Easing Impact of a Tax Rise

Earlier in the week, David Johnston, of the New York Times, posted an article with advice for taxpayers earning more than $200,000 per year – who’s tax rates will likely go up in the next fourteen months. This is due to tax cuts sponsored by President Bush that are set to expire at the end of next year.

When the Bush cuts expire, the two top tax rates will move up from 33 percent and 35 percent to 36 percent to 39.6 percent. For a couple making $500,000, the added tax will be about $6,000 per year, for a couple making $1 million about $30,000.

The bite could be less than that for business owners, however. President Obama, on the campaign trail, proposed allowing founders of small businesses to sell their enterprises without owing capital-gains taxes. Congress has yet to act on this idea.

He also campaigned on the promise that there would be no tax increases on the bottom 98 percent of earners. Earlier this year, President Obama signed a two-year tax break that one of his economic advisers, Austan Goolsbee, said “included $63 billion for the Making Work Pay Tax Credit, a direct tax cut for 95 percent of workers and the magnitude of just about the largest middle-class tax cut ever.”

For high-income taxpayers, here are some steps to arrange your affairs to get the most benefit with the least tax when the Bush cuts lapse:

Check out the tip at the New York Times website...

Tax Challenges of Being a U.S. Citizen Abroad

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

The IRS Still Wants your Money

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

Foreign Earned Income Exclusion

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

Foreign Tax Treaties

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

IRS Reminds Taxpayers of the Expanded Recovery Act Tax Credits

As the seasons change, the IRS is reminding taxpayers that they can weatherize their homes and be rewarded for their efforts. According to this recent press release, homeowners making energy-saving improvements this fall can cut their winter heating bills and lower their 2009 tax bill as well.

The American Recovery and Reinvestment Act (Recovery Act), enacted earlier this year, expanded two home energy tax credits: the non-business energy property credit and the residential energy efficient property credit.

Non-business Energy Property Credit

This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items does not count.

By spending as little as $5,000 before the end of the year on eligible energy-saving improvements, a homeowner can save as much as $1,500 on his or her 2009 federal income tax return. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. These tax savings are on top of any energy savings that may result.

Residential Energy Efficient Property Credit

Homeowners going green should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit, equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property.

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1st UBS Client Charged By US Gets Probation In Tax Case

The results are in for the first U.S citizen to be tried in a UBS offshore banking case. Steven Rubinstein – an accountant from Florida – was ordered to pay a $40,000 criminal fine and sentenced to 3 years of probation after pleading guilty in court.

The sentence was lighter than the recommendation of prosecutors, who sought a one-year prison term for Rubinstein. He faced a possible sentence of 18 to 24 months under advisory sentencing guidelines.

Rubinstein was sentenced in a Florida federal court for filing a false tax return. Prosecutors charged him in April and he pleaded guilty in June.

Prosecutors said Rubinstein communicated with UBS bankers from 2001 to 2008 about the purchase and sale of securities worth more than 4.5 million Swiss Francs. They also said Rubinstein repatriated roughly $7 million into the U.S. to buy property and build a home in Boca Raton, Fla.

Continue reading at WSJ.com…

New York, New Jersey Counties Lead in Property Taxes

From Bloomberg.com:

The counties of Westchester, New York, and Hunterdon, New Jersey, charged the highest property tax bills in the U.S. during 2006-2008, the Tax Foundation said. All of the 10 top-paying counties were in the two states.

The median annual tax bill in Westchester, north of New York City, was $8,404 in the three-year period, the Washington, D.C.-based research organization said today in a study based on U.S. Census data. Hunterdon homeowners paid $8,347.

“In seven New Jersey counties and three New York counties, the median property tax over 2006-2008 is more than 7 percent of median household income, compared with the national median of 2.85 percent,” the study said.

New Jersey’s property taxes are an issue in the state’s Nov. 3 election for governor. Democratic incumbent Jon Corzine said on Oct. 23 he would halt growth of property taxes if re- elected. Republican challenger Christopher Christie said he would cut taxes across the board.

New Jersey ranked first among states with a $6,320 median property tax bill in 2008, Census Bureau data last month showed. States with the lowest median real-estate taxes last year were Louisiana, $188; Alabama, $383, and West Virginia, $457, the bureau said.

“The Northeast remains the area with the highest property taxes,” Gerald Prante, a Tax Foundation economist, said at the time. “These states also have high per capita income, and the highest property tax bills, in terms of dollar amounts, are usually found in the areas with the highest incomes.”

The top 10 counties for property tax bills in 2006-2008 were: Westchester, New York, with $8,404; Hunterdon, New Jersey, with $8,347; Nassau, New York, at $8,306; Bergen, New Jersey, with $7,997; Rockland, New York, at $7,798; Essex, New Jersey, with $7,676; Somerset, New Jersey, at $7,676; Morris, New Jersey, with $7,310; Passaic, New Jersey, at $7,095, and Union, New Jersey, with $7,058. The national median is $1,854, the Tax Foundation said.

Hiring A Tax Attorney vs. Negotiating with the IRS on your Own

Earlier this week we posted a new entry to my law firm’s Tax Relief Blog describing the benefits and advantages of hiring a tax attorney versus negotiating a settlement with the IRS on your own. You can check out a snippet of the blog entry below, or check out the full version at the Roni Deutch Tax Relief Blog.

Being faced with a huge back tax liability can be scary to say the least. The IRS can use aggressive collection tactics such as bank levies and wage garnishments to take your money. Fortunately, the IRS has a number of settlement programs designed to help taxpayers resolve their IRS tax debts including Offers in Compromise and placement into Currently Not Collectible status. Although taxpayers have the right to negotiate directly with the IRS, it is often a good idea to hire a professional, such as an attorney, to represent you in the negotiations. However, there are some instances where a taxpayer may be better off working directly with the IRS.

