Saturday, October 30, 2010
Earlier in the week the IRS announced the adjustments to pension plan limitations in 2011, which will have an impact on a handful of retirement plans popular among American taxpayers. US News.com put together a list of the top five retirement tax breaks that will be affected by the IRS' recent announcement. You can find a few items from their list below, or the full text here.
401(k)s. The savings limits for employer-based retirement accounts are not increasing next year because inflation was too low to trigger an increase. The cost-of-living index used to calculate increases in 401(k) savings limits is currently greater than it was in 2009, but it is still less than the measurement for the third quarter of 2008. The maximum amount investors can contribute to 401(k)s will not be raised until the September inflation measurement climbs above where is was in 2008. Contribution limits cannot be reduced under current law.
Traditional IRAs. Certain income ceilings determine who is eligible for a tax break for contributing to an IRA. Individuals who have a retirement plan at work can contribute the full amount to an IRA until their modified adjusted gross income (AGI) reaches $56,000. The amount eligible for tax deferral is then gradually phased out until income reaches $66,000 in 2011, the same amount as this year. However, married couples filing jointly will get higher income limits next year. For a spouse who participates in a retirement plan at work the income phase-out range will be $90,000 to $110,000 in 2011, up from $89,000 to $109,000 this year. For IRA owners who do not have access to a retirement account at work, but are married to someone who does, the deduction will be phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000 this year.
Roth IRAs. More high income retirement savers will be eligible to make Roth IRA contributions next year. Married couples filing jointly can contribute to a Roth IRA until their AGI reaches between $169,000 and 179,000 next year, up from $167,000 to $177,000 in 2010. The AGI phase-out range for singles and heads of household will increase from $105,000 to $120,000 this year to between $107,000 and $122,000 in 2011.
Saver’s credit. The AGI limit to get the saver’s credit will be $56,500 for married couples filing jointly in 2011, up from $55,500 in 2010. For heads of household the income limit will increase from $41,625 this year to $42,375 in 2011. Single people and married individuals filing separately can earn up to $28,250 and still get the saver’s credit, up from $27,750 this year.
It is hard to imagine a more terrifying nightmare than being wrongfully convicted and imprisoned. It is comforting that there’s been a dramatic increase in wrongfully convicted persons gaining their freedom, often after a decade or more of wrongful imprisonment. Yet it is appalling that so many lives are destroyed. And more and more cases are being uncovered.
Exonerees may later seek redress from the cities, states and officials whose actions precipitated their wrongful conviction. They may receive payment under federal or state civil rights and compensation statutes or under the common law of false imprisonment. The biggest payouts usually involve prosecutors who have unlawfully buried witnesses and destroyed evidence. See $18 Million to Man Wrongly Imprisoned, Wrongly Convicted Man Gets $7.95, Million Settlement, and City to Pay $9.9 Million Over Man’s Imprisonment.
The changes in an exoneree’s life from this physical and mental ordeal are incalculable. But if an exoneree eventually recovers damages, are they taxable? The Internal Revenue Code exempts payments received on account of personal physical injuries and physical sickness. That means settlements for auto accidents are tax-free. Yet appallingly, some exonerees have been forced to pay taxes on their awards, ostensibly because there is nothing “physical” about being locked up.
Thursday, October 28, 2010
Due to a lack of controls to prevent ineligible taxpayers from claiming the 8,000 first-time homebuyer tax credit, and credits for vehicles, the IRS paid out $111 million in erroneous refunds. The Treasury Inspector General for Tax Administration released these figures, among others, earlier today.
To put the errors in perspective, IRS processed more than $81 billion in claims for stimulus-related tax benefits in 2010, involving upwards of 90 million returns.
About 126,000 of those returns were flagged by TIGTA as including erroneous claims that weren’t caught by the IRS before they were processed. In some cases, the IRS put compliance controls in place during the tax-filing season to catch the errors.
The number of U.S. taxpayers filing returns electronically continued to increase, reaching 72% of all filers in 2010, the report said.
About 8 million people claimed more generous tax credits for college tuition in the stimulus law this year, for a total of $7.1 billion in benefits. Four million took advantage of a tax break for state sales and excise taxes on new-vehicle purchases, for an average tax deduction of $2,048.
In their newest press release the IRS announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2011.
In general, these limits will either remain unchanged, or the inflation adjustments for 2011 will be small.
The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government’s Thrift Savings Plan remains unchanged at $16,500.
The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500.
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.
While many political pundits continue to emphasize the public’s frustration with taxation, Vanessa S. Williamson—a graduate student in government and social policy—started a website last August to take the conversation in a new direction.
The website, dubbed “I Heart Taxes,” was created as a way for individuals to showcase their pride in the “patriotic pro-tax movement,” according to Williamson.
“[If you are] proud to be a taxpayer, you could really show your pride,” Williamson said.
“I Heart Taxes” is a combination of a blog providing tax-related commentary with an online store selling merchandise that highlights how tax dollars are used to support government programs.
Williamson, who launched the website on the anniversary of Social Security’s creation this past summer, said that her inspiration sprung from her friends’ Facebook status updates around Tax Day that praised their monetary contributions to government programs.
