Uncle Sam Wants You... to Repay the Home Tax Credit

If you bought a house in 2008, and took advantage of the $7,500 credit, your timing was not so good. Those who bought in 08 will need to repay that money to the IRS.

MSNBC’s Allison Linn explains:

Uncle Sam has a reminder for some people who took advantage of the first-time homebuyer tax credit three years ago: He wants his money back.

Americans who bought homes in 2008 using the government’s tax credit will be required to start repaying the credit beginning with their 2010 tax return, according to the Internal Revenue Service.

In an odd twist, those who took advantage of a nearly identical tax credit in 2009 or 2010 will not be required to pay it back.

Under the terms of the 2008 tax credit, the credit must be paid back over a 15-year period, beginning with this year’s return.

That means anyone who took the maximum $7,500 credit will have to add $500 to their income tax liability for 15 years. If you sell your house before the 15 years are up, the entire tax credit bill will be due the year the house is sold.

The Internal Revenue Service describes the 2008 program as “like an interest-free loan.”

Read more here

(Thanks to Marty Wolk for the heads up!)

Questions for the Tax Lady: August 2nd, 2010

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 #1: I recently got divorced from my spouse and am required to make alimony payments. Can I deduct these funds on my federal tax return?

Yes, as long as you meet the IRS’ requirements you should be able to deduct alimony payments paid to a former spouse. To learn more about the alimony payment deduction, check out this article from the Roni Deutch Tax Center – Tax Help Blog.

Question #2: I had to pay late penalties to the IRS, can I deduct these expenses?

No. According to IRS.gov, interest and penalties paid to the IRS on federal taxes are not deductible.

Questions for the Tax Lady: July 12th, 2010

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 #1: Is it possible to have federal taxes withheld from my unemployment check?

Yes. To have taxes withheld from your unemployment compensation you will need to file IRS Form W-4V, Voluntary Withholding Request.

Question #2: What are the differences between traditional and Roth IRAs?

The largest difference between traditional and Roth IRAs are their tax implications. When you have a Roth IRA contributions are made from income that has already been taxed. These contributions are not tax deductible, but future withdrawals are not subject to an income tax. On the other hand, traditional IRA contributions are tax deductible, but you will have to pay income taxes on future withdrawals.

The Tax Implications of the Gulf Oil Spill Catastrophe

Oil has been spewing into the Gulf since April 20^th and although the media is reportedly limited in their ability to report on the spill, many of us are well aware of the severe environmental implications. With oil washing up onto the American coast, and reports of massive underwater plumes, it is hard to imagine things could get any worse. However, the oil spill will have a long-term financial affect on the oil industry, businesses and millions of taxpayers.

Obama and Oil Taxes

President Obama has attempted to increase taxes on oil companies several times without success. In Obama’s first budget proposal he recommended a $31 billion tax on oil and gas companies, but Congress never enacted any legislation with the tax. Last year, the House of Representatives did pass cap and trade legislation designed to limit pollutant emissions and auction allowances to polluters, but the bill has stalled in the Senate for months. However, due to the strong public reaction to the BP oil leak Obama may finally make it happen.

Barrel Tax

Congress has been reluctant to pass any legislation to increase taxes on oil companies, but last week the House of Representatives passed a bill that would increase the current per barrel tax on oil from 8 cents to 34 cents. The Senate is now considering similar legislation, and there are rumors that the tax could be as high as 41 cents per barrel. These new taxes could potentially raise more than $12 billion in federal revenue over the next decade.

Drilling, a “Short-Term Bridge” to Clean Energy

Although he proposed tax increases on oil and gas companies, President Obama also supported continued offshore drilling during an address in March. Since the Gulf explosion the President has pulled back on some of those plans; clarify that drilling should only be used as a “short-term bridge” to clean energy.

Fisher Frustrations

When BP announced they would help reimburse Louisiana fishers for lost income due to the oil spill, taxpayers were glad to see the multinational corporation helping out smaller businesses. However, many fishers are becoming frustrated by the hoops they must jump through to collect payments from BP, while their own bills pile up. In order to receive assistance, each fisher must turn over three years of tax records, which is presenting a problem for some. In small town communities, it is fairly common for temporary workers to get paid in cash, moving from one fishing boat to the next when work is available, and some of the local small businesses are struggling to get the records needed for relief from BP.

