Thursday, December 31, 2009
Dealing with IRS collection agents can be a scary thing, however as this blog entry from my law firm’s website points out, there are dozens of secrets about the tax debt collection process that the IRS does not want taxpayers to know. After defending Americans against the IRS for nearly twenty years, my staff and I are familiar with all of the IRS’ secrets and collection tactics. I have included a few of the items on the top 10 list below, but you can check out the full text at the Roni Deutch Tax Relief Blog.
1. Automatic Extensions
Although we all rush to get our tax returns filed before the April 15th filing deadline ever year, the IRS actually provides you with an easy way to get an extra six months to file your return. By requesting an automatic extension using IRS Form 4868, you can get a few extra months to file your return. In many cases, it is often better to request an extension then to file a flawed return that will result in an audit or back tax liability.
In addition, filing for an extension alone carries no penalty with it. Rather, it is the failure to pay on time that will result in interest and penalties. An automatic extension does not extend the deadline to pay taxes to the IRS. Therefore, if you anticipate having an outstanding tax liability, you will still need to pay the IRS by April 15th to avoid penalties and interest. On the other hand, if you are expecting a refund, then you need not worry about being penalized for requesting an extension.
2. The IRS Wants To Settle Quickly
It may not seem like it when you are dealing with them, but the IRS actually wants to settle your delinquent account as quickly as possible because pursuing collections against you can be expensive. In some cases, the IRS can even be convinced to settle your account for less than what you owe. However, you will need to convince the IRS that because of your financial circumstances it is better for them to accept your offer to pay a reduced amount.
3. The IRS Does Not Want to Seize Your AssetsOne common misconception is that the IRS prefers to seize your personal property and liquidate it to satisfy your tax debt. However, the process of identifying, locating, seizing, and selling your assets is a very difficult and labor-intensive process for the IRS. As such, the IRS would much rather settle with you then go down this path. Additionally, issuing a wage garnishment or bank levy is much easier and cheaper for the IRS to obtain. If you ignore your tax debts, then the IRS will likely try to use a wage garnishment or bank levy to try to collect from you as opposed to seizing your assets.
From MSN Money:
More than three years into a painful housing crash, the real-estate market has sent recent -- albeit tentative -- signs of stabilization. Home sales have increased, inventory levels are down, and price declines have become less precipitous.
Along with more-affordable home prices and a tax perk from Uncle Sam, attractive mortgage rates -- which remained near 5% as of late December -- have been a driving force behind this development. The availability of low mortgage rates will play a decisive role in the performance of the 2010 housing market as well.
To help consumers better understand the requirements and costs they will face as they shop for a home loan next year, U.S. News spoke with a handful of housing market experts and compiled a list of 10 things to know about getting a mortgage in 2010.
1. Lending standards
The steep run-up in home prices during the first half of the decade was fueled in large part by breezy lending standards. Some bankers handed out loans without down payments or documentation requirements.
But when the housing bubble popped and those loans became massive losses, banks began raising lending standards for borrowers of all stripes. And with the labor market continuing to erode -- the unemployment rate topped 10% in October -- and mortgage delinquency rates setting records, there is no reason to expect credit requirements to loosen in 2010.
Earlier this week the RDTC Tax Help Blog posted this interesting article with tax tips for caregivers. Preparing and filing a tax return is difficult enough for the average taxpayer to figure out, however when providing care to an elderly relative or dependent your tax returns can get even more difficult. Fortunately, as this article explains, the IRS and a few dozen state tax agencies offer lots of credits and deductions to help anyone in this situation.
Claiming a Dependent
In most cases, caregivers can benefit from claiming the person they care for as a dependent. Just remember, you cannot claim an individual as your dependent unless you are providing over half of their support for the year of which you are filing. Additionally the dependent must be either related to you or have lived with you for a full calendar year.
Dependent Care Credit
Since providing care to an elderly relative or permanently disabled friend is more than a full time job, caregivers will often need to hire someone to assist them with the duties. Fortunately, the dependent care credit will allow you to deduct up to 35% of your expenses for hiring such help. Check out IRS Publication 503 for a full run down on the credit, and qualifying factors.
Deduction Qualifying Criteria
The person whom you are giving care to will need to meet certain criteria in order for you take medical expense deductions on their behalf. In most situations you will need to be related to the individual or they will need to be a permanent member of your household, meaning they have lived with you for at least a calendar year. The dependent will need to be a U.S. citizen, and most importantly you will need to have provided more than half of that person’s total support for the tax year. If you are not the only person providing a majority of the care then a multiple support agreement will be necessary.
Multiple Support Agreement
In some cases, more than one person is offering assistance to an individual, which can cause some confusion when tax time rolls around. As a partial solution, the IRS created the multiple support agreement. By filling out IRS Form 2120 – a multiple support declaration – one person in a group of two or more will be allowed to claim the individual in need of care as a dependent (even if they are not the majority care provider), and take the allowable exemptions. This type of arrangement is especially helpful for caregivers who do not make enough money to provide care to a dependent, as this type of situation can raise a red flag in the eyes of the IRS.
Wednesday, December 30, 2009
The temporary repeal of estate taxes for 2010 has some wealthy taxpayers going to great lengths to take advantage of this change. According to this article on the Wall Street Journal, some families are even debating between keeping loved ones on life support for a few days in order to avoid paying estate taxes.
