" chapter, or help out at a food shelter. Although you cannot take a tax deduction for your time, you can deduct any direct expenses you incur as long as the charity you are working with is qualified. Therefore, if you bought gas for your car to participate in a "Meals on Wheels" program then you could deduct it on your tax return. Just be sure to keep the receipts!

3. Business Donations

If you own your own business, or are self-employed, then you can make donations on behalf of your business. This means you could donate any old office equipment you are no longer using, and if your business does free work for a charity then you can consider the time spent working on the project as a donation.

4. Non-Cash Donations

Since most of us are tight on cash because of the poor economy, you can also consider donating non-cash items such as clothes, food, or even a vehicle. Even though the donation is not money, you can still get a tax deduction as long as you get a receipt for the donation. However, the IRS has become very weary of non-cash deductions, so make sure you only claim the “fair market value” of the item donated.

5. Get More People Involved

When it comes to charity the more people you can get to help the better. Gathering your family, church group, or coworkers to help out at a charitable event will make volunteering both more enjoyable and more efficient. You could even speak with your employer, or human resources department, to help organize a company wide donation event.

New Tax Scams

In my 18 years of tax law practice, I have seen a number of tax scams. Most of the time, people try to hide assets, or under report income so their tax liability will appear lower. It is fairly common. Illegal, of course, but common nonetheless. But, I recently heard of a tax scam that seems rather creative in its fraud.

(Remember that this is highly illegal, and punishable by hefty jail sentences.)

Rather than under reporting income, some self-employed individuals are actually over reporting their income. Now, what is the benefit of doing this? They get to claim the maximum Social Security payments without paying into the system.

This scam only works for self-employed individuals. You see the Schedule SE is the self-employed person’s record of Social Security taxes you paid out. So, if you under report your income, your Social Security benefits get under reported as well. Meaning when you finally retire, your benefits will be greatly reduced.

Now, here is where the tax scammers found their loophole. The way the law is written, to get the highest amount of Social Security benefits, you must report 40 quarters (or 10 years) wherein you owed the maximum Social Security taxes. You only have to owe that amount, nothing in the law says you must pay that amount.

Therefore, if a self-employed person reports that they owe the maximum Social Security tax for 10 years straight, they need only avoid IRS collections until the liability runs out. Those who successfully run this scam avoid collections by not having bank accounts, not having assets, and running their business on a strictly cash basis.

With all the work and inconvenience in the scam, you are probably wondering how much this actually pays. The maximum Social Security benefit is $2,323 a month. So, collect that for 20 years, and you’re looking at hundreds of thousands of dollars.

Now, my purpose for writing about this scam is not to help you defraud the government. (I repeat, this is highly illegal. Do not do this!) Instead, this just illustrates how much effort some people will put into fraudulent schemes, while so many others refuse to put half the time into legally reducing their tax liability by increasing their tax knowledge.

(Hat tip to fellow tax blogger: Anthony Parent. http://www.irsmedic.com/2009/06/01/greatest_tax_scam/)

State Budget Plan to Demand Faster Tax Payments

California lawmakers are voting on their new budget plan today, and the San Francisco Gate posted a new article taking a look at the proposed budget. According to their article, the State would “increase the amount withheld from employee paychecks by 10 percent, speed up estimated tax payments, and begin withholding state income tax from certain payments - such as interest, dividends and gambling winnings”. Although the plan has a lot of critics, it is expected to help close the state’s budget gap.

These maneuvers will not increase tax revenue by more than a token amount. They will simply bring revenue that normally would be paid in the fiscal year that begins July 1, 2010, into the current fiscal year, which ends June 30, and thereby help "balance the budget."

And what about the hole in next year's budget? The state could fill it by stealing from the next year.

"It's a gimmick," says Gina Rodriquez of Spidell Publishing, which provides information to tax professionals.

Here's a closer look at how this would impact taxpayers. Remember that the state's fiscal year ends June 30 but the tax year ends Dec. 31:

-- Starting in October, employers would have to increase the amount withheld from employee paychecks for state taxes by 10 percent. If you were having $50 withheld, starting in October you would have $55 deducted.

When you file your 2009 tax return, you would owe less or get a bigger refund than you would if this change did not take place.

People could prevent or reverse the withholding increase by filing a new Form DE 4 with their employer. But the state figures most people won't, because they're lazy or busy or like getting a big tax refund.

This move would accelerate $1.7 billion of personal income tax receipts into 2009-10, mainly through increased withholding in January through June. Any excess revenue collected during that period would not have to be refunded until taxpayers file their 2010 returns in early 2011, which falls into next fiscal year.

Continue reading at SF Gate.com…

Toyota to End Calif. Joint Venture with GM

Just last week I posted a blog entry discussing how California lawmakers were struggling to find a way to save the State’s last remaining auto plant. However, earlier today I came across this Associated Press article published by the SacBee.com announcing that Toyota Motor Corporation has indeed decided to liquidate its joint venture with General Motors. For those of you who do not recall, the plant assembled vehicles for both Toyota and GM. However, just because Toyota is pulling out does not mean the factory will close, but it does not give GM a short time frame to decide the fate of the factory and the 6,400 California taxpayers it employs. Check out a clip from the AP story below, or check out the full article below.

Toyota Motor Corp. has decided to liquidate its stake in a California manufacturing plant that it jointly operated with General Motors, a Japanese news agency reported Thursday.

The Japanese carmaker will begin negotiating with the "Old GM" starting next week, Kyodo News reported, citing unnamed company officials.

Toyota spokesman Mike Goss would not confirm that the Japanese automaker had made a final decision on the fate of Fremont, Calif.-based New United Motor Manufacturing Inc., also known as NUMMI. Goss said Toyota will begin negotiations with the GM officials about the plant and added that the company is conducting an "extensive review" of its production needs.

A GM spokeswoman was not immediately available to comment.

Nummi's fate was thrown into question last month when GM announced it was withdrawing from the 50-50 joint venture. GM emerged from bankruptcy protection shortly after the announcement and the company's stake in NUMMI is now part of Motors Liquidation Co. - also known as Old GM - where it will be liquidated under court supervision.

The NUMMI plant, established in 1984, employs 4,600 workers and makes the Pontiac Vibe station wagon for GM, and the Corolla compact car and Tacoma pickup truck for Toyota.

Report on Home Sales Gives Wall Street a Push

Some good news for the housing industry arrived today with the announcement that sales of previously occupied homes jumped 3.6 percent last month. According to the National Association of Realtors, “sales rose at a seasonally adjusted annual rate of 4.89 million last month, above the 4.84 million units analysts had been expecting. That further encouraged market hopes that housing, and in turn the overall economy, are recovering.”

Due to the good news on the housing front, the U.S. stock market also saw some improvements. According to the New York Times the down topped 9,000 today, the first time it has gone so high since January 2^nd. I’ve included a clip of their story on the topic below.

The Dow Jones industrial average was up 148 points or 1.7 percent. The Dow last closed above 9,000 on Jan. 2. The index had been up 24 points ahead of the report. The Standard & Poor’s 500-stock index gained 16 points, or 1.7 percent, while the Nasdaq was 32 points, or 1.7 percent, higher.

Stocks had already been rising after another batch of generally positive earnings reports.

Earlier, the Ford Motor Company surprised the market with a second-quarter profit of $2.3 billion, due mainly to a huge gain for debt reduction, while the drug maker Wyeth, the cigarette maker Philip Morris International and the candy maker Hershey all raised their profit forecasts.

A report from UPS, however, was less upbeat. The world’s largest shipping carrier said its second-quarter profit plunged 49 percent as sales tumbled. The company also issued third-quarter guidance below analysts’ forecast.

Also on Thursday, the government reported a bigger-than-expected rise in new jobless claims, though the report was distorted by the timing of auto plant shutdowns.

The Labor Department said the number of new claims for unemployment benefits rose by 30,000 last week to a seasonally adjusted 554,000 — above analysts’ estimate of 550,000.

However, total unemployment benefit rolls fell to the lowest level since mid-April.

Continue reading here…

IRS Reminds Taxpayers to Take Advantage of Recovery Act Benefits

According to a new press release earlier this week, the IRS is reminding “taxpayers to take advantage of the numerous tax breaks made available earlier this year in the American Recovery and Reinvestment Act.”

The recovery law provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient and parents and students paying for college. But all of these incentives have expiration dates so taxpayers should take advantage of them while they can.

First-Time Homebuyer Credit

The Recovery Act extended and expanded the first-time homebuyer tax credit for 2009.

Taxpayers who didn’t own a principal residence during the past three years and purchase a home this year before Dec. 1 can receive a credit of up to $8,000 on either an original or amended 2008 tax return, or a 2009 return. But the purchase must close before Dec. 1, 2009, and an eligible taxpayer cannot claim the credit until after the closing date. This credit phases out at higher income levels, and different rules apply to home purchases made in 2008.

New Vehicle Purchase Incentive

ARRA also provides a tax break to taxpayers who make qualified new vehicle purchases after Feb. 16, 2009, and before Jan. 1, 2010.

Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and you may claim the deduction for taxes paid on multiple purchases. But the deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A.

Energy-Efficient Home Improvements

The Recovery Act also encourages homeowners to make their homes more energy efficient. The credit for non-business energy property is increased for homeowners who make qualified energy-efficient improvements to existing homes. The law increases the rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to a total of $1,500 for improvements placed in service in 2009 and 2010. Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

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GOP's New Youth Ambassador: Lady Gaga?

According to CNN Republicans attending a GOP weekly conference meeting earlier in the week were shown a video titled “Just Tax.” The viral video was made with the same tune and style of popular recording artist Lady Gaga’s “Just Dance,” only those words were replaced with “Just Tax”. It was made by 23 year old Peter Cowman, a recent graduate from the university of Washington, and was shown to GOP leaders as an example of how they could reach out to younger voters. Check out the full video below.

Franchising Consultant Recognized at Annual Convention

Earlier today Franchising.com published a new press release about Alex Cunningham, a franchise consultant whom I recognized in my speech at the Roni Deutch Tax Center's 2nd Annual Franchise Convention in May. Check out a clip from the release below, or read the full story here.

The Consultant of the Year Award recognizes Alex Cunningham for strengthening the Roni Deutch brand by selling 20 Roni Deutch Tax Center franchise territories in Florida and New Jersey in 2008-2009. To continue his success and to keep the momentum going forward, Cunningham is currently working on additional development deals in Connecticut, Louisiana, Texas, and New York that could total more than forty new territories for Roni Deutch Tax Center.

"It is a tremendous honor to receive this award," said Alex Cunningham. "To win the Consultant of the Year Award takes an incredible amount of effort, discipline, and energy. This award is not only for me, but for the great entrepreneurs I have worked with that have seen the immense opportunity in this industry."

For over two decades, Alex Cunningham has specialized in helping mid-level executives transition into franchising, and has built partnerships with over 85 companies, as well as helped pair more than 1,000 entrepreneurial prospects with franchises that closely match their experience, long-term goals, and passion. He has the expertise and knowledge to consult extensively with national franchisor operations, and help potential franchisees match their goals and qualifications to the "best fit" franchise opportunity.

“Should You Be the Face of Your Business?”

Earlier in the week Business Wizard published an article on whether business owners should be the face of their business or not. The author interviewed me weeks ago, and I am even quoted at the end of the article. You can read a short segment of the story below, or go to BuWiz.com for the full version.

Further, having the company so open at so many points gives the company an edge in the competitive field of enterprise software. “The bigger you get, the more faceless you become,” Simpson says. “If you had a problem at IBM, who would you call? There are too many gates at a big company. We have all these little pieces of evidence that we are incredibly available to you.”

Many entrepreneurs choose not to self-brand out of fear that doing so could hinder or prevent selling the company. Vietia says that a self-branded firm can be sold with careful planning. For 18 years, Roni Deutch has been the face and voice of her tax law firm, making regular appearances on network news, TV commercials, blogs and online videos. While she has no plans to sell, she imagines her persona would be an asset to potential buyers. “Colonel Sanders later sold his business, and they continued to use his face to promote it,” she said. When reminded that Sanders was a caricature to begin with–one that was further simplified post mortem, Deutch says: “If I had to change to become a caricature I absolutely would.”

Foxy Brown Owes the IRS Too

It seems like nearly every week I come across a new story about a celebrity or professional athlete who some how forgot to pay their full tax bill. Well it seems like the latest addition to the list is pop music artist Foxy Brown, who has been charged with evading taxes for over 6 years. According to Contact Music Brown owes the IRS over $640,000. Check out a clip of their story below.

Rapper Foxy Brown has been hit with a lawsuit from U.S. tax officials after running up debts of $641,558 (£427,705). The star is accused of failing to keep up with her taxes since 2003, and Internal Revenue Service (IRS) agents have taken their case to a court in New York to try to recoup the cash. IRS officials have filed tax lien documents against Brown for allegedly missing payments between 2003 and 2006, reports AllHipHop.com.

Pelosi Explains Tax Proposal In Health Care Bill

With all the concern over the House’s health care bill, and Obama’s recent omission that he was not familiar with all the provisions in it, Speaker of the House Nancy Pelosi tried her best to defend the proposed tax increases. She asserted that only very wealthy Americans will be paying more taxes, and that the Middle Class would not be affected. Check out the following story on Pelosi’s arguments below courtesy of USA Today.

Ensuring that the middle class doesn't have to pay the $1 trillion-plus price for overhauling the nation's health care system could mean that the wealthiest Americans will pay a higher rate than the House originally proposed, Speaker Nancy Pelosi, D-Calif., told USA Today’s editorial board Tuesday.

"I wanted to remove all doubt that we were not touching the middle class on this," Pelosi said, explaining why she has advocated in recent days for a higher income threshold for taxes proposed in the House version of the health care bill. "When you go there you get less money because there are fewer people so you have to adjust the fee, but you can't adjust it endlessly. It has to be responsible."

President Obama continued to push for quick legislation Tuesday and had harsh words Tuesday for those who want to "block" health care legislation.

"Time and again we've heard excuses to delay" health care reform, Obama said in brief remarks from the White House Rose Garden. But he also stressed the "common ground" that has already been forged on Capitol Hill.