Williamson said she wanted to create a site where people would be able to show similar enthusiasm.
In just a few weeks a deficit commission is planning to submit recommendations for balancing the federal budget by 2015. Experts predict that they will recommend getting rid of a handful of popular tax breaks including the mortgage interest deduction. Although they are popular among American taxpayers, the tax incentives reportedly cost the government about $1 trillion a year.
At stake, in addition to the mortgage-interest deductions are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.
The officials are also looking at potential cuts to defense spending and a freeze on domestic discretionary spending. It is unclear if the 18-member panel will be able to reach an agreement on any of the items by a Dec. 1 deadline.
Even if they do reach an agreement, any curbs on current tax breaks would likely face tough sledding in Congress. The banking and real-estate lobbies have fiercely rebuffed efforts to rescind the mortgage-interest deduction in the past.
Wednesday, October 27, 2010
Back in 2006 the IRS began using private debt collection companies to collect unpaid tax debts. Then, after a study suggested that the costs for hiring private companies was higher than the IRS's collection efforts, the agency let their agreements expire in 2009. However, according to a new report from the Government Accountability Office, the IRS's study of private debt collectors was not designed to support its decision.
The GAO found that the IRS study was not originally intended or designed as the primary support for its decision on whether to continue with the private debt collection program, but IRS officials nonetheless used it as such. The IRS did not have guidance for program managers on the type of analysis that should be done to support their decisions to create, renew or expand programs. The IRS also had not retained sufficient documentation on the sample used in the study or documented some analyses that would have been helpful if performed.
“According to this report, the IRS used a flawed study to justify ending its contracts with private agencies to collect owed taxes that the IRS wasn’t collecting on its own,” said Senate Finance Committee ranking member Charles Grassley, R-Iowa, in a statement. “The IRS knew the study was flawed because the GAO told the IRS how to do the study. But the IRS didn’t implement the GAO’s recommendations to fix the study, even though it agreed with them. The IRS used the results from the defective cost-effectiveness study to defend its decision to terminate the use of private collection agencies, even though that wasn’t the primary purpose of the study.”
The study results may have been overstated or understated because the study sample was not generalizable to the program as a whole, said the GAO. The study had a narrow objective of comparing the results for the IRS working the same cases as PCAs had, and as a result, the study design did not consider other factors recommended by the Office of Management and Budget and other guidance on conducting program analysis. For example, the study did not analyze alternatives to program scale, such as expanding it or scaling it back. Program analysis guidance states that to the extent possible, all costs and benefits should be counted and alternative means of achieving a program’s goals should be considered.
From the Associated Press:
Switzerland and Germany are poised to sign a deal that will make it easier for Berlin to obtain information on suspected tax cheats hiding assets in secret Swiss bank accounts, officials said Wednesday.
The agreement — whose broader purpose is to prevent companies and individuals from being taxed twice — includes a clause to help resolve what has become a long-running and at times acrimonious dispute between the two countries.
Swiss Finance Minister Hans-Rudolf Merz is due to meet his German counterpart Wolfgang Schaeuble in Bern late Wednesday to complete the deal, which requires Switzerland to lift its strict banking secrecy laws in future cases of suspected tax evasion. They will also declare their intention to find a solution for billions of euros (dollars) in untaxed German assets already sitting in Swiss vaults, officials said.
Berlin has long accused Switzerland of shielding German tax cheats by only helping foreign authorities investigate outright tax fraud but not the lesser offense of tax evasion.
Last year Schaeuble's predecessor, Peer Steinbrueck, called for governments to use "the whip" against Switzerland, while his party colleague Franz Muentefering of the center-left Social Democrats said that "in the old times one would have sent in troops" to combat tax havens. The remarks prompted outrage in Switzerland.
According to a notice posted on its website, the IRS has begun reviewing several taxable Build America Bonds issued in 2009 and 2010 to ensure the bonds were compliant with the tax code. The agency is also seeking to understand "practices in the relatively new market for BABs." ABC News.com posted an article explaining the IRS's review; you can find a snippet of their story below or check out the full text here.
Build America Bonds were created in last year's economic stimulus plan to spur investment in infrastructure. The bonds have become popular with cities and local governments because they pay a federal rebate equal to 35 percent of interest costs.
BABs have developed a large market share, accounting for nearly a quarter of new debt issues this year. Their success has inspired the U.S. Congress to change other bonds included in the stimulus plan to the same model -- taxable debt that pays a federal rebate.
This new model of debt is called "direct pay."
The IRS notice, which is dated October 25, says it is looking into whether issuers complied with limitations on premiums, capital spending requirements and limits on issuance costs. It is also looking into when BABs may be retired.
States and local governments selling the bonds are concerned about losing the federal rebate or having the payments delayed if the U.S. government says they have violated securities laws.
The IRS offered some reassurance in the notice, saying it is "committed to further developing its compliance programs for direct pay bonds similar to its compliance programs for tax-exempt bonds."
As part of the new health reform bill, a handful of medical expenses will result in a break for American taxpayers. Dentures, acne cream, and even artificial turf for children with allergies are all viewed as medical expenses by the IRS. However, nursing mothers will not be allowed to use tax-sheltered health care accounts to pay for breast pumps, since the IRS has ruled that breastfeeding does not qualify as a form of medical care.