"I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days," says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. "Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?"
Currently, the tax applies to about 5,500 taxpayers a year. So, on average, at least 15 people die every day whose estates would benefit from the tax's lapse.
After U.S taxpayers sacrificed billions of dollars to bail out Wall Street, the rescued financial institutions promised to cut executive bonuses and extravagant business expenses. However, data shows that many of the same companies that we bailed out earlier in the year, are planning to give out hefty bonuses in the first few weeks of the New Year. As this story on CNN Money.com explains, many of the major banks in this country are showing no signs of reducing their executive bonuses.
Under pressure to prevent another meltdown, Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) have been cutting back on cash bonuses and insisting on so-called clawbacks -- arrangements that allow companies to reclaim past bonuses when there is employee misconduct.
Yet for all their supposed reform-mindedness, the banks show no sign of pulling the emergency brake on the great compensation escalator.
A year after taxpayers saved the finance industry from collapse, the big banks will hand out billions of dollars in bonuses in the coming weeks -- at a time where unemployment tops 10% and many people are still losing their homes to foreclosures. To say this rankles in some quarters is an understatement.
"There is a need to show restraint considering the unusual circumstances of the past year or so," said Tim Smith, a senior vice president at socially responsible investment firm Walden Asset Management in Boston. "That's what you're not seeing right now."
Treasuries headed for the worst year since at least 1978 as the U.S. stepped up debt sales to help spur growth in an economy recovering from its deepest recession in six decades.
U.S. seven-year notes were little changed before today’s $32 billion sale of the securities, the last of three auctions this week totaling $118 billion. The Treasury sold a record- tying $42 billion of five-year securities yesterday and $44 billion in two-year notes on Dec. 28. U.S. government securities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes, the worst annual performance since at least 1978, when Merrill began collecting the data.
“It’s the last hoop the market has to jump through in 2009,” said James Collins, an interest-rate strategist in the futures group in Chicago at Citigroup Inc., one of 18 primary dealers obliged to participate in the Treasury’s auctions. “Yields have been trending higher. It’s been a response to increased supply.”
Last week I posted this entry discussing changes to IRA’s in 2010. A few days later an associate of mine sent me a link to this article on NCPA.org taking a more detailed look at who would benefit from a Roth IRA conversion. Like any major financial decision, converting your IRA is a big step and you should probably talk to a financial advisor before making the conversion.
Who Would Benefit from a Roth IRA Conversion?
Ostensibly, the benefit of conversion is that the taxes are paid today at a known rate, instead of in the future at an unknown and possibly higher rate. But deciding whether to convert a traditional IRA to a Roth IRA depends largely on the ability to pay the taxes that are due when the conversion takes place. For 2010 conversions, individuals have two years to pay the income tax due. A Roth IRA conversion is ideal for anyone who:
Can pay the taxes using money from nonretirement funds.
Expects that their federal income tax rate when they retire will be much higher than it is today - because their income will be higher and the burden of government will be higher.
Faces little to no federal income tax burden today - so that a conversion would cost very little to complete.
Taxes on a Roth Conversion.
Suppose you convert a traditional IRA to a Roth but take a distribution from the traditional IRA account in order to pay the taxes. Is it worth it? That depends on your current marginal tax rate, income level and how many years you are from retirement. Consider that a distribution from the IRA to pay taxes on the conversion is subject to a 10 percent penalty in addition to federal income taxes if you have not reached 59-and-one-half years.
With these considerations in mind, the table shows the cost of converting $25,000 from a traditional IRA to a Roth IRA and using money from the account to pay the taxes.
Tuesday, December 29, 2009
During 2009, the country’s economy has gotten worse, unemployment rates increased, and the Senate recently increased the Federal government’s debt ceiling. With two ongoing wars and a new health care reform plan, combined with record low tax revenues, Congress is going to need to find ways to increase Federal revenue. Senators and House of Representative members are on a Winter break for now, but when they return on January 20, 2010 they will decide the fate of a slew of tax law changes. To help my readers stay ahead of the game, I have put together this article on taxes to watch out for in the New Year.
Value Added Taxes
I have warned about the possibility of a value added tax (VAT) in several blog entries throughout the year, and every day it becomes a more likely possibility. The benefit to the government is that a VAT could generate billions of dollars in revenue. It is meant to add taxes to manufacturers but consumers always end up paying higher prices as a result. Proponents claim that increased tax credits for low-income families would help with the added VAT burden, but in today’s economy consumers are not spending like they used to. If a VAT was implemented it would almost certainly reduce consumer spending.
You may remember hearing the phrase “fair tax” during the recent presidential election. Republican candidate Mike Huckabee was a large supporter of this tax, which would pretty much eliminate the current tax system, and possibly even the IRS. It may sound nice, but to make up for the lost revenue the Federal government would need to impose a 23 to 30% tax on the purchase of all goods. Although supporters say that the price of products would decline without payroll or corporate taxes, there is no way to know what the “break even” point would be. This new type of tax is unlikely to come to fruition in 2010 as there are no bills currently being debated in Congress. However, it may gain traction as a campaign talking point during the run-up to Congressional elections in late 2010.