"We have traveled long and hard to reach this point," Obama said adding that "we are closer than ever before to the reform that the American people need, and we're going to get the job done."

Lawmakers in Congress are debating ways to pay for Obama's pledge to provide health insurance to the 50 million people in the country who do not have it.

California Budget Deal Closes $26 Billion Gap

California Governor Arnold Schwarzenegger and the California legislature announced yesterday that they had finally put together a budget deal that settles the states whopping $26 billion deficit. Reactions to the budget are mixed, but at least the state is finally taking responsibility for their budget. According to the LA Times, the following changes will be made to the stat budget. However, as the author points out the reductions do not add up to $26 billion, and are pretty general to say the least.

Cuts

• K-12 and community college education -- $4.3 billion
• Higher education -- $3 billion
• Medi-Cal -- $1.3 billion
• State worker pay -- $1.3 billion
• Corrections -- $1.2 billion
• CalWorks/welfare -- $528 million
• Home health aides -- $226 million
• Healthy Families children’s insurance -- $124 million
• Local transportation -- $1 billion
• Redevelopment agencies -- $1.7 billion

Additional Revenues

• Accelerate income tax withholding -- $1.7 billion
• Increase estimated tax payments for businesses and the self-employed -- $610 million

New Funds

• Sale of State Compensation Insurance Fund -- $1 billion
• Assumed federal funds for Medi-Cal program -- $1 billion

Accounts Shift / Borrowing

• Local government borrowing -- $2 billion
• Education deferrals -- $1.7 billion
• June 2010 state worker paycheck deferral -- $1.2 billion

The Wall Street Journal also published a piece with strong opinions on some of the cuts. Check out a clip of their article below, or find the entire full here.

Under the budget plan, state lawmakers would cut $15 billion in spending. The rest of the gap would be filled by taking funds from local governments and through one-time fixes and accounting maneuvers. The deal must still be approved by rank-and-file legislators, who are expected to vote on it Thursday.

"We have accomplished a lot in this budget," Mr. Schwarzenegger told reporters after lawmakers struck the deal Monday evening. "We dealt with the entire $26 billion deficit," he said.

The nation's most populous state faces a $26 billion gap in a $92 billion general-fund budget through June 2010. Mr. Schwarzenegger and legislators have been wrestling over the budget for weeks, forcing the state's chief accountant to issue IOUs to many creditors, including some welfare recipients.

As of Friday, the state had issued 153,711 IOUs, worth a total of $682 million. The office of Controller John Chiang said it would need to evaluate the budget proposal before determining when it could stop issuing the warrants.

Economists said the spending cuts would bruise a California economy already slammed by rising unemployment and foreclosure rates. "It will certainly offset a fraction of the federal-stimulus effect this fall," said Roger Noll, a professor emeritus of economics at Stanford University. "That will mean the depth and duration of the recession [in California] will both be bigger than otherwise would've been the case," he said.

The leaders of the Democratic-controlled state legislature said that of the $15 billion in cuts, $9 billion would come from education, $1.3 billion from state-worker furloughs and $1.2 billion from the prison system.

"For Democrats, I have to tell you that many of cuts we had to make, at another time, we would've thought unthinkable," said Assembly Speaker Karen Bass.

Ms. Bass also said that local governments "will have to share the pain." The state will take away $4.3 billion from local governments by borrowing from them or redirecting funds that had been earmarked for them.

Converting an IRA into a Roth? How's Your Crystal Ball?

Ron Lieber of the New York Times recently published an article discussing the unpredictable future of Roth IRAs. At one point, Lieber even proposes the possibility of taxes on withdrawals from Roth IRAs. Lieber predicts that “at the most extreme end, the federal government might try to tax the earnings on a Roth after all, say through the capital gains tax, which is currently at 15 percent for long-term gains but could go up in the next few years.”

You’ll be hearing a lot in the next six months about Roth Individual Retirement Accounts — but not as much as you should about a long-term threat that hangs over them.

Starting Jan. 1, you’ll be able to take a regular IRA, say, one that you have in a brokerage account after having rolled an old 401(k) into it, and turn it into a Roth. You’ll be able to do this no matter how much money you make, though you’ll have to pay income taxes at your current rate on whatever you move. Currently, you can’t make the conversion at all if your household has more than $100,000 in modified adjusted gross income. (That’s a technical Internal Revenue Service term, which it defines in Publication 590, available on its Web site).

Why would you want to make such a swap? Because you think you or your heirs could end up with more money over the long haul by investing in a Roth instead of a regular IRA.

With a Roth IRA, you pay no taxes on your earnings in most instances when you take money out; distributions from regular IRA’s are taxable the same way that income is, though the basic IRA does offer a tax deduction when you first deposit money into the account. The Roth offers no such deduction when you contribute money to it.

So if you think your tax rate will be higher during retirement than it is now, say if you’re fairly young for instance, making the conversion early in 2010 looks sensible.

Continue reading here…

US State Budgets Hit by Shrinking Tax Take

From FT.com:

Sharply falling tax revenues across the US have left states facing fresh budget shortfalls and threatening further painful spending and service cuts following previous multiple rounds of belt-tightening.

In the first quarter of the calendar year, tax collections dropped by 11.7 per cent, the largest fall on record, according to the Rockefeller Institute of Government. Of 50 states, some 45 reported declines.

Early figures for April and May show an overall decline of nearly 20 per cent for total taxes, “a further dramatic worsening of fiscal conditions nationwide”, says the institute.

Billions of dollars of federal stimulus funds, combined with cuts to state employee jobs, school districts, healthcare and even the US prison system, have so far failed to close the budget gaps.

“The states are constantly trying to recalibrate their budgets to deal with a shrinking revenue base,” said Susan Urahn, managing director of state policy initiative at the Pew Center on the States.

It raises questions about how deep the decline in services may go, the direction of tax rates, and whether the federal stimulus measures are working.

Bailouts Could Cost U.S. $23 Trillion

According to a new estimate from Politico.com the Federal bailouts from the past year could end up costing a staggering $23 Trillion. However, the author admits that this number is a “worst-case scenario.” Neil Barofsky, the special inspector general for the government’s financial bailout programs, also asserts that this total is unlikely and that a number of problems would need to emerge forcing the government to spend more. According to Barofsky, the government has spent about $2 Trillion so far.

Still, the enormity of the IG’s projection underscores the size of the economic disaster that hit the nation over the past year and the unprecedented sums mobilized by the federal government under Presidents George W. Bush and Barack Obama to confront it.

In fact, $23 trillion is more than the total cost of all the wars the United States has ever fought, put together. World War II, for example, cost $4.1 trillion in 2008 dollars, according to the Congressional Research Service.

Even the Moon landings and the New Deal didn’t come close to $23 trillion: the Moon shot in 1969 cost an estimated $237 billion in current dollars, and the entire Depression-era Roosevelt relief program came in at $500 billion, according to Jim Bianco of Bianco Research.

The annual gross domestic product of the United States is just over $14 trillion.

Treasury spokesman Andrew Williams downplayed the total amount could ever reach Barofsky’s number.

“The $23.7 trillion estimate generally includes programs at the hypothetical maximum size envisioned when they were established,” Williams said. “It was never likely that all these programs would be ‘maxed out’ at the same time.”

Ask the Tax Lady: July 20th, 2009

As I mentioned last Monday, I am now doing a weekly feature on my blog titled “Ask the Tax Lady.” Throughout the week, I am going to gather questions from friends and followers of mine on Twitter, MySpace, and Facebook that I will answer in this new weekly feature. In addition to answered questions asked of me directly, I also found a few other users on Twitter who posted random tax questions. Check out the questions and answers from last week below, or click one of the links to ask me your own question!

Question #1: How do I get an IRS levy released?

The IRS must release your levy if ANY of the following occur:

1. You pay the tax, penalty, and interest you owe (please see Full Pay Service).

2. The IRS discovers that the time for collection (the statute of limitations) ended before the levy was served (please see Tax Account Review).

3. You provide documentation proving that releasing the levy will help the IRS collect the ta owed.

4. You have an Installment Agreement, or enter into one, unless the agreement says the levy does not have to be released (please see Installment Agreement).

5. The IRS determines that the levy is creating a significant economic hardship for you (please see Currently Not Collectible).

6. The fair market value of the property exceeds such liability and release of the levy on a part of such property could be made without hindering the collection of such liability.

For more information check out this article on RoniDeutch.com.

Question #2: What are the tax legalities of an eBay business?

An eBay business should be treated just like any other home business. In fact, all income you make from eBay should be reported to the IRS, regardless of the amount you make. However, just like having a garage sale, you will only need to report the money you make if it is in fact income. Therefore, if you bought a computer for $1000 and sold it on eBay (or at a garage sale) for $100 then it is not income since you did not make any profit. However, if you make and sell products on eBay for a profit, then you should report the income to the IRS.

Although many people fear that eBay is required to send the IRS data for its users, their spokesperson Chris Donlay says this is not the case. “The IRS would need to provide us with a subpoena for a specific individual before we would provide any data. I don't believe this is something that would be typically done for a routine audit, though it theoretically could happen.”

However, just because eBay is not reporting the income does not mean it is ok not include it on your tax return. Remember that the IRS now has the ability to monitor bank accounts and if you are making regular deposits then they might get suspicious. To learn more about eBay and tax issues, check out this interesting article I came across this weekend.

Question #3: When did April 15 become tax day?

According to Wikipedia:

The {tax} filing deadline for individuals was March 1 in 1913 and was changed to March 15 in 1918 and again to April 15 in 1955. Today, the filing deadline for U.S. federal income tax returns for individuals remains April 15 or, in the event that the 15th falls on a Saturday, Sunday or holiday, the first succeeding day that is not a Saturday, Sunday or holiday.

Question #4: Is Schaumburg, IL Restaurant Sales Tax the Highest in the Nation at 12%?

Yes, the 12% sales tax levied on foods and beverages in Schaumburg, IL make it the highest sales tax rate in the nation. In addition to the state’s general sales tax the small tourist town also levies a 2% Village of Schaumburg Home Rule Food & Beverage Tax.

Schaumburg’s neighbor Chicago, IL has the highest sales tax rate of any major metropolitan city at 10.25%. However, these rates are based off of a relatively low state sales tax. California has the highest statewide sales tax at 8.25%, but nearly every city and town levies additional sales taxes. In fact, in the South Gate and Pico Rivera, CA the total sales tax is also 10.25%.

Examples of How Tax Increases could Hit the Rich

Over the weekend, I came across this informative article from the Associated Press explaining how families would be impacted if the House’s new tax increate were to become law. As you can see from the examples below, some taxpayers could face a huge tax bill next April.

• A family of four making $450,000 a year would pay $103,600 in federal income taxes, an increase of $1,000.
• A single filer making $450,000 a year would pay $112,200 in federal income taxes, an increase of $7,100.
  
• A family of four making $800,000 a year would pay $220,800 in federal income taxes, an increase of $30,000.
  
• A single filer making $800,000 a year would pay $231,300 in federal income taxes, an increase of $30,700.
  
• A family of four making $5 million a year would pay $1.81 million in federal income taxes, an increase of $443,500.
  
• A single filer making $5 million a year would pay $1.83 million in federal income taxes, an increase of $452,000.

CBPP: House Health Bill’s “A Reasonable Approach”

Last Friday, the Center on Budget and Policy Priorities released a study examining the House of Representative’s much-discussed proposal for funding health care reform. They call the plan “a reasonable approach” and assert that the “impact on small businesses would be modest.” However, as the recession continues, even a small tax increase could delay recovery. Check out a snippet from their study below, but be sure to check out the full explanation of the study (including graphs) at CBPP.org.

Reforming the health care system to provide universal health coverage is an urgent priority. But, facing huge projected budget deficits that have the nation on an unsustainable fiscal path, the White House and Congress must enact a health reform plan that is also fully financed and that reduces the growth rate of health care costs over the long term.

Policymakers have been considering two major proposals to help finance health care reform that represent sound tax policy: (1) limiting the tax exclusion for employer-provided health benefits, and (2) capping the value of itemized deductions at 28 percent or a somewhat higher level. Capping the exclusion has the added benefit of helping slow the growth of health care costs. House Democrats have now advanced a third major proposal that also represents sound tax policy: imposing a graduated surcharge on high-income taxpayers.

The House surcharge proposal is reasonable and well targeted. In recent decades, incomes have grown disproportionately for households at the top of the income scale, while their tax burden has fallen substantially. Moreover, despite charges to the contrary, the proposal would have only a small impact on small businesses. The congressional Joint Tax Committee estimates that it would have no impact at all on 96 percent of small business owners — broadly defined as any taxpayer with as little as $1 of business income — and that only half of the 4 percent of small business owners who would be affected derive more than a third of their income from a business. At the same time, the House plan would enhance the ability of small businesses to offer affordable, quality health insurance to their employees.

High-Income Households Have Far Outpaced Others in Recent Decades

The surcharge would affect only the highest-income 1.2 percent of taxpayers, according to the Joint Tax Committee. Very high-income households have benefited handsomely — both absolutely and compared to the rest of the population — from both recent trends in pre-tax incomes and recent changes in tax policy. Congressional Budget Office data show that between 1979 and 2006 (the most recent year for which these data are available): [3]

The before-tax income of the top 1 percent of U.S. households increased by 226 percent, on average (after adjusting for inflation), compared to an increase of just 15 percent for families in the middle fifth of the income spectrum.

Lawyer Could Face Jail for Voir Dire Question

From ABA Journal.com:

A federal magistrate has found patent lawyer John van Loben Sels in contempt of court and threatened him with a 48-hour jail sentence for a question he asked during voir dire.

Van Loben Sels asked potential jurors in a patent infringement suit whether they had "a problem with a company that puts its headquarters offshore on a Caribbean island in order to avoid paying U.S. taxes," the Recorder reports. He is a partner with Wang, Hartmann, Gibbs & Cauley of Mountain View, Calif.

U.S. Magistrate Judge Charles Everingham IV of Marshall, Texas, had prohibited Van Loben Sels and other lawyers for Beyond Innovation Technology Co., a defendant in a patent suit, from saying anything about the tax motivation for the Cayman Islands home of the plaintiff, O2 Micro.

