House of Representatives Holds Tax Reform Hearing Today

Is this a start to the changes we all know are so desperately needed? According to WaysAndMeans.house.gov, the committee will host the first in a series of hearings on fundamental tax reform today. The focus of the hearing is listed below.

The hearing will examine the economic and administrative burdens imposed by the current structure of the Federal income tax. It will explore the cost of complexity borne by American families, the cost of a corporate tax system that is increasingly out-of-step with the rest of the world, and the broader cost to the U.S. economy of a tax system that fails to maximize job creation and impedes economic growth.

The following witnesses are expected to testify:

• The Honorable Nina E. Olson, National Taxpayer Advocate

• Robert A. McDonald, Chairman of the Board, President and Chief Executive Officer, The Procter & Gamble Company

• Warren S. Hudak, President, Hudak & Company, LLC

• Kevin A. Hassett, Ph.D., Senior Fellow & Director of Economic Policy Studies, American Enterprise Institute

• Martin A. Sullivan, Ph.D., Contributing Editor, Tax Analysts

How to Find a Low-Tax Place to Retire

For most of us “retirement” means lounging in warm weather, relaxing, and never having to work again! None of us want to pay higher taxes now; so why would we in our retirement?

USnews.com shares an article that goes over major taxes and tax breaks you should take into consideration when deciding to retire: Social Security, Pensions, Income Tax, Property Tax and Sales Tax. Read what they had to say:

Social Security. Most states no longer tax Social Security benefits. Some 35 states don't require residents to pay tax on Social Security income, according to an analysis by tax publisher CCH. Missouri and Iowa are in the process of phasing out their Social Security taxes. And Kansas residents with adjusted gross incomes of $75,000 or less are exempt from paying taxes on their Social Security checks.

Pensions. The tax treatment of pension income varies considerably from state to state. Some states, such as Pennsylvania and Mississippi, exempt all pension income from taxes. Other states exempt a portion of specific types of pension income. In Michigan, for example, all federal pensions and public pensions from specific states are totally exempt from tax. Private pensions were tax-exempt up to $45,120 for individuals and $90,240 for couples in tax year 2009. "When the economy was doing well, pension tax thresholds were moving out further and further, but now we're seeing a freeze on these threshold amounts," says Kathleen Thies, a CCH state tax analyst.

Income tax. Retirees who haven't saved enough to finance their desired lifestyle may need to work during their golden years. If your retirement plans include a part-time job, take a look at state income taxes. Seven states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. And two states, New Hampshire and Tennessee, tax dividend and interest income only.
Great advice: While states without an income tax can seem like an obvious choice for retirees, it's also important to look at property and sales taxes, which tend to be higher in income tax-free states. "If you're thinking of retiring in four different places, figure out the total tax cost in all the places and then you can make an effective comparison," advises Paul Erickson, a professor of accounting at Baylor University. "The property tax and sales tax could be higher than what you paid on income tax."

Property tax. The median property tax paid in the United States in 2008 was $1,897, according to a Tax Foundation analysis of Census Bureau data. But taxes paid ranged from a median of just $188 in Louisiana to $6,320 in New Jersey. "Most states give residents over a certain age some type of a break on their property taxes," says Rob Shrum, state affairs manager for the Tax Foundation. Some counties in Florida, for example, allow permanent residents age 65 and older within certain income limits a tax exemption of up to $50,000 of the value of their primary residence. Widows and widowers also get an extra $500 property tax exemption in Florida. Contact a state's department of revenue to inquire about property tax breaks for seniors.

Sales tax. Many cash-strapped states have been increasing their sales tax to raise needed funds. Seven states increased their sales tax rate in 2009, according to Vertex Inc. research. The average sales tax rate in the United States now stands at 5.5 percent. It may also be worth looking at the types of items and services that sales and excise taxes apply to. "Typically elderly people will be purchasing less cars or furniture or big-ticket items than someone with a growing family, but they still need to purchase food and clothing," says John Minassian, vice president of content development for Vertex Inc.

There are five states that levy no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. States with low taxes for shoppers include Colorado (2.9 percent) and Georgia, Hawaii, Louisiana, New York, and Wyoming (all 4 percent). California has the highest sales tax in the country at 8.25 percent in 2010.

Why 47% of Americans Paid No Income Tax in 2009

One specific statistic got a lot of media attention this last tax season: approximately 47% of Americans would pay no federal income tax in 2009. The Tax Policy Center recently published a report explaining why so many people would be tax-free.

The first factor in so many people not having to pay income taxes is the recession. Many people lost their jobs, or had their pay cut as a result of the economic downturn. The lower your income, the less you pay in taxes. If your income gets low enough, you will not be subject to federal income taxes.

The biggest factor in the high number of people who didn’t have to pay income tax: tax credits and deductions. The increase in deductions, credits and dependent exemptions has lowered tax liabilities almost across the board, often low enough to remove all tax liability.

So, is this a good thing? A bad thing? It’s up for debate. Yes, our country is neck-deep in budget deficits, and more tax revenue would certainly help solve that issue. On the other hand, nearly every family has suffered some economic losses in the last few years, and that extra cash in their pockets goes a long way in helping stay afloat. Either way, I will be keeping an eye on this trend over the coming years to see how it all plays out.

