President Barack Obama Says He Didn't Raise Taxes Once, But He Did

In an interview with Bill O'Reilly, President Barack Obama said, "I didn't raise taxes once. I lowered taxes over the last two years." However, fact checkers were quick to point out that the President has in fact raised a few taxes including those levied on cigarettes as well as the tax implications of health care reform. Income taxes? Sure, those have not gone up, but as for other taxes… President Obama seems to have a selective memory.

From PolitiFact.com:

Looking at the whole statement, he's both right and wrong. For clarity's sake, we're going to take Obama's statement in two parts. Here, we'll look at his statement, "I didn't raise taxes once." In a separate report, we'll look at his statement, "I lowered taxes over the last two years."

The idea that Obama did not raise taxes is just plain wrong. He signed legislation raising taxes on cigarettes and other tobacco products soon after taking office; that money goes to pay for children's health insurance programs. The law went into effect in 2009. He also signed the health care law, which includes taxes on indoor tanning that went into effect last year. (Regular PolitiFact readers will remember our fact-check of reality TV star Snooki and her complaint about the new tax last year.)

The new health care law also includes a tax on people who decide not to have health insurance, as an incentive for them to get coverage. The tax phases in gradually, starting in 2014. By 2016, the tax would be $695 per uninsured person up to a maximum of three times that amount, or $2,085. The law includes exemptions for people who can't find affordable insurance, and a few other special circumstances.

More significantly, the health care law includes new taxes on the wealthy, starting in 2013. Individuals who make more than $200,000 and couples that make more than $250,000 will see additional Medicare taxes of 0.9 percent. They will also, for the first time, have to pay Medicare taxes on their investment income at a 3.8 percent rate. (Current law is that all workers and employers split a 2.9 percent Medicare tax; the self-employed pay all of it.)

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IRS Is Taxing My Nobel Prize!

Winning a Nobel Prize comes with a lot of perks, but one thing most people do not realize it also comes with is a tax bill.

Forbes.com reports:

Most of us will never win a Nobel Prize, but if we do, it comes with a tax bill. Our old friend the IRS gets a cut of the roughly $1.4 million USD ($10 million Swedish kronor) cash prize. The 2010 winners may not be complaining, but some may be surprised. See Life After Winning a Nobel Prize. Martin Chalfie, won the 2008 Nobel Prize in Chemistry, lamenting that since the Reagan era when the tax code was changed, the IRS collects tax on prizes just like any other income.

President Obama cleverly avoided tax on his Nobel Peace Prize last year—and got great press—by regifting it. Since Jerry Seinfeld’s eponymous series brought “regifting” out of the closet, 60% of women and 40% of men admit they regift. There’s even a “Gift and Re-Gifts” neighborhood on eBay.

Before 1986, many prizes were tax-free as long as no significant services were involved. Since 1986, though, prizes and awards are taxable.

You can decline an award, as George C. Scott did an Academy Award for Patton in 1971. You can even decline a Nobel Prize to avoid the tax. That’s actually surprising, since the tax law routinely attributes taxable income to you “constructively” when you could have received a payment but chose not to. See When You’ve Got Taxable Income but No Cash.

If you are awarded a cash prize you can turn around and give it to charity but that doesn’t avoid all the tax. Why? You can’t deduct charitable contributions exceeding 50% of your “contribution base”—generally your adjusted gross income. The limit is even lower (30%) for gifts to certain types of organizations. You can carry over excess deductions for up to five years, but in the meantime, are paying tax on monies you’ve given away.

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Oprah: “I'll Pay the Taxes for My Aussie Giveaway”

According to TMZ.com, the Oprah Winfrey Show will take care of the tax liabilities of her recent Australian giveaway. Oprah made headlines a few years ago when she gave away automobiles to her audience members, and then left them high and dry when the enormous tax bills arrived.

TMZ spoke with Larry Edema from Michigan -- who was selected to be in the audience on Monday for Oprah's big giveaway -- and dude tells us Winfrey had a certified public accountant on hand to address the tax issue right after the taping.

Edema says the CPA informed the group that all taxes associated with the trip would be "handled by the Oprah show," so the trip would truly be 100% free.

The CPA also explained that O would cover all sightseeing costs and travel-related expenses -- including passport costs for people who can't afford them.