Everingham said Van Loben Sels would not have to serve the sentence if he behaved for the rest of the case, according to the story. But he granted a mistrial and imposed other sanctions on Beyond Innovation Technology Co., known as BiTEK. It will have to foot the bill for new jury selection, will get half the voir dire time of its opponent and will get two peremptory challenges instead of four, according to the Recorder.

Van Loben Sels had defended his question, saying it was hypothetical and he didn't refer to O2 Micro by name.

Tax Tips for Teachers

Summer break is—unfortunately—winding down for students and teachers alike. While teachers all over the country will soon start planning their lessons, this is also the prime time to get your tax files in order. Teachers are in a great position to reduce their tax burden, but it takes time, effort and some thought.

Like anyone else, the best way for teachers to save money on their taxes is to get educated and get organized. If you know what tax breaks you are entitled to, you can actually claim them. And if you have all your tax documentation organized, you’ll be able to prove that you are entitled to each credit, deduction and exemption.

Teachers in particular have a great way to save money on their taxes: the Educator Expenses Deduction. The IRS recognizes that teachers often spend their own money on classroom supplies. Therefore, this deduction is good for up to $250 every year ($500 if your spouse is also a teacher and you file jointly).

While you do not have to itemize deductions to get this deduction, you do have to be organized. Too many teachers keep sloppy records, then can not find their receipts. To help you get organized, here is what I recommend. Create a file labeled “Classroom Expenses”. Keep the file handy so it is easier to properly file receipts than to throw them on the counter. You can go a step further and attach your receipts to a piece of paper with the purpose of the expense written in. You probably will not remember that you spent $5.89 on pencils for your classroom 9 months from now and some receipts are a little difficult to read. This extra step can save you a lot of squinting at receipt tape come tax season.

If you get your system in order now, you will be all set to file your receipts when you go shopping for supplies next month.

Mortgage Firms Struggle to Redo Hard-Hit Loans

At a time when struggling homeowners need it most, new studies are showing that mortgage firms are struggling to negotiate loan modifications fast enough to keep up with demand. The change comes with new government pressure to negotiate more loans under their Home Affordable Modification Program, or HAMP, where the Federal government encourages these firms to help keep families in their homes. Check out the following story on the issue courtesy of the Wall Street Journal.

Morgan Stanley chief John Mack recently made a new friend, he told shareholders in April -- a Southern woman who had benefited from the big bank's stepped-up efforts to modify loans under a new federal program aimed at keeping borrowers in their homes.

"I'm now invited -- if I ever visit Memphis, Tennessee -- to drive two hours south to have dinner with her and her family," Mr. Mack said.

But by some measures, Morgan Stanley's mortgage-loan servicing firm, Saxon Mortgage Services Inc., has a long road to go. An April Credit Suisse Group analysis of how quickly companies have renegotiated loans ranked Saxon last among 18 mortgage-servicing firms. Saxon has modified just 6% of the loans it oversees that originated between 2005 and 2007. By contrast, Litton Loan Servicing, a Goldman Sachs Group Inc. unit, modified 28% of its loans.

Such firms are at the center of a grand government experiment aimed at halting foreclosures and the collateral damage they cause neighboring homes. New foreclosure notices will total 2.4 million this year, which could trigger price drops in 69.5 million nearby homes, estimates the Center for Responsible Lending, a financial-services research and policy firm. At an average decline of $7,200 a house, that translates to a potential drop of $502 billion in total U.S. property values.

The government plan, rolled out in February and called the Home Affordable Modification Program, or HAMP, will pay mortgage-servicing firms to modify mortgages and find other ways to keep people in their homes. But the program's sheer scale and the speed with which it was rolled out have created a new set of problems for some of the 27 firms charged with carrying it out.

Continue reading…

Personal Finance: Now's The Time To Plan Tax Savings

This morning Reuters.com posted a new article stressing the importance of starting to plan for tax season now, and I could not agree more! By planning early you can make a conscious effort throughout the year to reduce your total liability! You can read a segment of the article below, or check out this article I posted on the topic earlier this year: Tax Planning for 2009 - How to Benefit from Recent Tax Law Changes.

High debts and recession anxiety have prompted many consumers to cut their expenses to the bone. But there's one other place they could be saving, and that's taxes.

Mid-year is the best time to start planning a year-end tax strategy. Accountants and other tax preparers aren't as busy as they are in the spring and the winter, so they have more time to meet with you and look over your financial situation. If you use a professional to help you at tax time, consider setting up an appointment this month. You'll get a lot of personal attention.

If you're a do-it-yourself tax planner and filer, it's still a good time to check out your status and lay plans for the remainder of 2009. You'll have five months to make the financial moves that will save you money when you file your income taxes for this year. And it's not just about income taxes: This year there are some sales and property tax moves that can put more cash in your pocket quickly.

Here's a grab bag of summer maneuvers -- from renegotiating your property taxes to grabbing the car tax break -- that you can use now to keep more money for yourself through 2009 and into 2010.

Appeal your property taxes. In the last three years, average U.S. home prices have fallen by about a third, according to the S&P/Case-Shiller Home Price Index. But it's unlikely your local or state government has been dropping your home's assessment or property taxes by the same percentages. It may be too late for this year's tax bill, but most states do have relatively easy procedures to follow if you want to appeal your assessment or the amount of your taxes. There's no reason not to do it. Check the website of your county or state treasurer's office to see how to do this.

Get organized early. Take a look at your year-to-date earnings and compare them with last year's. Remember that there is a Making Work Pay tax credit in play that will pay individuals $400 and couples filing jointly $800 for 2009. If you haven't already cut your withholding at work for this, you may be able to trim your withholding for the rest of the year. You may also be able to reduce your estimated tax payments if you typically earn a lot of money in interest income and find yourself earning less than usual this year. Start collecting and keeping all pertinent receipts. For example, you can get a child-care tax credit for the cost of day camp for kids under 13 if you are busy working while the kids are being bussed to the pool and park.

Health Bills To Increase Federal Costs

From CQ Politics:

The health care overhauls released to date would increase, not reduce, the burgeoning long-term health costs facing the government, Congressional Budget Office Director Douglas Elmendorf said Thursday.

That is not a message likely to sit well with congressional Democrats or the Obama administration, and House Speaker Nancy Pelosi, D-Calif., said Thursday she thinks lawmakers can find ways to wring more costs out of the health system as they continue work on their bills.

The chairman of the Senate Finance Committee, Democrat Max Baucus of Montana, who has not yet released a bill, said his panel is acutely aware of the long-term cost concern. “Clearly our committee will do what it can,” he said. “We are very seriously concerned about that issue. We very much want to come up with a bill that bends the cost curve.”

But Baucus suggested the White House is making the task difficult with opposition to one cost-cutting approach Elmendorf cited — limiting or even ending the tax exclusion for employer-provided health benefits.

The Democrats and President Obama have cited two goals in their overhaul proposals — expanding coverage to the estimated 47 million Americans who currently lack it and bringing down long-term costs because the growth in Medicare and Medicaid spending threatens to swamp the federal budget in coming years.

California Lawmakers Scramble to Keep State's Last Car Factory Open

Lawmakers are struggling to save California’s last remaining car factory, NUMMI plant, in Fremont. The plant is operated by both GM and Toyota, and employs over 5,000 Californians. Legislators are hoping to push through a bill that will give the plant increased tax breaks, and a decision is expected this afternoon. Check out the following article from the LA Times discussing the issue.

"We believe that plant is a public good," said state Sen. Roderick Wright (D-Inglewood), who co-wrote the Senate bill. He added that his own Los Angeles County district is home to parts suppliers that would be affected should NUMMI close. "The fact that we could lose our last car manufacturing facility is unconscionable."

But amid Sacramento's grinding budget crisis, there is considerable doubt about how much money would be available to provide tax cuts to one of the world's largest companies -- and whether any amount of taxpayer-funded goodies would be sufficient considering the depths of the auto industry's woes.

"How many extra millions do taxpayers have to give Toyota to stay?" said Lenny Goldberg, executive director of the California Tax Reform Assn., who questions whether those kinds of incentives even work. "If you're going to give it away, give it away right."

Manufacturers have long complained about the cost of doing business in California. The legislation proposed this week would, in part, reduce that burden for the auto industry, sponsors said.

The bills, ABX4 31 and SB 830, would exempt NUMMI and other auto plants from sales tax on improvements and retooling of the plant, a process that can cost hundreds of millions of dollars. Toyota is not currently retooling NUMMI, but it could in the future to build fuel-efficient vehicles such as hybrids.

The Senate bill goes further. It would designate the plant and the area around it an enterprise zone, which provides a variety of other tax benefits. In addition, the bill would cut state fees that NUMMI pays for utilities, and it would encourage state and local agencies to buy vehicles made at the plant.

Legislators say they will urge Gov. Arnold Schwarzenegger to use the incentives as leverage with Toyota to keep the plant operating.

Tax Preparer Review; Public Forums to Gather Input this Summer

According to their newest press release, the IRS will put together a series of public forums “at which individuals and representatives of diverse constituent groups will be able to provide input on the development of tax preparer performance standards.”

The public forums, a crucial part of an effort launched in June by IRS Commissioner Doug Shulman to help ensure tax preparers are qualified, ethical and provide a high level of service, will kick off on July 30 in Washington, D.C.

“These public meetings will be an important part of the dialogue as we move toward a set of comprehensive recommendations by the end of this year,” Shulman said. “We want an open discussion on how to strengthen the overall integrity of our tax system.”

Two panels are scheduled for a forum on July 30. The first panel will give consumer groups an opportunity to provide recommendations. These groups include the AARP, Consumer Federation of America, Center on Budget and Policy Priorities, National Community Tax Coalition and Low Income Tax Clinics.

The second panel will be made up of tax professional groups, including the American Institute of Certified Public Accountants, the National Association of Enrolled Agents, the National Association of Tax Professionals and the National Society of Accountants.

The two panels will take place at the Ronald Reagan Building amphitheater in Washington starting at 9 a.m. on July 30. People interested in attending should confirm attendance by sending an e-mail message to: CL.NPL.Communications@irs.gov.

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Justice Sonya Sotomayor: The Future of Taxes in the United States

Over the past week, President Obama’s first nomination to the U.S. Supreme Court, the Honorable Sonya Sotomayor, has been making headline after headline as she moves through the nomination process. As such, I thought it would be a good time to take a look at some of her tax related opinions, and predict how the future of taxation in the United States might change if she were to become a Supreme Court Justice.

Lack of Tax Related Cases

Unfortunately the Supreme Court does not hear many cases on tax issues, which makes predicting how a new Justice will influence the court all the more difficult.

According to the Tax Girl, whom I follow on Twitter, during the term beginning in October 2007, the Supreme Court only agreed to hear five tax-related cases. They are all listed below, along with a brief note on the issue. As you can see, none of them were very note worthy.

• Kentucky Department of Revenue v. Davis, No. 06-666 (state bond issue)
• Knight v. Commissioner, No. 06-1286 (trust administration fees)
• CSX Transportation Inc. v. Georgia State Board of Equalization, No. 06-1287 (railroad property valuation)
• MeadWestvaco Corp. v. Illinois, No. 06-1413 (state gain issue)
• Boulware v. United States, No. 06-1509 (diversion of corporate funds to a shareholder of a corporation)

Most Cited Tax Case

Unfortunately, Judge Sotomayor has not written extensively on tax law. In fact, there is really only one tax related case that she has drafted an opinion. Although the case does not provide enough information to determine how she would decide on future issues, it can provide some hints.

In the case of Knight vs. Commissioner, 467 F.3d 149 (2006) Sotomayor’s court unanimously upheld a lower tax court ruling that said some fees paid by a trust are only partially tax deductible. Although they upheld the decision, the rejected the lower court’s reasoning and Sotomayor authored the deciding opinion.

The reason this case has gotten so much attention was because the U.S. Supreme Court heard the appeal, and rejected Sotomayor’s reasoning. They did unanimously uphold the decision, but Chief Justice Roberts noted that Sotomayor’s approach "flies in the face of the statutory language." I also found it especially interesting that one of the main areas the two courts disagreed on was what the term “would” meant under the statute in questions.

Other Relevant Cases

Although she has only authored an opinion on one tax related cases, Justice Sotomayor has ruled on a few other related cases. The first of which was Dabit vs. Merrill Lynch, 395 F.3d 25 (2005), where she overturned a lower court decision and allowed certain types of fraud lawsuits to be settled in state court, rather than federal. However, the U.S. Supreme court overturned the decision claiming that the federal government did have interest in overseeing such cases.

Empire Healthchoice Assurance, Inc. vs. McVeigh, 396 F.3d 136 (2005) was another interest case that has been discussed frequently over the past week. In it Sotomayor ruled against a health insurance company that sued the estate of a deceased federal employee who had won a settlement form a separate civil case.

U.S. Supreme Court Justice Sotomayor

Although it is impossible to predict how Justice Sotomayor would rule in a case as a Supreme Court Justice, we can make some predictions based on her history. According to the Congressional Research Service, Sotomayor’s “approach as an appellate judge has been an adherence to the doctrine of stare decisis,” meaning she has a tendency to uphold concepts decided by former justices. The report also found that her approach was “in line with the judicial philosophy of Justice Souter,” the judge she is nominated to replace.

From looking at the findings of the Congressional Research Service, and examining her history, it is quite difficult to determine how taxation in the United States would change if Sotomayor’s nomination was accepted. However, based on her decision against health care and investment companies, it seems likely that Sotomayor might be somewhat progressive in her approach to the tax code. Yet, with the Supreme Court only hearing a handful of select cases per year she might never even get the opportunity to rule on a meaningful tax case.

Nomination as a Distraction?

As the nomination hearings continue to make headlines, and media outlets debate Sotomayor’s use of the phrase “Wise Latina,” some bloggers are beginning to think that the Obama Administration and Democratic leaders are using the media fixation as an opportunity to “sneak through” a hefty tax increase. The bill in question was proposed in the House of Representatives as a way to generate funds to pay for health care reform. The 1% increase on families making $350,000 or more per year, and up to 5.4% increase on those making over $1 million would generate an estimated $540 billion in additional federal revenue. Although passing legislation while the American media focuses on another issue is a common tactic used in Washington, I hope it is not a sign of things to come for Justice Sotomayor and the Obama Administration.

