5 Common Questions About Bankruptcy and Tax Debts

It is not uncommon for those calling my law firm about their IRS tax debt to ask about Bankruptcy.

My law firm recently began offering bankruptcy services to residents of Northern California, this blog discusses the most common questions we receive about bankruptcy and tax debts—and their answers of course.

1. Will my tax debts be resolved by filing for bankruptcy?

Unfortunately, there is no straightforward answer to this first question, as it will depend on your unique financial situation. There are some basic parameters, but there are many exceptions to the general rule. You should always consult with a bankruptcy attorney to determine if your tax debs will be settled by filing bankruptcy.

If your IRS liabilities meet a strict set of conditions then they may qualify to be discharged through Chapter 7 bankruptcy. On the other hand, if you file for Chapter 7 and you have assets that are not exempt, they may be liquidated and the proceeds distributed to creditors. Since the IRS is considered a creditor, a court appointed trustee would examine any claim they might file and determine if it should be paid. If the tax debt is not dischargeable, you may still owe the balance of the tax debt even if they were paid in part.

If you file a Chapter 13 bankruptcy and you have tax debts that cannot be discharged in Chapter 7, you will be required to pay the taxes in full over a period of time up to 60 months, along with certain distributions to other creditors.

2. What are the qualifications to have my debts discharged?

In order to have unpaid tax debts discharged through Chapter 7 bankruptcy all of the following conditions must be met. If even one is not met, then the debts will remain after the proceedings have concluded.

1. The debts must be related to a return that was last due at least three years prior to the bankruptcy filing. The limit also takes extensions into account; therefore if you requested a six-month extension on any of your returns it will add another six months to your wait time.
2. The IRS assessed your tax debt at least 240 days before you begin proceedings.
3. The tax debts must have resulted from unpaid income taxes. Other debts such as unpaid employer payroll taxes and trust fund recovery penalties cannot be discharged.
4. The income tax debt cannot be the result of having filed a fraudulent return or from willfully attempting to evade or defeat the tax.

3. If my tax debts are discharged will it remove an IRS lien?

Again, this is going to depend on your unique financial situation. Generally having debts discharged through a Chapter 7 filing will prevent the IRS from pursuing any additional collection activities against you. However, it will not remove any previously recorded IRS tax liens on your property. You will need to pay the value of the lien in order to have it removed.

On the other hand, if your tax debts are settled through a Chapter 13 filing, then you can have the lien removed once you finish making payments to the IRS.

4. Is it true I need to have filed my tax returns in order to have IRS debts discharged?

Yes, as I mentioned above your tax returns need to be filed with the IRS in order to have the debt discharged by filing for Chapter 7 bankruptcy. If you never filed your own return, and the IRS filed a Substitute for Return on your behalf to assess the debt, then it will not be discharged. Then, after your proceedings conclude you will still have to find a solution to your tax debt problems.

5. If my tax debts are not discharged in bankruptcy, what other options do I have?

If your tax debts do not qualify to be discharged through Chapter 7 bankruptcy then you have a handful of additional options for settling the liabilities. The IRS offers tax settlement programs such as Installment Agreements, Offers in Compromise, or placement on the IRS’ Currently Not Collectible status. For more information on any of these programs you can read about them on my law firm’s website.

If you have any question about bankruptcy you would like to get answered then send them to me via Twitter, or this Questions for The Tax Lady contact form.

Trimming your Tax Liability Before the End of the Year

This year, end of the year tax planning has become even more confusing. Why? Because Congress continues to stall on taking any action on the Bush tax cuts; this inaction could result in significant tax increases on all Americans.

Obama's Compromise

President Obama put together a deal with Republican leaders last week to extend all of the Bush tax cuts for two more years. The compromise also included an extension of unemployment benefits and stopped the estate tax from increasing to 55% in 2011. However, the House of Representatives rejected the bill and have yet to pass any other tax legislation.

Why the Uncertainty is Problematic

Tax planning in prior years has always been pretty straightforward. Make donations to charities; make an extra mortgage payment, max out on your 401(k) contributions etc. However, with the possibility of a tax rate increase some experts are suggesting taxpayers wait until next year.

If your tax rate does increase next year, then it would be better to defer any deductions to 2011, when they will be more valuable. Deductions lower your taxable income, unlike credits, which are dollar for dollar benefits, so if tax rate goes up in 2011 then all of the standard end of the year deductions might be worth more if you wait until January.

What you CAN do

Although many tax laws are up in the air, there are some things you can do now that will help lower your tax liability without worry about next year’s tax rates. First of all, if you are a homeowner then you might want to consider making energy-saving improvements to your home such as adding dual pane windows or purchasing an Energy Star water heater or air conditioning system. The 30% (up to $1,500) tax credit is scheduled to expire at the end of the year. For more information on qualifying expenses, check out EnergyStar.gov.

Other Uncertain Tax Benefits

The energy credit isn't the only tax incentive currently in limbo. The new health care legislation will ban using funds from flexible spending accounts to purchase over the counter medication and claim it as a deduction starting in 2011. If you qualify for the medical expense deduction then it might be a good idea to stock up on your over the counter meds while you can still deduct the expenses.

Another deduction that might expire at the end of the year is the $250 deduction for educators. If you are a teacher, or work in a classroom then be sure to take advantage of this classroom expense deduction while you can.

Obama Directs His Staff to Analyze Options for Overhaul of U.S. Tax System

Over the weekend President Obama directed his team to begin considering options for a massive overhaul of the U.S. tax code. Officials say that it is part of the president’s long term plan to fix the deficit. If there’s anything our country needs, it’s a simplified tax code. Let’s just see if he can get the job done.