Knowledge and Experience

The biggest reason to consider hiring a tax lawyer to negotiate a tax debt settlement with the IRS is because of the knowledge and experience they bring to the table. Tax attorneys may spend years studying the IRS tax code and honing their negotiation skills. They usually have experience in successfully helping taxpayers resolve their debts. Negotiating a settlement will require a lot of knowledge of complicated IRS laws and tax codes. Therefore, if you are going to do it on your own, then you will need to spend a decent amount of time researching tax law before you begin. You might even want to purchase a few books on tax debt resolution so that you can be as familiar as possible with the process.

Convenience

Another reason to consider hiring a tax attorney is the convenience it brings. Not only can negotiating with an IRS agent be stressful, but it also requires a lot of work. In order to qualify for most tax settlement programs, you will need to present the IRS with full financial disclosure and convince them you cannot afford to pay for basic living expenses in addition to a tax payment. Compiling all of this data, calculating the correct expenses, and presenting a case to the IRS is a very complicated process, and can easily take weeks of effort to complete.

The only exception is if you are trying to get placed on a Streamlined Installment Agreement, which does not require a financial disclosure as long as the taxpayer’s debt is under $25,000 and they intend to repay the entire tax liability within five years. Therefore, if you meet the conditions for a Streamlined Installment Agreement then you may be able to negotiate your own settlement. However, if you are hoping to qualify for an Offer in Compromise or a standard Installment Agreement then you might want to consider speaking with an attorney.

Mortgage Activity Fell in U.S. Last Week

According to UPI.com, the amount of mortgage applications fell by around 12% in the United States last week. The Mortgage Bankers Association made the announcement at the end of last week, and also reported that the Refinance Index fell by over 16%.

The average interest rate for 30-year, fixed-rate mortgages decreased from 5.07 percent to 5.04 percent with points rising from 1.13 to 1.25, the organization said.

Rates for the average 15-year, fixed-rate mortgage increased slightly from 4.51 percent to 4.53 percent. Points in 15-year, fixed-rate mortgages fell from 0.96 to 0.78.

The average interest rate for one-year adjustable rate mortgages fell from 6.86 percent with an average 0.31 points to 6.79 percent with 0.29 points, the report said.

What to Expect When Contacting the IRS

My YouTube team shot another video last week for our tax tips video series. In this episode, Edward Lester discusses what you should expect when contacting the IRS. You can watch the embedded video below and be sure to head over to my YouTube channel to subscribe to my videos.

3 Tips for a More Secure Retirement

Planning for retirement is no simple or streamlined task. However, one of my favorite bloggers, The Motley Fool, posted 3 great trips this morning to help anyone with their retirement planning. You can check out a segment of his article below, or click here to read the full version

Successfully planning for your retirement takes a lifetime of hard work and dedication. After going to all that trouble to provide for your golden years, the last thing you want is to blow it by making mistakes when the time comes to start spending down your retirement savings.

IRAs, 401(k) plans, and other methods of saving for retirement give you valuable tools that you can use to boost the value of your portfolio. When you start taking money out of these accounts, though, you need to remember that there's more involved than just asking for a check. Smart planning can make a huge difference in how much of your hard-earned money you actually get to keep.

How the IRS gets its due

Some of the best features of retirement accounts are their tax benefits. Traditional IRAs and 401(k) plans, for instance, give you a current tax deduction that can save you thousands in income taxes year after year.

After you retire, though, it's payback time for the IRS. Every time you take money out of a traditional IRA or 401(k), you create taxable income that will usually increase your tax bill. In addition, if you decide to retire before you turn 59 1/2, then an additional 10% penalty may apply if the withdrawal doesn't qualify for one of many exceptions to the penalty rules.

Given this, many investors choose to go with Roth IRAs if they can. But even with Roths, you'll want to be careful: Once you take money out of the Roth, it no longer generates tax-free income for you.

Electric-Car Companies Grab U.S. Cash to Blunt Risks

From Bloomberg.com:

Electric-car makers ranging from Ford Motor Co. to California startups are using $11 billion in taxpayer funds to supply a market that doesn’t yet exist.

Fisker Automotive Inc., backed by a $528.7 million U.S. loan, said today it will join the rush to the assembly line by buying a closed Delaware plant from the former General Motors Corp. for $18 million. It will spend $175 million to refurbish and retool the factory to build plug-in hybrid cars.

Obama administration aid to spur demand for more fuel- efficient autos is luring companies including General Motors Co. and Nissan Motor Co. into the electric-car push. The result may be a supply of new vehicles that outstrips demand, said Michael Omotoso, a senior manager for J.D. Power & Associates in Troy, Michigan.

“The U.S. government is saying we’ll have 1 million electric vehicles on the road by 2015; we’re saying it will take three to five years longer,” Omotoso said. “Realistically, manufacturers could be selling 80,000 to 100,000 by 2015.”

Investors betting on acceptance of electric autos include Kleiner Perkins Caufield & Byers, the venture-capital firm that employs former Vice President Al Gore and is backing Fisker.

“A huge amount of private capital is on the sideline, so a new locus for funding right now is the U.S. government,” said Ray Lane, a managing partner at Kleiner Perkins who works on the firms’ alternative energy investments. “The Department of Energy has stepped into the role of private capital, at least temporarily.”

City to Pay for Informing on Tax Cheats

According to a new article from NBC Chicago, a few cities in the Chicago metropolitan area are going to begin offering financial rewards for citizens who provide information on tax cheats. Although the IRS has been running a whistleblower program for years, it is a new development for local governments. Check out the article explaining the new tax protocol below.