Cleanup Efforts and Job Creation

Many fishing jobs were lost due to the oil spill, but the cleanup efforts have resulted in a significant number of new jobs in related industries. BP reportedly has over 25,000 workers and independent contractors working on the Gulf cleanup project. In addition to this direct job creation, many local businesses are also seeing related economic boosts. Hotels that are usually only half full during this season are hanging up “No Vacancy” signs, and other businesses such as restaurants are also seeing sizable customer increases from all the cleanup personnel.

State Oil Taxes

Plenty of states – including Alaska – already tax oil companies; and those states that do not are working to enact taxes on oil companies while public opinion is still strong. My home state of California is a prime example. The state Assembly has already put together a proposal to raise an estimated $1.2 billion per year in new oil company taxes. However, this is a very controversial issue as many assert doing business in California is already difficult because of all the additional taxes levied on businesses and corporations.

Short and Long Term Effect on Consumers

If taxes are indeed raised on oil companies, many experts assume this tax will be passed on to consumers. Several politicians are adamantly denying this prediction, but large oil and gas companies will undoubtedly find a way to pay these additional taxes without affecting their profit margins. Additionally, the oil leak will likely have an impact on the long-term supply of available usable oil, which could lead to even higher prices on consumers.

Long Term Financial Predictions

There is no way to predict the exact implications the Gulf oil catastrophe will have on American taxpayers, as no one knows how long it will take BP to stop the leak. On one hand, the temporary increase in cleanup-related jobs is helping many people financially. On the other hand, the environmental devastation will likely hurt the Gulf for years, if not decades, to come. With a pivotal midterm election in November, the future of any oil company tax increases could be in question. Oil taxes are very controversial, and public opinion will play a major role in how Congress decides.

IRS Issues Regulations on 10-Percent Tax on Tanning Services Effective July 1

Just days after Jersey Shore star Snookie and Senator John McCain brought media attention to the now famous tanning tax, the IRS has issued a new press release regarding the regulations on the 10 percent tax due to take effective July 1^st.

In general, providers of indoor tanning services will collect the tax at the time the purchaser pays for the tanning services. The provider then pays over these amounts to the government, quarterly, along with IRS Form 720, Quarterly Federal Excise Tax Return.

The tax does not apply to phototherapy services performed by a licensed medical professional on his or her premises. The regulations also provide an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.

You can download a PDF version of the regulations courtesy of FederalRegister.gov by clicking here.

The Pros and Cons of Value Added Taxes

A few weeks ago the U.S. Senate rejected a proposal to institute a Federal Value Added Tax (VAT) with an 85-13 majority vote. Although common throughout Europe these taxes are highly unpopular in America. The Senate’s decision was significant, as it is the first time either of the Congressional chambers have sent a strong message against a Federal VAT.

It was important for the Senate to go on record voting against a VAT as President Obama’s debt commission is considering a handful of tactics to improve the country’s debt problems. The commission – which is made up of eighteen members including six Senators – is expected to submit a report later this year on how to deal with the country’s financial problems. All six of the Senators in Obama’s commission voted against a VAT. Since the President’s rules assert fourteen of the eighteen members must agree on the commissions final recommendations, it is very unlikely that a VAT will be included in their proposal.

Since we have been hearing so much about a Federal VAT over the past few years, I wanted to take a minute to review some of the largest pros and cons of such a tax with all of my blog readers.

PRO: Increased Revenue

Obviously, the largest benefit of any new taxes would be an increase in federal revenue. Currently, only state and local government agencies charge taxes on purchases, but by instituting a VAT the federal government could benefit from consumer spending as well.

CON: Regressive Tax System

Compared to our current tax system a VAT would be considered significantly regressive, meaning they benefit higher income taxpayers more so than those living closer to the poverty line. As we have all seen from recent headlines 47% of Americans pay little or no federal income tax. However, if the government instituted a VAT many more would pay federal taxes.

PRO: Easier Tax System

The U.S. tax system is very complicated and confusing. More and more Americans pay for professional tax help each year because of how complicated U.S. tax law has become. Proponents of a VAT suggest that it would make taxes more efficient and easier for taxpayers to understand.