Health Care = Tax Increases

This morning it seems like all the headlines are about the new plans for health care reform. For those of you who have not have heard, yesterday House Democrats unveiled their health care reform bill (H.R. 3200). To finance the massive project, they are hoping to raise taxes on the following taxpayers.

• 1.0% increase for married couples earning $350,000 - $500,000
• 1.5% increase for married couples earning $500,000 - $1,000,000
• 5.4% increase for married couples earnings > $1,000,000

Additionally, the 1.0% and 1.5% rates are scheduled to increase in 2013 to 2.0% and 3.0% unless the government can find $150 billion in health care savings. Understandably, many taxpayers are angered by the announcement, which would push the total tax rates in some states to nearly 60%.

As the Wall Street Journal points out, “Obama has promised to let the lower Bush tax rates expire after 2010. This would raise the top personal income tax rate to 39.6% from 35%, and the next rate to 36% from 33%. The Bush expiration would also phase out various tax deductions and exemptions, bringing the top marginal rate to as high as 41%.”

Then add the Rangel Surtax of one percentage point, starting at $280,000 ($350,000 for couples), plus another percentage point at $400,000 ($500,000 for couples), rising to three points on more than $800,000 ($1 million) in 2011. But wait, there's more. The surcharge could rise by two more percentage points in 2013 if health-care costs are larger than advertised -- which is a near-certainty. Add all of this up and the top marginal tax rate would climb to 46%, which hasn't been seen in the U.S. since the Reagan tax reform of 1986 cut the top rate to 28% from 50%.

States have also been raising their income tax rates, so in California and New York City the top rate would be around 58%. The Tax Foundation reports that at least half of all states would have combined state-federal tax rates of more than 50%.

The Associated Press also published an article on the new surtax, claiming that the “House Ways and Means Committee announced it would vote on the proposal beginning on Thursday. The panel is one of three that must act before the bill can go to the full House, probably later in the month.”

Their article also explains Obama’s involvement in the bill, noting that “the developments occurred one day after President Barack Obama met with key Democrats in a White House session in which he told a powerful Senate chairman he wants legislation by week's end in his committee.”

In a statement, Obama praised the proposal, saying it "will begin the process of fixing what's broken about our health care system, reducing costs for all, building on what works and covering an estimated 97 percent of all Americans. And by emphasizing prevention and wellness, it will also help improve the quality of health care for every American."

In addition to Obama’s efforts to work with congress, his administration is also set to begin airing television commercials to generate more support for their plan. According to Yahoo Finance, “the 30-second ads will begin airing Wednesday in Washington, D.C., and on cable TV nationally. In the ads, private citizens describe problems they've had with the medical system and say it's time for action. The sponsor is Organizing for America, Obama's campaign organization, which has become part of the national Democratic Party. The group would not reveal the cost.”

Picking on the Swiss – the Obama Administration Blows up a Tax Treaty

As the IRS and Justice Department continue to work with USB, the largest bank in Switzerland, to hand over the names of 52,000 U.S. taxpayers with private accounts, some experts are beginning to wonder if this really is a good move by the new administration. Obama just returned from a diplomatic journey around the world, and now as the Federal Government puts pressure on UBS, they might end up ruining our long and peaceful relationship with Switzerland.

According to the Wall Street Journal, “this sort of fishing expedition expressly violates the U.S.-Swiss treaty on sharing tax information. The original treaty dates back 30 years, and under the pact the Swiss regularly provide the IRS with information on specific cases. But what the IRS is attempting here is a mass search of U.S. taxpayers merely for banking in Switzerland.”

This is not to say that everyone caught up in the IRS's dragnet is pure. But the American system of justice contains probable cause and reasonable search requirements precisely to prevent law enforcement from rounding up everyone who might conceivably be guilty of some crime. And while the Justice Department argues that UBS systematically marketed its private banking services in order to avoid U.S. taxation, the charges against UBS itself were settled in February, so this is not about the bank. It is about its customers, and an effort to grab perhaps a couple of billion dollars in allegedly unpaid taxes.

Those customers are protected by Swiss bank-secrecy laws that make it a felony to improperly disclose client identities. Those laws are very much in force, and the Swiss authorities have threatened to seize the client data demanded by the U.S. rather than permit UBS to comply.

Switzerland is a neutral country and so technically isn't an American ally, but it has long been a good friend, representing U.S. interests in Cuba and Iran, among other good offices. On Monday, Judge Alan Gold delayed until August a hearing on the case, giving UBS and the feds time to reach a settlement before the judge rules on the IRS demands. The Justice Department is nonetheless still threatening to indict UBS if it fails to comply.

Tax Court Rejects Gay Activist's Attempt to File Joint Return With Long-Term Partner

Earlier today, I came across this entry on the Tax Prof Blog about a recent ruling from the U.S. tax court against a California gay rights activist. According to a post from October of 2008, Merrill “filed papers with the U.S. Tax Court objecting to the Defense of Marriage Act (DOMA) based on the 1st Amendment Establishment Clause of the U.S. Constitution. He objects to not getting all the same benefits as other married couples” under the current tax code.

On Monday the Tax Court dismissed Merril’s claims, saying “we must decide whether petitioner, who was unmarried but in a committed relationship with another man during the years at issue, is entitled to married filing joint status. We hold that he is not.”

Petitioner and Mr. Boyle lived in North Carolina during the years at issue. They participated in a commitment ceremony in 2004, but North Carolina did not recognize same-sex marriages. Petitioner and Mr. Boyle were legally married in 2008 after moving to California.

Petitioner failed to file a tax return for either of the years at issue. Respondent contacted petitioner about filing income tax returns. Petitioner responded with a letter stating that he was not evading taxes, but refused to pay taxes as an act of civil disobedience advocating same-sex marriage equality. Respondent prepared substitutes for returns for the years at issue and issued deficiency notices to petitioner. In the substitutes for returns, respondent determined petitioner's filing status to be single. Petitioner resided in North Carolina when he filed the first petition regarding his return for 2004, and he resided in California when he filed the second petition regarding his return for 2005.

In both petitions, petitioner argued that he must be accorded married filing joint status, rather than single status, because of his long-term domestic partnership with Mr. Boyle. Respondent filed motions for partial summary judgment on whether petitioner is entitled to married filing joint status for the years at issue. Respondent argues that petitioner is not entitled to this status because he was not married in the years at issue and he did not file a joint return for those years. We agree and discuss each of respondent's arguments in turn.

Petitioner admits he was not legally married for either of the years at issue but argues, nonetheless, that he should be allowed to file joint returns because he was in a long-term committed relationship with his gay partner and North Carolina did not recognize same-sex marriage. Despite petitioner's argument, a taxpayer must file a joint return with his or her spouse and it must be signed by both spouses to claim the married filing joint status.

We conclude that respondent properly determined single filing status for petitioner. Accordingly, we hold that petitioner is not entitled to married filing joint status for the years at issue.

To read the court’s full decision check out Merrill v. Commissioner, T.C. Memo 2009-166 (July 13, 2009).

The 0% Tax Rate Solution

From the Wall Street Journal:

The federal income tax code is now so mangled that we can probably increase federal revenues with a 0% income tax rate for a majority of Americans.

Long before President Barack Obama took office, the bottom 40% of income earners paid no federal income taxes. Because of refundable income tax credits like the Earned Income Tax Credit (EITC), in 2006 these bottom 40% as a group actually received net payments equal to 3.6% of total income tax revenues, according to the latest Congressional Budget Office data. The actual middle class, the middle 20% of income earners, pay only 4.4% of total federal income tax revenues. That means the bottom 60% together pay less than 1% of income tax revenues.

This actually resulted from Republican tax policy going all the way back to the EITC, which was first proposed by Ronald Reagan in his historic 1972 testimony before the Senate Finance Committee on the success of his welfare reforms as governor of California. Besides calling for workfare, Reagan proposed the EITC to offset the burden of Social Security payroll taxes on the poor. As president, Reagan cut and indexed income tax rates across the board and doubled the personal exemption. The Republican majority Congress, led by former House Speaker Newt Gingrich, adopted a child tax credit that President George W. Bush later expanded and made refundable, while also reducing the bottom tax rate by 33% to 10%.

President Bill Clinton expanded the EITC in 1993. But it was primarily Republicans who abolished federal income taxes for the working class and almost abolished them for the middle class. Now Mr. Obama has led enactment of a refundable $400 per worker income tax credit and other refundable credits, which probably leaves the bottom 60% paying nothing as a group on net.

Many conservatives are deeply troubled by this, arguing that everyone should be contributing something to the tax burden. They worry that, not paying for any of the tab, this majority will see no reason not to vote for limitless spending burdens. But are conservatives now going to campaign on increasing taxes on the bottom 60%, arguing that is good tax and social policy? Steve Lonegan recently demonstrated in the New Jersey gubernatorial primary that this is not a viable political position. He proposed a 3% state flat tax which, while very good tax policy, would increase taxes slightly for the bottom half of income earners. His victorious opponent Chris Christie pounded away in advertising on that point.

But what if Republicans proposed a federal tax reform with a 0% income tax rate for the bottom 60% of income earners? With that explicit 0% tax rate framing the issue, abolishing the refundable tax credits that actually ship money to lower income earners through the tax code would become politically viable. Trading an explicit 0% tax rate for the bottom 60% in return for eliminating the refundable tax credits would likely be at least revenue neutral, and probably result in a net increase in revenue.

Obama Says Jobless Rate Likely to Tick Up for Several Months

Just days after returning from a week of travel, President Obama is making headlines this morning with his announcement that the country’s unemployment problems are not likely to improve any time soon.

"My expectation is that we will probably continue to see unemployment tick up for several months," Mr. Obama told reporters after a meeting with Dutch Prime Minister Jan Peter Balkenende.

According to a new article from the Wall Street Journal, “unemployment stood at 9.5% nationwide last month, a rate that has prompted calls for additional stimulus measures, as well as criticism that the earlier $787 billion package has so far failed to create jobs. Mr. Obama, who has said he believes joblessness will soon hit 10%, will visit Michigan later Tuesday, a state already dealing with double-digit unemployment.”

While he said he doesn't have a "crystal ball," Mr. Obama said he anticipates unemployment will follow historical trends and lag "for some time" even after an economic recovery begins.

On the positive side, he said the U.S. has "seen some stabilization in the financial markets, and that's good because that means companies can borrow and banks are starting to lend again."

"The challenge for this administration is to make sure that even as we are stabilizing the financial system, we understand that the most important thing in the economy is people able to find good jobs that pay good wages," Mr. Obama said.

With the economy stalling, and the administration’s recent admission that they had underestimated the scope of the troubled economy it is no wonder that experts are beginning to question Obama. According to a story on CBS News, “Obama’s economic forecasts for long-term growth are too optimistic, many economists warn, a miscalculation that would mean budget deficits will be much higher than the administration is now acknowledging.”

Christina Romer, chairwoman of the White House’s Council of Economic Advisers, said in a POLITICO interview that the administration—like many independent economists—did not fully anticipate the severity and pace of this recession. She said the White House will be updating its official forecasts.

The new numbers will come as part of a semiannual review that, under ordinary circumstances, is the kind of earnest-but-dull document that causes many Washington eyes to glaze over.

This time, however, the new forecasts - if they are anything like what many outside economists expect - could send a jolt through Capitol Hill, where even the administration’s current debt projections already are prompting deep concerns on political and substantive grounds.

Clinton Flip Flops on NYC Tax Issue

U.S. Secretary of the State Hillary Clinton, and former NYC Senator has come under fire from the city’s mayor for supposedly “stabbing the city in the back.” According to recent reports Mayor Bloomberg has accused Clinton of changing her views on tax exemptions for diplomats staying in NYC, which has resulted in nearly $250 million dollars in losses for the city.

The mayor said it is not only a double cross but also a double flip-flop. As New York's junior senator, Clinton fought to make diplomats pay up. And he said her reversal changes a longstanding policy.

"Since 1873 they've been saying this is taxable," Bloomberg said.

What's more, the mayor predicted that -- freed of paying property taxes -- some governments would see it as a business opportunity to buy up properties and make money renting them out.

"It's just patently unfair to New Yorkers and Americans and it contravenes established policy for 130-odd years and it just doesn't make sense," Bloomberg said.

U.S. Mulling Mortgage Aid for Unemployed

As the unemployment problem in the country continues, the Obama administration is looking to help the poor U.S. housing market by offering specific aid for taxpayers struggling to make their mortgage payments. According to a new article from Reuters, the President has prompted policy makers to consider new options “allowing borrowers to delay, defer or skip payments," which are more effective than those currently available in the private sector.

The number of failing home loans has been climbing for three years as risky borrowers have defaulted on their easy-to-get loans, property values have sunk and the unemployment rate has climbed.

But the official said the idea, which is still evolving, was difficult from a policy perspective and carries potential hazards. It could help more people struggling with economic difficulty, but it also could create perverse incentives that distort the housing market, said the official, who did not want to speak on the record about internal administration debates.

The official said such a program would be in keeping with other measures to help workers who have lost jobs in the current recession.

Minority Broadcasters Seek Federal Aid

From the Wall Street Journal:

A group of minority broadcasters asked Treasury Secretary Timothy Geithner Monday for financial assistance akin to the aid that has been extended to the financial and auto industries.

"Minority-owned broadcasters are close to becoming an extinct species," the letter said. "Even in better economic times, minority broadcasters have historically had difficulties accessing the capital markets."

The broadcasters told Mr. Geithner they can bounce back if they are given some temporary assistance while the credit markets are slow. "Unlike the auto business, broadcasting has been healthy for many years," their letter said.

The broadcasters appeal follows a proposal sent in May to Mr. Geithner by a group of influential House members asking for a minority broadcaster support program, bridge funding, or government-backed loans.

The House letter was signed by House Majority Whip James Clyburn (D., S.C.) and a group of key committee chairmen, including Financial Services Committee Chairman Barney Frank (D., Mass.) Ways and Means Committee Chairman Charles Rangel (D., N.Y.) and Oversight Committee Chairman Edolphus Towns, (D., N.Y.).