As I explained earlier last week, Congress failed to take any action on the estate tax. This means that in 2010 there will be no estate tax levied whatsoever, unless Congress passes a retroactive bill. However, beginning in 2011 the estate tax will return and target even more taxpayers. If current laws are not changed, in 2011 the estate tax will return to a historic rate of 55%, and it will get levied on all estates valued at $1 million, which would represent the highest estate tax since the early 1990’s. Unfortunately for anyone inheriting a sizeable estate in 2010, Democratic leaders in Congress have vowed to deal with the estate tax as soon as they return to session, which could result in a permanent 45% estate tax rate.
It is widely known that military spending, especially during a war, adds up quickly. Over the past eight years, the costs of the military efforts in Afghanistan and Iraq have cost an estimated $1 trillion. As such, David Obey, (D – WI) – chair of the House Appropriations Committee – has proposed a war surtax that would range from an additional 1 to 5% income tax on the highest-earning households. Not surprisingly, there is a lot of opposition to this tax, and many experts claim that unused TARP funds could be used to pay for the military costs. On the other hand, some insist that a war tax would create a nationwide sense of urgency to end the wars.
Taxes on Stocks
One of the more popular revenue-raising ideas on Capitol Hill is to tax the sale of financial instruments like stocks, options and derivatives. The main proponents of the bill are two Democratic House members – Ed Perlmutter and Peter DeFazio – who have titled their bill the “Let Wall Street Pay for the Restoration of Main Street Act of 2009.” It would be a 0.25% tax on purchases of securities, and could potentially raise $150 billion per year. Supporters claim that the bill would deter investors from making risky moves, while critics are concerned that such a tax could lead to a market crash and ruin the country’s economy.
IRA's in 2010
Unfortunately it looks like life is going to change drastically for anyone with an IRA in 2010. Starting in the New Year, income limitations will disappear for individuals hoping to convert to a traditional IRA or tax deferred retirement plan into a Roth IRA, which lets taxpayers take untaxed withdrawals. The previous limit had only allowed taxpayers making $100,000 or less to take advantage of a Roth IRA conversion.
Patient Protection and Affordable Care Act
Like my blog entry last week on the Senate’s health care bill explained, any type of health care reform is going to lead to increased taxes. In the current legislation there are taxes on tanning salons, “Cadillac” health care plans, fees on businesses that do not provide coverage and a Medicare tax increase for individuals making over $200,000. As the House and Senate work to come up with a bill that can pass through both houses, all taxpayers should pay close attention to the tax increases that will undoubtedly accompany the legislation.
Employee Health Benefits
Although the health care reform bills do not contain any taxes on employer-provided health care, the House’s legislation does include a section that would make employers show those health care benefits on employees W-2s forms. There has been a lot of discussion in Washington about taxing employer provided health benefits, and it is definitely an issue everyone should watch out for.
Marijuana TaxOver the past year there has been more and more interest in taxing the sale of marijuana. Earlier in the year Oakland, California became the first U.S city to institute a tax on marijuana sales, with 80% of the voters approving. Professor Jeffrey A. Miron of Harvard University estimates that the legalization and taxation of marijuana in the U.S could easily raise $2.4 billion a year, taking a large chunk out of the deficit. However, many suggest that the additional costs associated with legalizing cannabis would outweigh the potential for revenue. For example, the U.S. collects nearly $8 billion per year in alcohol taxes, but the overall cost of alcohol-related problems to the government is over $70 billion. This new type of “sin tax,” is highly controversial, and also probably unlikely to be an issue Congress faces in 2010. However, it – like the Fair Tax – may come up during the run-up to Congressional elections in late 2010.
After recently passing the Senate, Obama has signed a bill into law that raises the Federal debt from 12.1 trillion to 12.4 trillion. There are many critics to this bill that was passed along partisan lines. However, the Obama administration has stated that they have no other choice. Reuters.com posted a story on how the debt limit has doubled over the past decade.
Congress approved an increase in the debt limit from $12.1 trillion on Thursday, winning two more months of funding for a record U.S. deficit as Obama tries to stimulate economic growth after the country's worst recession in 70 years.
Critics say Democrat Obama is making the deficit worse, but the White House blames the recession and unfunded cuts in taxes and prescription drug aid, which were all inherited from his Republican predecessor George W. Bush.
The U.S. government posted a record $1.4 trillion deficit in the fiscal year ended September 30 and is on track during the current fiscal year to spend at least $1 trillion more than it collects.
After a long battle with the IRS, and pleading guilty to tax fraud, ‘Girls Gone Wild’ producer Joe Francis is now attempting to sue the IRS for illegally freezing his bank accounts. According to WebCPA.com, he asserts that since a judge approved his plea bargain his assets should not have been frozen.
Francis pleaded guilty in October to two misdemeanor counts of filing false tax returns, and in early November U.S. District Judge S. James Otero sentenced him to time served. Francis had been held without bail for nearly a year in the tax case. Under the plea deal, Francis agreed to pay restitution, back taxes and interest totaling $249,705, plus a fine of $10,000.
In addition, he agreed to plead guilty to two misdemeanor counts in exchange for having the charges dropped. Francis claims that his CPA, former Mantra Films CFO Michael Barrett, conspired with two others to embezzle millions of dollars from the company and then contacted the tax authorities in order to win a whistleblower award from the IRS.