With all the changes the health care overhaul will bring in the coming years, it nonetheless will leave those regulations intact when new rules for flexible spending accounts go into effect in January. Those allow millions of Americans to set aside part of their pretax earnings to pay for unreimbursed medical expenses.
While breast-feeding supplies weren’t allowed under the old regulations either, one major goal of the health care overhaul was to control medical costs by encouraging preventive procedures like immunizations and screenings.
Despite a growing body of research indicating that the antibodies passed from mother to child in breast milk could reduce disease among infants — including one recent study that found it could prevent the premature death of 900 babies a year — the I.R.S. has denied a request from the American Academy of Pediatrics to reclassify breast-feeding costs as a medical care expense.
In some respects, the biggest roadblock for mothers’ groups and advocates of breast-feeding is one of their central arguments: nursing a child is beneficial because it is natural.
I.R.S. officials say they consider breast milk a food that can promote good health, the same way that eating citrus fruit can prevent scurvy. But because the I.R.S. code considers nutrition a necessity rather than a medical condition, the agency’s analysts view the cost of breast pumps, bottles and pads as no more deserving of a tax break than an orange juicer.
Tuesday, October 26, 2010
According to data from a new Social Security report one out of every 34 Americans that earned wages in 2008, had no income whatsoever in 2009. Although the report came out earlier in the month, this article on Tax.com has brought the data back into the spotlight.
It's not just every 34th earner whose financial situation has been upended by the financial crisis. Average wages, median wages, and total wages have all declined -- except at the very top, where they leaped dramatically, increasing five-fold.
Johnston writes that while the number of Americans earning more than $50 million fell from 131 in 2008 to 74 in 2009, those that remained at the top increased their income from an average of $91.2 million in 2008 to almost $519 million.
The wealth is astounding, says Johnston. "That's nearly $10 million in weekly pay!... These 74 people made as much as the 19 million lowest-paid people in America, who constitute one in every eight workers."
Last week Lambda Legal published a helpful guide to help taxpayers and tax preparers in California with a recent IRS tax law change that applies to thousands of legally married same-sex couples, as well as registered domestic partners in California. Check out the following snippet from their press release, or click here for the full text.
The change, announced earlier this year by the Internal Revenue Service, applies to California's registered domestic partners (RDPs) and also may apply to the state's estimated 18,000 legally married same-sex couples, as well as registered domestic partners in Nevada and Washington. In a change from the approach taken by the Bush Administration, the IRS will now recognize the jointly owned community property income earned by California RDPs, the same way it long has done for different-sex married couples who file separate federal income tax returns. Recognition of "community income" means couples each will report half of their combined income on their separate returns -- called "income-splitting" -- which can mean big savings for couples with wide disparities in income.
"This change represents one more good step in the direction of treating same-sex couples who have formalized their relationship under state law the same as married different-sex couples are treated," said Jennifer C. Pizer, National Marriage Project Director for Lambda Legal. "The problem addressed by this new policy highlights what marriage discrimination means – an endless stream of sometimes small inequalities that often end up costing same-sex couples real dollars as well as their dignity. But let's be clear – while this is welcome progress towards our community's goal of full legal equality for same-sex couples, the IRS still won't allow us to file a joint tax return or otherwise respect our family relationships, and federal law as a whole still discriminates against us in countless serious ways. This is a small step, but it's a good one."
The document is entitled "The IRS Applies 'Income-Splitting' Community Property Treatment to California's Registered Domestic Partners: Preliminary Answers to Some Frequently Asked Questions." It was prepared by Pizer, Lambda Legal Staff Attorney Peter C. Renn and tax attorneys at the prestigious Irell & Manella law firm in Los Angeles, with consultation by Wendy E. Hartmann of the Bennett & Erdman law firm, also in Los Angeles, who specializes in estate planning for same-sex couples.
From Washington Post.com:
Within 15 years, the sun could supply 10 percent of the nation's power needs, according to research by the nonprofit group Climate Action. The White House will be part of any such trend, as President Obama announced the return of solar panels to heat water and supply some electricity for the first family.
The president's move has homeowners wondering whether their roofs should be soaking up rays, too. So how do you go solar?
Your first step is to the Web.
Sites sponsored by the Department of Energy and several solar panel manufacturers offer calculators to give you a sense of whether solar is worth pursuing for your home. You enter your Zip code and electrical needs - either in terms of kilowatt-hours from your utility bill or how much you spend per month on power. The program knows how much sun your area enjoys and which tax incentives are available. It will predict how much money you'd save over 25 years, after which most solar panel warranties expire. (The panels will probably last longer than that, though.)
The program doesn't know much about your particular home, and those details can make a difference. Do you have a south-facing roof? Is your roof shaded by trees you're fond of? You'll need to call in some installers for a reality check.
My favorite holiday (Halloween) is just a few days away, and thousands of children and adults are getting out their pumpkin carving kits to prepare for the big night. Unfortunately, according to new reports a family owned pumpkin stand was almost put out of business because of an aggressive State tax collector.