CON: Higher Probability of Fraud

Although tax fraud is a serious issue currently facing the Federal government, many experts predict that since a VAT would create a more open system, that would likely lead to increased fraud. Additionally, the change from our current tax system to one with a VAT would be very difficult and time consuming, with lots of opportunities for fraud.

PRO: Lost Online Sales Taxes

Online stores such as Amazon.com, often get out of charging consumers sales taxes because of a 1992 Supreme Court ruling that retailers must have a physical presence in the state to collect excise taxes. However, some experts claim that a VAT could solve this problem of lost online sales taxes by levying taxes on all sales, even online sales.

CON: Less Revenue Than Expected

Unfortunately, it takes government agencies a lot of time and money to enforce VATs. In some countries, the VAT has generated significantly less revenue than expected because of the hefty enforcement costs. As such, it is hard to predict how a VAT would impact federal revenue since there is no way to predict how much the change, and ensuing enforcement would cost.

Tax Bills In 2009 At Lowest Level Since 1950

According to a new analysis of federal data, the average U.S. taxpayers paid less tax last year then they have since 1950. Federal, state, and local taxes, consumed about 9.2% of personal income in 2009, which is much lower then the 12% average we have seen for the past few decades.

The overall tax burden hit bottom in December at 8.8.% of income before rising slightly in the first three months of 2010.

"The idea that taxes are high right now is pretty much nuts," says Michael Ettlinger, head of economic policy at the liberal Center for American Progress. The real problem is spending,counters Adam Brandon of FreedomWorks, which organizes Tea Party groups. "The money we borrow is going to be paid back through taxation in the future," he says.

Individual tax rates vary widely based on how much a taxpayer earns, where the person lives and other factors. On average, though, the tax rate paid by all Americans — rich and poor, combined — has fallen 26% since the recession began in 2007. That means a $3,400 annual tax savings for a household paying the average national rate and earning the average national household income of $102,000.

Continue reading at USA Today.com…

Questions for the Tax Lady: April 26th, 2010

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 #1: If I make energy efficient upgrades to a rental property will they still qualify for the federal tax credit?

Unfortunately, the IRS will only allow you to claim the federal tax credit for energy efficient improvements made to your primary residence. Therefore, rental properties or summer homes will generally not qualify.

Question #2: I just realized I made a mistake on my federal tax return, how do I correct it?

You may need to file an amended return with the IRS depending on the error. If it is just a simple math error then the IRS will most likely correct it, but if you forgot to include all sources of income or missed a valuable credit then you will need for file IRS Form 1040X, Amended U.S. Individual Income Tax Return.

How to Avoid Giving Uncle Sam a Free Loan

From Market Watch.com:

With April 15 behind you, it's time to breathe a sigh of relief. But if you got a tax refund this year, consider making changes now to avoid giving the government an interest-free loan until next April.

Organizing your finances so that you get no refund and owe nothing when you file your return is the ideal touted by some financial planners. Managing your taxes is not easy.

Still, by adjusting your withholding now you can at least reduce your refund.

"There are lots of people who say any refund is too big because they don't want the government to have their money and not [pay] interest on it," said Diane Winland, certified public accountant and certified financial planner at Financial Finesse Inc.

Winland said she isn't a fan of writing checks to the Internal Revenue Service, but "I actually like to owe a little."

You can choose to have less in taxes deducted from each paycheck, and instead take that money and put it to work for you by investing or saving it.

Top Ten List Of Things To Know About Making Federal Tax Payments

With only a little over a week before the tax deadline, many taxpayers are rushing to get their returns prepared. Unfortunately, it can be easy to make a mistake and if you owe the IRS money then you face the risk of an additional fee or penalty if you do not get your taxes paid in full before April 15^th. CreditUnionsOnline.com put together a nice list of 10 things to know about making federal tax payments, and if you need to write a check to the IRS this year then I highly recommend checking out their full list here.

1. Never send cash!

2. If you file electronically, you can file and pay in a single step by authorizing an electronic funds withdrawal via tax preparation software or a tax professional.

3. Whether you file a paper return or electronically, you can pay by phone or online using a credit or debit card.

4. Electronic payment options provide an alternative to paying taxes or user fees by check or money order. You can make payments 24 hours a day, seven days a week. Visit IRS.gov and search e-pay, or refer to Publication 3611, e-File Electronic Payments for more details.