However, shortly after the judge accepted his plea deal, the IRS filed a lien for $33,819,087.14 for three years of back taxes, from 2001 to 2003 (see IRS Files $34M Lien Against ‘Girls Gone Wild’ Founder).
The IRS made an announcement this month that is a matter of pennies but could significantly affect some taxpayers' 2010 amount owed; by reducing the allowance for mileage deductions.
Claiming the mileage traveled for business is, after all, one of the favorite ways to rack up deductions, which you must declare on Schedules A and Form 2106 or 2106-EZ. For outside salespeople, pizza delivery people, and others who spend a lot of time on the road for work, it's huge, and it adds up fast; with 2009 rates at 55 cents per mile for business travel (anything done for pay -- going on appointments, taking your boss to the airport, going to the post office, etc. -- except your commute) an average employee who drove 10,000 miles for work could save $1,000 in taxes. The deduction rates for driving for medical purposes or moving, at 24 cents a mile, weren't shabby, either, and meant that many taxpayers could make a big reduction in their taxes owed simply by writing down mileage.
But for 2010, the standard rates will fall considerably, down to 50 cents for business miles and 16.5 cents for medical miles or moving, affecting that sample average taxpayer by more than $200 in taxes owed at the end of the year. For serious road warriors, it could be a huge impact, increasing taxes owed by more than a thousand dollars.
Bradley Birkenfeld, a former UBS banker and informant in the UBS case is now saying he can further assist in the tax case against the bank. He was slated to start a three year prison sentence early in January, but is reportedly hoping that additional cooperation with the government will reduce that sentence.
As this article on NYTimes.com explains, Birkenfeld was sentenced in August, but filed a new postponement request earlier this week with a federal district court in Florida.
The filing also requested a hearing to reconsider the 40-month sentence imposed on Mr. Birkenfeld on Aug. 21.
Prosecutors described Mr. Birkenfeld as the man most responsible for igniting an investigation into rich Americans’ use of secret Swiss bank accounts to avoid taxes. Partly because of Mr. Birkenfeld’s disclosures, UBS has agreed to disclose to the United States the names of 4,450 wealthy Americans suspected of hiding assets and dodging taxes in secret accounts.
The United States Treasury loses an estimated $100 billion a year to offshore tax cheats.
N'Sync was once one of the hottest boy bands around and J.C. Chasez was one-fifth of the members, which also included Justin Timberlake, Joey Fatone, Lance Bass and Chris Kirkpatrick. You would think the guys would've walked away from that deal without a financial worry in the world.
Apparently for J.C. Chasez, that is not the case. The America's Best Dance Crew judge just had a lien filed against him by the state of Mississippi accusing him of owing $206,965 in delinquent taxes.
Monday, December 28, 2009
Question #1: I’m self-employed, and have all of the documents ready to prepare my 2009 tax return. When is the earliest I can file?
Well first of all congratulations on getting your financial documents gathered and organized early. However, the IRS does not generally begin accepting and processing returns until January 15th. The usually begin accepting e-filed returns a few days prior, but I would say it is best to wait until after the 15th to file your return.
Question # 2: Can you recommend any good charities to donate to before the end of the year?
Just before the holiday weekend The Glass Hammer – one of my favorite blogs – posted this interesting article explaining why it is important to have a career mentor, even if you have been working in the field for a few years now. As author Andrea explains, mentoring has been associated with higher job satisfaction, higher promotion rates, higher future income, increased work success, and higher retention rates.
1. Perspective and Experience. A mentor can give you the benefit of his or her perspective and experience. He or she can help you assimilate to a new position and give you an insider’s view on how to get things done.
Bayer agrees, “This was the value to me of working with my first real mentor. She knew all about navigating big, traditional companies and how the structure and promotional system works. She helped me build my ‘personal board of directors,’ people who provided support for me, and how to make a ‘dance card’ whenever I was going to a large corporate event of some type (to make sure I had people to try and talk with and know what I was going to talk about). This mentor gave me the help I needed to advance my career significantly, starting that year.”
2. Think Outside the Box. A mentor can help you look at situations in new ways. He or she can ask hard questions and help you solve problems.
“This was another critical area for me – my mentors helped me to gain a level of self awareness that I wasn’t getting to on my own. My mentor helped me to learn and use emotional intelligence, even helped me craft exercises and offered practice and reviews, so that I could become proficient in understanding myself, my impact on others, and other people’s emotional being and state, and how to use that to work together better. This was a big ‘growth spurt’ for me, both at work and personally,” Bayer said.
According to Nasdaq.com, the Senate adjourned Thursday for a break that will last until January 20th, 2010. Although the Senate was able to pass a health care bill, and raise the government’s debt limit, they left four Treasury Department nominees waiting on their confirmation.
Those nominees include Lael Brainard, the White House's pick for Treasury under-secretary for international affairs, whose nomination had been delayed for months as Senate Finance Committee staff scrutinized her tax returns.
The Finance Committee approved the nominations of Brainard and the other three Treasury officials Wednesday, but the nominations did not clear the full Senate because of an objection from at least one senator. At press time the source of the objection could not be learned.