The Lewiston Tribune reports the Idaho State Tax Commission has called for the closure of a family's pumpkin stand in Lewiston, a mill city along the Snake and Clearwater rivers.
Dan and Kami Charais told the newspaper that a Tax Commission employee informed them the stand was in violation of laws and had to shut its doors.
The couple says their 4- and 6-year-old children had been carving out a niche for themselves in the local jack-o-lantern market - to raise money for school sports, they say.
A Tax Commission representative told the newspaper that even goods sold at roadside stands are taxable and that the stand did not have a proper permit.
Monday, October 25, 2010
Halloween is one of my favorite holidays. I always look forward to my law firm’s annual celebration. However, there is more to Halloween than costumes and trick-or-treating. The end of the year is only a few weeks away, and Halloween season is a good time to start thinking about taxes. To help my readers save a little money this year, I have put together ten spooky Halloween tax tips.
1. Haunted Home Renovations
Before you have guests over for a Halloween party, you might want to consider making some green renovations to save on energy. By installing a programmable thermostat, or upgrading to dual pane windows, you can keep your guests comfortable and also qualify for an Energy Star tax incentive. For more information, check out EnergyStar.gov.
2. Spooky Soiree's
Most teachers try to throw Halloween parties for their students, but due to budget cuts many educators are forced to finance these events out of their own pockets. Fortunately, if you are a qualifying teacher then you can use these expenses as part of your educator expense deduction.
3. Supernatural Savings
The average consumer spends about $66 each year on Halloween decorations, costumes and candy. Unfortunately, if you visit your local party supply store then you may end up paying more then you need to for your Halloween supplies. Instead, check out deals online to make your money stretch.
4. Eerie Extensions
If you had to file a tax return extension in 2009, then October 15th was the deadline to get your return in. The longer you wait to file your return, the more you will have to pay in IRS late penalties. If you have not yet competed your return, I highly recommend calling a tax professional right away.
5. Chilling Charity
As the weather cools down in October, charities begin asking for cool weather donations. When you have some free time, go through your winter wardrobe with your family to see if you have any extra sweaters, or blankets to donate. Keep the receipt for your contributions, and you can deduct the donation on your next tax return. However, you will need to itemize your return to qualify for this specific tax incentive. For more information, you can read this article explaining the charitable contribution deduction on RDTC.com.
6. Tip or Treat
If you receive tips at your job, then the IRS requires that you keep track of your total tips and report them to your employer. According to Topic 761, if you get $20 or more in tips during a calendar month then you are required to report them to your employer by the 10th of the following month.
7. Witchy Work Party
Throwing a Halloween party at the office is not only great for moral, but also comes with a nice little tax deduction. Food and supplies purchased for your employees can usually be written off if the party is held on the premises. If you plan a dinner or get together at a nearby restaurant then you can deduct half of the expense.
8. Dastardly Deadlines
Since every taxpayer is not required to make estimated quarterly tax payments, it can be easy to forget about the deadlines. Unfortunately, September 15th was a payment due date, and if you did not remember to send in your check then you should try to do so as soon as possible to avoid excessive penalties.
October is a busy month for many farmers. Luckily, there are several ways for taxpayers who own farms to save on their taxes. Hiring family members or depreciating capital farm assets are both tax savvy moves to make. For more information, you can read IRS Publication 225, Farmer’s Tax Guide.
10. Creepy CalculatingLike it or not, Halloween means that there are only two months left in the year. It is a good idea to think about calculating your tax liability so that you get a head start on end of the year tax planning. If you are looking for ways to prevent owing the IRS a large payment, then check out this article on RDTC.com with advice on how to lower your tax liability.
Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!
Question: Roni, if I donate Halloween candy and costumes to a local children’s home, is that deductible?
Answer: What a fun idea and a wonderful thing to do for those kids. Dressing up for Halloween is such a big part of childhood; I love the idea of helping underprivileged kids experience that!
To answer your question, yes you should be able to deduct the contribution so long as the children’s home is a recognized tax-exempt charitable organization. If you aren’t sure, you can ask the organization or you can check out www.IRS.gov to be sure. And remember, you will need some written acknowledgement of your donation from the children’s home, like a thank you letter.
Question: What are the differences between tax credits, deductions, and exemptions?
Answer: I’m so glad you asked this question, people use these terms interchangeably, and it drives me a little nuts.
A deduction refers to something you spent money on that can be deducted from your taxable income. The amount of the deduction varies based on what the expense was, how much you spent and IRS eligibility requirements. For example: if you donate $1,000 to a recognized charity, you could deduct your taxable income by $1,000.
An exemption allows you to reduce your taxable income, much like a deduction. However, exemptions are given in set dollar amounts ($3,650 in 2010) and are not tied to your actual expenses. Instead they are generally tied to the number of people you support. For example, you can claim an exemption for yourself, one for your spouse if you file jointly, and one additional exemption for each taxable dependent you support.
The tax bill impact of deductions and credits is tied to your tax bracket. If you are in the 25% tax bracket, a $1,000 deduction results in a $250 reduction in tax your tax bill. In the same vein - still assuming a 25% tax bracket - that $3,650 exemption will result in a $912.50 reduction in tax bill.