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Tax Implications of Early IRA Withdrawals

Last week, the Roni Deutch Tax Center – Tax Help Blog posted an article on the tax implications of early IRA withdrawals. As the blog entry explains, although the purpose of an IRA is to save for the future, it is not uncommon for taxpayers to ‘borrow’ money from their account. Here are excerpts from the article:

Taxes and Penalties

Unless you qualify for a special exemption, every early withdrawal will be subject to a 10% tax penalty. In addition to the flat penalty, you will also have to pay income taxes on the money you take out.

Qualified Distributions

Fortunately, there are tax laws in place that allow taxpayers who have IRAs to take penalty-free withdrawals in certain situations. These instances are known as qualified distributions, and are made to assist those in special financial situations. If you have a Roth IRA which has been open at least five years, distributions can be taken both penalty, and tax-free.

Continue reading at RDTC.com…

The Tax Implications of Divorce

This morning a new entry explaining the tax implications of divorce was published on the Roni Deutch Tax Center – Tax Help Blog. As the article explains, our complicated tax system can often make stressful situations, such as a divorce, even more stressful. I have included a segment of the article below, but to learn more about the tax implications of divorce, check out the Roni Deutch Tax Center – Tax Help Blog.

Tax Filing Status

Even if you spent most of the year married to your partner, if you become legally divorced on or before December 31st, you will not be eligible to file a joint return. Therefore, if you are in the process of getting divorced, which will not finalize before the end of the year, you will need to file as a married taxpayer (either a joint or separate return). If you and your former spouse are on good terms, you should try to discuss tax planning as it related to your divorce. Additionally, if you are unmarried and your spouse was not a member of the household for at least six months of the year, and you have a qualifying dependent, you may be able to take advantage of the head of household filing status.

Child Custody and Tax Exemptions

If you had children with your ex-spouse then a whole new set of tax complications may emerge depending on the specifics of your child custody arrangements. If one parent is required to make child support payments, that parent will not be able to deduct the payments on a federal return. Additionally, child support payments are not considered taxable income for the parent receiving the payments. The parent has majority custody can also claim the children as dependents, and benefit from the resulting tax incentives.

Living Situation

A home is often the most expensive purchase a taxpayer will make in their lifetime, and can result in serious financial issues during a divorce. You and your former spouse will undoubtedly need to decide what to do with the property after the divorce is finalized. One ex-spouse may decide to continue living there, possibly with dependent children, or you may decide to sell the home and split the proceeds. If you do sell the home, and profit from the sale, then you will want to reinvest those funds within two years to avoid the capital gains tax.

Divorce and Attorney Fees

There is a small category of attorney fees may be deductible expenses on your tax return. For example, although, the legal fees for the divorce itself are not deductible, legal fees related to estate planning due to a divorce may be. To be on the safe side, you should ask your attorney to divide the bill into non-deductible charges, tax-deductible alimony charges, and property settlement charges. By doing this, we will be able to help your tax preparer have sufficient proof to claim the tax deductible fees on your return.

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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.

10 Things you Should Know About the Tax Implications of Health Care Reform

Yesterday morning President Barack Obama signed the historic health care reform bill into law. Many experts are citing the legislation as the largest social package to pass through Congress in over forty years, and it will obviously have a significant impact on all American taxpayers. There have been dozens of stories published regarding health care reform, and it can be hard to comprehend everything. Therefore, I have gathered a list of the 10 most important things you should know about the tax implications of the legislation.

1. Mandatory Coverage Penalties in 2014

As you have probably already heard, beginning in 2014 you will be required to have health insurance. If you do not, then you will be forced to pay a $95 per person (or 1% of your income) fee. In 2016 this amount will increase to $695 or 2.5% of your income.

2. IRS Enforcement / Additional Costs

Unfortunately, the IRS is slated to take care of handling the mandatory coverage penalties that take effect in 2014. However, as Professor James Maule explains in this blog entry the thought of the IRS reviewing and approving every single American’s health insurance plan, when they can barely handle processing tax returns will be interesting to see. Additionally, the Congressional Budget Office has estimated they would need at least $10 billion dollars in additional funding to meet this new responsibility.

3. Low Income Subsidies

To help offset the cost of purchasing health insurance for your family, the federal government will provide taxpayers who cannot afford coverage with significant subsidies. It has been estimated that all families making under about $88,000 per year will qualify for some type of tax incentive.

4. Fees on Employers

You probably already know that under the package large businesses will be required to provide coverage for employees or pay a per worker fine. However, under the compromise package this fee was raised from $750 to a staggering $2,000. Employers will be able to qualify for a temporary tax credit of up to 35% of their contributions towards health insurance premiums.