At a hearing last week, National Association of Black Owned Broadcasters President James Winston told lawmakers that advertisers have severely cut investments in minority audiences at the same time minority broadcasters are having difficulty negotiating loan terms with banks.

Research from the Internet advocacy group Free Press says minorities own just 7.7% of full power commercial radio stations and 3.2% of full power commercial TV stations.

Tax Implications of Health Care Reform

Health care reform has been a hot topic as of late in Washington, DC. Most of the debate has focused on how to pay for it. With the federal government already having spent record sums to bailout financial firms and the auto industry, and having borrowed even more to help spark the economy through a stimulus, Congress and Obama administration realizes that they have to find a new revenue source to finance the initial transition.

What complicates this even more is some campaign promises—and implied promises—that Democrats and President Obama made during the campaign leading up to last November’s election. Prominent among these promises are the following:

* Must provide coverage to at least 95% of Americans
* Transition must cost ~$1 trillion or less over 10 years
* Transition must be financed through an identified stream of revenue
* Must not raise taxes on those earning less than $250,000 per year

Given the above, Congressional leaders and the Obama Administration have been limited in what they can and cannot do, or run the risk of creating a new “read my lips” moment with voters.

Notwithstanding the above, there are some particular tax changes and increases that are being seriously considered. Please see below for more information. Moreover, let me know your thoughts, by posting them here on my Twitter account.

Limit Income-Tax Deductions

By only allowing taxpayers in the top two income tax brackets (33% and 35%) to deduct their mortgage interest, charitable contributions, and local taxes at the 28% rate it is suggested that the Federal government could collect $267 billion over the next 10 years. This is supposedly one of the Obama administrations main tactics for raising revenue. However, numerous Democratic leaders have already spoken out against it claiming it would hurt charities and residents of highly taxed areas such as New York City. Although experts predict that the original proposal will likely not pass into law, they are suggesting that some type of watered down version will.

Taxing Employer Provided Benefits

With the support of both Republicans and moderate Democrats in Congress—and even the most influential members of the Senate Finance Committee—the concept of taxing employer provided health benefits is something that has been getting a lot of attention lately. Although House Speaker Nancy Pelosi adamantly opposed any legislation regarding the issue, there are number of recent compromises that have made the new tax more likely to become law. The compromises include capping the value of benefits that go untaxed (for example if the tax-free limit is $13,000, an employee with a policy worth $15,000 would pay income taxes on $2,000), and imposing an income tax surcharge on the wealthiest taxpayers.

Tax Surcharge on the Wealthy

Speaking of tax surcharges on the wealthy, increasing the tax rate on taxpayers with incomes of over $200,000 or couples earning over $250,000 has also been discussed as a way to help pay for health care reform. This is the hot proposal in the House. Current proposals would levy an additional 3-4%, with the possibility of an additional 0.6% tax on those making more than $500,000. It is projected that if passed these tax increases would generate an estimated $832 billion in Federal revenue over the next decade. Unfortunately, these increases would be on top of Obama’s plan to let the “Bush Tax Cuts” expire, which would already increase the top tax rate to 39.6%. Therefore, it would put the combined state and Federal tax rates of some Americans at 51%, which is higher than many European countries including France and Germany. Although this plan has zero support from Republicans in Congress (the Obama administration has yet to support it either), it is favored by many Democrats and could pass with their filibuster proof majority.

Increased “Sin Taxes”

As I mentioned in an entry earlier this month titled 10 Ways the Federal Government May Try to Collect More Money -- From You, increased taxes on sugar heavy soft drinks, tobacco products, and alcoholic beverages (also known as sin taxes) could provide up to $200 billion in additional tax revenue over the next 10 years. According to reports taxes on alcohol were last raised in 1991, and adjusted for inflation they are actually 37% lower today. However, with little support and opposition for dozens of industries, any such increases are very likely to ever see the light of day.

Repeal of Tax Saving Accounts and Deductions

Although not a direct tax increase, by repealing tax-advantaged savings accounts for health expenses, and repealing the medical expense deduction the Federal government could save over $250 billion. However, these taxes would mostly affect senior citizens already struggling with huge medical bills, and would directly break Obama’s pledge to not increase taxes on families making under $250,000.

Shared Responsibility Payments

Although it may sound confusing, shared responsibility payments are basically fines for not having insurance. By requiring Americans to have some sort of coverage—similar to how motorists must get auto insurance—and enforcing a $1,000 per year fine, the Federal government could collect over $36 billion over the next decade. It would likely include subsidies for lower income Americans, and the concept has gotten support from a number of key Senate Democrats.

Expanded Medicare Taxes

One of the final taxes being considered to help pay for health care reform is an expansion of the Medicare tax. Currently the tax is only levied on earned income (wages from your employer, etc.). By levying the tax on capital gains, dividends and other unearned income, and increasing the rate for high-income earners, the government could collect over $500 billion over the next year. However, raising taxes on unearned income is highly unpopular among the American public, and under the current proposal 80% of the tax increase would be paid for by the top 5% of taxpayers.

Ask the Tax Lady

Although tax season may be over, U.S. tax laws and the IRS code gets more and more confusing by the day. With new credits and deductions, changes to health care on the horizon, and a filibuster proof majority in Congress, being an American taxpayer is more difficult than ever.

To help keep my friends and followers online informed about the ever-changing American tax code, I have launched a new feature on my blog called “Ask the Tax Lady.” I am going to gather questions through my social networking accounts, and answer them in a weekly column on my blog. So add me as a friend, or follow me through one of the links below and send me a message, or @ reply with your questions. Then, check back next week to see all of my answers!

UBS in Talks to Settle Case on 52,000 Accounts

After months of negotiation it looks like UBS, the largest Swiss bank, has finally agreed with the Federal government to give up the names of over 52,000 Americans who are suspect of using their accounts to illegally avoid paying their taxes.

According to Bloomberg.com, “UBS agreed to an unprecedented breach of Swiss secrecy laws by giving the Internal Revenue Service data on more than 250 accounts. Switzerland, which supports UBS in the case, said the U.S. push for data on 52,000 other accounts is a threat to its sovereignty and would force the bank to violate Swiss criminal laws protecting bank secrecy.

“Over the last week or so, there have been high-level officials from the two governments meeting, trying to narrow the issues and bring about a resolution,” Stuart Gibson, a Justice Department senior litigation counsel, told U.S. District Judge Alan Gold today at a hearing.

UBS attorney Eugene Stearns said the bank learned on July 11 about discussions between the Swiss and U.S. governments.

“We are anxious for the governments of these two democracies to resolve these issues,” said Stearns. “It’s a minefield trying to resolve these issues.”

Lynnley Browning of the New York Times also weighed in on the latest developments noting that “the dispute between UBS and the United States has escalated into a diplomatic drama and has threatened to pierce the veil of Swiss financial secrecy. UBS and the Swiss government have said they will not disclose client names, even if ordered by a judge, because doing so would violate Swiss laws governing financial secrecy and subject UBS executives to prosecution in Switzerland.”

In February, the Internal Revenue Service, backed by the Justice Department, sued UBS, the world’s largest private bank and a pillar of the Swiss economy, to force it to disclose the names of 52,000 wealthy American clients suspected of tax evasion through UBS’s offshore private banking division.

The Justice Department also increased its pressure on UBS on Sunday, saying in a separate filing that it would consider imposing unspecified monetary sanctions on the bank if it failed to turn over the names upon a judge’s order.

Death and Taxes: Big IRS Bill Looms for Michael Jackson’s Estate

It seems like every time you turn on CNN or check Google News there is another story about Michael Jackson. However, when I came across this article from the Associated Press with the tagline “the Tax Man is in the mirror for the estate of the late King of Pop” it caught my interest. The story claims that Jackson’s estate could end up owing more then $80 million to the IRS.

“To settle his tax bill, the executors of his estate may have to sell or borrow against lucrative but hard-to-value assets or ask the IRS for a multi-year extension. That could allow the estate to pay the tab over time with earnings from Jackson's share in rights to songs by the Beatles and his own music — prized properties whose value will likely make the estate's tax bill only bigger.”

"The government is not going to take a Beatles record as payment. They want to be paid in cash," said Roy Kozupsky, a veteran estate lawyer in New York who has worked on behalf of several wealthy clients.

“Given the convoluted nature of Jackson's finances, coming up with the cash won't be easy. Technically, the tax bill is due nine months after the date of death. In special cases, estates can spread out the payments for a period of up to 14 years. Once paid, the tax bill could dramatically shrink the inheritance passed on to the pop star's heirs — his 79-year-old mother and three children.”

To learn more about how estate taxes are calculated, check out this entry I posted in June titled “Everything you Need to Know About Taxes After Death.”

Democrats Agree on Tax Hike to Fund Health Care

From the Washington Post.com:

House Democrats agreed yesterday to raise taxes on the wealthy to pay for a sweeping expansion of the nation's health-care system, proposing a surtax on the highest earners that could send the top federal tax rate toward 45 percent.

Beginning in 2011, the plan would target all income over $350,000 a year for families and $280,000 a year for individuals, Democratic sources said. The surtax would start at 1 percent, rise to around 1.5 percent for families earning more than $500,000, then step up again, to around 3 percent, for families earning more than $1 million, Democrats said.

That would raise about $550 billion over the next decade, Democrats said -- about half the cost of reforms that are expected to cost about $1 trillion. The surtax percentages could rise two years later, they added, if lawmakers think additional cash is needed to cover the cost of health-care reform.

The top federal tax rate currently stands at 35 percent, but Democrats have vowed to raise it to 39.6 percent next year, when cuts enacted during the Bush administration expire. Combined with other federal tax adjustments, the surtax could leave most taxpayers with annual incomes more than $350,000 facing top federal rates of at least 45 percent, said Robert Carroll, a senior fellow at the nonprofit Tax Foundation.

Taxing Illegal Income

Every so often, I hear someone complain that as much as taxes take out of their income, they would be better off being a criminal. At least then they could keep whatever they earn, right? Well you might not want to quit your day job.

Over the last several years, I have heard increasing reports of the government charging criminals with tax evasion. Ridiculous though it sounds, according to the Internal Revenue Code, income derived from any source, including illegally earned income, is subject to income tax. And often the IRS only becomes aware of the illegal income after an arrest is made.

It is rather strange to think of a criminal diligently reporting the proceeds of their illegal activities, but this is what the IRS requires.

Most people know that infamous mobster, Al Capone, was arrested and imprisoned for tax evasion. You might assume this was an extreme case, and the government just needed a way to take out kingpin. However, charging those arrested and or convicted of crimes with tax evasion is gaining in popularity.

Specifically targeted are:

• Telemarketing Fraud
• Financial Institution Fraud
• Insurance Fraud
• Organized Crime
• Illegal Gaming

Why the emphasis on pursuing illegal income taxes? Well, the IRS is in serious need of funds, and illegal activities produce a lot of cash flow. The IRS states “Tax cases involving legally earned income are and continue to be a priority for IRS Criminal Investigation, followed by money laundering and illegal source income cases.”

You see? No one escapes the federal tax system.

Senators Attack Carbon Tax Proposals On US Imports

Earlier in the week a handful of senior Democratic Senators announced that they would be changing a provision in a bill recently passed by the House of Representatives that imposes carbon taxes on imports. According to FT.com, the original bill contained “tough provisions to impose carbon tariffs, aimed at protecting American companies’ competitiveness against imports from countries without equivalent carbon emission controls.” Both leaders in the Senate, and the Obama administration have warned that such a provision could spark a global trade war, and Chinese officials have already spoken out about it.

Senator John Kerry, who is helping to write the senate’s version of the bill, said in a hearing on the issue on Wednesday: “We have already come to the conclusion in working on the Senate bill that we’re going to try and change that provision . . . we haven’t landed yet completely on where we come out”.

Max Baucus, the Democrat senator who chairs the senate finance committee, said any provisions that “provoke retaliation from our trading partners will only hurt the same industries we’re trying to help”, adding that he was “confident we can craft legislation that strikes the right balance”.

Differences in the two versions of the bill will eventually have to be reconciled before passing into law.

President Barack Obama has warned the House’s carbon tariffs plan could send the wrong signal to trading partners. India called the measures “pernicious” while China said they would violate World Trade Organization principles and amounted to “trade protectionism in the disguise of environmental protection”.

A recent report from the WTO said that such “border tax adjustments” could in theory be made consistent with WTO rules, but trade lawyers stress that crafting such laws is likely to be very difficult in practice.

Continue reading this story at FT.com.

Warren Buffett Says Second Stimulus Might Be Needed

It seems like almost every day there is a new story supporting a second economic stimulus program. Earlier in the week I posted an entry about an Obama advisor who was advocating one, and now financial mogul Warren Buffet has also come out announcing that a second stimulus might be necessary. The billionaire is well known for making money based on his skill to judge the state of the economy, and is often asked for his advice on anything finance related. I’ve included a snippet of a Reuters.com article on the topic but you can find the original post here.

Legendary investor Warren Buffett said in an interview aired on Thursday unemployment could hit 11 percent and a second stimulus package might be needed as the economy struggles to recover from recession.

Buffett, the billionaire founder of Berkshire Hathaway, said Americans suffered "a shock to the system" from the economic difficulties in the final quarter of last year but had started to rebound.

"We're not in a freefall, but we're not in a recovery either," he told ABC's "Good Morning America."

"We were in a freefall really in the last quarter of last year, starting in the financial markets and spreading to the economy, and we had this huge change in behavior."

Buffett, a supporter of President Barack Obama during last year's election campaign, said a second economic stimulus package might be needed. The Obama administration says it does not see a need for a second stimulus yet.

"I think a second one may well be called for. It is not a panacea. A stimulus is the right thing. You hope it doesn't get watered down," he said.

He likened the first $787 billion stimulus package passed by Congress to "half a tablet of Viagra and then having also a bunch of candy mixed in --- it doesn't have really quite the wallop."

Buffett said unemployment had "a ways to go" and he would not be surprised to see it hit 11 percent before it recovers.

"I'm not predicting it but no that would not surprise me," he said of the 11 percent figure.