A tax credit is a dollar for dollar reduction in your tax bill. Credits are usually tied to how you spend money, or your income and family status. So, if you have a $100 tax credit, it will result in lowering your total tax bill by $100. Tax credits are almost always more beneficial than deductions.
There are refundable and non-refundable types of credits. A refundable credit means that if the amount of your credit exceeds the amount of taxes due, you can actually get a refund check for the rest. (For example, if your tax bill is $500, and you have a refundable credit for $1,000, you could actually get a refund check for $500.). Non-refundable credits can only result in a reduction of your tax bill, but not give you a refund. For example, if you have a $500 tax bill, and a $1,000 non-refundable tax credit, your tax bill will be reduced to zero, but you would not get a check for $500.
I hope this helps clarify these tax terms for you. Understanding the differences can help you make better tax choices.
Although my home state of California is often scrutinized for it's heavy corporate tax rate, according to this article from LA Times.com, the burden is no heavier than the national average. In fact, California takes an estimated 4.7% of what businesses produce in taxes, which is the exact same as the national average.
The government take is higher in Alaska (13.8%), New York (5.5%) and Florida (5.3%). Even Texas, known for rolling out the red carpet for business, pocketed more than California — 4.9%.
That's according to an annual study of the tax burdens in all 50 states by the Council on State Taxation, a business-friendly group led by senior executives of Chevron Corp., General Electric Co. and other major corporations.
"California is pretty middle-of-the-pack when it comes to business taxes," said Joseph R. Crosby, the organization's senior director of policy.
Although the state's corporate income tax rate — 8.84% — is among the higher in the nation, its bite is diminished by various tax credits and other measures that have been adopted over the years, including:
• One of the most generous research-and-development tax credits in the nation, allowing businesses to deduct 15% of the amount they increase their R&D funding over a base level. The national median is 6.5%, according to Yonghong Wu of the University of Illinois at Chicago.
• Proposition 13, the 1978 initiative that limits property tax increases to 1% a year until properties are sold, when they are reassessed at the market value. This has slowly shifted the property tax burden from businesses to homeowners, since commercial real estate changes hands less often than residential.
Over the weekend it was reported that a law firm in Connecticut opened the first drive-through law firm. Now, dropping off documents for clients of the personal injury firm is as easy as getting a Mc Vale meal.
The Kocian Law Group has opened a drive-through office in a building that once housed a former Kenny Rogers Roasters.
Attorney Nick Kocian tells WVIT-TV that clients can use the drive-through at the law firm's Manchester, Conn., site to drop off and pick up documents.
He says it's more convenient for his clients. A paralegal works at the window, handing out documents and answering questions.
Consultations and meetings with lawyers will still be scheduled for the office.
From The Tax Foundation:
If you haven't watched last night's season four finale of Mad Men, I won't give anything away other than something you already knew: Don Draper is selling his Ossining, NY house where he's been letting his ex-wife and her new husband live. His accountant helps him figure out the sale, to which Don grouches, "What's the capital gains tax, 48%?"
Not quite, Don, although the comment should make viewers aware of the higher tax rates of 1965 compared to today. Don's probably got income taxes in his head: the federal income tax in 1965 topped out at 70% on income over $100,000, having been reduced from 90% by the Kennedy-Johnson tax cut of 1964. (Today it's 35%, and scheduled to go to 39.6% on January 1, 2011.) Don Draper is probably in that top tax bracket, since he has the cash on hand to lend the firm $150,000 as he just did. (Not a loss, an investment!)
Today, the long-term capital gains tax is 15% (scheduled to go to 20% on January 1, 2011); Don's probably paying about twice that. Since 1997, much of one's capital gain from the sale of a home is excluded from tax. (This change has been suggested as a contributing factor to the home-flipping phenomenon and the housing crash.) Before 1997, the exclusion was much smaller and you had to buy another home within a certain timeframe. This generous provision didn't exist for Don Draper; it didn't come about until 1978.
Back in 1965, figuring out capital gains tax was more complicated. This Congressional Research Service paper (PDF) summarizes the fiddling with capital gains tax, beginning in 1921 when they were taxed at a flat 12.5% rate. In 1938, a big change occurred where you either excluded half of your gain but paid full tax on the other half, or you paid a flat 15% on the whole thing. After 1942 (until 1969), the rule was the same but the flat rate was 25%. So Don could either pay 35% (70% on half of the gain) or 25%. Plus New York taxes of 10%, with some of that deductible. I'm sure that's what his accountant told him after his "48%" line.
Saturday, October 23, 2010
Earlier in the week the Freakonomics blog on NYTimes.com posted an opinion piece on the largest tax mistakes that could be made this year. With the looming expiration of the Bush tax cuts, and changes to capital gains rates on the horizon new tax laws are inevitable. Author Stephen J. Dunber asked a hand full of "smart people" what would be the biggest potential tax policy mistake? You can find a few of the responses below courtesy of the Tax Prof, or click here for the full article.