Meanwhile, the Senate confirmed Miriam Sapiro as Deputy U.S. Trade Representative, before adjourning. It also confirmed Paul Anastas as an assistant administrator at the Environmental Protection Agency, and John Norris as a member of the Federal Energy Regulatory Commission.
The other Treasury nominees who will have to wait until the Senate returns for final confirmation include Michael Mundaca for assistant secretary for tax policy; Mary John Miller for assistant secretary for financial markets; and Charles Collyns for deputy under secretary for international finance.
From Huffington Post.com:
The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac.
The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years.
Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter.
By making the change before year-end, Treasury sidestepped the need for an OK from a bailout-weary Congress.
While most analysts say the companies are unlikely to use the full $400 billion, Treasury officials said they decided to lift the caps to eliminate any uncertainty among investors about the government's commitments. But the timing of the announcement on a traditionally slow news day raised eyebrows.
Thursday, December 24, 2009
This time of year is normally a retailers dream, but according to Bloomberg.com people are spending much less than usual this holiday season. With banks tightening their lending practices before a new credit-card law is due to take effect, large retailers are expected to lose out on nearly $9 billion in lost revenue.
Sales in November and December may fall 1.2 percent to $436.7 billion from the same period in 2008, said Britt Beemer, chairman of consumer polling firm America’s Research Group. If lenders weren’t cutting customer spending limits and rejecting more credit-card applicants, sales would gain about 0.8 percent to $445.5 billion, he said in a Dec. 21 interview.
Target Chief Financial Officer Douglas Scovanner says the credit-card legislation is exacerbating a spending slump just as consumers begin to consider more discretionary purchases they would usually buy with credit. Items such as clothing, jewelry and home goods suffered steeper declines during the recession and are among the most profitable sales for retailers.
“It will mute the impact of the rebound that would have otherwise occurred,” Scovanner said. “Diminished availability of credit equals diminished spending.”
Yesterday top lawmakers announced that they would be extending the $31 billion package of tax measures that are due to expire at the end of the year. It includes job creation efforts, renewable energy provisions, and state sales tax write-offs for taxpayers.
According to the Wall Street Journal, Senators Max Baucus (D., Mont.) and Chuck Grassley (R., Iowa) informed Majority Leader Harry Reid that the Senate Finance Committee will set the path to extend the credits when Congress returns from a holiday recess in January.
"These provisions are important to our economy -- not only because they help create jobs, but also because they are used to address pressing national concerns," the lawmakers said in the letter. "We understand that the expiration of these provisions creates uncertainty and complexity in the tax law."
Messrs. Baucus and Grassley are the chairman and top Republican, respectively, on the panel charged with writing tax law.
They said they intend to extend the credits retroactively to the beginning of 2010, so there is no gap for recipients of the measures. The package includes a $7 billion research and development credit, as well as a number of renewable energy provisions and a state sales-tax write-off for individuals.
In a new press release yesterday, the IRS announced the 2010 inflation adjustments on excise taxes for that apply to the domestic segments of taxable air transportation and to the use of international air facilities.
The Fiscal Year 2010 Federal Aviation Administration Extension Act, Part II, signed into law on Dec. 16, 2009, extends these excise taxes to air transportation that begins or is paid for no later than March 31, 2010.
These excise taxes are adjusted annually for inflation:
For 2010, the excise tax on the domestic segment of taxable air transportation is $3.70, up from $3.60 in 2009.
The excise tax for 2010 for international flights that begin or end in the United States is unchanged at $16.10.
The tax on use of international air facilities also applies at a reduced rate to departures of interstate flights that begin or end in Alaska or Hawaii. For 2010, the international air facilities tax on these flights is $8.10, up from $8.00 in 2009.
Goldman Sachs' banking titans and top congressional Democrats don't often see eye to eye -- executive pay caps, anyone? But here's something the megabank and Capitol Hill agree on: One of the best ways to get financing to worthy small businesses is through a little-known community lending vehicle called a CDFI.
Taken together, Goldman Sachs and the federal government have earmarked more than $300 million to invest in these local financiers in 2010. Compared to Wall Street's bailout billions, that's pennies on the dollar, but for CDFIs it's a jackpot. Next year's funding pool is almost three times bigger than any they've ever had before.
A CDFI is a Community Development Financial Institution, a certification conferred by the Treasury Department. The program gives low-interest government loans, grants and tax credits to organizations that specialize in economically developing low-income and otherwise underserved markets.
CDFIs were a hot topic at the small business lending forum Treasury Secretary Timothy Geithner convened last month to brainstorm solutions to the ongoing credit crunch small companies face. Wary of lending to firms struggling through the recession, banks slashed their small business credit this year.
Wednesday, December 23, 2009
The Senate is expected to vote on their health care bill (the Patient Protection and Affordable Care Act) this Christmas Eve. They are also going to vote on legislation that will raise the federal government’s debt limit. Since no Republican Senators are likely to vote in favor of either measure, Congress is attempting to use the holiday vote to help avoid negative publicity. However, in order to get the sixty votes needed to pass the measure, Democratic leaders have made quite a few changes to the legislation. To help my readers stay updated on the massive health care overhaul, I have put together this article explaining the tax changes in the Senate’s bill.