From Bloomberg.com:

No decisions have been made about what options to pursue or a timeline for presenting a plan to lawmakers, said the official, speaking on condition of anonymity because no formal action has been taken. Any changes likely would take years to implement.

Obama said this week that revamping the nation’s tax system will have to be considered to deal with budget deficits and make the tax code more “fair” and “efficient.”

“The idea is simplifying the system, hopefully lowering rates, broadening the base,” Obama said in an interview yesterday with NPR News. “What I believe is, is that we’ve got to start that conversation next year.”

The administration is focusing on the issue as Congress debates measures to extend tax cuts set to expire at the end of the year and the president considers a report by his commission on reducing the federal deficit, which included recommendations to change tax laws.

Read more here

Will Rising Mortgage Rates Spur Home Sales?

The historically low mortgage rates we’ve seen over the last year or so haven’t done much to spur home sales, but raising the rates might? Seems strange, but some experts are predicting that increasing rates might just push Americans into buying.

According to CNN.com, rates surged to a six-month high this past week after President Barack Obama and congressional Republicans agreed to extend tax cuts for two years.

Though the deal is still being debated in Washington, financial markets interpreted the development as likely to accelerate the economic recovery but also swell the budget deficit. Though the yield on the benchmark 10-year bond has retreated some, it has still increased 21 basis points this week.

Because yields on Treasuries, especially the 10-year bond, largely influence mortgage rates, borrowing costs for mortgages have suddenly gone up. The average rate for a 30-year fix loan increased to 4.61% in the week ended Thursday from 4.46% the previous week, following a fourth week of increases, according to Freddie Mac (FMCC). The average 15-year rate rose to 3.96% from 3.81%. These rates are the highest they've been since June.

This follows a period of historically low mortgage rates. But even though borrowing costs for new home loans are cheap, they haven't exactly spurred the kind of home buying that one would expect. What's more, lower rates haven't spawned much refinancing, since many home owners are stuck holding property valued at less than what they owe on their mortgages. The latest Case Schiller Index reported that home prices nationwide declined 2% during the three months ending in September, after rising 2.4% during the previous quarter. According to Zillow, home prices have lost $1.7 trillion in value in the past year.

Read more here

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Roni Deutch, A Professional Tax Corporation Launches End-Of-Year Donation Drive

‘Tis the season for giving; what are you and your company doing to help your community? The incredible employees of my law firm put together an end-of-year food and clothing drive to benefit Sacramento Food Bank & Family Services. You can read more about it below.

The community action committee at Roni Deutch, A Professional Tax Corporation is ending the year with yet another charitable donation drive.

"This is the season of giving," explains The Tax Lady Roni Deutch, "and I am asking my employees to help bring holiday cheer to those less fortunate by participating in our end-of-year donation drive."

"Times are tough, and according to the California Employment Development Department the unemployment rate here in Sacramento is around 13%," explains Deutch. "There are so many families that depend on Sacramento Food Bank & Family Services, and I am proud to assist in the efforts of the Sacramento Food Bank & Family Services."

On November 30th, Sacramento Food Bank & Family Services dropped off two collection barrels at Deutch's North Highlands, CA office. One barrel will be used to collect non-perishable food donations, the other for clothing donations. The donation drive will last through January 4th. 2011.

Read more at PRweb.com...

Household Wealth Grows $1.2 Trillion

CNN is reporting that American households’ wealth increased over the last few months. Are you feeling richer?

From CNN.com:

Americans got richer in the third quarter even as home values hit the skids after more than a year of increases.

Net worth for households and individuals climbed $1.2 trillion, or 2%, to $54.9 trillion in the third quarter, according to the Federal Reserve's Flow of Funds report released Thursday.

Household wealth had tumbled in the second quarter -- sliding $1.5 trillion between April and June -- after having climbed for four straight quarters. But growth returned in the third quarter thanks to higher stock values, with the S&P rising 11% following a 12% slide in the second quarter.

Corporate equities jumped $939 billion and mutual fund shares gained $378 billion, eclipsing the $698 billion dip in real estate assets -- the first decline in five quarters.

"Today's report shows that households have continued to rebuild their balance sheets throughout Q3, although the boost to net worth was completely due to a strong recovery in the equities market," Theresa Chen, an economist with Barclays Capital, said in a note to clients. "Looking forward, we expect net worth to rise further as overall economic activity increases and the employment outlook improves."

Continue reading here...

Hip Hop Icon Doug E. Fresh Owes 2 Million to IRS

According to Hip Hop RX, music icon Doug E. Fresh (known as The Human Beat Box) is in debt to the IRS for more than $2 million. He has reportedly been dealing with financial problems for over two decades. Just one more in the long list of celebs with tax problems…

Doug E. Fresh, real name Douglas E. Davis, 44, has a lien against him for $2,276,848 dollars, according to the Detroit News. The tax lien against Doug E. Fresh was reportedly filed on October 20th.

This is not the first time Doug E. Fresh has had trouble with the IRS, as back in December of 2008, New York Post reported that the IRS filed a $367,000 tax lien against the hip hop pioneer plus over $40,000 in state taxes.

Read more here

Party On for a Tax Break

My latest article for WomenEntrepreneur.com has been published. Read on where I discuss the tax benefits of a seasonal office party. You can get a valuable tax deduction by showing your appreciation for clients, customers, and employees this holiday season.