"We're going to come out of this better than ever, the best days of America lie ahead but not next week or next month," he said.

How to Survive an IRS Audit

On Monday the Roni Deutch Tax Center – Tax Help Blog posted a very helpful article on how to survive and IRS audit. Over the past 18 years I have heard so many horror stories about audits, and most of this panic is entirely unnecessary. If you stay organized, and were honest on your tax return, then you will most likely not have anything to worry about. However, to help any one preparing for an audit, check out the following list of tips.

Always Be Prepared

Technically, every single taxpayer is eligible for a tax audit. While some audits are selected because the taxpayer’s return flagged the system, many are conducted entirely randomly. This means that as a taxpayer you should be prepared for the possibility of an audit at all times. You should make sure to you keep all financial documents, W-2’s, receipts, etc., in one safe place. That way if you are audited, you can easily find everything you will need to verify your income and deductions. Although there is no way to fully avoid being audited, you can follow some of these tips while preparing your next return to try to reduce the odds.

Read and Respond to Notices

Generally, when the IRS notifies you of an audit you must respond within 30 days. If you do not, then you risk having the IRS review and adjust your total tax liability without getting your input. In addition to responding quickly, you will also want to take a thorough look over the notice. It will give you specific information on what is being examined, so that you can prepare for your audit knowing exactly what is being scrutinized.

Know your Rights

Do not let yourself get intimidated by aggressive IRS agents, as a taxpayer you have a set of rights designed to protect you and your money. You have the right to select where the audit takes place, when it takes place, etc. Do not let an auditor intimidate you in to having an audit at your place of business unless that is where you want it. To learn more about your rights during an audit, check out IRS.gov.

Take your Time

Just like you, the IRS makes mistakes and easily could have made one on your case. Take your time compiling your records and be absolutely sure you have everything that you need. Do not let an IRS agent push you into setting a date for your audit. Take as long as you need to gather all of the financial documentation that you need in order to justify the tax return in question.

Mayor’s Office: Jackson Memorial Cost L.A. Taxpayers $1.4M

From CNN.com:

The memorial service for singer Michael Jackson cost the city of Los Angeles $1.4 million, the mayor’s office said Wednesday.

Spokeswoman Sarah Hamilton said the costs included putting extra police on the streets, trash pickup, sanitation, traffic control and more for the Tuesday event.

Three thousand police officers — almost one-third of the Los Angeles police force — were on hand to ensure the Jackson events proceeded smoothly, Los Angeles Assistant Police Chief Jim McDonnell said Tuesday.

The city, which is $530 million in debt, set up a Web page asking Jackson fans to donate money to help with the expenses.

On Tuesday morning, hundreds of donors contributed more than $17,000 through the Web site. But then, the high volume of traffic caused it to crash frequently and for long periods of time, the mayor’s office said.

The city, therefore, was unable to collect contributions for several hours on Tuesday. The site also crashed for 12 hours, beginning at 8 p.m. Tuesday — and again, periodically throughout Wednesday morning, the office said.

The Los Angeles City Attorney Carmen Trutanich does not want taxpayers to pay a penny for the service, his spokesman said Wednesday.

“The city attorney does not want something like this happening again, the city paying (the initial costs) for a private event,” said spokesman John Franklin. “That’s especially in a cash-strapped city, where people have been furloughed or even lost jobs.”

Michael Roth, spokesman for AEG — which own Staples Center and put on the event — could not be reached for comment

Summertime Tax Tips Available on IRS.gov and Via E-Mail

In a their newest press release, the IRS announced that they would once again be giving out free summertime tax tips. This year the tips come with a useful spin though. Not only will the tips be given out 3 at a time once a week throughout the summer, but also taxpayers can now register to have the tips sent directly to their email as they are published. See the release, below.

The Internal Revenue Service is publishing summertime tax tips to provide useful and concise advice on topics that affect taxpayers.

Many people don’t think about their taxes until the start of the filing season in January. That can be a mistake. Steps such as checking your withholding, getting the proper receipts from charities, organizing all the records you will need or setting a personal tax strategy that can save money at tax time are most effective if they are done well before year’s end.

The IRS is publishing three tax tips per week this summer. Topics range from how parents can get credit for sending their kids to day camp to protecting yourself from identity theft.

Now you can receive IRS Tax Tips via e-mail as soon as they are published by signing up through the IRS e-news subscription page, e-News Subscriptions. When subscribing, a confirmation message will be sent via e-mail. Verification must be sent in response in order to confirm a subscription.

For more summertime tax and financial advice, check out these two older entries from my blog: 20 Ways to Save Money this Summer and Top 10 Summertime Tax Tips.

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Taxes and the World Series of Poker Tournament

Yesterday marked the beginning of the World Series of Poker tournament, and according to reports over 800 people were turned away. Although the potential players all had their $10,000 buy in, the tournament’s organizers put a tight cap on the number of people who could participate.

"We are sorry, and I am sorry," claimed the World Series of Poker commissioner Jeffrey Pollack. "The last thing that we ever want to do is deny people entry into our events."

According to the Associated Press there were 6,494 players competing for a part of the $61 million prize pool. The top prize is estimated to be a staggering $8.55 million, but remember that all gambling winnings are technically taxable income.

The IRS’ website claims that all gambling winnings “must be reported on your tax return. You must file Form 1040 (PDF) and include all of your winnings. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips. For additional information, refer to Publication 525, Taxable and Nontaxable Income.”

“A payer is required to issue you a Form W-2G (PDF) if you receive certain gambling winnings or if you have any gambling winnings subject to Federal income tax withholding. All gambling winnings must be reported irrespective as to whether any portion thereof is subject to withholding. In addition, you may be required to pay an estimated tax on your gambling winnings. For information on withholding on gambling winnings, refer to Publication 505, Tax Withholding and Estimated Tax.”

For more information on taxes and gambling – including how to deduct losses – check out this page on IRS.gov.

California Government Doles Out More IOUs

Another 12,500 IOUs were issued by California on Tuesday, as a way to make up for bills they were unable to pay. This decision brings the total number of California’s IOUs issued to over 72,000, and that number is only expected to rise. Check out the following clip from a new Sacramento Bee article discussing this disastrous situation below.

Last week's decision by state Controller John Chiang to issue "registered warrants" instead of checks to taxpayers owed refunds, vendors and other groups was the most dramatic step a state has taken this year to confront billions of dollars in budget shortfalls. A total of 72,000 IOUs have been written since last week.

Gov. Arnold Schwarzenegger, a Republican, and the Democratic-controlled Legislature have been unable to agree on a package of spending cuts and tax increases to close a massive budget gap.

The result is a standstill — and IOUs that reached a total of $109 million Tuesday.

California issued IOUs in 1992 during a 61-day budget impasse. Some states issued IOUs during the Great Depression. The notes, now worthless, can be bought at antique shops, says Chicago bankruptcy attorney James Spiotto, an expert in government finance. Spiotto says he doesn't know of any state other than California to issue IOUs since the Depression.

Continue reading this article, here.

Will Or Trust? Understanding The Differences

Earlier today I came across this new Associated Press article on the differences between a will and a trust. Candice Choi, the article’s author, points out that after Michael Jackson death, questions about his will have sparked thousands of questions about wills and trusts in general. Choi provide several helpful answers to some of these common questions, and I highly recommend anyone confused about Wills check it out.

One of the big mysteries in the chaotic days following Michael Jackson's death was whether he left behind a will.

After initially stating the entertainer likely died without one, the superstar's family reversed course and produced a 7-year-old will this week.

The five-page document filed in court simply transferred Jackson's estate into a family trust, leaving a slew of questions unanswered about the King of Pop's finances.

The setup is common in California and numerous other states, where trusts are used in place of wills partly as a way to avoid court proceedings and keep financial matters private. There are other reasons to set up a trust rather than a will.

A will generally spells out a one-time distribution of assets, while a trust can stipulate that assets are distributed over time. So if you have young children, a trust could see that they get their inheritance in installments upon certain milestones, such as a birthday, graduating college or marriage.

Once the document you pick is drawn up, be sure to let family members or those named in the trust or will know where to find it. Anybody who has possession of your will — often your attorney — is obliged to file it in court upon your death.

It's common to leave copies of trusts with your attorney or designated trustees, said Akers, who is also chairman of the real property, trust and estate law division at the American Bar Association.

Who Is the Small Business Majority?

From the New York Times.com:

The Small Business Majority released a series of state polls today and yesterday that make an astonishing claim: small business owners, by wide majorities, support a mandate that would require that businesses either provide health insurance for their employees or pay a tax to fund government-supported insurance for them. In Iowa, 65 percent support the pay-or-play proposal; in Nebraska, 59 percent favor it. Across 16 states, support for the employer mandate ranges from 59 percent to 72 percent

As far as the Agenda knows, the Small Business Majority research is the only research that has found that small businesses buy in to pay-or-play. All of the other small business advocates claim the opposite, and by greater margins — even the National Small Business Association, whose moderate leanings seem practically radical, at least compared to those of its larger rivals, the U.S. Chamber of Commerce and the National Federation of Independent Business.

The novelty of such a claim raises a whole bunch of questions. We’ll return to the polls themselves another day. But first, let’s take a look at Small Business Majority. The group has gotten a lot of press this spring, first as one of two small business invitees to the White House health care summit in March. Then, last month, it released a study by MIT economist Jonathan Gruber that claimed health care reform proposals that include an employer mandate would save small businesses $855 billion over ten years. Suddenly, the organization is a player. But just what is Small Business Majority, and whom does it really represent?

The group has been around since 2004, founded by a tech entrepreneur named John Arensmeyer. “We really felt there needed to be a more sort of measured, pragmatic voice that was not ideological in the public policy discussions around small business issues,” he says. Chief among its positions is that bearing the cost for effective health care reform is a “shared responsibility” — shared among government, individuals, and employers.

10 Ways the Federal Government May Try to Collect More Money -- From You!

For the first time in history, studies are showing that Federal aid has become the top revenue source for state and local governments. In addition to helping out other government agencies in the country, the Federal government has also spent billions of dollars bailing out banks, insurance companies, and U.S. automakers.

With all of this spending, you would think the government would have enough revenue to support it. However, last year the Federal government reported a huge decrease in tax revenue, which has left lawmakers scrambling to find ways to raise more funds. With recent news that the Obama administration might be considering another expensive stimulus package, I began wondering how much more spending the Federal government can continue to afford? If the administration continues on it’s current path, then odds are us taxpayers are going to have to pay for it through higher taxes. To help all of my readers understand this situation, I have put together the following list of potential sources for federal revenue that you should be on the lookout for.

1. Value Added Tax

Recently the idea of instituting a Value Added Tax (VAT) has been getting a lot of attention in the media. Last month, Democratic Senator Kent Conrad even proposed the idea to the Obama administration. The idea behind a VAT is simple: it is basically a Federal sales tax that is levied on the transfer of nearly all goods and services. Although popular in European countries, the idea of a VAT tax in America has very little public support. As I explained before in an entry titled Is a Value-Added Tax the Answer, this type of tax is regressive by nature. In a time where everyone is tightening his or her personal budget, this type of tax would probably only hurt our economy further.

2. Internet Taxation

From it's humble beginnings, the world wide web has been the scene of a never ending debate as to whether taxes should work the same way online as they do offline. As of today, there are some states that levy sales taxes on Internet purchases, but there are no such taxes on the Federal level. Although creating a new Federal Internet sales tax would be difficult, there are a number of other ways the Feds could try to squeeze some revenue out of the Internet. They could tax Internet access and connections; they could place a tax on Internet providers, or even levy a tax on e-mail usage. Fortunately, the Internet Tax Freedom Act prevents any of the aforementioned taxes, but if the government got desperate enough then they could begin eyeballing Internet taxes.

3. Capital Gains Tax

During his campaign President Obama was adamant about increasing the capital gains tax rate. At the time he claimed that such an increase would be “fair” to the American public, but after winning the election the increase never came to fruition. However, even though doubling the capital gains rate is pretty unlikely, the Obama administration could easily revert back to their original idea of increasing the capital gains rate by a few percentage points.

4. Taxes on the Marriage Industry

As I had mentioned in a previous entry, Miriam Marcus of Forbes magazine has suggested that if the Federal government recognized marriages between same-sex couples then it could stimulate the struggling wedding industry. If the U.S. Supreme Court did decide to extend marriage rights to gay couples, then you can expect that the government will look for a way to get some money from the increase in business that the wedding industry would experience. Some estimates say that the government could see up to $10 billion in additional revenue, which is a pretty sizeable amount of money.

5. By-the-Mile Road Tax

To help generate federal revenue, some experts are beginning to warn that the government might consider shifting to a by-the-mile tax system to replace current fuel charges. In a by-the-mile system a GPS device in taxpayers cars would calculate the total tax due based on miles driven. This would require some serious technological advances, but a federal commission reportedly claimed that the by-the-mile tax was the “best path forward to keep revenues flowing to highway and transportation projects.” However, many Americans would surely not like the idea of the federal government monitoring their vehicle’s location and I would say that this program is quite unlikely to be implemented in the next decade.

6. Taxes on Employer Provided Health Care

As the country struggles to find a solution to our current health care problems, one idea that has been supported by the Obama Administration is the idea of taxing employer provided health care programs. They claim that it could supplement the cost of a government provided health care, but this tax would go directly against Obama’s campaign promise not to raise taxes on any one making under $250,000.

7. Green Energy Advancements

It is no secret that green energy advancements are very popular among the American public. Although some experts suggest that now is not the time for expensive green technology advancements, the majority of American taxpayers seem to support the idea of “clean energy” and are willing to pay more for it. Now that many of the hybrid related tax credits are expiring, you can expect that the government is going to try to assess taxes on “green energy” sources, just like they do with petroleum and diesel.

8. Increased Compliance Enforcement

Every year the tax gap—or difference in what the government should collect in tax revenue and what they actually do collect—gets larger and larger. Last year, the total number of audits performed on businesses and taxpayers with yearly incomes over $1 million decreased drastically. Some government officials are claiming that by revitalizing the Internal Revenue Service with better equipment and more efficient audit strategies, they could collect a few billion dollars extra each year in Federal revenue. However, this comes at a time when some taxpayers are struggling to put food on the table let alone deal with aggressive IRS auditors.

