45% Don't Owe U.S. Income Tax

According to new reports, nearly half of Americans did not pay federal income taxes for tax year 2010. However, as CNN reporter Jeanne Sahadi explains, this statistic is often misunderstood, and misrepresented. Remember, politicians use stats like this to get everyone riled up, without providing any underlying information. Remember, everyone pays taxes, just not everyone pays federal income taxes, and that’s by design.

From CNN.com:

For tax year 2010, roughly 45% of households, or about 69 million, will end up owing nothing in federal income tax, according to estimates by the nonpartisan Tax Policy Center. Some in that group will even end up getting paid money from the federal government.

That does not mean such households end up paying no taxes whatsoever. For instance, those in the group still pay other taxes such as state and local income taxes, as well as property and sales taxes.

And the group doesn't necessarily get off scot-free when it comes to payroll taxes -- which support Social Security and Medicare.

More than two-thirds -- or 49 million of the 69 million households -- pay payroll tax. Of those, 34 million end up paying more in payroll taxes than they get back on their federal return. The other 15 million pay payroll tax but they get enough refundable credits to offset what they paid.

More here

Mad Men and Taxes (No Spoilers!)

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.

Don has good timing, though. In 1969, the alternative flat 25% was eliminated for high-earners, bringing the capital gains rate to 35%. The new alternative minimum tax (AMT) limited the value of deductions, capital losses were limited, and a war surtax was enacted. The long-term capital gains tax began to fall again in the late 1970s and again under Reagan, rose in the 1986 tax reform (as a separate, flat rate), then was cut in 1997 and again as part of the Bush tax cuts. It currently stands at a flat 15% rate.

6 Surprising Facts About The Early Days Of Income Tax

When thinking about the word “taxes,” most taxpayers think about the money being taken out of their paychecks, rather than the early history of American taxation. However, some of the facts in this article from SFGate.com on the early days of the income tax are very interesting, so I though I would share the information with all of my blog readers. Check out a few of the facts below, or head over to SFGate.com for the full list.

Fact One: Taxes Were Simple

The first 1040 form produced by the Bureau of Revenue, as it was called then, totaled only four pages, with three pages to be filled out by the taxpayer, and one page of instructions. The tax system was so simple.

Fact Two: The Tax Base Was Small

The first $3,000 of income for an individual taxpayer, or $4,000 for a married couple was exempt from tax. In 1913, the tax only applied from income between March 1 and the end of the year, so these exemptions were adjusted to $ 2,500 and $3,333 for that year. This meant that most Americans didn't have to pay any tax. If you adjust $3,000 in 1913 for inflation, it is equivalent to $66,000 in today's dollars.

Fact Three: The Tax Rate Was Low

The tax rate for those who had to pay was minuscule - 1% of taxable income, less the exemptions above and the deductions that were allowed at the time. High-income earners paid more, however, as a 1% surcharge was levied on taxable income between $20,000 and $50,000. The surcharge went as high as 6% for taxable income above $500,000. A taxable income of $500,000 in 1913 is equal to approximately $11 million in today's dollars. (For more, see A Concise History Of Changes In U.S. Tax Law.)

Continue reading at SF Gate.com…

Bill Gates Sr. on Raising Taxes

According to an interview in Bloomberg News, Microsoft founder Bill Gates’s father, the retired Washington State lawyer Bill Gates Sr., wants his son to pay more in state income taxes. Mr. Gates Sr. supports a Washington State initiative to impose a state income tax on individuals earning more than $200,000 a year and couples earning more than $400,000. More specifically, individuals would pay a 5 percent tax on income over $200,000 and 9 percent tax if they earned over $500,000. Couples would pay 5 percent over $400,000 and 9 percent if they earned a combined income over $1 million.

According to the Department of Revenue for Washington State, Washington doesn’t collect personal income taxes. However, persons that engage in business in Washington State are subject to business and occupation and/or public utility tax. “Poor people and middle-income people are paying too much to support the state, and rich people aren't paying enough,” Mr. Gates Sr. stated in his interview.