Holiday Parties

Who doesn't love a party? Holiday office parties are a fantastic way to show your employees you appreciate them. Showing appreciation for the people you work with every day is especially crucial during challenging economic times. And with holiday bonus checks shrinking every year, a holiday party is a nice alternative. Let me get to the best part: The cost of throwing parties for your employees is 100 percent deductible. The food, the beverages, the decorations -- all those expenses can be deducted. The only caveats: The expenses must not be overly extravagant (e.g., champagne, caviar and lobster for a holiday luncheon), and the parties must be infrequent (weekly parties are likely to raise an eyebrow or two at the IRS and could invite an audit).

Another common business practice is hosting holiday events for clients. Some choose to throw one big party; others opt to take individual clients out for a meal. Either way, when you entertain clients and potential clients, the tax benefit is the same: You may deduct 50 percent of the cost. The requirements here are that the expenses not be extravagant, and business must be discussed or conducted either during or adjacent to the meal (e.g., going out to dinner after a meeting).

Gift Giving

Many business owners reward their employees with small gifts, tokens of appreciation at the holidays. These can be part of a holiday party or a stand-alone gift. The key here is to keep the value of these gifts in a reasonable range or, as the IRS says, "of nominal value." Doing so allows you to give these gifts and claim deductions for nonwage work business expenses. Even better, these "de minimis" gifts are not subject to the standard 50 percent deduction limit that usually applies to meal and entertainment expenses.

Continue reading at WomenEntrepreneur.com...

Secret GOP Plan: Push States to Declare Bankruptcy and Smash Unions

Reuters reports that Republicans in Washington are systematically working to destroy government employee unions once and for all. This is shaping up to be the political battle of 2011; leaving us all wondering, how will this hurt/help our struggling economy? Will California really declare bankruptcy?

From Reuters.com:

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.

Republicans in the House of Representatives already want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about these future obligations. Republican Representatives Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more conservative rate of return than many plans currently expect. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds.

Treasury's Shock and Awe on AIG

According to CNN, the Treasury and Federal Reserve finalized details of the latest restructuring of the financial giant yesterday. The agreement will allow AIG to borrow funds from the Treasury to repay the federal government. This will leave the Treasury a 92% stake in the company.

"Today's announcement is a milestone in the government's long-stated efforts to exit our investments in private companies as soon as practical while protecting taxpayers," the government said. "When all is said and done, we believe taxpayers will recover every dollar invested in AIG and stand a good chance of making a profit."

That's a large chunk of stock, and the government – which is not exactly eager to be seen in the bailout business nowadays, what with all the associated bad press – would surely like to sell it sooner rather than later so it can advertise all the profits its so-called investments are making for taxpayers. This has worked wonders lately with two other bailed-out outfits, Citi (C) and GM (GM).

Thus, the Wall Street Journal reports the government wants to sell a quarter of its stake -- $15 billion worth -- in a series of deals that would ideally start early in 2011.

Continue reading at CNN.com...

Snipes on Larry King Live

Actor Wesley Snipes appeared on Larry King Live earlier in the week making one final attempt to avoid jail time. He has been ordered to surrender to prison officials no later than today, but is insisting that the media has misreported facts about his case. Perhaps Mr. Snipes forgets, the media didn’t convict him, nor do they have the power to keep him out of jail.

Hat tip: Tax Prof Blog

Five Ways New Estate Tax Deal Affects you

After long last, we finally see what will happen with the estate tax in 2011. Until Congress made this move, the estate tax was set to return in 2011, at a top rate of 55% for estates valued over $1 million. In the deal reached between Obama and Republican leaders, the top rate will be 35%, and the tax will only apply to estates valued at over $5 million.

MarketWatch.com put together a list of the ways this deal on the estate tax will affect everyday taxpayers. You can find a section of their article below, or click here for the full text.

For starters, consider the possibility that most Americans won’t even need a plan for federal estate taxes, especially if Congress also passes what estate planners refer to as “portability.” That’s the ability of a surviving spouse to use the unused exemption of the first spouse to die.

“There will be a significant drop-off in the business of estate tax planning, because even more people will have no significant estate tax problems,” said Howard Zaritsky, a Rapidan, Va.-based attorney specializing in estate planning. “And if Congress also passes ‘portability,’ this will very significantly remove over 99% of the public from the need for estate tax planning.”

Some years ago, a net worth of around $3 million to $3.5 million was considered the wealthiest 1% of the population, according to Martin Shenkman, an attorney and CPA who practices in New York City and Teaneck, N.J.

In a report on the tax compromise, written for Steve Leimberg’s Estate Planning Newsletter, Shenkman said: “A $5 million threshold would thus mean far less than 1% of the families would be effected. If in 2009, with a $3.5 million exclusion, only about 16,000 decedents filed a federal estate tax return, a $5 million exclusion should reduce the number to a miniscule figure.”

Of course, the specific federal estate tax exemption and rates could still change, but if the proposed agreement does in fact become law, estate planners say these five moves will be important to manage your financial affairs properly:

1. Create a bypass trust

Don’t overlook the potential need for a bypass trust.

According to Shenkman’s report, “Failing to establish the bypass trust that had been the cornerstone of most tax oriented estate plans of the past might lead the surviving spouse to a taxable estate problem, especially if the survivor’s exclusion is not indexed for inflation.”

Continue reading at MarketWatch.com...

Tax-Cut Extension May Bolster Economy, Limit Need for Fed to Go Beyond QE2

From Bloomberg.com:

President Barack Obama’s agreement to prolong Bush-era income-tax cuts may reduce pressure on the Federal Reserve to extend its $600 billion bond-purchase program while spurring U.S. economic growth.

Obama’s deal with congressional Republicans may raise gross domestic product next year by as much as half a percentage point to about 3.1 percent, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Tom Porcelli, a senior economist at RBC Capital Markets Corp. in New York, is raising his growth forecast for 2011 by one point, also to 3.1 percent.