William G. Gale (co-director, Urban-Brookings Tax Policy Center): "Policy makers have already made the biggest potential tax policy mistake they could have made this year. Ever since the tax cuts were enacted in 2001 and 2003, policy makers have known the law would expire at the end of 2010. That “drop dead” date offered an auspicious way to galvanize a systematic effort to reform a tax system that is badly in need of repair. Instead, policy makers pretty much ignored the issue until just before the 2010 Congressional recess, when politically tinged efforts to extend some or all of the tax cuts finally began — a “debate” that was too little, too narrow, and too late."
Donald Marron (director, Urban Brookings Tax Policy Center): "With little time left on the legislative clock, policymakers will be hard-pressed to top the tax policy blunders they’ve already made this year. Most notable is their failure to decide what this year’s tax law should be. While politicians, analysts and the media endlessly debate how expiring tax cuts might affect taxpayers in 2011, the real disgrace is that we still don’t know what the tax law is in 2010."
Joel Slemrod (professor of economics and public policy, University of Michigan): "The biggest possible mistake would be to lose sight of the long-term issues that surround tax policy. Given the depth of the recent recession as well as the slow pace and apparent fragility of the expansion, it is appropriate that the macroeconomic effect of tax policy changes be taken seriously. A big jump in the tax level could abort the delicate recovery."
Michael Cooper over at The New York Times stopped off at the Pig Pickin and Politickin rally in North Carolina the other day to ask folks about the Obama tax cuts. Their response, not surprisingly, was “What Obama tax cuts?”
This despite the fact that about one-third of the much-reviled 2009 stimulus—or almost $300 billion--came in the form of tax reductions. According to Tax Policy Center estimates, 96.9 percent of households enjoyed a tax cut that averaged almost $1,200. Just one measure—Obama’s Making Work Pay tax credit—put more than $116 billion into people’s pockets in 2009 and 2010.
Yet, a Times poll found that fewer than 10 percent of those surveyed had any clue. Remarkably, fully one-third thought their taxes went up—even though the actual number was about zero.
How could so many people have missed it? After all, $1,200 ain’t nothing. In large part, it was due to the design of Obama’s tax plan. Earlier stimulus tax cuts often came in the form of ostentatious checks from the Treasury. In 2008, for example, President Bush proposed a tax reduction only half the size of Obama’s (about $145 billion). But it was delivered to households in the form of rebate checks—generally $600 per adult and $300 per child.
Swiss banking regulators warned financial institutions in the country that they need to overhaul their services yesterday to prevent another legal battle with the IRS. According to the Wall Street Journal, the regulators suggested banks limit the risk of being pursued by U.S. authorities like USB was earlier this year.
"In its capacity as supervisor, Finma expects institutions to take due account of foreign supervisory legislation in particular, and to define a service model appropriate for each individual target market," Finma said in a statement.
The cost of doing business—both monetary and in reputation—with wealthy foreigners has risen considerably since the U.S. and European Union member states began piling pressure on Switzerland, eager to get at tax income from undeclared funds held in Swiss banks.
The highest-profile case is UBS, which was pursued by U.S. authorities in the criminal as well as civil courts over hidden Swiss accounts. UBS ultimately admitted wrongdoing, paid $780 million to defer criminal prosecution, and handed over thousands of sets of data on clients to set aside the litigation. The U.S. is expected to set aside the civil court case shortly.
The UBS case has wide implications for other Swiss banks, many of which have traditionally dealt with assets of foreign clients, some of it undeclared, according to private bankers.
Last year, Switzerland ceded some ground, finally bringing it in line with standards laid out by the Organization for Economic Cooperation and Development. For example, it now helps foreign nations pursue tax evaders as well as outright cheats.
Friday, October 22, 2010
New reports have emerged regarding the complicated international business structure to keep its corporate tax rate at a super low 2.4%. The search giant takes advantage of generous laws in countries including Ireland, the Netherlands, and Bermuda to save on their tax bill.
The heart of Google's (GOOG) international operations is a silvery glass office building in central Dublin, a block from the city's Grand Canal. In 2009 the office, which houses roughly 2,000 Google employees, was credited with 88 percent of the search juggernaut's $12.5 billion in sales outside the U.S. Most of the profits, however, went to the tax haven of Bermuda.
To reduce its overseas tax bill, Google uses a complicated legal structure that has saved it $3.1 billion since 2007 and boosted last year's overall earnings by 26 percent. While many multinationals use similar structures, Google has managed to lower its overseas tax rate more than its peers in the technology sector. Its rate since 2007 has been 2.4 percent. According to company disclosures, Apple (AAPL), Oracle (ORCL), Microsoft (MSFT), and IBM (IBM)—which together with Google make up the top five technology companies by market capitalization—reported tax rates between 4.5 percent and 25.8 percent on their overseas earnings from 2007 to 2009. "It's remarkable that Google's effective rate is that low," says Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Dept. "This company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent." The corporate tax rate in the U.K., Google's second-largest market after the U.S., is 28 percent.
In Bermuda there's no corporate income tax at all. Google's profits travel to the island's white sands via a convoluted route known to tax lawyers as the "Double Irish" and the "Dutch Sandwich." In Google's case, it generally works like this: When a company in Europe, the Middle East, or Africa purchases a search ad through Google, it sends the money to Google Ireland. The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don't stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008.
Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn't tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the "Double Irish" nickname.)