No Public Option
First of all, I think it is important to note that the most recent legislation – which will be voted on tomorrow – does not contain a public option. Although President Obama had pushed for a government run health insurance option, in order to get the necessary votes it was removed. Instead the federal government will contract with insurers for two national health plans that will be offered through a new insurance exchange. The plan will be handled by the U.S. Office of Personnel Management, which already oversees the health policies of over eight million federal government employees.
After all the recent changes, the Congressional Budget Office estimates that the legislation would cost $871 billion over the next ten years. It is reported that the plan will be paid for by $483 billion in spending cuts, as well as $498 billion in new revenue. The budget office asserts that it will reduce the federal deficit by around $130 billion over the next decade.
Current estimates show that 83 percent of Americans under the age of 65 have health insurance coverage. If enacted, the Senate’s plan would expand coverage to an estimated 94 percent of Americans under the age of 65. This would leave about 24 million people in this country without insurance, a third of which are thought to be immigrants living in the country without proper documentation.
Individual Mandate Tax
One of the first tactics the Senate is using to fund the legislation is through an individual mandate tax. Beginning in 2014, anyone who does not have a “qualifying” health insurance plan must pay an income surtax. The tax is expected to generate over $15 billion in federal revenue, and will begin as a 0.5% tax in 2014. However, it will increase to 1% in 2015, then 2% in 2016.
Employer Mandate Tax
In addition to levying taxes on individuals, the new bill will create an employer mandate tax that is expected to generate $28 billion over the next decade. It will force all employers with 50 or more employees to either provide health care coverage, or pay a non-deductible tax of $750 for each full time employee.
Cadillac Health Care Plans
Just like the initial bill the Senate proposed, the final legislation will include a new 40% tax on “Cadillac” health insurance plans beginning in 2013. According to the legislation, this will include plans valued at $8,500 for individuals, and $23,000 for families. However, there are a few exceptions, such as Longshoremen who lobbied heavily to have members of their union excluded from this new tax.
Cosmetic Tax No, Tanning Tax Yes
After immense pressure from the cosmetic surgery industry, the 5% tax on elective cosmetic procedures was removed from the Senate’s bill. However, in its place Democratic leaders added a 10% tax on tanning salons.
Small Business Credits
Starting in 2010 – a year sooner than originally proposed – tax credits will become available to small businesses with less than 25 employees, and an average salary of $50,000 to encourage them to offer health insurance benefits. Businesses with 10 or less employees and an average wage of $25,000 will be able to take advantage of an even larger federal credit.
Increased Medicare Payroll Tax
The original Senate bill had called for a 0.5% Medicare payroll tax increase for individuals earning more than $200,000 and married couples earning over $250,000. However, the recent amendments have raised the tax to 0.9%.
Taxes on Insurers and Medical Device Manufacturers
A whole new set of taxes will get levied on health insurance companies and medical device manufacturers. The federal government is expecting to generate over $60 billion in additional revenue over the next decade by imposing taxes on firms with $50 million or more in profit. Additionally, they also plan to levy a $2 billion per year tax on the medical device industry starting in 2011 that will increase to $3 billion in 2017.
Increased Medical Deduction Limit
According to the NY Times, a new watchdog report has emerged showing that thousands of Americans may have incorrectly claimed tax breaks enacted by the recent stimulus package. Over 73,000 taxpayers reportedly took advantage of the first-time homebuyers credit, resulting in over $500 million in lost federal revenue.
That finding was one part of a report by the inspector general for tax administration that said the Internal Revenue Service does not know whether the majority of the $312 billion in tax breaks available through the American Recovery and Reinvestment Act are being claimed legitimately.
The report said that for businesses and individual taxpayers claiming tax relief under the 2009 act, “the IRS is unable to verify eligibility for the majority of Recovery Act benefits at the time a tax return is processed.”
The finding is likely to stoke debate in Congress and among analysts over the merits of the package, a centerpiece of the Obama administration’s economic recovery plan.
The act, passed by Congress in February as a means of stimulating the ailing economy, provides $252 billion in tax breaks to individuals and $74 billion to businesses. The overall act, of which tax breaks are the showpiece component, was designed to pump $787 billion into the economy. Tax benefits for individuals include first-time homebuyer credits, residential energy improvements, and the “Making Work Pay” credit designed to reduce tax bills for working families. For businesses, they include credits for renewable energy investments, construction and accelerated depreciation and loss carrybacks, among other things.
Earlier this morning I came across an interesting article from MSN Money discussing how the financial situation of most middle class families has not improved over the past decade. When comparing the year 1999 – the peak of the dot-com boom – to the recession of 2008 and 2009 it is easy to understand why so many families feel their finances are worse off now than they were a decade ago.
"This hasn't been a sterling decade," says Isabel Sawhill of the Brookings Institution and the author of "Creating an Opportunity Society." She argues that the American dream of prosperity and advancement has turned into a myth. "The average American family hasn't been able to improve its financial situation."
Of course, it's impossible to compare 1999 with 2009 without noting that in 1999, the economy was still floating happily in a dot-com bubble, while this year we've been mired in the worst recession since the Great Depression.