The agreement goes beyond what economists were expecting by including a 2 percent cut in payroll taxes, which fund Social Security and Medicare. The proposal also sets the estate tax at a top rate of 35 percent, extends aid for the long-term unemployed by 13 months and would allow companies next year to deduct the full cost of investments in equipment.

“I think it does reduce the odds that the Fed does more purchases,” Feroli said. “You’re going to have a pretty nice increase in disposable income and that should lift consumer spending.”

Stocks rallied after the agreement was announced, sending the Standard & Poor’s 500 Index to the highest level since the financial crisis in September 2008. Gains were erased in the final hour of trading after Obama said he’ll push to overhaul the tax code in two years. Treasuries fell and copper rose to a 31-month high.

Official White House Statement on Bush Tax Cuts

Well, at least we finally know what the result of all the political posturing is: the Bush tax cuts will be extended for all taxpayers, including the highest earning taxpayers. Yesterday the White House released their official statement regarding the deal on the Bush tax cuts. The President explained why he compromised:

We saw that in two different votes in the Senate that were taken this weekend. And without a willingness to give on both sides, there’s no reason to believe that this stalemate won't continue well into next year. This would be a chilling prospect for the American people whose taxes are currently scheduled to go up on January 1st because of arrangements that were made back in 2001 and 2003 under the Bush tax cuts.

I am not willing to let that happen. I know there’s some people in my own party and in the other party who would rather prolong this battle, even if we can't reach a compromise. But I'm not willing to let working families across this country become collateral damage for political warfare here in Washington. And I'm not willing to let our economy slip backwards just as we're pulling ourselves out of this devastating recession.

In addition to the official statement, the White House press secretary also released their "Fact Sheet on the Framework Agreement on Middle Class Tax Cuts and Unemployment Insurance." According to the document, the President’s plan will accomplish the following three things:

Working families will not lose their tax cuts.

A typical working family faced a tax increase of over $3,000 on January 1st. That’s avoided under this framework agreement, and working families won’t see their tax cuts go away next year.

Focused on high impact job creation measures.

The framework agreement includes some of the best measures for jumpstarting growth and job creation, including a full year of emergency unemployment insurance benefits, about $120 billion in payroll tax cuts for working families, and a continuation of tax credits for working families. This is on top of growth generated by extension of the middle-class income tax rates.

Does not worsen the medium- and long-term deficit.

These are responsible, temporary measures to support our economy that will not add costs by the middle of the decade. The President does not believe it is affordable to make the high-income tax cuts permanent and will continue to have that debate in the years ahead.

IRS Expands Use of Twitter to Help Taxpayers, Tax Professionals

In preparation for the new tax season the IRS is expanding their presence of Twitter to "to share timely information with taxpayers and the tax professional community." It’s about time the agency jumped on board and committed whole-heartedly to social media.

From IRS.gov:

The IRS Twitter news feed, @IRSnews, provides the latest federal tax news and information for taxpayers. The focus of the IRS Twitter messages will be on easy-to-use information, including tax tips, tax law changes and important IRS programs such as e-file, the earned income tax credit and “Where’s My Refund." Anyone with a Twitter account can follow @IRSnews by going to http://twitter.com/IRSnews.

Another important IRS Twitter feed, @IRStaxpros, is designed for the tax professional community. Follow @IRStaxpros by going to http://twitter.com/IRStaxpros. The IRS also tweets tax news and information in Spanish at @IRSenEspanol. Follow this Twitter feed by going to http://twitter.com/IRSenEspanol.

The IRS Twitter feeds will work in conjunction with IRS.gov and the IRS YouTube channels to bring IRS information direct to taxpayers. Since August of 2009, there have been more than 1 million views of videos on the IRSvideos (http://www.youtube.com/irsvideos), IRS multilingual (http://www.youtube.com/user/IRSvideosmultilingua) and IRS American Sign Language (ASL) (http://www.youtube.com/IRSvideosASL) channels.

Continue reading at IRS.gov...

Mortgage Tax Break in the Crosshairs

Looking for ways to reduce the deficit, one panel is recommending limiting, or even killing altogether, the mortgage interest deduction. You can bet the housing industry will fight this tooth and nail!

From CNN.com:

Don't even think of touching the mortgage interest tax deduction in the midst of a fragile housing market.

That was the immediate response of the housing industry, which has come out with guns blazing against the presidential deficit commission's proposal to overhaul the coveted tax provision.

"We will fight this proposal," said Joe Stanton, chief lobbyist for the National Association of Home Builders. "From everything we've read, it will end up being a tax hike."

Charged with finding ways to reduce the nation's exploding federal debt, the bipartisan debt panel recommended Wednesday a wide range of controversial spending cuts and tax changes that would slash $4 trillion in deficits over the next 10 years.

Among the proposals was a major change to the mortgage interest deduction, which costs the Treasury Department an estimated $131 billion a year.

Currently, taxpayers who itemize their deductions can deduct the interest on mortgages of up to $1 million for their principal and second residences, plus on home equity loans of up to $100,000. The provision generally benefits higher-income Americans since they are more likely to itemize.

Continue reading here...

The Walking Death Tax

Although a deal may have been reached for the Bush tax cuts, and an unemployment benefit extension, Congress seems to have forgotten about the estate tax. In just 26 days, the estate tax is set to return at levels that will hit the middle class.

The Wall Street Journal reports:

Without action in the lame duck Congress, the estate tax will rise from the dead on January 1 with a vengeance, the rate climbing back to 55% from zero this year. The exemption amount will revert to a miserly $1 million, unindexed for inflation, so more middle class taxpayers will get hit year after year.