Chicago and Cook County residents aren’t the only ones about to get shocking tax news; the city is debuting a “tax whistle-blower” plan that could turn neighbor against neighbor in Chicago’s business community.

The folks at city hall will pay cash bounties to informants who turn in business tax cheats around the city. The reward would amount to some sort of percentage of the tax money that the city recovers.

"It's just another way of bringing people into compliance," Revenue Department spokesman Ed Walsh told the Sun-Times.

How to Have a Recession Friendly Halloween

The bad economy has all of us pinching our pennies a little tighter this year. However, the recession does not need to ruin your holidays. With some advanced planning and preparation, you can easily have a recession friendly Halloween.

General Tips

Keep your Spirits Up!

Do not let the idea of having to stick to a budget ruin your Halloween. As you will see from the rest of this article, there are plenty of ways to save money without sacrificing anything.

Embrace Halloween Crafts

There are plenty of ways to make decorations and costumes on a limited budget. Just stop by your local craft store and check out their Halloween section. If you have children, you can always enlist their help and make the task a family project!

Shop Specials and Discounts

Lots of stores run special discounts on Halloween merchandise and costumes this week. Pick up a local newspaper to browse the ads and take advantage of any sales you can find.

Decorations for Under $5

Turning your home into a haunted house does not need to break the bank. Check out the following ways you can create festive decorations for just a few dollars.

Graveyard Fog

You do not need to purchase an expensive fog machine to give the illusion of a haunted graveyard. You can pick up some dry ice from a local grocery store for a couple of bucks, and place it in a bucket with some warm water.

Tombstones

It only takes a few minutes to make a few spooky tombstones to decorate your house. Cut pieces of cardboard then paint them with grey and black. You can then write personalized messages on the tombstones such as “R.I.P” followed by the name of a friend or family member.

Ghosts

Making your own ghosts is actually pretty easy. Take either a foam ball or a balloon and wrap it with white cloth. You can then hang them by fishing line all over your house for a spooky effect.

Spider Webs

You can buy bags of spider web from your local 99-cent, or dollar tree store that will go a long way towards making your home look spooky and mysterious. You can also enhance the effect of the cobwebs by placing strings of black lights behind them.

Saving Money on a Halloween Party

The costs of hosting a Halloween party can add up quick, but you can save easily keep from breaking the budget by following these tips.

Dead Punch

Make a bowl of "dead punch" by mixing a batch of regular fruit punch, with floating ice cube hands in it. To make these frozen hands simply fill a few plastic gloves with water, tie off the ends, and place them in the freezer. Then, remove the ice cube hands and place them in your punch just before guests arrive.

Terrifying Table Settings

You can make beautiful centerpieces for next to nothing by filling some glass vases with fall leaves, or gauze and fake spiders for a scarier effect. If you are hosting a dinner party you could cut down on costs by making your own place cards and table decorations.

Pumpkin Potluck

Every one loves carving pumpkins for Halloween, so why not just host a pumpkin carving potluck? By having guests bring a dish you can save on food, and by carving pumpkins you can save on entertainment expenses.

Crafty Costumes Ideas

It is easy to get caught up in the Halloween fun and drop major cash at the Halloween costume shop. However, making your own costume can be both cheaper and more fun and original than buying a generic costume from the store.

H1N1

You can easily dress as the H1N1 virus – or Swine Flu – by throwing on some doctors scrubs and putting on a pig nose, or just wearing a pig nose and carrying around a tissue box. You could even “quarantine” yourself by wrapping a few pieces of caution tape around your arms or waist.

Bunch of Grapes

You can make a quick and easy costume with just a green shirt and a bag of purple balloons. Just blow up enough to cover yourself in, then pin the ends of the balloons to your shirt in a grape formation. Make sure to avoid sharp corners, and you have got yourself a creative costume!

The King of Pop

Because of his tragic death earlier in the year, Michael Jackson is going to be a hit costume this Halloween. To honor the late King of Pop, you can put dress like him by wearing a single glove, a colorful shirt, and a snazzy hat. If you have enough time you could even bedazzle your glove and hat for a more stylish look.

Mummy Costume

The mummy costume is a Halloween staple, especially for anyone looking to save money. Just get some medical gauze from the store and wrap it around a white shirt and light pants. To make the look more authentic you could lie out the gauze before hand and add some streaks of gray and black paint to give it a mummified look.

Balloon Boy

Since the Balloon Boy incident turned out to be a big hoax, and the boy was found in his own attic, you can easily make fun of this pop culture event by dressing like it for Halloween. The great thing about creating a Balloon Boy costume is that there are dozens of options. Since the boy was found inside a box in the attic you could put a big cardboard box around you and carry around a gray balloon. Or, you could wrap yourself in foil and mimic the now famous balloon that we all saw on the news. Just use your imagination and the possibilities are endless.

Questions for the Tax Lady: October 26th, 2009

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: Are alimony payments taxable income?

Answer: Yes, alimony payments are subject to an income tax in the year received. You will need to report this income on IRS Form 1040 when you file your return this April. For more information on alimony, child support, court awards, and damages check out this page on IRS.gov.

Question #2: If my husband and I foreclose on our home, and the bank forgives us of the negative equity, will we have to claim that as taxable income?

No, fortunately you will not. Although canceled credit card debt is considered taxable income, this is not the case with mortgage related debt. Your lender should be familiar with this exclusion, but do not freak out if you do get a 1099 Form from them in January. Just file IRS Form 982 with your tax return, and you will not need to claim the canceled mortgage dept as income.

Health Insurer Profits not so Fat

As the reform debate continues in Washington, recent reports have emerged showing that the health insurance industry is not as profitable as many would assume. Calvin Woodward of My Way News has posted this interesting article looking at some of the claims about health care profits and a more detailed look at the numbers regarding those claims. According to Woodward, farm and construction machinery, Tupperware, the railroads, Hershey sweets, Yum food brands and Yahoo are all more profitable than the health insurance industry.