9. More “Sin Taxes”

Taxes levied on certain products, such as cigarettes and alcohol, are frequently referred to as “sin taxes.” Although they are often thought to discourage certain behaviors, they also generate a considerable amount of federal revenue. Estimates say that in 2007 alone the Federal government collected nearly $7 billion from taxes on cigarettes alone. As the economic troubles continue, tobacco and alcohol sales have stayed consistent, and you can bet that the government has taken note. Whole websites, books, multiple blogs, and articles have been dedicated to the idea of preventing any more of these taxes. Many Americans who purchase tobacco products or alcohol feel it is their right to do so with out being forced to pay extra taxes.

Also, there are some rumblings about legalizing some additional “sins” (e.g. marijuana, prostitution, gambling, etc.) to increase the tax base. But so far, these rumblings are only coming from the local or state level. Nevertheless, you can bet that the federal government will make sure to join the party were any state to legalize these products or services.

10. Budget Cuts

This seems like the ultimate no-brainer—if you are looking for ways to save money then reduce the amount you are spending. Unfortunately, the Feds have yet to wholeheartedly embrace cutting spending. So far, only state and local government grants have been cut (by about $18 billion) and several aid programs have been cut or reduced, but this is not enough. To really save money the Federal government needs to make drastic cuts. The state of California has been able to reduce their budget by millions by giving pay cuts to state employees. The Federal government might also benefit from pay reductions, but there are lots of other options. President Obama has proposed implementing a pay-as-you-go system where for every dollar the government spends a dollar is cut somewhere else. However, it is going to take more then just a fancy name to reduce Federal spending.

Obama Adviser Says U.S. Should Consider Second Stimulus

Just days after admitting that they underestimated how bad the countries economic problems were, the Obama administration is supposedly considering another economic stimulus package. According to Laura Tyson, an advisor to Obama, the last stimulus package was “a bit too small.” She continued to claim that a new stimulus plan would have a “positive effect, but the real economy is a sicker patient.”

According to a new Bloomberg story about the stimulus, Tyson claims that the new package would have a more pronounced impact in the third and fourth quarters.

“Tyson’s comments contrast with remarks made two days ago by Vice President Joe Biden and fellow Obama adviser Austan Goolsbee, who said it was premature to discuss crafting another stimulus because the current measures have yet to fully take effect. The government is facing criticism that the first package was rolled out too slowly and failed to stop unemployment from soaring to the highest in almost 26 years.”

“Obama said last month that a second package isn’t needed yet, though he expects the jobless rate will exceed 10 percent this year. When Obama signed the first stimulus bill in February, his chief economic advisers forecast it would help hold the rate below 8 percent.”

“Unemployment increased to 9.5 percent in June, the highest since August 1983. The world’s largest economy has lost about 6.5 million jobs since December 2007.”

“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum. “We probably have already 2.5 million more job losses than anticipated.”

Leadership Advice for Current and Future Executive Women

Earlier today I came across this helpful article on one of my favorite blogs, the Glass Hammer, with leadership advice from various executive women. Being a woman in the business word can be difficult, to say the least. Fortunately, the bloggers at the Glass Hammer have gathered some simple and straightforward advice. Check out a clip of their article below.

Get Really, Really, Really Good at Your Job.
“I didn’t chart my career out,” said Sutton, “but I always had a good view of what I loved doing and what the next career step might be.” Sutton started her career in finance as a clerk with Wachovia and worked her way up through the organization over 35 years, until she left to establish the banking business for Morgan Stanley. She added, “I’ve given advice to people I’ve mentored that if you are too focused on the next step, you are not going to do a very good job in the job you are in. And I’ve seen that over and over again. Get really, really, really good at the job you are in because if you are and you’ve mastered it, you will move from the next role to the next role to the next role, but if you look too far ahead, you probably won’t… People who seem to be really successful are great operators. They get in the business and understand the business.”

Be Comfortable With Ambiguity.
Said Smith, who, after 14 years of brand management and executive roles at Kraft Foods, was brought to Avon by Andrea Jung to help her transform the company: “We are all taught that great leaders set the strategy and then set everybody off marching. But, right now, nothing is more important than a general agile leader who is comfortable with ambiguity. Let’s face it - it is going to be a bumpy and fascinating ride. We need people who are nimble and agile in their thinking who are, to some degree, comfortable with figuring it out as they go along. We [at Avon] look for people who can handle change, who can handle the curve balls…understanding that you can’t possibly have it all figured out and being open to that. Also, people that can communicate and inspire. That’s always been important in leadership but now more than ever because you have to communicate and be really transparent and take people along on the journey, to say, ‘This is uncharted territory but this is where we are going.’” Sutton agreed, adding that even her job at Morgan Stanley, which was created for her, changed shortly after she joined the company. “What I was hired to do changed in 6 months and that shifted because the environment changed. [But it was OK because of] the belief I could make a difference.”

Think of Your Career as a Jungle Gym Rather Than a Ladder.
Moderator Pattie Sellers advised the audience of MBA women: “Don’t think of your career as a ladder, think of it as a jungle gym. If you think of it as a ladder, you won’t have the peripheral vision to enable you see the lateral opportunities and especially today when you don’t know what the hot job is going to be tomorrow. You’ve got to keep yourself open and you’ve got to swing to the opportunities that come along.” Smith agreed, “I believe the greatest plans are restrictive instead of instructive. Figure it out as you go along. The only guiding principle I’ve had is to insist that my life and work have passion and purpose. When I think about the pivotal jobs I took [like her move to Kraft’s Callard & Bowser-Suchard to handle the then-unknown Altoids brand for Kraft or the jump from being Group Vice President and President of the U.S. Beverages and Grocery Sectors in Kraft to Brand President for Avon], they really made no sense on paper.” She continued: “Just go into everything saying – I’m going to be inspired and I’m never going to settle and go where that takes you. ” And Sellers added, “I’m struck by women on the Fortune’s Most Powerful who’ve taken lateral moves or even taken downward moves because they wanted to expand their experiences. And that’s what pays off in the long term.”

Apple Wins North Carolina Tax Break For $1 Billion Data Center

According to CNN.com a town in North Carolina has just given the green light to Apple Computers to build a giant data center in their county. The local government has agreed to provide the technology giant with over $46 million worth of tax incentives over the next decade, which undoubtedly led to the agreement.

The decision Monday helped spur Apple's plans to expand its network of data centers, which are warehouse-sized buildings that house vast numbers of giant computers known as servers. Data centers are usually used to manage the flow of Internet traffic. In Apple's case, the Maiden, NC data center could be used to bolster its iTunes music store business.

Apple has already agreed to invest $1 billion in the structure in Maiden, which is about 30 miles northwest of Charlotte, according to the agreement. If Apple invests an additional $1 billion into the data center, the county and town will provide another $20.7 million in incentives over another 10-year period.

"There is no commitment beyond the billion dollars," said Scott Millar, president of the Catawba County Economic Development Corp.

IRS Suspends Penalty Collections Against Some Small Firms

From the Wall Street Journal.com:

The Internal Revenue Service said it will suspend through Sept. 30 efforts to collect penalties assessed against certain small business owners, after key lawmakers said the penalties were more punitive than Congress intended.

Small business owners who bought employee benefit plans that the IRS has condemned as "listed" tax shelters are facing hundreds and thousands in penalties, in some cases more than 10 times any tax benefit derived from the transaction.

IRS Commissioner Doug Shulman said in a letter Monday to lawmakers that the agency will suspend collection activities in cases where the transaction resulted in an annual tax benefit of less than $100,000 to individuals or less than $200,000 for businesses.

"I am dismayed by the feedback that I have received from some of the most seasoned IRS examination professionals that this statutory provision, in certain cases, requires them to assess penalties that are way out of line with penalties for other similar cases of non-compliance," he wrote.

Last month, lawmakers including House Oversight Subcommittee Chairman John Lewis, D-Ga., and Rep. Charles Boustany, R-La., and Senate Finance Committee Chairman Max Baucus, D-Mont., and Sen. Charles Grassley, R-Iowa, told Shulman they aim to pass legislation to make penalties in such cases less stringent.

They asked the IRS to cease efforts to collect the penalties until Congress has passed legislation reducing them for small businesses.

At issue is a penalty for failure to report a listed tax shelter transaction, among transactions the IRS considers most egregious. Set up by a 2004 law, the penalties are assessed at $100,000 per individual per year, and $200,000 per business entity per year. Under the law, the IRS has no discretion to reduce the penalty amounts and they cannot be challenged in court.

Who’s to Blame for the Housing Market Crash?

In a new article on the Wall Street Journal the Mortgage Bankers Association suggests that zero money down loans, not subprime loans, led to the recent mortgage meltdown. Their research found that negative equity was the number one cause of foreclosures during the first half of 2008, and that down payments of under 3% were also a significant contributing factor. Check out their chart below.

The article then goes on to claim that the myths about subprime loans are delaying any efforts by the government to improve the dragging economy. I’ve included a clip of their article below, but be sure to check out the full text at WSJ.com.

Many policy makers and ordinary people blame the rise of foreclosures squarely on subprime mortgage lenders who presumably misled borrowers into taking out complex loans at low initial interest rates. Those hapless individuals were then supposedly unable to make the higher monthly payments when their mortgage rates reset upwards.

But the focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures. (These percentages are based on the period since the steep ascent in foreclosures began -- the third quarter of 2006 -- during which more than 4.3 million homes went into foreclosure.)

Sharing the blame in the popular imagination are other loans where lenders were largely at fault -- such as "liar loans," where lenders never attempted to validate a borrower's income or assets.

This common narrative also appears to be wrong, a conclusion that is based on my analysis of loan-level data from McDash Analytics, a component of Lender Processing Services Inc. It is the largest loan-level data source available, covering more than 30 million mortgages.

Vice President Biden Announces “We Misread How Bad the Economy Was”

In an interview that has gotten a lot of people talking, last night on ABC’s “This Week” Vice President Joe Biden admitted that the Obama administration "misread how bad the economy was.” He did go on to say that he stood by their stimulus package and that it would create more jobs as the spending pace picks up. However, with unemployment rates continuing to rise, many people are justly concerned over this admission. Check out the video of the interview below.

According to the Associated Press Biden went on to say “that the $787 billion economic stimulus package was set up to spend the money over 18 months. Major programs will take effect in September, including $7.5 billion for broadband Internet service, plus new money for high-speed rail and the nation's electrical grid.”

Taxes and Independence Day

Over the holiday weekend, I came across this great article by Neil Buchanan via the Tax Professor discussing the connections between Independence Day and taxation. Check out a clip from their post below.

I thought I would take another look at our oft-mentioned and seldom-read Declaration of Independence to see what it has to say about taxes and other issues of import. Herewith, a quick (and admittedly incomplete) summary of the contents:

Obviously, the most important issue addressed in the Declaration was the ongoing violence in the colonies. Among its more memorable descriptions of conditions at the time, the Declaration reminded the world that King George III "has plundered our seas, ravaged our coasts, burnt our towns, and destroyed the lives of our people." The founding fathers were understandably focused primarily on matters of life and death.

Beyond those immediate concerns, though, the bulk of the Declaration expresses, in essence, a thirst for politics. That is, the major non-war-related complaint is that there is no locally elected legislature passing laws for the colonies. Our founders were willing to lay their lives on the line, in other words, to create legislatures.

For those of us who are law professors and lawyers, it is interesting that the Declaration also seems to express (or at least imply) a desire for lawsuits and defense lawyers. The king "has obstructed the Administration of Justice, by refusing his assent to laws for establishing Judiciary powers" and "depriv[ed] us, in many cases, of the benefits of Trial by Jury." (Current readers are likely to split into two camps in their reactions to those statements, with some saying "If they only knew what they were getting us into," and others saying, "Yes, lawyers are an essential ingredient of a stable nation.")

The Declaration also notes that the king had prevented colonists from trading with foreign nations, which was an especially sore point for our resource-rich and young nation. (There is also, I should say, a rarely-quoted—and inflammatory—comment about the American Indians, reminding us that even the Founding Fathers made controversial statements.)

Finally, though, what about taxes? Exactly one statement appears on the subject: The king had assented to Parliament's laws that "impos[e] Taxes on us without our Consent." That's it. For some reason, I always thought that taxes played a bigger part in the Declaration. All it says, though, is that taxes are unacceptable if we do not impose them on ourselves.

Volatile Swings for Price of Oil Hobble Industry

From the NY Times.com:

The extreme volatility that has gripped oil markets for the last 18 months has shown no signs of slowing down, with oil prices more than doubling since the beginning of the year despite an exceptionally weak economy.

The instability of oil and gas prices is puzzling government officials and policy analysts, who fear it could jeopardize a global recovery. It is also hobbling businesses and consumers, who are already facing the effects of a stinging recession, as they try in vain to guess where prices will be a year from now — or even next month.

A wild run on the oil markets has occurred in the last 12 months. Last summer, prices surged to a record high above $145 a barrel, driving up gasoline prices to well over $4 a gallon. As the global economy faltered, oil tumbled to $33 a barrel in December. But oil has risen 55 percent since the beginning of the year, to $70 a barrel, pushing gas prices up again to $2.60 a gallon, according to AAA, the automobile club.

“To call this extreme volatility might be an understatement,” said Laura Wright, the chief financial officer at Southwest Airlines, a company that has sought to insure itself against volatile prices by buying long-term oil contracts. “Over the past 15 to 18 months, this has been unprecedented. I don’t think it can be easily rationalized.”

T.E.A. Parties

The Fourth of July usually means backyard barbecues, a trip to the lake, and watching the night sky explode with fireworks. This year will be a little different. This Independence Day, thousands of protesters will gather across the nation to act out against taxes. These protests deemed TEA Parties, which stands for “Taxed Enough Already,” began on April 15 this year. Over the last few months the movement has gained momentum, now boasting almost 1,700 registered “Tea Parties.”

Several groups claim to be the originators of the “Official TEA Party”, each with a different slant to their protests. Much like the first round of TEA Parties, what is actually being protested is up for debate. The common thread is that people do not like to pay taxes, especially when those taxes increase while government spending is growing. However, many groups have expanded the scope of the TEA parties using these protests for some unrelated purposes.