Continue reading at CreditUnionsOnline.com…

Taxes to Watch Out for in 2010

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.

Fair Tax

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.

Estate Taxes

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.

War Taxes

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 Tax

Over 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.

Tax Challenges of Being a U.S. Citizen Abroad

Yesterday the Roni Deutch Tax Center – Tax Help Blog posted a new article with advice for American taxpayers living outside the country. As the entry explains, even if you move to another country you are still going to have to deal with the IRS and U.S. taxes. I have included a section of the article below, but you can find the full text here.

The IRS Still Wants your Money

You may be surprised to learn that even through you may move out of the country, and work abroad, you are still required to pay taxes. Every year you will need to file a tax return claiming your worldwide income, even if you have already paid taxes on the income in the country you are living in. This applies to both earned income (such as wages or self employment income) and unearned income (such as capital gains, interest and dividends, etc).

Foreign Earned Income Exclusion

If you have been earning income while living abroad for more than a year, then you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. It would allow you to exclude up to $91,400 of foreign income for the 2009 tax year. The requirements depend on which country you are residing in, how many days you have been living there, and your worldwide income. This credit can be especially beneficial to taxpayers who might be subject to double taxation (those who have to pay taxes to both the U.S. government and their local tax authority). You can use the foreign income exclusion form (IRS Form 2555) to claim this deduction, but be sure you speak with a tax professional specializing in foreign income before sending off your return.

Foreign Tax Treaties

Fortunately, the United States has made tax treaties with several foreign countries to make paying taxes less difficult for some Americans living abroad. These treaties allow qualifying taxpayers to pay a reduced tax rate. Some are even allowed to be exempt from reporting foreign income. However, do not get too excited just yet. Not every foreign country has made an agreement with the U.S. government, so be sure to check out IRS Publication 901, and speak to a qualified expert before you begin taking advantage of treaty related tax benefits.

The Great Tax Drought of 2009

Recently the media has been given a lot of attention to job losses, and the ongoing health care debate, but one topic that has seemingly fallen off the radar is falling tax revenue. According to CNN Money, decreased federal tax revenue affect nearly all Americans.

Through the end of August, Uncle Sam collected 25% less in tax revenue for the year than during the same period a year earlier. The two biggest culprits were a 56% drop in corporate income tax revenue and a 20% drop in individual income tax revenue.

On balance, the Congressional Budget Office expects that tax receipts will be 14.9% of gross domestic product this year, well below the historical 18.3%average.

While revenue forecasts for next year are better, the CBO estimates tax receipts will only make up about 15.7% of GDP.

But two factors could lower that estimate. The first is whether or not the projections for economic growth and the unemployment rate prove too optimistic. If they do, that would reduce how much tax revenue Washington collects.

Continued at CNN Money.com…

A New Federal Tax Reform Panel

From Williams Tax Planning Blog:

Obama has appointed Paul Volcker to head a panel that will make recommendations for reforming our nation's tax laws. Volcker is also the head of the President's Economic Recovery Advisory Board.

The advisory panel will consider ways to simplify the tax code and reduce tax evasion, and will make recommendations to the President by December 4th, 2009, according to a White House briefing.

The last time we had any serious consideration for tax reform was in 2005 when President Bush appointed a panel of advisors to come up with simplified tax systems. Those recommendations were never implemented. There is a strong suspicion that recommendations coming out of this new tax reform panel might not fare any better. Rosanne Altshuler, who worked as the chief economist on the 2005 panel, fears that Paul Volcker and his team might be too constrained,

"President Obama has said that no one making less than $250,000 could pay higher taxes under any new reform. That means ninety-five percent of taxpayers can’t pay additional tax, even if it would result in a more efficient system, decrease inequities, or make their lives much simpler. At a time of monster deficits, that pretty much rules out any sensible reforms."

Senate Considers Federal Tax On Soda

From CBSNews.com:

The Senate Finance Committee today is hearing proposals on how to pay for President Obama's proposed universal health care plan, which is expected to cost more than $1 trillion. Among the proposals, as Consumer Affairs reports: A three-cent tax on sodas as well as other sugary drinks, including energy and sports drinks like Gatorade. Diet sodas would be exempt.