But experts say these are just details. They argue that dozens of indicators -- after adjusting for 30% inflation since 1999 -- have been marching in the wrong direction for years, in ways big and small:
In 1999, 67% of workers had to pay part of their health care benefits cost, says the Bureau of Labor Statistics. In 2008, that had risen to 75%.
According to the Census Bureau, 10.3% of U.S. families lived under the poverty line in 2008, versus 9.3% in 1999.
Households in the bottom 10% made $12,181 or less in 2008, which was down 8.1% from 2000. But the threshold for household incomes in the top 5% was $180,000, down just 0.9% from 2000.
It was a little like financial Groundhog Day at the White House today-- President Obama again met with a group of bankers, and again asked them to provide more loans to business owners so they can hire more people.
The difference is that this group consisted of a dozen owners of smaller, community banks.
Obama said he had "the same conversation that I had with some of the larger banks last week and that I've been having with CEOs of companies across the country."
The goal, he said, is to see "that businesses are getting the capital that they need and that we are starting to see people hired again, people able to finance their homes, finance college educations and so forth."
And again, banking analysts pointed out that it's not that easy to find credit-worthy borrowers in this economy.
And many lenders are "getting a lot of grief from the banking examiners," said banking consultant Bert Ely. "They're criticizing the bankers for some of their loans."
At the White House meeting, Obama echoed a message he has used for months, and will continue to use as long as the unemployment rate remains in double digits. "Everything that we're going to be doing here in the White House over the next several months," he said. "is going to be geared towards catalyzing and spurring additional lending."
As I explained in this blog entry from early last week, the city of Pittsburg, PA had been considering a first-in-the-nation tax on college tuition fees. Fortunately, the city’s officials have decided not to move forward with this highly unpopular tax increase. According to the Associated Press, they ditched the tax after two universities and a nonprofit health insurance company agreed to make large financial contributions to the city.
Mayor Luke Ravenstahl hopes the contributions from the University of Pittsburgh, Carnegie Mellon University or Highmark Inc. will serve as a catalyst to get other nonprofits to help the city financially.
Ravenstahl had called for the 1 percent tuition tax on the city's 65,000 college students as a way of getting money to help pay for some $15 million a year for the city's pension obligations.
Nonprofits are exempt from most taxes, but represent many of Pittsburgh's major employers and hold about one-third of the city's property value.
Neither the mayor nor the three institutions would disclose how much they would give, but Ravenstahl said he was optimistic the money would help resolve the city's long-standing financial problems.
"This is a leap of faith for all of us. The future of our city and our citizens is riding on it," he said.
Tuesday, December 22, 2009
Does it pain you to fill out a tax form each year? Does knowing that the IRS takes a large chunk of your salary give you the runs? This product isn't deductible, but it'll sure make you feel better. A collage of the 1040 IRS Form is printed throughout the whole roll!
As the country continues to follow Tiger Woods, and the excessive media coverage of his transgressions, many financial experts are beginning to wonder what – if any – tax implications his affairs might lead to. According to reports, Tiger gave away thousands in “hush money” to different women, and as the Improper.com points out in this article it could result in a gift tax penalty.
Woods reportedly wired tens of thousands of dollars a month to his mistresses, according to MSNBC, quoting several unnamed women who were involved with the golfer. The dollar amounts range from $5,000 to $10,000 per month, and some of the women claimed to be getting as much as $20,000 per month.
“The money comes via a wire transfer,” one woman told MSNBC. “There’s no contract about it, there’s no discussion about what it’s for, but it’s implied that it’s in exchange for keeping quiet about his affair.”
If Woods is paying women to be quiet, he better have covered his tracks, a tax expert said. “The IRS regulations require that someone gifting in excess of $13,000 per year file a gift tax return,” John Fisher, a Pennsylvania-based tax attorney, told the New York Daily News.
In addition, any person who receives $10,000 or more in gifts must report the amount on their tax return, declare the money as income and pay taxes on it.
State tax collectors in California plan to target businesses that made expensive purchases online to avoid California’s high sales tax rates. The LA Times posted an interesting article about the states latest attempt to increase revenue and you can find a segment from their story below.
Under a law passed over the summer, the state Board of Equalization will send 184,000 letters by the end of the year to service businesses such as law firms, child care companies and Lasik eye surgery centers that have more than $100,000 a year in revenue.
The tax board is looking for out-of-state purchases, especially of expensive equipment, fixtures or software that might be subject to the levy, known as a "use tax."
The notices order the companies to register with the tax board and, by April 15, report and pay tax owed for the last three years or prove why they are exempt.
If the tax board doesn't hear back from a business, the agency will automatically register it in February.
Last week the RDTC Tax Help Blog posted a helpful article for anyone looking to lower their taxable income before the end of the year. In addition to the standard end of the year tax tips, the blog even provides links to charities that accept donations online, and banks that will allow you to setup college saving funds online. I have included a few tips below, but be sure to check out the full article here.
Electronic Mortgage Payments
If you can make your mortgage payment online, then you might want to make an extra mortgage payment before the end of the year. Since the IRS allows you to deduct all mortgage interest, this could significantly lower your taxable income for the year. However, if you make the payment close to the end of the year then you will want to be sure and double check the 1098 Form you receive from your lender to ensure it includes the last minute payment.