From the Wall Street Journal:
During last year's "Jobs Summit," President Obama said he was open to any good idea to get the economy moving again. Today he should be especially so, since Washington's many monetary and fiscal policy decisions have not been able to spur the robust growth or job expansion that we all would like. And yet there is a simple idea—the trillion-dollar elephant in the room—that has apparently been dismissed for no good reason.
One trillion dollars is roughly the amount of earnings that American companies have in their foreign operations—and that they could repatriate to the United States. That money, in turn, could be invested in U.S. jobs, capital assets, research and development, and more.
But for U.S companies such repatriation of earnings carries a significant penalty: a federal tax of up to 35%. This means that U.S. companies can, without significant consequence, use their foreign earnings to invest in any country in the world—except here.
According to the IRS' newest press release, the Information Reporting Program Advisory Committee (IRPAC) released its newest report. The annual report includes recommendations on a variety of tax issues.
IRPAC provides a public forum for the IRS and members of the information reporting community in the private sector to discuss relevant information reporting issues. The IRPAC is administered by the National Public Liaison Office of the IRS. IRPAC draws its members from the tax professional community
Based on its findings and discussions, IRPAC reviewed 30 issues and made recommendations on a broad array of issues and concerns, including the following:
- Health care reporting (Form W-2) for 2011.
- Information reporting (Form 1099-MISC) under the Patient Protection and Affordable Care Act of 2010.
- Cost basis reporting by financial institutions of customer cost basis in securities transactions.
- Payment reporting (Section 6050W) made in settlement of payment card and third party transactions.
- Withholding and tax information reporting of payments of U.S. source income to foreign financial institutions and non-financial foreign entities, under Foreign Account Tax Compliance Act (FATCA).
My home state of California is on the verge of making history. Proposition 19, which currently has a narrow lead in the polls, would repeal marijuana prohibition. Supporters of the legislation have suggested that the law could generate over a billion dollars in revenue for the state. However, according to this article on Politico, these estimates are misleading.
Supporters of legalization claim that treating marijuana like other legal vices – for example, tobacco and alcohol — could generate $1.4 billion in badly needed new tax revenue for California. This is more than alcohol and tobacco cigarette taxes, combined, now generate.
Such claims could easily push Prop 19 over the top on Nov. 2. Unfortunately, the tantalizing revenue projections are high—“Up in Smoke” high.
California is unlikely to collect $1.4 billion in marijuana taxes. Not yet, anyway. But it’s not because forecasters have grossly over-estimated Californians’ appetite for the drug. Commentators quibble about consumption data, but no one seriously doubts marijuana is a multibillion-dollar industry in the Golden State.
Rather, the real problem with the revenue estimates is that forecasters have ignored how hard it would be to collect a marijuana tax.
The state’s Board of Equalization, for example, has just assumed marijuana growers would pay any tax—100 percent of the time. That’s an audacious assumption. No tax has a 100 percent compliance rate. And the incentive to evade a marijuana tax would be particularly strong: the tax rate forecasters use is around 37 percent.
Wednesday, October 20, 2010
Bank of America made headlines with their announcement that they would temporarily pause all foreclosure proceedings to investigate procedures and allegations of false affidavits. Shortly thereafter banks like Chase and GMAC also issued a memorandum against evictions. The current review is only expected to take a few weeks. At that point financial institutions are hoping that foreclosures can resume, however, the possibility of mass foreclosure fraud has worried taxpayers across the country. Currently, 10% of Americans are delinquent on their home loans, and with an election just around the corner many members of Congress have spoken out about the possibility of a nationwide foreclosure freeze. Although the Obama administration does not support the moratorium on a Federal level, the Senate Banking Committee has scheduled a hearing on November 16th to address the issue.
For all of my readers confused about the foreclosure fraud investigations and nationwide freeze, I have put together the following list of pros and cons. If you can think of any that I might have missed, drop me a line on either Twitter or Facebook.
Pro: Help to Struggling Homeowners
The number of American families that has suffered a foreclosure has been on the rise since 2007, and it has been expected that nearly five million homeowners could face foreclosure in the next two years. With a freeze in place, thousands of families will be able to stay in their homes. However, the current moratorium is only temporary and banks are still tracking delinquency so that they can resume foreclosure proceedings once the investigation has concluded.
Con: Nightmare for Banks
Although the investigation into foreclosure practices might be good for families struggling to pay their bills, it could become a nightmare for banks, and many other Americans. The credit market has been tight for years, which has made it difficult for small business owners to hire additional workers. Economists suggest that financial institutions stand to lose $2 billion every month that foreclosures are not moving forward. If revenue continues to decline, many worry that it will continue to prevent any improvement to the unemployment problem. Additionally, if banks are found guilty of foreclosure fraud it could lead to hundreds of lawsuits.
Pro: Fraud Investigations
The reason banks have been stalling foreclosures is to look into allegations of foreclosure fraud. When Bank of America began their freeze, officials claimed it was to look into cases to ensure no fraudulent documents were used to confiscate homes. After the investigations conclude, safer foreclosure programs are expected to be enacted which will help protect American homeowners. Additionally, some taxpayers could receive compensation if it is deemed that banks used fraudulent documents.