I agree with the editor of FutureofCapitalism.com, “if Mr. Gates Sr. wants to pay more in on a voluntary basis that is one thing, and like David Koch points out, it will mean he has less to give away to charity.” This would also apply to all others above the $200,000 threshold. Other opponents to this initiative and higher taxes say taxes like these will kill jobs.

Initiative 1098, as it is called, was co-authored by the Economic Opportunity Institute, a non-profit group in Seattle, and has drawn funding from the Service Employees International Union. Supporters must collect more than 240,000 valid signatures by July 2 to qualify for the November ballot.

1/3 of Tax Returns Filed Pay Zero Tax

According to the Tax Foundation “46.6 million people who filed tax returns in 2007 had a zero or negative tax liability -- 32.6% of the 143.0 million tax returns filed. In about half of these cases, substantial additional money was ‘refunded’ to the tax filer. 15 million people do not earn enough to file a tax return, so 61.6 million people do not pay federal income taxes.”

The Tax Prof Blog posted the following video when covering this story of a FOX News segment with Jim Angle discussing this disturbing figure. You can check out the embedded video below.

New York Income Tax Revenue Falls 36% in Year, Paterson Says

Over the past year there have been dozens of reports of states struggling because of the recession. However, experts were shocked by the huge decrease in revenue the state of New York has seen over the past year. According to an announcement made by New York Governor David Paterson, the states tax revenue has fallen an astounding 36%.

The report comes out after what Paterson describes as a “frustrating” attempt to close the state’s budget gap, which exceeds $2 billion. Checkout the following article on the shocking announcement courtesy of Bloomberg.com.

“We added personal income tax, which we thought would make the falloff 10 percent to 15 percent,” Paterson, a Democrat, said on CNBC today, referring to $5.2 billion in new or increased taxes. “This is what is so frustrating. It’s still 36 percent, meaning our revenues fell more in 2009 than they did in 2008.”

Wall Street companies lost $42.6 billion last year and year-end bonuses to workers fell 44 percent to $18.4 billion. Income tax receipts were down 24 percent as of Aug. 31, according to the state comptroller’s office. Paterson’s estimate includes data since then.

Besides boosting taxes for the fiscal year that began April 1, lawmakers made $5.1 billion in spending cuts. The plan also includes $6.2 billion in federal stimulus money and $1.1 billion in one-time revenue, according to the Assembly.

The budget will still be $2.1 billion in deficit because spending plans exceed revenue projections, the state Division of Budget said July 30. The report predicted deficits of $4.62 billion in 2011, $13.3 billion in 2012 and $18.2 billion in 2013.

Furloughs to Hurt Tax Collection, Officials Say

No matter how hard they try, it seems California legislators cannot get the state’s budget under control. After their choice to put State workers on two furlough days a month, a new study has come out reporting that the missed work will drastically reduce the amount of revenue the state collections in income taxes. The estimated loss over the next fiscal year could be as much as $1 billion. Below I’ve included a story about the new revelation courtesy of SFGate.com.

The setback could further strain California's budget, contributing to shortfalls in the current and next fiscal years.

Officials from Gov. Arnold Schwarzenegger's administration - from the Department of Finance, the Franchise Tax Board and the Board of Equalization - presented the state Senate Budget Committee on Tuesday with the estimated revenue losses due to the furloughs and budget cuts.

At the hearing, Sen. Denise Moreno Ducheny, D-San Diego, told the officials they should rethink the wisdom of the work stoppages at the tax and equalization boards.

"I just don't see where we're getting savings," a visibly frustrated Ducheny, who chairs the Senate Budget Committee, told a panel of administration officials.

The Income Tax System is Broken

From CBSNews.com:

On April 15, don't be surprised if the line at your local post office is a bit shorter than usual. That's because your neighbors may not be paying any income taxes this year.

An astonishing 43.4 percent of Americans now pay zero or negative federal income taxes. The number of single or jointly filing "taxpayers" - the word must be applied sparingly - who pay no taxes or receive government handouts has reached 65.6 million, out of a total of 151 million.