"While many factors promote weight gain, soft drinks are the only food or beverage that has been shown to increase the risk of overweight and obesity, which, in turn, increase the risk of diabetes, stroke, and many other health problems," Michael Jacobson of the Center for Science in the Public Interest, which is pushing the idea, said in his testimony. "Soft drinks are nutritionally worthless…[and] are directly related to weight gain, partly because beverages are more conducive to weight gain than solid foods."

According to Jacobson, "Beverage companies market more than 14 billion gallons of calorie-laden soft drinks annually. That is equivalent to about 506 12-oz. servings per year, or 1.4 servings per day, for every man, woman, and child."

He argued that each penny of tax on a 12-ounce drink would raise $1.5 billion annually and lower consumption roughly one percent, improving overall health. The Congressional Budget Office estimates that a three-cent tax would generate $24 billion over the next four years.

Such a tax might well be considered a "sin tax" similar to the taxes levied on cigarettes, which are extremely high compared to most other consumer products. Jacobson also wants the taxes on alcohol raised -- he argues that doing so will "compensate society for the costs of alcohol abuse and alcoholism and to marginally reduce problem drinking." The argument echoes the idea of cigarette taxes helping pay for health care costs associated with smoking.

In his testimony, Jacobson also called for a ban on artificial trans fat and a reduction in sodium levels in food.

Any soda tax a proposal is unlikely to pass easily, as New York Governor David Paterson well knows. Paterson's proposed 18-percent tax on soft drinks died amid pressure from the industry and resistance among New Yorkers who didn't want to pay more for soda.

It would also, it should be noted, only pay for a tiny portion of the health care overhaul.

Susan Neely of the American Beverage Association, which represents Coca-Cola Co., PepsiCo Inc. and others, told the Wall Street Journal that the tax would hit poor Americans hardest and would not lower consumption.

"Taxes are not going to teach our children how to have a healthy lifestyle," she said. Neely said the industry backs programs to lower consumption of sugary drinks in schools.

Tax Move Saves Family $1.5 Million

From the Wall Street Journal.com:

The elderly couple weren't even Eileen O'Connor's clients, but she knew they needed assistance.

The husband, a longtime executive at a technology firm near Washington, D.C., had accumulated $6 million in company stock through his retirement plan and an employee stock purchase plan. He was in his mid-eighties and ready to retire. The problem: If he rolled the funds into an IRA, he would be required to take large distributions and pay the subsequent income tax on those withdrawals - which the couple actually didn't need in the first place.

O'Connor, a certified financial planner and vice president at McLean Asset Management Corp., heard about the situation from the couple's adult daughter, who was a client. O'Connor saw an opportunity to take advantage of tax benefits related to closely held stock in a retirement account. Certain employees who own such stock can gain tax benefits by rolling the shares into a taxable account instead of an IRA: The rollover earns a step-up in basis, the taxable account doesn't require minimum withdrawals, and any withdrawals are taxable at the capital-gains rate instead of the significantly higher ordinary-income rate.

To take advantage of those provisions, Internal Revenue Service rules require the employee elect this option before he or she retires. So timing was of the essence for this family - as was compliance with the complex set of IRS requirements related to such transactions.

There was another big issue as well: "Her father was used to managing everything himself, so he started making some of the arrangements on his own," says O'Connor. "Then he dropped dead in the middle of the whole thing."

That's when O'Connor stepped in. Last September, two months after the man's death, she investigated whether the transaction was still possible. Satisfied that it was, she began working nearly full-time on the project, which had to be completed by year end, in partnership with a CPA firm.

Ultimately, O'Connor's solution was to establish two trusts for the family. The first held assets for the wife, who is in her mid-eighties and in poor health. The second was funded with the rolled-over company stock in order to exclude it from the wife's taxable estate and to achieve the step-up in basis. Once the rollover was complete, O'Connor sold all the shares and distributed the proceeds to individual accounts for each of the couple's three adult children.

"It was a tremendous amount of work," O'Connor says." And it made me realize that there's a real opportunity in helping people who have complex estates to settle. There are new assets to be managed, and new planning issues for the beneficiary."

O'Connor's help certainly paid off: By taking advantage of the relatively obscure provisions in IRS code, she helped the family save $1.5 million.