Democrats and their allies have gone after insurance companies as rapacious profiteers making "immoral" and "obscene" returns while "the bodies pile up."

Ledgers tell a different reality. Health insurance profit margins typically run about 6 percent, give or take a point or two. That's anemic compared with other forms of insurance and a broad array of industries, even some beleaguered ones.

Profits barely exceeded 2 percent of revenues in the latest annual measure. This partly explains why the credit ratings of some of the largest insurers were downgraded to negative from stable heading into this year, as investors were warned of a stagnant if not shrinking market for private plans.

Insurers are an expedient target for leaders who want a government-run plan in the marketplace. Such a public option would force private insurers to trim profits and restrain premiums to compete, the argument goes. This would "keep insurance companies honest," says President Barack Obama.

The debate is loaded with intimations that insurers are less than straight, when they are not flatly accused of malfeasance.

They may not have helped their case by commissioning a report that looked primarily at the elements of health care legislation that might drive consumer costs up while ignoring elements aimed at bringing costs down. Few in the debate seem interested in a true balance sheet.

The Incredible Shrinking Estate Tax

As yet another sign of the country’s economic woes, this year there were just 5,500 Americans who left behind taxable estates. This equates to less than one-quarter of one percent of all U.S. deaths, which is the smallest percentage since the great depression. Why is the percent of taxable estates so low? Well TaxVox has put together an interesting article explaining the trend, as well as the as graph comparing deaths subject to tax and exemption levels, both of which are listed below.

In part, that tiny fraction reflects the current recession’s devastation of assets—the Fed estimates that the total value of household and nonprofit assets fell by about one-sixth between 2007 and the first quarter of 2009. But changes in estate tax rules over the past decade have played a much larger role than economic swings.

The Economic Growth Tax Relief and Reconciliation Act of 2001 (EGTRRA), best known as the Bush tax cuts, phases the estate tax out over a decade. The act raised the effective exemption incrementally from $675,000 in 2001 to $3.5 million in 2009 and dropped the top tax rate from 55 percent to 45 percent. The levy disappears entirely in 2010, only to return in 2011 under pre-EGTRRA law—a $1-million exemption and 55-percent top rate. The Obama administration has proposed making the 2009 parameters permanent and indexing them for inflation. Others would set a higher exemption and a lower tax rate.

So what’s happened?

For decades before 1976, only estates worth $60,000 or more owed estate tax. That threshold remained constant in nominal terms, so more and more estates had to pay the tax as economic growth and inflation boosted household wealth. In 1943, just under 1 percent of deaths led to estate tax payments; by 1976, that share had grown to 7.65 percent (see graph).

Congress doubled the effective exemption to $120,000 in 1977 and raised it gradually to $600,000 in 1987, where it stayed for ten years. As the exemption rose, the share of estates owing tax fell to just 0.9 percent in 1987 before growing again because of the fixed exemption. In 1997, when a bit more than 2 percent of estates owed tax, Congress again enacted a series of increases in the exemption that would have reached $1 million in 2006. Deaths resulting in estate tax liability stabilized until EGTRRA set off the latest inexorable drop in taxable estates.

A Sarah Palin Tax Problem?

From Talking Points Memo:

Back in September, it was reported that a dinner with former Alaskan governor Sarah Palin was being auctioned by charity on eBay with a minimum asking bid of $25,000.

That was sort of funny.

It was later reported that the winning bid was $63,500, from a woman in Alabama.

That was less funny, and less widely reported.

But the tax consequences were apparently not thought about, because she might have realized taxable income of $63,500 with nothing to show for it.

There is a sometimes-overlooked tax regulation that states that you don't realize income by providing services to a charity, but that you do realize income by providing a service to someone else who then pays the charity for that service. (Treas. Reg. 1.61-2(c).)

If Sarah Palin had charged someone $63,500 to have dinner with her, she would have $63,500 of income, and she could later donate that money to charity and claim a charitable deduction subject to the limits on charitable deductions (usually 50% or 30% of adjusted gross income). The point made by the regulation, and by various rulings issued by the Internal Revenue Service, is that Palin can't avoid that result by assigning the right to have a dinner with her to a charity and letting the charity collect the money. As the Supreme Court first ruled back in 1930, the law taxes incomes "to those who earned them." Lucas v. Earl, 281 U.S. 111, 114 (1930).

So Palin should report the $63,500 as income, and then claim a charitable deduction for the same amount. If the charity is a "public charity" described in IRC section 170(c)(1), and she has at least $63,500 of other income, with no other charitable deductions, it might be a "wash," because she will also be entitled to a charitable deduction of $63,500 for the money that was (after all) paid to charity. But if she doesn't have that much other income, or if she claims other charitable deductions, it's possible that her charitable deduction will be less than the income realized, and she will end up having to pay federal income tax on money she didn't actually receive.

Tightening the Bankruptcy Laws in the Midst of a Deep Recession

From Creditslips.com:

Beginning on November 1, some people might suddenly find they are now ineligible for chapter 7 bankruptcy. Making it harder to file bankruptcy in the middle of our financial crisis may not be the best policy idea to come down the pike, but it is exactly what Congress set in motion in 2005. Here is why.

The U.S. bankruptcy law has a means test that is meant to filter "can pay" debtors into chapter 13. It's a test that was not needed--there was no evidence of widespread abuse of the bankruptcy system--and the test is not having its intended effect--the income distribution of filers has not changed. The means test begins with an inquiry that asks whether a debtor is above or below the state median income for a household of the same size in the debtor's state.