One Tea Party site states:

Are you fed up with a Congress and a president who:

• vote for a $500 billion tax bill without even reading it?
• are spending trillions of borrowed dollars, leaving a debt our great-grandchildren will be paying?
• consistently give special interest groups billions of dollars in earmarks to help get themselves re-elected?
• want to take your wealth and redistribute it to others?
• punish those who practice responsible financial behavior and reward those who do not?
• admit to using the financial hurt of millions as an opportunity to push their political agenda?
• run up trillions of dollars of debt and then sell that debt to countries such as China?
• want government controlled health care?
• want to take away the right to vote with a secret ballot in union elections?
• refuse to stop the flow of millions of illegal immigrants into our country?
• appoint a defender of child pornography to the Number 2 position in the Justice Department?
• want to force doctors and other medical workers to perform abortions against their will?
• want to impose a carbon tax on your electricity, gas and home heating fuels?
• want to reduce your tax deductibility for charitable gifts?
• take money from your family budget to pay for their federal budget?

If so, help organize and/or participate in a Taxed Enough Already (TEA) party in your community on July 4. You choose the time and the location. Use the registration form to the right.

The Re Tea Party Website states:

The Boston Tea Party was an act of direct protest by American Colonists demanding representation in the British Government. They became known as the original patriots.

America’s Tea Party of 2009 will reinvigorate that American and Patriotic spirit; one that demands respect for individual rights and property. As the bailouts spiral out of control, we are forced to fund failed banks. With foreclosures on the rise, we are made the collateral of reckless spending. And, when the bills come due, the IRS knocks on the door of “self-responsibility”.

ENOUGH!

No matter your take on the current administration and economic situation, I think we can agree that these protests celebrate what has made our country so great. Every one of us has the legally protected right to be ticked off, and to voice our anger in a significant way. And that is a beautiful thing.

Happy 4th of July

Since most people are taking tomorrow off to begin their holiday weekend early, I wanted to make sure to wish all of my readers a happy Independence Day in my posts today. Be sure to be safe, and enjoy the patriotic holiday!

Applications For Home-Buying Tax Credit To Be Cut Off Today

The application deadline for the popular $10,000 California homebuyers tax credit is today. The California Franchise Tax Board had extended the number of applications they would accept, and there are now 75 spots left for California taxpayers who are eligible for the credit. However, according to the Sacramento Bee the California Franchise Tax Board announced this morning that they would no long accept applications past midnight tonight. Check out a clip of Sac Bee’s coverage of the last minute change below.

Early Wednesday, the FTB said it has received 11,925 applications for the popular tax credit - 75 short of its 12,000-application limit.

The state tax agency said last month it would take 2,000 extra applications for the credit because many received are duplicates, invalid or incomplete.

The tax credit program launched March 1 to move statewide home builders' excess, unsold inventory, proved more popular than expected. The FTB said it has already issued 4,808 certificates for nearly $45 million worth of credits. Officials expect to process and award all the credits by the end of August.

Home builders have shifted their focus to efforts to add $200 million more to the original $100 million allocation. But that's proved more difficult than expected in a rancorous budget climate. Some economists have criticized further allocations as a stimulus for home building when the state's larger problem, they argue, is an excess of unsold existing homes.

The California Building Industry Association, a trade group for residential builders and suppliers, maintains that each $10,000 tax credit adds $16,000 to state government revenues and $3,000 to a local government because of the economic activity generated.

National Taxpayer Advocate Submits Mid-Year Report to Congress

The IRS posted a new press release recently announcing that the National Taxpayer Advocate Service (TAS) had delivered their mid-year report to congress earlier this week. In the report, the TAS emphasizes the importance of tax preparer oversight, improving taxpayer services, improving access to the offer in compromise program, and improving the IRS’s ability to effectively deliver refundable tax credits. You can read a segment of the release below, but the full text can be read by visiting the IRS’s newsroom.

The report notes that FY 2010 will mark the ten-year anniversary of the Taxpayer Advocate Service, which began operations in March of 2000. “As TAS enters its tenth year, both TAS and the IRS face a difficult environment for achieving what is, in essence, the same mission – ensuring that the IRS treats taxpayers fairly and identifying ways to increase voluntary compliance while addressing noncompliance,” Olson said. She identified the collection of tax revenue at a time when “increasing numbers of taxpayers have difficulty paying their daily living expenses” as a principal challenge.

The Advocate’s report, which is required by law, sets out the objectives of the Office of the Taxpayer Advocate for the upcoming fiscal year and provides substantive analysis of issues and statistical information. Among the areas the report identifies for particular emphasis in FY 2010 are the following:

1. Taxpayer Services. The report notes that the IRS created a five-year strategic plan for taxpayer service (known as the Taxpayer Assistance Blueprint, or “TAB”) in response to a directive from the House and Senate Appropriations Committees in FY 2006. The directive was originally motivated by concern that IRS taxpayer services were often ad hoc and not sufficiently coordinated or research-driven. The Advocate’s report expresses concern that the momentum to implement and refine the TAB recommendations has abated. It recommends that the IRS reinvigorate its efforts to pursue cross-functional, research-driven service improvements.

US Bank Regulators Clash Over Private Equity Rules

From Reuters.com:

U.S. bank regulators on Thursday clashed over stringent proposed guidelines for private equity investments in failed banks, with some officials expressing concern that the tough proposals could scare away needed capital.

The heads of the Office of the Comptroller of the Currency and the Office of Thrift Supervision both aired their concerns at a board meeting of the Federal Deposit Insurance Corp, during which the board proposed the new guidelines.

FDIC Chairman Sheila Bair said the guidelines need to include strong capital requirements and other provisions to ensure the safety and soundness of the banks, but said she is open to comments on the proposal.

The FDIC plans to hold a roundtable discussion on the proposal next week, Bair said.

Congress's Spending on Taxpayer-Funded Trips Rises Tenfold

According to a new analysis from the Wall Street Journal, the amount of money U.S. Senators and members of the House of Representatives has increased drastically over the past decade. The findings have many Americans concerned, wondering why Congress is excessively spending taxpayer money while the rest of the country is struggling to make ends meet. Check out the data supporting the analysis below, courtesy of the Wall Street Journal.

The spending on overseas travel is up almost tenfold since 1995, and has nearly tripled since 2001, according to the Journal analysis of 60,000 travel records. Hundreds of lawmakers traveled overseas in 2008 at a cost of about $13 million. That's a 50% jump since Democrats took control of Congress two years ago.

The cost of so-called congressional delegations, known among lawmakers as "codels," has risen nearly 70% since 2005, when an influence-peddling scandal led to a ban on travel funded by lobbyists, according to the data.

The Journal analysis, based on information published in the Congressional Record, also shows that taxpayer-funded travel is a big and growing perk for lawmakers and their families. Some members of Congress have complained in recent months about chief executives of bailed-out banks, insurance companies and car makers who sponsored corporate trips to resorts or used corporate jets for their own travel.

Although complete travel records aren't yet available for 2009, it appears that such costs continue to rise. The Journal analysis shows that the government has picked up the tab for travel to destinations such as Jamaica, the Virgin Islands and Australia's Great Barrier Reef.

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Refinance Program Expands to Cover Mortgages 25% Under Water

Earlier in week it was announced that the Home Affordable Refinance program would now accept applications from homeowners who are up to 25% under water on their mortgage. Meaning that you can still qualify to refinance your home even if the current value is up to 25% less then what you still owe.

Financial expert Suze Orman took to her blog to explain what this change means to the average American. You can check out a clip from her entry below, or click here to check out the full text and links to more information.

If you have a mortgage that is either backed or held by Fannie Mae or Freddie Mac, and you are still on-time with the payments, you may be able to refinance into a low-rate mortgage to help you stay in the home. When the program was launched in the spring your mortgage could be as much as 105% of the home’s current value (or to put it another way, you could be 5% under water) and still be eligible for the program But the government realizes that it needs to reach more people at risk of losing their home, so it has now expanded the acceptable loan-to-value (LTV) to 125%.

What to Do:

If you have were already turned down for a Home Affordable refinance because your LTV was too high, I want you to go back and try again. Make sure the lender knows about the new rule. Hey, print out this official release and show them.

If you hadn’t bothered to try and refinance because you knew your mortgage was over the old 105% limit, well, now’s your chance.

States Work to Stave Off Government Shutdowns

Since today – July 1st – marks the beginning of the new fiscal year for most states, legislators needed to have budgets prepared by yesterday evening. However, California is not the only state government that is facing budget problems. According to a new Associated Press article, “Legislators in more than a half-dozen states, their revenues evaporating in the recession, frantically worked to stave off government shutdowns and devastating service cuts.”

Across the country, lawmakers are feeling the heat as their legislatures began the new fiscal year without a budget in place.

In Illinois, the sputtering drive to come up with a state budget broke down completely Tuesday, leaving the state without any plan for paying its employees or delivering government services. The session ended without any firm plans to return or even for Gov. Pat Quinn and legislative leaders to resume negotiations.

In Pennsylvania, Gov. Ed Rendell said Tuesday night he didn't think an agreement with lawmakers would come soon. The state faces the prospect of not being able to pay state employees if they cannot resolve an impasse.

Although other states in the country are experiencing ongoing budget problems, none of them are expected to have as serious of an affect on the rest of the country as California. They other day I posted an entry explaining how the Golden State’s poor economy could prolong the recession, and this new AP article reiterates that message.

“Fallout from California's budget mess threatened to spread nationwide because of the sheer size of the state's economy. The Senate rejected three bills designed to save $5 billion, including $3.3 billion in education funding cuts that had to be enacted before Wednesday”

State Taxation of Professional Athletes

Earlier today, I saw this interesting entry on the Tax Professor Blog that immediately caught my attention. The article by Alan Pogroszewski takes an in-depth look at the tax issues professional athletes face in different states. I’ve included a quote from the introduction below, but you can find the full article including a helpful graph, at Tax Prof Blog.

“This article will begin with a historical look at the states’ ability to tax both their resident and those nonresidents who earn income within their borders by reviewing the Supreme Court’s interpretation whether this is within the state’s constitutional power. This will be followed by an examination on how individual states came to determine the apportionment of income of a nonresident. This section reviews the individual state court decisions that define the tax implications to off season training, spring training the post season, and the allocation of athletes playing and signing bonus for a nonresident athlete. The article then examines the practical application of this tax in whether or not states increase their overall income tax revenue by this practice. Research in this section indicates that they in fact do. The article then concludes with the practical consequences on how these laws affect individual athletes. This Article concludes with the fact that there may be at least one reason why you may want to sign a free agent client with the Tampa Bay Rays rather than with the San Diego Padres.”

To learn more about athletes who have had tax issues, check out this entry I posted to my blog a few months titled “10 Professional Athletes that had IRS Tax Problems.”

After Call From Senator's Office, Small Hawaii Bank Got U.S. Aid

Although numerous financial institutions have already begun repaying money they were loaned by the federal government, a new report has surfaced questioning the aid that was provided to a small Hawaiian bank. Check out the following article on the developing story via the Washington Post.

Sen. Daniel K. Inouye's staff contacted federal regulators last fall to ask about the bailout application of an ailing Hawaii bank that he had helped to establish and where he has invested the bulk of his personal wealth.

The bank, Central Pacific Financial, was an unlikely candidate for a program designed by the Treasury Department to bolster healthy banks. The firm's losses were depleting its capital reserves. Its primary regulator, the Federal Deposit Insurance Corp., already had decided that it didn't meet the criteria for receiving a favorable recommendation and had forwarded the application to a council that reviewed marginal cases, according to agency documents.

Two weeks after the inquiry from Inouye's office, Central Pacific announced that the Treasury would inject $135 million.

Many lawmakers have worked to help home-state banks get federal money since the Treasury announced in October that it would invest up to $250 billion in healthy financial firms. But the Inouye inquiry stands apart because of the senator's ties to Central Pacific. While at least 33 senators own shares in banks that got federal aid, a review of financial disclosures and records obtained from regulatory agencies shows no other instance of the office of a senator intervening on behalf of a bank in which he owned shares.

Inouye (D-Hawaii) declined a request for an interview but acknowledged in a statement that an aide had called the FDIC to ask about Central Pacific's application. Inouye said he was not attempting to influence the outcome. The statement did not address Inouye's personal role in the inquiry, including whether he directed the aide to make the call or knew at the time that it had been made.

Even if Inouye were directly involved, it would not violate the rules the Senate sets for itself, experts said.

Continue reading here.

Amazon and Blue Nile Cut Off Affiliates in More States Over Taxes

From Internet Retailer.com:

Jewelry e-retailer Blue Nile Inc. today joined Amazon.com Inc. in severing its referrals from Rhode Island online affiliates because of legislation that would require the collection of sales tax. The two retailers recently took similar action in North Carolina and Amazon today cut off its affiliates in Hawaii.

“This is a result of the tax collection legislation passed by the Rhode Island state legislature, and expected to become law,” Blue Nile said in a letter sent today to its Rhode Island affiliates. “Blue Nile regrets the need to take this action. As the U.S. Supreme Court’s 1992 Quill decision makes clear, the proposed bill is unconstitutional as it requires sellers with no physical presence in the state to collect sales tax on sales to buyers in that state.”

Blue Nile made a similar announcement to its online affiliates in North Carolina on Saturday, June 27.

Amazon also sent similar messages to its Rhode Island affiliates yesterday, to its North Carolina affiliates on Friday and to its Hawaii affiliates today. “This is a direct result of the unconstitutional tax collection scheme passed by the Rhode Island General Assembly with a veto-proof majority,” Amazon said in the message yesterday. “As a result, we will no longer pay any referral fees for customers referred to Amazon.com or Endless.com after June 29. We were forced to take this unfortunate action in anticipation of actual enactment because of uncertainties surrounding the legislation’s effective date. The governor could sign the bill—or have his veto overridden—any day now.”

Both Blue Nile and Amazon said they would pay their affiliates for all referral fees earned until the recent terminations. Amazon notes that its referral fees can run as high as 15% of the value of a sale transaction, and that it will make final payments to affiliates by Sept. 1.