Today, her firm manages assets for each member of the family. "It was a very stressful time for them. They were going through their own adjustments, and then there were all these details to deal with," she says. "It felt really good at the end to have taken care of that for them, and they recognized the value, too. I think they'll be clients for a long time because of it."

Stimulus Benefits Could End Up Costing Retirees At Tax Time

Sandra Block of USAToday.com wrote an interesting article on how stimulus benefits could complicate the taxes of retirees. You can find a snippet of her post below, but the full text can be found here.

When lawmakers enacted the economic stimulus package this year, they included benefits for seniors. Smart move: Many retirees also have been hit hard by the economic downturn, and they vote in large numbers. Unfortunately, some of the tax headaches we discussed in an earlier column could also affect retirees.

Some examples of potential problems:

Taxpayers who receive a pension and have taxes withheld from their payments could end up owing money to the IRS next year.

In March, the IRS adjusted withholding tables to reflect the Making Work Pay credit, which is worth up to $400 for single workers, and up to $800 for married taxpayers who file jointly. The adjustments will apply to wages, but they'll also affect the amount withheld from pension payments. And that's a problem, because pension payments are ineligible for the credit, says Mark Luscombe, federal tax analyst for tax publisher CCH.

This won't be an issue for retirees who pay taxes on their pension payments each quarter instead of having their taxes withheld, Luscombe says. Likewise, individuals who receive a pension but also have a job may still qualify for the credit because they have earned income, he says. But retirees who have taxes withheld from their pensions and don't have any earned income may need to adjust their withholding to avoid owing money next year.

For information on how to avoid unpleasant surprises at tax time, go to www.irs.gov and search for Publication 919, "How Do I Adjust My Tax Withholding." The section titled "Retirees Returning to the Workforce" includes information for pensioners, and is relevant even if you're not going back to work.

Social Security beneficiaries who have earned income could end up receiving a larger credit than they're entitled to.

Next month, the Social Security Administration will deliver a one-time payment of $250 to more than 55 million Americans who receive Social Security benefits or Supplemental Social Security Income. For most beneficiaries, this won't create any problems. But seniors who receive Social Security benefits and also have a job could also end up owing the IRS money next year.

Here's why: If you're employed and have taxes withheld from your paycheck, you'll also receive the Making Work Pay tax credit. But the maximum amount you can receive from both programs is $400, says Michael O'Toole, director of publications and government relations for the American Payroll Association.

"If a single person is getting $400 in reduced withholding from a job, and getting the $250 economic recovery payment because they're collecting Social Security, they're going to be underwithheld by $250," he says.

As a result, Social Security beneficiaries who have jobs may also need to adjust their withholding.

Taxes: Have You Paid Your Fair Share?

From CBS News.com:

I guess we've all paid - or avoided paying - our taxes by now and it feels good to have it over with. It didn't hurt much, did it? I made more money last year than I made the year before, but of course my taxes were higher too - the most I ever paid.

To tell you the truth, I have a feeling I paid more than my share of taxes. I guess everyone feels that way.

I have an idea how the IRS could get more money out of the tax cheaters and it wouldn't cost the government a nickel: they would make tax records open to all of us. The figures would be available to anyone who wanted to look them up. This would be a good way to get everyone to pay what they owe. I'd be willing to do it if everyone else did it.

Some people wouldn't dream of cheating anywhere else but they don't worry about cheating on their tax returns if they think they could get away with it.

I've always thought that Uncle Sam goes about trying to get us to pay our taxes the wrong way.

The IRS never appeals to us as patriotic Americans. I think what everyone pays should be public information. Americans would be happier to pay their income tax if they thought that everyone was paying what they were supposed to pay.

Maybe people would be proud of what they pay instead of hiding their income.

I don't know why our tax returns are secret, anyway. What we earn isn't usually much of a secret to anyone who knows us or to anyone who wants to find out what we make.

About 45 percent of what the federal government gets comes from individual income taxes.

Forbes magazine did a piece that said that rich people hide more of their income than poor people hide. Well, of course they have more to hide but generally speaking I think Americans are willing to pay their income taxes. They just want to be damn sure they paid their share - not their share and part of someone else's.

Lay 'Death Tax' Debate To Rest

From the LATimes.com:

Everybody's familiar with Ben Franklin’s old saw about nothing being certain but death and taxes. But how about the "death tax"?