The state median income figures are periodically updated by the U.S. Census and the Executive Office for U.S. Trustees (EOUST) publishes a table that is used in the bankruptcy courts. Don't blame either the Census or the EOUST for this one. They are just doing what Congress directed. These changes happen automatically.

With the recession, incomes are going down. Thus, in half of the data points on the table, the median income that will subject a debtor to the means test has decreased. In Illinois, for example, right now a filer from a 1-person household goes through the means test if he or she has median income above $47,355. On November 1, that will change to $46,105.

Administration to Decide on Housing Tax Credit Soon

Despite pleas from thousands of homebuyers and intense lobbying, the Obama administration and those deciding the fate of the first time homebuyers tax credit are not ready to make a decision just yet. According to MarketWatch.com, Housing and Urban Development Secretary Shaun Donovan said earlier this week that the administration does not have the information they need yet to make the decision, and will not have that information for a few weeks.

"We understand the urgency of this situation," Donovan said at a Senate Banking Committee hearing, according to Congressional Quarterly. "And we believe that within the next few weeks, we will have additional data that will allow us to sit down with you" and discuss whether and how to extend the credit, said Donovan, according to CQ.

Sens. Christopher Dodd, D-Conn., and Johnny Isakson, R-Ga., have proposed extending the $8,000 credit through the end of next June. Created by the economic stimulus package signed by President Barack Obama in February, it's now set to expire on Nov. 30.

"The credit is set to expire in five weeks," said Dodd. "But the work of stabilizing the housing market won't be done. We still need to use every tool at our disposal to try and fix this problem," Dodd said.

The hearing came after the Commerce Department reported that new construction on U.S. housing units was essentially flat in September, at a seasonally adjusted annual rate of 590,000. See full story.

Following 14 straight quarters of declines, many economists expect that residential investment will finally add to U.S. growth in the current quarter, which ended in September.

IRS Announces Pension Plan Limitations for 2010

According to their new press release, the IRS has announced cost-of-living adjustments to dollar limitations for pension plans and other items for the 2010 tax year.

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost-of-living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.

The limitations that are adjusted by reference to Section 415(d) will remain unchanged for 2010. This is because the cost-of-living index for the quarter ended September 30, 2009, is less than the cost-of-living index for the quarter ended September 30, 2008, and, following the procedures under the Social Security Act for adjusting benefit amounts, any decline in the applicable index cannot result in a reduced limitation. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will be $16,500 for 2010, which is the same amount as for 2009. This limitation affects elective deferrals to Section 401(k) plans and to the Federal Government’s Thrift Savings Plan, among other plans.

Effective January 1, 2010, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remains unchanged at $195,000. For participants who separated from service before January 1, 2010, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2009, by 1.0000.

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Higher Jobless Rates Could Be “New Normal”

Some economists are shedding a new and interesting light on the economic recovery and the future of job losses by saying it could be the “new normal”. They assert that we cannot expect to recover from this recession like we have from those before because of heavy losses in the banking and automobile industry. Check out the following article on the “new normal” from the Associated Press.

Even with an economic revival, many U.S. jobs lost during the recession may be gone forever and a weak employment market could linger for years.

That could add up to a "new normal" of higher joblessness and lower standards of living for many Americans, some economists are suggesting.

The words "it's different this time" are always suspect. But economists and policy makers say the job-creating dynamics of previous recoveries can't be counted on now.

Here's why:

• The auto and construction industries helped lead the nation out of past recessions. But the carnage among Detroit's automakers and the surplus of new and foreclosed homes and empty commercial properties make it unlikely these two industries will be engines of growth anytime soon.

• The job market is caught in a vicious circle: Without more jobs, U.S. consumers will have a hard time increasing their spending; but without that spending, businesses might see little reason to start hiring.

• Many small and midsize businesses are still struggling to obtain bank loans, impeding their expansion plans and constraining overall economic growth.

Continue reading at Yahoo News…

Obama's Tax on Work

The Wall Street Journal recently posted an interesting article on how Obama’s healthcare bill could affect marginal tax rates, and in turn, the taxation of work. Many claim that these changes could result in higher taxes for middle-income American families. I’ve included a clip of the article below.

None of the new distortions that the Senate health-care bill will layer onto the already-distorted tax code have received the attention they deserve, but in particular its effects on marginal tax rates could use scrutiny. Incredibly, for those with lower incomes, ObamaCare will impose a penalty as high as 34% on . . . work.

Central to Max Baucus's plan—assuming the public option stays dead—is an insurance "exchange," through which individuals and families could choose from a menu of standardized policies offered at heavily subsidized rates, provided that their employers do not offer coverage. The subsidies are distributed on a sliding scale based on income, and according to the Congressional Budget Office, 23 million people will participate a decade from now, at a cost to taxpayers of some $461 billion.

Think about a family of four earning $42,000 in 2016, which is between 150% and 200% of the federal poverty level. CBO says a mid-level "silver" plan will cost about $14,700 in premiums, of which the family will pay $2,600—since the government would pay the other $12,100. If the family breadwinner (or breadwinners, because the subsidies are based on combined gross income) then gets a raise or works overtime and wages rise to $54,000, the subsidy drops to $9,900. That amounts to an implicit 34% tax on each additional dollar of income.

Or consider a single worker earning $20,600 and buying an individual "silver" policy with a premium at $5,000. Again according to CBO, if his income rises to $26,500, his subsidy plummets to $2,700 from $4,400 (including a cost-sharing subsidy that goes away). This is a 29% marginal tax; moving to other income levels yields increases in the neighborhood of 20% to 23% for both individuals and families. Jim Capretta, a fellow at the Ethics and Public Policy Center, calculates that when combined with other policies like the Earned Income Tax Credit that also phase out, the effective marginal rate would rise to nearly 70% at twice the poverty level.