President Obama and Congressional Democrats don't think this is a high priority, but voters do. A November Gallup Poll found that Americans think that keeping the estate tax "from increasingly significantly" is "very important" by 56% to 17% "not too important." That's more than think it is a priority to extend current tax rates (50%), extend jobless benefits (48%), ratify the Start treaty (40%) or let openly gay men and women serve in the military (32%).

Liberals are content to let the rate revert to 55%, with some moderate Democrats arguing for a 45% rate. Republican Jon Kyl of Arizona and Democrat Blanche Lincoln of Arkansas are pushing a compromise that would lower the top rate to 35% with a $5 million deduction. That rate is still 35 percentage points too high for our liking, but we'll take it as an alternative to the greedy political confiscation of more than half of the wealth built by someone who has saved over a lifetime. An estate of $5 million isn't all that much for a successful and thrifty business person with some real estate to accumulate over 50 or 60 years.

Mr. Obama, who professes to care about small businesses and jobs, should pay attention to new estimates by the Joint Committee on Taxation. The committee finds that reverting to the 55% rate with a $1 million exemption will tax roughly 10 times more small businesses and farms than would Mr. Kyl's proposal. A recent study by Doug Holtz-Eakin, the former director of the Congressional Budget Office, finds that the estate tax reduces savings and capital formation and forces family businesses to liquidate at the time of an owner's death, which puts hundreds of thousands of jobs in peril.

Read more here

Obama Agrees to Two-Year Tax Cut Extension, Lower Payroll Taxes

After months of debating, the President has announced that he plans to break one of his largest campaign promises and extend all of the Bush tax cuts, even those to the wealthiest taxpayers. Obama has agreed to a deal with Republicans to allow for the two-year extension in exchange for an unemployment insurance extension and a reduction in the payroll tax. More spending and less revenue, how will this affect the deficit? Well, it can’t help.

From Business Week.com:

Obama said he would accept lower rates on high earners’ income, dividends, capital gains and multi million-dollar estates for the next two years to break a stalemate over extending the Bush administration’s tax cuts for middle-class taxpayers before Congress adjourns. The current tax rates, enacted in 2001 and 2003, are set to increase Dec. 31.

Without the compromise, middle-income families would become “collateral damage for political warfare here in Washington,” Obama said in televised remarks yesterday. He said he still believes that the nation can’t afford to permanently extend the reduced top tax rates.

“This compromise is an essential step on the road to recovery,” said Obama, who criticized Republicans for insisting on permanent tax cuts for the wealthiest Americans “regardless of the cost of impact on the deficit.”

Obama spoke in Washington after a White House meeting with Democratic congressional leaders. They and the Republican leadership still have to sell the plan to their caucuses. Obama called it a “framework” for a deal.

In addition to preserving the status quo on Bush policies, the proposal creates more than $300 billion in new tax cuts for wage-earners, wealthy families, and corporations.

Flawed New $100 Bill, $110 Billion Fed Headache

The federal government has produced over 1.1 billion new $100 bills; however the bills have a problem. These high tech bills easily crease during printing, causing blank spots. Now they all must be inspected, and the Feds are still working to find a way to mechanically separate the good bills from the flawed bills. Cost to fix this all: $110 billion.

CNN Money reports:

Originally scheduled for a February 2011 release date, the bills were the first run of a high-tech note designed to combat counterfeiting by including a 3-D security ribbon.

The Federal Reserve first acknowledged an issue with the bills in October, but did not specify the scope of the problem.

The flaw -- a problem with sporadic creasing of the paper that results in small blank spaces -- only surfaced during a part of the process that requires high pressure printing, the official said.

That made the flaw difficult to detect during the normal inspection process.

"The Bureau of Engraving and Printing did testing so they could be sure the notes would run correctly," the official said. "Unfortunately the creasing problem did not reveal during testing. It's very difficult to detect."

Read more here

Questions for the Tax Lady: December 6th, 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: Question: If I owe the IRS, can they place a levy on my husbands wages?

Answer: Good question. If you file jointly, it is possible that the IRS would come after your husband’s wages to cover your debt. When you file a joint tax return with your husband the IRS goes by the concept of “joint and severable liability”. Which means you can both be subject to collections for unpaid debts.

Now, there are things you can do to avoid this situation. First, if you have an existing tax debt, tell your spouse. Second, don’t file a joint tax return. This should go a long way toward keeping your debt from affecting your husband’s taxes.

Another issue you might discover, if you file jointly, is that the IRS may keep your husbands tax refund to pay your tax debt.

Question: Is it true that making an extra mortgage payment before the end of this month can help lower my tax liability?

Answer: Absolutely! Prepaying deductible expenses, like mortgage interest, is a great way to reduce your tax burden. Just a few things to remember: All payments must be made by December 31, 2010. You should also be aware that the Form 1098 your mortgage lender sends you may not show the early payment. You can still deduct it, you’ll just have to make sure you hang on to receipts and canceled checks as backup documentation. And finally, no double dipping! That early payment cannot be deducted on the following year’s tax return if you use it on this year’s, so plan accordingly.

IRS Announces 2011 Standard Mileage Rates

In their newest press release the IRS issued the 2011 standard mileage rates. These numbers are used to calculate deductions for an automobile that is used for either business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

51 cents per mile for business miles driven

19 cents per mile driven for medical or moving purposes

14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

Tax Breaks for Bailout Recipients Stir Up Debate

From the Wall Street Journal:

Senate legislation unveiled Thursday has estate planners asking whether the window has closed for clients to make gifts to children and grandchildren at unusually low tax rates.