Those numbers come from an analysis published yesterday by the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution. Neither is a low-tax or conservative advocacy group; the Urban Institute was created under the Johnson administration during the Great Society era, and it receives most of its funding from the federal government.

"You've got a larger and larger share of people paying less and less for the services provided by the federal government," says Roberton Williams, a senior fellow at the Tax Policy Center. "The concern is that the majority can say, 'Let's have more benefits, spend more,' if they're not paying for it. It's 'free.' That's not a good thing to have."

By historic standards, today's situation is an aberration. Between 1950 and 1990, the number of owe-no-money federal tax returns averaged 21 percent, dipping to 18 percent in 1986, according to Tax Foundation data. In the 1990s, the owe-no-money percentage hovered around 25 percent of taxpayers.

But then politicians began another round of tinkering with the tax code, adding reams of new pages to an already incomprehensible set of rules that even the guy overseeing the IRS can't seem to figure out.

Democrats wanted to lower taxes on the least affluent, while Republicans wanted to lower taxes on everyone. The result was bipartisan enthusiasm for tax credits aimed at everything from children (1997) and college students (1997) to hybrid cars (2005) and homebuyers (2009). Many of these credits dole out cash to people even if they report no income, making them mere government handouts.

Income Taxes: What You Need to Know

From the New York Times:

When it comes to income taxes, there are different types of people.

There are individuals who find pleasure in tackling the 1040 all on their own. At the other end of the spectrum, there are people who make a mad dash for the nearest H&R Block about 9 p.m. on April 15.

But no matter where you fall on that scale, it’s important to master the basics. Most of life’s milestones carry some sort of tax implication, whether it’s having a child, purchasing a home, changing jobs or, yes, even dying. And as you travel through life and your situation evolves, your approach to income taxes needs to be adjusted accordingly.

To complicate matters, the rulebook is constantly changing. So taxpayers must sort through a befuddling mix of new rules, deductions and credits each year. For some people, all of the noise is justification enough to pay an accountant.

Even if you do, there is still a variety of issues you should be aware of that will help you maximize your tax savings. This guide will explain how income taxes work and how to trim your bill, and offer a few approaches to tax preparation.

Top 10 Tips for Selecting a Tax Preparer

Choosing a tax preparer may seem like an easy task, but if you do not choose carefully, you could end up losing money. If you select an untrained preparer you could miss important deductions and credits, or, on the flip side, they could get you in trouble with the IRS by taking advantage of too many deductions. To assure you are making a smart choice, I have compiled the following list of tips to help you select a quality tax preparer.

1. False Guarantees

If a tax preparer promises you a big refund before looking at your financial information then you should go running the opposite direction! No one is guaranteed a refund, and if someone promises otherwise, they are probably going to do something unscrupulous. Use you best instincts to differentiate from real professionals and those trying to use black hat tricks to get leads.

2. Are They Current?

As you can imagine, you need a lot of training to become a tax preparer. Unfortunately it does not stop there. Each tax season bring a set of newly expired tax laws as well dozens of new deductions, credits, and regulations. Most tax preparers will enroll in some sort of update training before each tax season, but not all. Make sure your tax preparer is up to date on all tax policies.

3. Note Availability

It is always a good idea to check your tax preparers’ year-round availability before signing any papers. While some tax preparation offices are open all year (including Roni Deutch Tax Center® locations), others are open only during the tax season. While this may not seem like a nuisance, you must remember you should keep track of your taxes all year, and you never know when an important tax-related question or concern may come up.

4. Quality is Priceless

Do not jump for a tax specialist just because they are the cheapest. Although tax preparation can get a bit pricey, choosing a tax prep specialist just because they have low rates is not a good idea at all. Odds are, deciding on a slightly more expensive but more highly trained professional will probably end up making up for the difference anyway.

5. Above & Beyond

On top of having a year-round specialist, it is also good to have one who will go above and beyond just preparing your return. If the IRS sends you a notice or query, will your tax preparer be able to help you solve the problem or at least recommend you to someone who can? Whenever you are looking for a tax preparer, you always want to know what type of audit protection or assistance they provide.