State Taxes Across U.S. Take Second Consecutive Record Plunge

From the Rockinst.org:

For the second quarter in a row, tax revenues collected by states across the U.S. plummeted sharply in April-June 2009, according to the latest quarterly report on state revenue collections issued today by the Rockefeller Institute of Government.

When compared to the same period one year earlier, second-quarter 2009 tax revenues in the 50 states dropped a record 16.6 percent — the second consecutive quarter in which revenues fell more sharply than during any previous time on record. Forty-nine states saw total tax revenue fall during the quarter, with 36 states reporting double-digit declines.

Tax collections for two major sources of revenue — sales taxes and personal income taxes — declined for the third consecutive quarter. Income tax was down by 27.5 percent, while sales tax was down by 9.5 percent.

How Uncle Sam is Killing your Savings

It is always a good idea to save up a little money in case of a rainy day, because you never know when you are going to need it in an emergency. However, according to CNNMoney.com the Federal government’s programs designed to stimulate the economy are actually hurting the investments of average Americans.

What do the record-high Wall Street bonuses have in common with the record-low yields for savers?

Answer: They show yet another way that prudent people, especially those living on fixed incomes, are being screwed by the government's bailout of the imprudent.

Here's the deal. The government is spending trillions to keep interest rates down in order to support the economy and prop up housing prices, and those low rates have inflicted collateral damage on savers' incomes.

"It's a direct wealth transfer from savers and retirees to overly indebted borrowers," says Greg McBride, senior financial analyst at Bankrate.com.

Since October 2007, when government intervention in the financial system began picking up speed, yields on the ultrasafe one-year and five-year investments that many retirees favor have tanked.

Two years ago the average yield on a five-year federally insured bank CD was 3.9%, according to Bankrate.com. Now it's 2.2%, a drop of more than 40%.

Yields on one-year CDs have almost vanished: 0.92%, compared with 3.6%. On five-year Treasury securities, yield is down to 2.3% from 4.4%. On one-year maturities, you get a minuscule 0.3%, down from more than 4% in 2007.

U.S. to Boost Small-Business Lending

According to the Wall Street Journal, President Obama is expected to make an announcement tomorrow morning with new initiatives designed to boost credit for struggling small business. The program will make it easier for banks to access funds from TARP (Troubled Asset Relief Program) that they can use to help fund small business loans.

The Obama administration has struggled to figure out what to do for small businesses and has spent months trying to get their initial program off of the ground.

The White House has faced criticism on multiple fronts related to small banks and small-business lending. Many community banks have complained the Bush and Obama administrations moved swiftly to help direct taxpayer money to large banks but made it harder for community banks to qualify. Small businesses have also complained existing government programs don't do enough to free up credit for their needs.

The Treasury Department is still working out details of the program, including how much it will cost banks to participate in the effort. The administration wants to make it less expensive for banks to access TARP funds by reducing the 5% dividend that financial institutions must currently pay, according to people familiar with the matter.

The Two Newest Celebrity Tax Scandals

Celebrity and New York rap artist Nas has become the newest celebrity to get in trouble with the IRS, just 2 weeks after Method Man another New York music artist joined the list of celebrity tax evaders. The IRS has filed a lien against Nas for $2,584,206.31 in unpaid income taxes. Check out this article on Examiner.com that discusses both Nas’ and Method Man’s problems with the IRS.

The other celebrity in trouble with the taxman is Anna Nicole Smith, who passed away well over 2 years ago. According to TMZ the IRS has filed a $125,112.86 federal tax lien against her estate in Los Angeles earlier this month.

Treasury Dept. Unveils Program To Fund Mortgages

The Treasury Department recently unveiled new plans to help more first time homebuyers get approved for mortgage loans. They are hoping to begin selling HFA bonds to the federal government in order to fund additional loans for struggling homebuyers. I’ve included a clip of an article from NPR.org explaining the Treasury Department’s new announcement, but you can read the full article here.

In a normal year, the so-called HFAs, or housing finance agencies, finance about $15 billion worth of mortgages, but the credit crisis has made it difficult for them to raise money for the loans.

Basically, the HFAs work like an affordable housing bank, says Steven Spears, acting executive director of the California Housing Finance Agency.

He explains that the agencies issue tax-exempt bonds to Wall Street and then the HFAs use the money to make loans. But investors have become reluctant to put their money into anything related to mortgages, especially in parts of the country, such as California, where home prices have fallen significantly since the market peak in 2006.

"They were just not interested," Spears said, explaining that his agency has been out of lending capital for a year now.

"Two years ago we had record lending, he said. "We had $1.7 billion in mortgages for first-time homebuyers. We're not making any loans at all really right now."

Treasury's plan is for the federal government to buy the bonds from HFAs, who will in turn have the money to lend to first-time homebuyers such as Natasha Henry, who is looking to buy a foreclosure in Boston's Dorchester neighborhood.

New Legislation Could Help Consumers with Debt Management

From Credit.com:

As millions of Americans continue to struggle with debt management, a prominent senator has unveiled legislation aimed at reducing the amount they pay on overdraft fees.

This week, Connecticut Democratic Senator Chris Dodd, chairman of the Banking Committee, announced that his new legislation would reign in fees that can approach $30 or more for accounts that overdraft by even a few cents.

"Banks should not be trying to bolster their profits at the expense of their customers," said Dodd, who added that his bill would shine "more light on these practices" while giving consumers greater control over their financial decisions.

As it stands right now, consumers who overdraft may not always be aware that they have done so, and lenders will often allow a transaction to clear anyhow for a fee. However, that fee often applies to each transaction that takes place when an account is overdrafted, which can cost consumers well over $100 by the time they check their balances. Some banks have also been criticized for manipulating the order in which transactions are processed to make overdraft activity more likely.