Wealth advisers have recently been touting the 35% gift-tax rate in effect in 2010, and the absence of a generation-skipping tax on gifts to grandchildren. Both taxes are scheduled to snap back to 55% on Jan. 1, creating a tax-saving opportunity for year-end gifts.

But the bill authored by Sen. Max Baucus (D., Mont.) would immediately re-impose the generation-skipping tax and raise the gift tax, both to 45% and retroactive to Thursday, Dec. 2.

Those provisions are part of broader legislation to extend expiring tax cuts, which isn't expected to pass the Senate in its current form. Ultimately it will have to be negotiated with Republicans, which could lead to changes on such items as effective dates.

Still, Mr. Baucus's choice to make the higher tax rates effective as of Thursday, instead of when final legislation actually passes, makes gifts in December a riskier proposition, wealth advisers say.

"There are some people who were thinking about making year-end gifts that would trigger a gift tax, who now will think twice about writing that check," said Anne Coventry, an estate planner at the Pasternak & Fidis law firm.

President Obama Expresses Disappointment with Tax Vote

Over the weekend the Senate blocked legislation that would have extended the Bush tax cuts to middle income taxpayers. President Obama reportedly called the vote very disappointing.

"It makes no sense to hold tax cuts for the middle class hostage to permanent tax cuts for the wealthiest two percent of Americans," he added.

Check out this video from the Associated Press, or the article below explaining the Senate's decision.

In a rare weekend session that followed days of stormy debate, the 100-member Senate on Saturday fell short of the 60 votes necessary to approve the Democratic proposal of renewing low tax rates only for individuals earning up to 200,000 dollars and for families with 250,000 dollars or less of income.

The measure, backed by the White House, would have let rates on higher earners rise at the beginning of next year to where they were before cuts enacted by former president George W. Bush's administration in 2001 and 2003.

Republicans blocked the legislation on a procedural vote, complaining the measure failed to extend low tax rates for wealthier Americans. They want all of the tax cuts -- including those that directly benefit the top earners -- to be extended instead.

They also rejected another Democratic proposal to extend the tax cuts for annual incomes of up to one million dollars. A handful of Democrats voted against the two measures.

"With so much at stake, today's votes cannot be the end of the discussion," Obama said in a statement.

Read more here

IRS Helps Small Employers Claim New Health Care Tax Credit

According to their newest press release, the IRS has released their final guide for small employers eligible to claim the new small business health care tax credit for the 2010 tax year. The release includes a one-page form and instructions small employers will use to claim the credit for the 2010 tax year. If you’re a business owner, see if you qualify. Tax credits are more valuable than deductions!

From IRS.gov:

New Form 8941, Credit for Small Employer Health Insurance Premiums, and newly revised Form 990-T are now available on IRS.gov. The IRS also posted on its website the instructions to Form 8941 and Notice 2010-82, both of which are designed to help small employers correctly figure and claim the credit.

Included in the Affordable Care Act enacted in March, the small business health care tax credit is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage they already have.

Continue reading at IRS.gov...

Stephen Colbert's Year-End Estate Planning Tips

Well, if Congress is going to torture us all with their inability to make decisions, at least we get some good comedy out of the mix. Best line: “all those poor innocent people who are willing to kill Nana for the extra cash.” Thank you, Mr. Colbert!

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Return of the Estate Tax
www.colbertnation.com
Colbert Report Full Episodes 2010 Election March to Keep Fear Alive

Hat tip: Tax Prof Blog

House Passes Legislation to Extend Only Some Tax Cuts

On Thursday the House of Representatives passed legislation to extend some of the expiring Bush-era tax cuts. 234 members voted for the bill, while 188 voted against it. The legislation now heads to the Senate, where it is expected to struggle. When are we going to see a final decision?!

The Hill.com reports:

Twenty Democrats broke with their party and voted against the bill after 33 had defected in a previous test vote. Most of those who voted with Republicans on the first ballot were members of the centrist Blue Dog Coalition, and many lost their bids to be reelected last month.

Speaker Pelosi gaveled the vote to a close herself, receiving a smattering of applause from Democratic members. The bill extends only the cuts for the middle-class, letting tax breaks end for families earning more than $250,000 per year and individuals making more than $200,000. Congress originally authorized the cuts in 2001 and 2003.

Three Republicans, Walter Jones (N.C.), Ron Paul (Texas) and John Duncan (Tenn.), voted with Democrats to renew only the middle-class cuts.

Read more here

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50,000 Inmates Claim Tax Refunds, Report No Wages

A report released today by a government investigator found that about 50,000 prison inmates claimed more than $130 million in tax refunds in 2010. These inmates did not provide any wage information to the IRS, but were still able to claim millions in refunds. Are these legitimate refunds, or fraud? The IRS won’t say yet, but you can be sure an investigation will be conducted.

The Associated Press reports:

The Treasury Inspector General for Tax Administration stops short of saying the refunds were fraudulently claimed. It does, however, say the Internal Revenue Service should investigate further.

The report is the latest in a series of audits looking at prison inmates claiming tax credits and other government payments. It notes that the IRS identified nearly 250,000 fraudulent tax returns during the 2010 filing season — a 50 percent increase over 2009 — preventing $1.48 billion in fraudulent refunds.

"While the IRS is identifying larger numbers of fraudulent returns, improvements must be made to its screening processes to ensure that returns filed by prisoners get adequate scrutiny," said J. Russell George, the Treasury inspector general for tax administration. "Expanded and expedited access to wage and withholding information would significantly increase the IRS's ability to verify information reported on a tax return when processed, and prevent fraud."

The IRS issued a statement saying the agency takes refund fraud seriously and aggressively fights it.