Con: Economic Recovery Prevention
Many politicians have warned a federally mandated nationwide foreclosure freeze would be bad for the economy. During a speech in New York, Senate Banking Committee Chairman Christopher Dodd said “a broad, sweeping moratorium is probably unwise. There are many institutions that are actually engaging the foreclosure process intelligently and well and doing a good job. To stop that across the board from happening would be very harmful for the economy.”
Pro: Stop to Robo Signing
Unfortunately, as financial institutions foreclosed on record numbers of homes over the past few years, the practice of using robo-signers emerged. Experts are accusing these so called robo-signers of approving hundreds of foreclosures every day, without taking the time to review them for legality. If investigations prove that this practice led to unjust foreclosures, then the government may step in to prevent robo-signers.
Con: Housing Market Instability
Earlier in the week the RDTC Tax Help Blog posted the newest entry in its deduction of the week series. The new article explains the deduction available for health saving accounts (HSAs). Contributions to these plans are usually tax-deductible, and withdrawals are not taxable if the money is used for a qualifying medical expense.
Above the Line
The HSA deduction is an above the line deduction, meaning that you can itemize even if you claim the standard deduction.
The deduction you can claim for your HSA contributions are limited to a maximum dollar amount. In 2010, the limit is $3,050 for individual coverage, $6,150 for family coverage, and $1,000 for catch-up contributions.
According to IRS Publication 969, to be eligible for the HSA deduction you must meet the following requirements:
- You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month.
- You have no other health coverage except what is permitted under Other health coverage.
- You are not enrolled in Medicare.
- You cannot be claimed as a dependent on someone else's 2009 tax return.
- Claiming the Deduction
A new guest blog authored by the Roni Deutch Tax Center team explaining how to interview potential employees has been posted on FranchiseBusinessReview.com. You can find a few of the tips below, or click here for the full list.
Schedule the interview for at least a couple days after you have decided to review the applicant. Take the time to prepare the questions you want to ask, and make sure you ask questions related to the specific position you are hiring for.
2. Phone Interview
If you are hiring for a specific position then you may want to have a phone interview before an in-person interview. This will help you make sure the applicants are qualified, and get a good sense of their personality. If you decide during the phone call that you like the applicant, setup a time for them to have an in-person interview.
3. Stick to the Rules
Before holding any interviews, make sure that you have reviewed all of your state laws on which questions you are not allowed to ask during an interview—having someone experienced with Human Resources give you the run down is optimal. Different states have different restrictions in addition to federally protected rights that you may not know about.
Tuesday, October 19, 2010
Of all the tax issues facing Congress when it returns for a lame duck session after the Nov. 2 midterm elections, the annual rite of patching the Alternative Minimum Tax will be the most urgent.
Unlike the debate over the Bush tax cuts, which will affect taxpayers' income in 2011, the AMT applies to 2010. And the delay in patching it is already causing problems and raising alarms for large numbers of middle-income taxpayers -- as many as 25 million Americans, according to one expert -- who could face a huge increase in their tax payments if Congress doesn't act.
Enacted in 1969, the Alternative Minimum Tax was originally aimed at 155 extremely wealthy taxpayers who had avoided paying federal taxes completely. It was an add-on tax designed to ensure that everyone paid some income tax every year. Since then it has evolved into the primary tax mechanism for taxing high income taxpayers.
Under the original system, taxpayers who earned more than $200,000 -- a very high income 30 years ago -- were required to calculate their taxes differently, resulting in a larger tax payment for the wealthy.
Last Friday Examiner.com posted an interesting article on the advantages of going green. An article from the RDTC Tax Help Blog was even quoted towards the end of the article, for a post from earlier in the year that explained the tax advantages of going green in 2010. You can find a section of the Examiner.com article below, or click here for the full text.
Improved customer image
Customers are influenced in their purchasing decisions by whether a business shows environmental consciousness. For instance, Environmental Leader reported in 2007 that 72 percent of rental customers wanted hybrid vehicles included among rental car options, according to a survey conducted by Priceline.com. Nearly half of all cell phone customers consider a mobile carrier provider's "green" credentials, according to a 2009 ABI Research report cited by Green Electronics Daily. In a tough housing market, 70 percent of potential home buyers were more inclined to purchase homes with "green" features, according to LOHAS Online, (Lifestyles of Health and Sustainability) quoting the 2008 Green SmartMarket Report from McGraw-Hill Construction Analytics entitled "The Green Home Consumer: Driving Demand for Green Homes." Customers also and tend to remain loyal to "green" companies during economic downturns, MoreBusiness.com claims.
Enhanced worker productivity
The U.S. Environmental Protection Agency (EPA) defines "sick building syndrome" to refer to health-related complaints by workers that cannot be attributed to a particular cause. A similar condition, "building related illness," applies to health-related complaints directly related to airborne contaminants. Symptoms of "sick building syndrome" and "building related illness" include respiratory distress, headache, fatigue and dizziness, according to the EPA. A survey of 100 office workers revealed that 23 percent suffered symptoms related to "sick building syndrome," according to the New York Real Estate Journal, citing research from the ASHRAE Journal (American Society of Heating, Refrigerating, and Air-Conditioning Engineers).
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