Critics of this and similar reform bills maintain that it's the responsibility of consumers to know at all times how much money they have in their accounts, and that banks are providing them with a service by allowing them to use their cards in such situations.

The NEXT Economic Stimulus Package

While the country continues to focus on health care reform, and random events like last week’s “Balloon Boy” fiasco, advisors for the Obama Administration and leaders in Congress are quietly working on ways to further stimulate the economy. With unemployment rates continuing to climb, and a housing tax credit due to expire in a few weeks, there is pressure on the White House to do something else to help the economy. Since the Obama Administration asserts that their $787 billion stimulus package did prevent job losses, and helped the economy from falling further, many experts are predicting that they will support another type of stimulus program. To help the readers of my blog keep track of these new developments, I have put together the following article taking a deeper look at some of the suggestions being considered for this new stimulus package.

Not Really Another Package

One of the administration’s biggest priorities is to keep any new legislation from being labeled as another stimulus package. Why? Because it implies that the first package was unsuccessful, and taxpayers are not likely to support a second unsuccessful program. The Obama Administration claims that only part of the original $787 billion budget has been spent, and that the program will fund projects aimed at helping the economy for the next year. With the first stimulus package still on everyone’s mind, and a huge health care reform bill, it may be difficult to get the American public to support another huge government program. Therefore, it is likely that we will see a handful of smaller pieces of legislation signed into law to help improve the economy rather than one big, expensive stimulus package.

Extending the Homebuyers Credit

One of the first actions Congress will likely take is to extend the $8,000 first time homebuyers credit that is due to expire on November 30th. The program has been deemed successful by dozens of economists, and there are dozens of industries lobbying heavily for it to be extended. Some proposals even call for the credit to be offered to all homebuyers, as opposed to just those who have not owned a home within the past three years, and others even call for it to be increased to $15,000.

$250 Check to Social Security Recipients

Like I mentioned last week, President Obama has called on Congress to send another batch of $250 checks to recipients of Social Security benefits. Earlier in the year, checks were sent out to Social Security recipients as well as taxpayers enrolled in Veterans Administration, Railroad Retirement and Supplemental Security Income benefit programs as part of February’s $787-billion economic stimulus package. Since it was announced last week that there would be no increase in the amount of money people on Social Security receive this year, many are predicting that another one time payment will be made.

Extend Unemployment Benefits

With businesses making cuts, it is getting harder and harder for Americans to find new jobs, as such the average time it takes someone to find a new employer is now longer then the length of time they can collect unemployment benefits. Therefore it is likely that Congress will extend the amount of time people can collect their benefits. Some proposals in the House of Representatives aim to provide 13 additional weeks of benefits in states with jobless rates of 8.5% or higher, while the Senate is considering proposals to extend benefits in all states.

Health Insurance for Unemployed Workers

Earlier in the year, Congress passed an act that provided a 65% subsidy of COBRA health-insurance premiums for workers laid off between September 2008 and the end of this year. For those of you who may not already know, COBRA is the program that allows taxpayers to keep their health insurance benefits after they have been let go. Since the subsidy, enrollments in COBRA have doubled, and it is expected that Congress will extend this program into next year.

Incentives for Companies Hiring New Employees

The original stimulus package had a tax credit for employers hiring new workers, but it was removed before the bill was signed into law. Now members of Congress are considering a variety of proposals aimed at offering incentives for companies to hire new employees. There is a proposal in the Senate to offer a $4,000 tax credit to businesses that expand their payroll. However, there is a lot of criticism over these types of incentives, and I am not sure if any would ever become law.

Refunds for Losses

Last week it was announced that Speaker of the House, Nancy Pelosi was also considering a proposal from a Republican Congressman to allow companies that are losing money to use their losses to get refunds of taxes paid in the previous five years. Currently, most businesses can only use current losses to get refunds from the previous year. A similar proposal was included in an early draft of February’s stimulus package, but was dropped when it was discovered it would cost nearly $20 billion.

Questions for the Tax Lady: October 19th, 2009

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: What is the Taxpayer Advocate Service

Answer: The Taxpayer Advocate Service (TAS) describes itself as “an independent organization within the IRS,” that helps mediate the resolution of tax debts. It is a free service offered by the Federal government, but not every taxpayer with back taxes will qualify for TAS assistance. You must meet certain income requirements and be able to prove that you are experiencing an economic burden because of the IRS collections. You can contact the TAS by calling 1-877-777-4778.

Question #2: What is the Earned Income Tax Credit, and how do I know if I qualify for it?

Answer: The Earned Income Tax Credit is a tax credit available to low income workers who may or may not have qualifying children living with them. It was designed to encourage low wage workers, while offsetting the burden of payroll taxes. Since it is a credit, not a deduction, the Earned Income Tax Credit can be subtracted directly from what you owe. For more information, including rules about qualifying, check out this article about the Earned Income Tax Credit on Wikipedia.

California Court Upholds 1% Tax on Millionaires

Last Wednesday, the California Court of Appeals ruled on Jensen v. California Franchise Tax Board, and rejected challenges to Proposition 63. For those of you who are not familiar, the proposition imposed a 1% tax on California taxpayers who earn more then a million dollars per year to fund mental health services. You can check out the following highlights of the ruling courtesy of the Tax Prof, or download the full text here.

We find no constitutional infirmity in the challenged portions of Proposition 63. An income tax may be rationally based on a taxpayer‟s income level and ability to pay, and there is no need to show that a particular taxpayer personally benefits from a tax assessed for the public good. Taxpayers earning more than $1 million annually do not comprise a “suspect class” requiring a strict scrutiny constitutional analysis. Further, Proposition 63 is valid even if it is not a constitutional amendment. ...