That's the loaded term employed by opponents of the estate tax, which has been part of the federal tax code for more than 90 years and the subject of furious repeal campaigns for almost that long.

Thanks to lobbyists and legislators looking out for the welfare of the richest Americans, the tax currently hits fewer than 3 of every 1,000 estates every year and bristles with exemptions and deferments for the rest. Its contribution to the federal treasury is about 1% of all revenue.

Yet it consumes enormous mind share in Washington. This month, a new tax-cut proposal from Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) won Senate approval. The resolution would raise the exemption on taxable estates to $10 million from the current $7 million (after the death of both spouses). It also would cut the rate charged on the nonexempt portion to 35% from the current 45%.

The tax is currently set to fall to zero for 2010 and return with a $1-million exemption and a 55% rate in 2011; President Obama proposes merely making today's exemption and rates permanent.

Arguments against the estate tax rank as the most special of special pleading, considering that more than 99.7% of all estates already are exempt. Perhaps 3,000 Americans who died in 2007 left estates valued from $7 million to $10 million; Lincoln and Kyl would have extended the exemption to them. As for those left to carry the burden, the number of taxpayers who died in 2007 leaving estates worth more than $10 million was 1,700. Their average estate was $31.6 million. Lincoln, Kyl and their colleagues actually wasted time on the Senate floor to give people like this a new tax break.

But then Kyl represents a state with a lot of wealthy retired sinus patients and Lincoln a state brimming with billionaires coincidentally bearing the same last name as the founder of Wal-Mart.

Even financial planners for the affluent acknowledge that many taxpayers are excessively concerned about the estate tax.

"A lot of people afraid they are going to be hit by it are completely out of the system" because of the exemption, says Mary Ann Mancini, head of the private client group at law firm Bryan Cave in Washington. "It resonates with people more on an emotional basis than a logical one."

No kidding. On the website of the Policy and Taxation Group, an anti-estate tax outfit founded by an Orange County wealth manager, you can find comments from taxpayers like this: "If I died today, I'd pay about $200,000 in death tax."

Tax the Super-Rich More Than the Rich?

From the WallStreetJournal.com:

One of the most contentious elements of President Obama’s tax plan is his definition of “wealthy.”

His plan calls for raising the marginal tax rate to 39.6% from 36% on those earning $200,000 or more. The proposal has elicited howls from conservatives who argued that $200,000 doesn’t count as wealthy — especially in major cities like New York and Los Angeles. And they’ve got a point.

But the definitional issue became a crutch, used by a plethora of pundits and politicians to say we shouldn’t raise taxes on the wealthy at all, since defining wealthy is impossible. The fact is, the government needs money, and it has to come from somewhere.

And there may be a more elegant solution: creating new tax brackets to separate the super-rich from the merely affluent.

In an insightful column in the New York Times Magazine, David Leonhardt explains that while the top tax rate used to be much higher than today’s top rate, it only applied to the super-rich. In 1960, the top rate was 91%, but it applied to the those making $400,000 a year — equivalent to $3 million in today’s dollars when adjusted for inflation. A couple making $20,000 (or $140,000 in today’s dollars) would pay 38%.

Franklin D. Roosevelt’s brackets had been even more extreme. His top rate of 79% applied to those making $5 million a year, or about $75 million today. “As the economist Bruce Bartlett has noted, that 79 percent rate apparently applied to only one person in the entire country, John D. Rockefeller (above),” Mr. Leonhardt writes.

Today, by contrast, the very well off and the superwealthy are lumped together. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change is especially striking, because there is so much more income at the top of the distribution now than there was in the past. Today a tax rate for the very top earners would apply to a far larger portion of the nation’s income than it would have years ago.

In other words, there should be a tax rate for Upper Richistan and one for Lower Richistan.

Of course, conservatives and some moderates argue that if we created a new bracket for the super-rich, they would simply move their money out of income and into lower-tax assets, like stocks or private businesses. So the net result would be less money for the government and less job creation and investment by the rich. (An op-ed by Mark Altieri in the Cleveland Plain Dealer over the weekend suggests that whenever Washington raises tax rates on the rich, revenues go down.)

Still, making a distinction between the haves and have-mores seems worth considering — if only for the entertainment of watching the pundits try to mount a populist defense against a tax on those making $3 million a year.