"The IRS is very successful at detecting and stopping incorrect refunds, including criminal refund fraud, and overall prevents 98 percent of questionable claims from being issued," the statement said.

Read more here

GM, Ford Post Sales Gains While Toyota Struggles

According to CNN, auto sales were up in November, but still remained near historic lows. So far this year 12.3 million vehicles have been sold. GM sales were up 11% compared to last year, Ford saw a nearly 20% increase, while Toyota's sales were down 3.2%. As it turns out, we’re all still hesitant to make big ticket purchases.

The overall numbers are an encouraging sign that the recovery is taking hold, and consumers are once again confident enough to purchase big ticket items, said Jesse Toprak, vice president of industry trends at TrueCar.com.

When comparison is limited to the four brands GM (GM) still sells -- Chevrolet, Buick, GMC and Cadillac -- sales rose 21% over last year. The 11% figure includes sales for discontinued brands such as Saturn and Pontiac.

"November sales results are consistent with our expectations and show that the plan we laid out earlier this year to steadily grow in the U.S. market is working," Don Johnson, vice president, U.S. sales operations said in a statement.

Continue reading at CNN.com…

Judge to Snipes: Check into Pennsylvania Prison by Next Week

Yesterday TMZ reported that actor Wesley Snipes was ordered to report to prison by next week. Snipes was warned that failure to report by December 9th, would result in "additional criminal charges."

Snipes was convicted in 2008 and has appealed several times, but it looks like he will finally have to serve his sentence. He is due to check into a prison located in Pennsylvania. Let’s hope the makers of “Master Daddy” (http://www.imdb.com/title/tt1757808/ ) can find a replacement, since Snipes apparently won’t be available.

Why the Spending Stimulus Failed

Yesterday the CBO reported that tax breaks were the least effective portion of the stimulus plan. Now we’re being told that the stimulus failed because it needed more tax breaks? Here’s the thing, we’ll never be able to prove that an economic plan “worked” or didn’t, simply because we can’t know what would have happened had we acted differently. So, at the end of the day, it’s all just speculation, but enjoy some more:

From the Wall Street Journal:

President Obama and congressional leaders meeting yesterday confronted calls for four key fiscal decisions: short-run fiscal stimulus, medium-term fiscal consolidation, and long-run tax and entitlement reform. Mr. Obama wants more spending, especially on infrastructure, and higher tax rates on income, capital gains and dividends (by allowing the lower Bush rates to expire). The intellectual and political left argues that the failed $814 billion stimulus in 2009 wasn't big enough, and that spending control any time soon will derail the economy.

But economic theory, history and statistical studies reveal that more taxes and spending are more likely to harm than help the economy. Those who demand spending control and oppose tax hikes hold the intellectual high ground.

Writing during the Great Depression, John Maynard Keynes argued that "sticky" wages and prices would not fall to clear the market when demand declines, so high unemployment would persist. Government spending produced a "multiplier" to output and income; as each dollar is spent, the recipient spends most of it, and so on. Ditto tax cuts and transfers, but the multiplier is assumed smaller.

Continue reading at WSJ.com...

Return of Estate Tax Looms as Final Impediment to Extending Bush Tax Cuts

Experts predict that a compromise on the Bush-era tax cuts may involve a return of the estate tax. Without any action at all, the estate tax will go from the 2010 zero percent, to a 2011 top rate of 55% on estates over $1 million.

Bloomberg.com reports:

A new tax on multimillion-dollar estates may emerge as the final hurdle to a deal that preserves most or all of former President George W. Bush’s tax cuts, analysts said. Congress has unsuccessfully sought at least a half-dozen times to resolve the issue since 2000, including an abandoned effort last December to prevent the estate tax’s expiration.

“The history on the estate tax is every time there’s almost an agreement someone leaves the table in the belief they’ll get a better deal next time,” said Clinton Stretch, a managing principal at the Washington consulting firm Deloitte Tax LLP.

With Obama planning to meet with bipartisan congressional leaders at the White House tomorrow, three main factions have formed in the Senate, none of which has the 60 votes needed to advance an estate-tax proposal. One includes Republicans such as South Carolina’s Jim DeMint who favor permanent repeal. Another is led by Democrats including Majority Leader Harry Reid who support a top rate of 45 percent that would apply after a $3.5 million tax-free allowance.

Read more here

Short on Votes, Deficit Panel Delays Decision

It looks like Washington is sticking with their usual methods of dealing with problems: just delay the vote! This method has been used so often, it’s almost a joke. Except, no one’s laughing. Between no clear call on the Bush tax cuts, estate tax changes, and now the deficit panel, all of Washington seems to be suffering from the same problem: procrastination in the face of opposition.

From Reuters.com:

A presidential panel on balancing the U.S. budget on Wednesday revised its fiscal austerity plan with deeper spending cuts and a more flexible tax code overhaul, hoping to draw broader political support.

The 18-member commission, established in February by President Barack Obama, discussed its revised plan at a public meeting on Capitol Hill. The panel is due to vote on it on Friday, two days later than originally scheduled.

The plan envisages reducing the budget deficit to 2.3 percent of gross domestic product by 2015, from 8.9 percent in the last fiscal year as the United States, along with other major powers, struggles to right its economy after the world financial crisis and deep recession.

Republican Senator Judd Gregg and Democratic Senator Kent Conrad, both veterans of Washington's budget wars, voiced support for the plan at the commission meeting.

"I am prepared to support this plan and support it strongly," said Conrad, who chairs the Senate Budget Committee.

CBO: Tax Cuts Were Least Effective Stimulus in Recovery Act

According to a new report from the Congressional Budget Office, the tax breaks provided by the Recovery Act did less to stimulate our economy than government spending, purchasing and transfer payments. You can find the summary of the CBO's report below (Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output From July 2010 Through September 2010P, or download the full PDF here courtesy of the TaxProf Blog.