Make State and Local Tax Payments
The IRS allows you to deduct all taxes paid to state and local governments. If you know that you are going to owe, then you might want to consider making an estimated payment before the end of the year. Check out your local tax agency’s website to see if they accept payments online, or they might have a phone number that you can call to make a payment with your credit card.
Order Energy Efficient Home Upgrades
The IRS offers a credit of 30% of the cost of qualified energy efficient home upgrades, up to $1,500. Although the credit applies to upgrades such as roofs and insulation, certain water heaters, windows, doors, and air conditioning units qualify as well. If you are in need of any of the aforementioned products then you could make your purchase from Lowes.com or HomeDepot.com in a matter of minutes. However, before you pull out your credit card be sure to check out this page on EnergyStar.gov explaining the Federal tax credit.
Splurge on Office Supplies and Furniture
If you are a small business owner and have an office or store for your business, then you can greatly reduce your taxable income within a few minutes by splurging on new office supplies and furniture. There are lots of great office furniture websites, and some that will even deliver and setup the furniture for you. In just a few minutes, you could easily reduce your tax liability by thousands of dollars.
From the Detroit News:
Comedian/actor Sinbad's financial problems just got a whole lot worse. The Benton Harbor native, who emceed Motown Records' 50th anniversary gala last month, owes more than $8.15 million in delinquent federal taxes and the U.S. Attorney General's office wants his house sold to help satisfy the debt, according to federal court records.
On Dec. 10, an assistant U.S. attorney asked a federal judge to foreclose on several tax liens and determine the 53-year-old comedian (full name Sinbad Adkins) is the true owner of a $1.5 million home in Hidden Hills, Calif.
The home's title is held by his brother, Michael Adkins, but since 1998 the federal government says mortgage interest and property taxes either have been paid by Sinbad's company Afros & Bellbottoms Productions Inc. or by the comedian's personal checking account.
Sinbad, who rose to fame on "Star Search" in the 1980s before starring in a string of movies like "Houseguest" and TV shows, really owns the property, the government claims. One possible hiccup, however. On Dec. 11, the day after the government filed the case, Sinbad filed Chapter 7 bankruptcy in California, listing between $10 million and $50 million in liabilities and less than $50,000 in assets.
The IRS claims Sinbad filed federal income tax returns for years 1998 through 2006 but failed to pay the reported taxes.
Monday, December 21, 2009
Last week the U.S. Senate attempted to decide the fate of the estate tax. Unfortunately, members of Congress failed to pass any type of change to the laws surrounding this tax, which will likely create a mess over the next few years for anyone inheriting a large sum of money or property.
Expiration in 2010
In 2001, a conservative Congress passed legislation gradually decreasing the estate tax rates. Currently there is a 45% tax levied on estates worth more than $3.5 million, or $7 million for couples. However, this tax is set to expire completely beginning on January 1st, 2009. Since Congress did not pass any extension, beginning in the New Year no estates will be subject to the tax.
Passage in House / Holdup in Senate
A few weeks ago the House of Representatives passed a bill that aimed to extend the current 45% tax. The Senate then attempted to vote on a similar bill last Wednesday that aimed to extend the tax for two months – giving them enough time to hopefully develop a long-term solution – but between strong Republican opposition and a Congress focused on health care reform the effort was unsuccessful. Many experts call the issue a failure on behalf of the Obama administration and Democratic leaders for failing to address the problem before, and by neglecting to work with Republican leaders to develop an amicable solution.
More Aggressive in 2011
Although the estate tax will expire at the end of this year, starting on January 1, 2011 it will return even more aggressive than before. Unless legislation is passed before 2011, the estate tax would resume with a 55% rate on all estates valued at more than $1 million. If enacted, this rate increase would revert the estate tax back to levels seen in the early 1990’s.
Capital Gains vs. Estate
With the estate tax gone in 2010, another tax will likely begin affecting those who inherit $1.3 million or more in assets next year. Typically, these estates would be subject to little or not capital gain taxes, but without an estate tax the opposite would be true. For example, if you inherit a property valued at $1.5 million and decide to sell it then you would have to calculate capital gains based on the value of the home when it was originally purchased, not when you inherited it. Estimates from the House of Representatives assert that over 70,000 people will be affected by this change in capital gains over the next year.
Likelihood of Another Vote
Unfortunately, it is probably too late in the year for the Senate to take any further action on the estate tax. However, Democratic leaders have made the issue a “top priority,” and promise to work on a solution in the beginning of 2010. There is even talk that they may attempt to make the tax retroactive, meaning anyone who inherits a large sum of property or assets could be vulnerable to the estate tax.
Confusing Tax Code
By not coming up with a permanent solution to the estate tax Congress is going to make taxes very difficult for thousands of Americans. The tax code is already horribly complicated and all of these changes to the estate tax will only confuse more taxpayers. Additionally, many taxpayers who inherit a sizeable estate may end up paying more in capital gains than they would have with a 45% estate tax.
Question #1: I have a small business with a few employees. If I throw a holiday party for them can I write off the expenses?
Yes, the IRS will let you deduct all expenses related to throwing a holiday office party. You could also deduct the costs of presents for your employees, as long as you do not give out cash or items easily exchangeable for cash, such as stocks.
Question # 2: What are some last minute ways to lower my taxable income for the year?
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