5. Medicare Tax Changes

One of the largest tax increases in the new health care reform legislation is the additional Medicare tax on high-income taxpayers. Single workers making over $200,000 and married couples filing a joint return that make over $250,000 will be required to pay an additional 0.9% Medicare payroll tax. However, this is not the only Medicare related tax increase. A new 3.8% Medicare tax will be imposed on net investment income.

6. Doughnut Hole Rebates

In order to fill the hole in prescription drug coverage, all senior taxpayers in the country will receive a $250 “doughnut” hole rebate this year.

7. Medical Expense Deduction Increase

Another component of the new law increases the minimum for qualifying for the medical expense deduction. Currently, in order to claim the deduction your medical expenses need to total 7.5% of your adjusted gross income, but in 2013 it will be raised to 10%. However, seniors will be exempt from this increase until 2017.

8. Cadillac Taxes

Another tax implication of health care reform that I have discussed many times over the past few months, are the “Cadillac taxes” that will be imposed on high-cost employer provided health care plans. This tax will be 40%. However, the qualifying amounts were raised in the compromise package to $10,200 for single taxpayers or $27,500 per family.

9. The Tanning Tax

Starting July 1, 2010 a 10% tax will be levied on all payments made for indoor tanning services. This new “vanity tax” could raise up to $2.7 billion over the next decade, but it has been estimated that the tax could result in a lost of nearly 9,000 jobs in the tanning industry.

10. Adoption Tax Incentives

On a seemingly unrelated note, the health care reform bill also extends and expands the tax credits for adopting a child. The refundable credit has been extended through 2011, and the value was increased by $1,000.

The Tax Implications of the Latest Health Care Reform Plan

President Obama recently put health care reform back into the spotlight by putting forth his own plan, loosely based on the legislation drafted by the House and Senate over the past year. In order to pay for the high price of reform, Obama’s proposal includes a number of tax increases.

Basics of the Legislation

Obama’s plan would cost an estimated $950 billion over the next ten years, and according to WhiteHouse.gov it would extend coverage to 31 million Americans. It would end discrimination against Americans with pre-existing conditions, and bring greater accountability to the health care industry. The President even claims the plan would reduce the deficit by $100 billion in the next decade, and $1 trillion during the second decade.

Opposition and 51 Vote Passage

Republicans in Congress have strongly opposed previous health care reform attempts and they now have enough votes to filibuster any future legislation. However, the White House and Democratic leaders in the Senate have threatened to use a process called “reconciliation” that would allow them to pass a bill with only 51 votes. Technically, this tactic can only be used on tax and spending bills, the most notable example was when President Bush used a reconciliation vote to pass the now infamous Bush Tax Cuts.

Medicare Tax Increase

The centerpiece of Obama’s plan to pay for the costs of health care reform is a 0.9% increase on the Medicare tax rate for individual taxpayers earning $200,000 or more per year. The rate increase would also apply to married couples earning over $250,000 a year that file a joint return.

Medicare Tax Extension

Another Medicare related tax increase is Obama’s desire to impose the 2.9% tax rate on interest, dividends, annuities, and most other investment income for individuals making over $200,000 and joint filers making over $250,000 per year.

This would represent a drastic change in American tax laws as the Medicare tax is typically considered a payroll tax that is only levied on wages. According to the Chicago-based Bretton Woods Research group, the 2.9 % tax on unearned income would produce a 3.5 percent to 4 percent decline in the broad stock indices.

Lesser Penalty for High End Policies

Obama’s proposal does include a tax on high-cost (Cadillac) health insurance policies, but it would not take effect until 2018 – as opposed to the 2013 date in the Senate’s legislation. Although the tax will be levied on insurers it is widely expected to result in reduced benefits for employees. In his proposal, Obama did raise the limits on this tax, and if the legislation became law the excise tax would only apply to individuals with premiums above $10,200 and $27,500 for families.

Fees on Pharmaceutical Business

Another source of funding in Obama’s plan are fees on the pharmaceutical industry – led by New York-based Pfizer – would be forced to pay over $10 billion in fees over the next 10 years. These fees would take effect faster than the Cadillac taxes, as pharmaceutical companies could begin making payments as early as 2011.