Center on Budget and Policy Priorities, New CBO Report Finds up to 3.6 Million People Owe Their Jobs to the Recovery Act:

Among ARRA’s most effective provisions for saving and creating jobs, according to CBO’s estimates, are direct purchases of goods and services by the federal government, transfer payments to states (such as extra Medicaid funding), and transfer payments to individuals (such as increased food stamp benefits and additional weeks of unemployment benefits). CBO’s estimates indicate that tax cuts are less effective job producers, and tax cuts for higher-income people and corporations have very low bang for the buck.

Senate Votes Down Ban on Earmarks

Yesterday morning the senate defeated a proposal to ban congressional earmark spending. Fifty-six senators voted against the legislation, which was offered as an amendment to a food-safety bill.

The Hill.com reports:

Senate Republicans have already passed a voluntary ban on earmarks in their caucus, but several GOP senators have objected to it. Democrats have so far declined to ban earmarks from their members.

The legislation would have established an earmark moratorium for fiscal years 2012 and 2013, and also would have covered the fiscal year that began on Oct. 1. Congress has yet to pass an appropriations bill for the current fiscal year, and in the lame-duck session lawmakers are likely to approve either an omnibus spending bill or a continuing resolution to keep the government operating.

In speeches on Monday, Coburn said the ban was the only way to rein in out-of-control spending. He did not speak on Tuesday morning, but Minority Leader Mitch McConnell (R-Ky.), who supports the ban, alluded to the issue in remarks about the current debate over tax cuts.

"Republicans have heard the voters loud and clear," McConnell said. "They want us to focus on preventing a tax hike on every taxpayer, on reining in Washington spending and on making it easier for employers to start hiring again."

Read more here

The Benefits of Hiring an Attorney to Help You File for Bankruptcy

My law firm recently began offering bankruptcy services to consumers in Northern California. We have been helping taxpayers resolve their federal tax debts for two decades, but many of our clients often struggle with unsecured debts as well. Filing for bankruptcy may seem scary, but it can offer relief and the fresh start that many families need in this economy. In honor of my firm’s new service, I have put together a list of advantages of hiring a professional to help you file bankruptcy.

Deciding to File

While the idea of having all or most of your debts eliminated is very tempting, filing for bankruptcy is not always the best choice. There are certain debts – such as some tax debts – that may not qualify to be discharged through bankruptcy. By consulting an experienced bankruptcy attorney, you can find out if it really is a good option for your specific financial situation.

Experience

Hiring an attorney who has experience with debts and finance will help ensure that your case is handled correctly, and that as many of your debts as possible are discharged. There are different chapters of bankruptcy, and it can be confusing trying to decide what to do on your own. In addition, laws are always changing and an attorney well versed in financial law will likely be up to date on recent changes in court procedures or bankruptcy law.

Error Control

Filing for bankruptcy on your own can be a very difficult and confusing process, but when it comes to something as serious as bankruptcy you want to avoid making any errors. An attorney who has helped clients through the process previously will know what to expect, and how to avoid making a serious error. In addition when you hire an attorney to handle your case you are really retaining an entire firm. There will be multiple legal assistants reviewing documents and helping with your case.

Valuing Assets

Putting a value on your own assets is not only difficult, but it can also be extremely emotionally straining for people. If you hire an attorney to file for bankruptcy, then you are also getting a trained, unbiased opinion when it comes to valuing your assets. They will work with you to make sure that your previous assets are not valued at less than what they are actually worth.

Hassling Calls

Anyone who has been in debt severe enough to file for bankruptcy knows that the relentless calls from creditors can be exhausting, embarrassing, and scary. However, once you hire an attorney, creditors and lenders can no longer call you directly. They are required by law to direct inquiries to your attorney.

Time is Money

When you retain an attorney to help settle your debts through bankruptcy then you may have to pay an initial fee to retain the firm. However, once you have done so they will take care of your case from start to finish. Ideally, resulting in the restructuring or discharging many debts. This is a very complicated process, and unless you are familiar with bankruptcy law, many Americans find the time and effort that goes into researching and preparing financial documents outweighs the fees associated with hiring an attorney. Finally, a trained lawyer is likely to achieve a better settlement than a person without any experience would be able to.

Questions for the Tax Lady: December 1st, 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: If Congress fails to pass any legislation, what will happen to the estate tax next year?

Answer: This question is haunting people all over the country. When the Bush Tax Cuts were enacted, the plan was to phase them out over a number of years, and then have a one-year repeal. The way the law is written, the estate tax will return to pre-2001 levels. Meaning estates valued over $1 million dollars are subject to a top rate of 55%. This is only if Congress does not take any action at all.

How likely is this? At this point, who can say? Several different plans are circulating through the halls of Congress right now, but it’s anyone’s guess what actually sticks.

Question: I saw in the news that the IRS announced they have a lot of money in undeliverable refunds? How do I find out if the IRS owes me a check?

Answer: Good question! Every year, millions of dollars in refund checks are returned to the IRS, usually due to a bad address. The good news is that, so long as you figure out that your refund is missing within 3 years of its issue, the IRS will issue you a new check. Visit www.IRS.gov and look at the “Where’s My Refund” page (http://www.irs.gov/individuals/article/0,,id=96596,00.html). You’ll need to enter in your Social Security or Individual Taxpayer Identification Number, your filing status, and the exact whole dollar amount of your refund (which should be displayed on line 72 of your Form 1040). It’s free, it’s quick and the best part, it could put hundreds more dollars in your pocket!