6. Other Businesses

If you are a business or small business owner, having a business-tax-savvy preparer is a must. There are separate deductions, credits, and guidelines for business owners. In order to take advantage of every business deduction you can and prevent from breaking any rules, you need a highly trained tax professional to help you with these sorts of tax returns. When interviewing a potential prepare, ask if they have other business clients and see if you can get any reviews from said clients in advance.

7. E-File is a Must

With modern technology, there is no reason to hire a tax preparer that does not file electronically. It is both faster and more efficient. Perhaps the best advantages of filing electronically is that your return is likely to come much faster, and as soon as your preparer files it, you have proof that it has been filed.

8. Check Reviews

If your tax preparer is well established, it should be no problem finding at least a few reviews on their services online. You can also ask friends, family, neighbors, and coworkers who they chose to prepare their taxes. Some tax preparers even have a list of testimonials from previous clients available in their office or online.

9. Taxes Take Time

Unless you are filing a simple 1040 EZ, filing a tax return can be a long and strenuous process. If you are a small business owner and a tax preparer says they can get you in and out in 10 minutes, you probably are not getting the best service. It should take a couple of visits to get your taxes filed, depending on how much paperwork you have and how well you have kept track of everything throughout the year.

10. Questions Galore

Last but not least, your tax preparer should be eager and willing to know every financial aspect of your life. This means they will not only ask if you have children, but ask their ages, their education levels, whether they are your dependent, and so on. A good tax preparer will ask you dozens upon dozens of questions to get you the best quality of service, which you deserve.

IRS E-Filing Now Open For Most Taxpayers

As of last Friday, the IRS officially opened e-filing for the tax season. All taxpayers that are not affected by the last minute AMT patches are now eligible to e-file their federal tax returns. To find out if these changes will delay when you can file your return, check out “How Will Congress’ Last Minute AMT Fixes Affect My Tax Return” on the RDTC Tax Help Blog.

Last year over 80 million taxpayers e-filed their income tax returns. Almost 57 percent of all returns were filed electronically.

“IRS e-file is the fastest, easiest and most accurate way to file a tax return,” claims IRS Acting Commissioner Linda E. Stiff. "We strongly encourage taxpayers to take advantage of the benefits that electronic filing offers."

Outsourcing Tax Return Preparation to India

TaxGuru has made an interesting post on an Indian firm that emailed him in regards to their American income tax preparation services. According to the email the Indian firm was hired by over 35 different American CPA firms last year and prepared over 3,500 tax returns. They charge a very low rate per return allowing a healthy profit to be made by the large CPA firms outsourcing these duties. This company is just one out of dozens that are already offering Indian outsourcing services. According to The CPA Journal some estimate that nearly 200,000 American income tax returns were prepared in India in 2004. Outsourcing these services allows the large CPA firms to lower their hourly expenses by over 50%, while sustaining their high fees.

As this practice becomes increasingly common, I recommend that everyone be cautious when dealing with a firm that outsources to any country. Although the individuals might be trained and might be qualified to prepare taxes, I would still be cautious. Having 100% accurate data in your income tax returns is extremely important. If something is wrong in your return it could result in massive IRS problems, including audits and even owed back taxes. With so much at steak you want to make sure you seek tax help from a reputable company, and outsourcing services to low-paid Indian workers does not exactly scream quality in my eyes. I suggest you ask any firm your considering point-blank if they outsource and where they outsource income tax preparation. If their response is no then you have nothing to worry about. However, if they do outsource I would be very cautious about using their services unless they provide some sort of guarantee.

Paying Taxes May Make People Happy

As odd as it may seem, that is the conclusion being drawn from a new study from University of Oregon. "Paying taxes can make citizens happy," claimed Ulrich Mayr, a professor of psychology. The study found that two reward-related areas of the brain lit up during a taxation test. These areas typically are activated when some one experiences feelings of satisfaction, such as after having eaten a meal. "The fact that mandatory transfers to a charity elicit activity in reward-related areas suggests that even mandatory taxation can produce satisfaction for taxpayers," the study said. For more information on the study check out CBC News.