Fate of the Legislation

In order to become law, Obama’s proposal will have to jump through a few hoops. Both the Senate and the House of Representatives need to pass the controversial bill before it can be presented to Obama for a signature. Republican leaders are already speaking out about the legislation, and it will no doubt be a hot topic at tomorrow’s health summit at the Blair House.

The Tax Implications of Obama’s Nobel Peace Prize

After it was revealed last week that U.S. President Barack Obama had won the Nobel Peace prize, Obama was quick to announce that he would be donating the $1.4 million cash prize to charities. This has led many experts to wonder, what tax implications will his prize have on Obama’s next income tax return?

Pat Regnier, of CNN Money, explains that Obama should not have to worry about any tax problems as long as the money goes directly to a charity. Additionally, he might even be ok if he does not have a charity selected when he receives the award since you can deduct charitable contributions up to 50% of AGI, and many suspect that the income he earns from his book this year will not outweigh the prize money.

However, Leonard E. Burman of the Tax Prof Blog brings up another interesting point. Check out her analysis of Obama’s taxes below.

Ellen Aprill's analysis of President Obama's Nobel Prize is fascinating, but left out an important factor in favor of using § 74(b) to avoid the recognition of income. If the president claims the prize as income and then makes a charitable contribution, he'll pay more tax because of the § 68 limitation on itemized deductions. The $1.4 million increase in income will reduce President Obama's itemized deductions by $42,000 (3% of $1.4 million), raising his taxes by $14,700. The problem arises because income is effectively taxed at a higher rate than deductions for people subject to the deduction phase-out.

Other phase-outs cause the same problem. AMT taxpayers in the § 55 phase-out range for the AMT exemption, for example, can face a big tax hit if they include an honorarium or award in income and then make an equal gift to charity. Every dollar transferred reduces the AMT exemption by 25 cents, costing 6.5 or 7 cents in tax depending on whether the taxpayer is in 26% or 28% AMT bracket. (This example has particular salience for me.)

I won't cry myself to sleep thinking about the president's extra tax burden because he can reduce other charitable contributions if he wants, but it is another example of how complex and counter-intuitive our tax system can be.

Obama Adviser Says no Climate Change Law this Year

A little over a week ago I posted a blog entry discussing the tax implications of cap and trade reform, and now Obama’s top energy advisor (Carol Browner) has spoken out saying that changes to our current climate and trade laws are “not going to happen.”

Browner made the statement at a conference organized by The Atlantic magazine, just days after Senate Democrats introduced a major bill on climate change. In a video posted on the magazine's Web site, Browner was asked about the prospects of enacting climate legislation by the time negotiations on a global climate treaty begin in December in Copenhagen.

"Obviously, we'd like to be through the process, but that's not going to happen," Browner said. "I think we would all agree the likelihood you would have a bill signed by the president on comprehensive energy by the time we go early in December is not likely."

Senate Democrats unveiled a bill Wednesday that aims to cut greenhouse gasses by 20 percent by 2020. The House passed a bill in June that calls for a 17 percent emission cut by 2020.

The Senate bill includes an economy-wide cap-and-trade system that would require power plants, industrial facilities and refineries to cut carbon dioxide and other climate-changing pollution. While there would be an overall emission cap, polluters would be able to purchase emission allowances to limit reductions. The bill, however, does not lay out how emission allowances would be distributed, a contentious issue left for resolving later.

Climate change is competing with several other big issues for the attention of lawmakers. Among the issues: overhauling the nation's health care system and imposing new financial regulations on Wall Street.

The Tax Implications of Foreclosures

After writing this blog entry on the true costs of foreclosures, I came across this great SmartMoney.com article that I thought might be of interest to my readers. The post describes – in detail – the tax implications of foreclosures, and offers helpful advice on how to avoid them.

A foreclosure transaction occurs when a mortgage lender repossesses a borrower’s property and then sells it to pay off the debt. In most cases, however, a foreclosure will only happen when the mortgage debt exceeds the property's fair market value, or FMV. In this situation, the federal income tax rules treat the foreclosure as a sale for the FMV amount.

Therefore, a tax gain will result if the property’s FMV exceeds its tax basis. (The tax basis of a principal residence usually equals the original cost of the property, plus the cost of any improvements.) On the other hand, a tax loss will result if the property’s FMV is less than the tax basis.

If a mortgage lender also forgives some or all of the debt against your property in conjunction with or after the foreclosure transaction, you have cancellation of debt (COD) income. That income is taxable unless an exception applies.

Continue reading this article at SmartMoney.com.