We are unaware of any case authority holding that wealthy individuals form a “suspect class” deserving of a heightened degree of scrutiny. Suspect classifications include race, gender, national origin or illegitimacy. Wealth generally confers benefits, and does not require the special protections afforded to suspect classes. Wealth has “none of the traditional indicia of suspectness: the class is not saddled with such disabilities, or subjected to such a history of purposeful unequal treatment, or relegated to such a position of political powerlessness as to command extraordinary protection from the majoritarian political process.” (San Antonio School District v. Rodriguez, 411 U.S. 1, 28 (1973).) ...

The Taxpayers are mistaken in thinking that taxpayers in a particular tax bracket cannot be singled out for an income tax to benefit society at large. ...

The tax imposed by Proposition 63 is not arbitrary merely because a person earning $1,000,001 is subject to the tax, while a person earning $999,999 is exempt. The government has leeway in “drawing lines” below which individuals are exempt from a tax. ...

The Taxpayers perceive themselves as victims of a populist movement to “soak the rich.” The desire of the majority of the electorate to tax a minority of citizens based on their earnings is not a basis for overturning an income tax. The courts “do not substitute their social and economic beliefs” to supplant the judgment of the enacting body.

2009 Federal Deficit Surges to $1.42 Trillion

According to the Associated Press, the U.S. Treasure released figures last Friday showing that the Federal government spent $46.6 billion more in September than it took in. To make matters worse, September is historically a month where the government’s revenue exceeds their spending. These numbers brought the fiscal year’s shortfall to $1.42 trillion. For comparison, last year's deficit was only $459 billion.

"The rudderless U.S. fiscal policy is the biggest long-term risk to the U.S. economy," says Kenneth Rogoff, a Harvard professor and former chief economist for the International Monetary Fund. "As we accumulate more and more debt, we leave ourselves very vulnerable."

Forecasts of more red ink mean the federal government is heading toward spending 15 percent of its money by 2019 just to pay interest on the debt, up from 5 percent this fiscal year.

President Barack Obama has pledged to reduce the deficit once the Great Recession ends and the unemployment rate starts falling, but economists worry that the government lacks the will to make the hard political choices to get control of the imbalances.

Friday's report showed that the government paid $190 billion in interest over the last 12 months on Treasury securities sold to finance the federal debt. Experts say this tab could quadruple in a decade as the size of the government's total debt rises to $17.1 trillion by 2019.

UBS Registered Mail Warns U.S. Clients

From Reuters.com:

Swiss bank UBS AG warned U.S. customers by registered mail their account details may be given to U.S. tax authorities, a method that could itself breach secrecy laws, a Swiss paper said on Sunday.

The use of registered mail and envelopes showing the sender was UBS could enable the U.S. authorities to trace customers wanted for tax evasion well before their details are handed over under a U.S.-Swiss double taxation agreement, Sonntag weekly paper said.

A spokesman for UBS declined to comment on the report.

Switzerland and the United States settled a row over evasion of U.S. taxes in August when Switzerland agreed to hand over details of 4,450 U.S. accounts at UBS.

But it could take into early 2010 before the first names are handed over under the agreed legal procedures.

Some 7,500 Americans voluntarily disclosed information about hidden overseas assets under a tax amnesty program that expired on October 15, according to the top U.S. tax collector.

Foreclosures: 'Worst Three Months of All Time'

Despite suggestions that the housing crisis was cooling off, a new report is claiming that the third quarter of this year was actually the worst three months of all time for home foreclosures in the U.S. According to the report, over 938,000 families received foreclosure notices in the past three months. To put those numbers into perspective, 1 out of every 136 homeowners in this country was forced into foreclosure in just the past few months.

"They were the worst three months of all time," said Rick Sharga, spokesman for RealtyTrac, an online marketer of foreclosed homes.

During that time, 937,840 homes received a foreclosure letter – whether a default notice, auction notice or bank repossession, the RealtyTrac report said. That means one in every 136 U.S. homes were in foreclosure, which is a 5% increase from the second quarter and a 23% jump over the third quarter of 2008.

Nevada continued to be the worst-hit state with one filing for every 23 households. But even tranquil Vermont, where the foreclosure crisis has barely brushed the housing market, saw foreclosure filings jump nearly 170% compared with the third quarter of 2008. Still, that resulted in just one filing for every 5,023 households in the state -- the best record in the country.

The RealtyTrac report also unveiled the results for September, and it found that there was slight relief from foreclosure filings. Last month, notices totaled 343,638, down 4% compared with August. Unfortunately, that total accounts for 87,821 homes that were repossessed by lenders.

Check out the rest of the article at CNNmoney.com, or click here to read an entry on the top foreclosure alternatives I posted earlier this week.

Oct. 17 is Last Day for Businesses to Request Tax Credit Certification for Some New Hires

According to their newest press release, the IRS is reminding businesses that October 17^th is the last day to claim the recently expanded work opportunity tax credit for hiring eligible unemployed veterans and disconnected youth.

In Notice 2009-69, released in August, the IRS extended the certification deadline from Aug. 17, 2009, to Oct. 17, 2009, and clarified the definition of “disconnected youth.” Revised Form 8850 , available on IRS.gov, is used by employers to request certification from their state workforce agency.

The American Recovery and Reinvestment Act, enacted in February, added unemployed veterans returning to civilian life and certain younger workers, referred to as disconnected youth, to the list of groups covered by the credit.

Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But under a special rule, businesses have until Oct. 17, 2009, to file this form for unemployed veterans and disconnected youth who begin work on or after Jan. 1, 2009 and before Sept. 17, 2009. The instructions for Form 8850 provide details on requesting the certification.