You can read the Tax Policy Center’s full report here.

California Boosts Income Tax Collection by 10 Percent

From the Associated Press:

California wage earners will soon notice a little less money in their paychecks.

Starting Monday, employers in the cash-strapped state are required to withhold 10 percent more in state income taxes to help ease the budget problems.

It's part of a plan to artificially inflate state revenue by $1.7 billion through next June.

Brenda Voet, a spokeswoman for the state Franchise Tax Board, says it's technically not a tax increase since workers will get their money back after April 15.

A single wage earner making $51,000 a year with no dependents will get about $4 less a week.

California to Withhold a Bigger Chunk of Paychecks

From LA Times.com:

Reporting from Los Angeles and Sacramento - Starting Sunday, cash-strapped California will dig deeper into the pocketbooks of wage earners -- holding back 10% more than it already does in state income taxes just as the biggest shopping season of the year kicks into gear.

Technically, it's not a tax increase, even though it may feel like one when your next paycheck arrives. As part of a bundle of budget patches adopted in the summer, the state is taking more money now in withholding, even though workers' annual tax bills won't change.

Think of it as a forced, interest-free loan: You'll be repaid any extra withholding in April. Those who would receive a refund anyway will receive a larger one, and those who owe taxes will owe less.

But with rising gas costs, depressed home prices and double-digit unemployment, the state's added reach into residents' regular paycheck isn't sitting well with many.

"The state's suddenly slapping people upside the head," said Mack Reed, 50, of Silver Lake. "It's appalling how brash that is."

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Error Rate of Tax Returns Prepared by IRS's Free Assistance Program: 41%

MA Rejects Elimination of State Income Tax

From the Boston Herald:

Massachusetts’s voters rejected a call to eliminate the state’s income tax after critics said it would have wreaked fiscal havoc at a time when the state is already grappling with a financial downturn.

The measure would have cut the 5.3 percent tax rate in half in January, and then killed it completely in January 2010.

Supporters, led by the Committee for Small Government, had argued the best way to cut government waste and overspending was to eliminate the tax, which would have reduced annual state revenues by 40 percent or about $12.5 billion.

Backers also said the question would have saved the average taxpayer about $3,700.

Committee Chairwoman Carla Howell blamed the defeat on the massive advertising campaign by opponents of the measure, saying both sides were initially in a dead heat in the polls and that voters were ultimately swayed by "scare tactics." Opponents spent more than $5 million while supporters raised only about $500,000.

"We knew this was a David vs. Goliath battle," Howell said. "All we needed was a bigger stone."

IRS Looking To Collect Personal User Data From Internet Firms

The Internal Revenue Service (IRS) is backing the U.S. Treasury Department’s efforts to include a proposal in the 2008 budget requiring many Internet businesses to collect personal data from their users. The proposal is part of an effort to close the ever-present gap between what Americans should pay in income taxes and what they actually do. This amounts to an estimated $300 billion per year. However, collecting the targeted data is going to be a difficult task for the site-operators and small business owners. Furthermore, the process will create security issues for millions of users in a time when online identity theft is rampant.

In 2001, the "tax gap" – difference between what the IRS should collect in taxes and what it actually does collect – was over $345 billion. Underreporting on individual income tax returns accounted for $197 billion of the gap. Underreporting on business tax returns accounted for $88 billion. This left the IRS collecting only about 85% of owed taxes. Since taking over the White House, the Bush Administration has seen this gap as an opportunity to increase the federal government’s revenue without raising taxes.

At the behest of the Bush Administration, the IRS has implemented a variety of new enforcement and collections measures to reduce the gap over the last five years. The efforts have paid-off: the IRS increased its enforcement revenues by nearly 44 percent from $33.8 billion in 2001 to $43.1 billion in 2004 to $48.7 billion in 2006. "Clearly, more work needs to be done by the IRS to improve service and enforcement," states IRS Commissioner Mark W. Everson. "But we are clearly making progress, and these numbers underscore that point."

Now, more enforcement and collection measures are on the table. As part of its ongoing campaign to close the tax gap, the Bush administration has allocated over $400 million of next year’s budget for these new measures. A main goal of the proposed measures is to increase the taxes paid by many sole-proprietors and small businesses. Currently, sole proprietors and small businesses report most of their income to the IRS through an "honor" system. The IRS claims some of these small businesses report only half of their total income, leaving millions of dollars in unpaid taxes. One specific target of the proposal is to collect taxes from income generated through online auction sites such as eBay and Ubid.com. Recent studies show over 700,000 Americans making their sole income from auction sites like eBay, and without any formal method to monitor these sales the government is assuming most of this income is being underreported.

Specifically, the new proposal would force auction sites acting as online brokers to file income statements for all customers using their sites to conduct 100 or more transactions or generating more than $5,000.00 per year in income. In order to comply, the sites would need to collect personal data from their users including name, address, and taxpayer identification or social security numbers (SSNs). Essentially, the IRS is forcing the collection of the data under the threat of liability and further legal consequence.

Typically, people generating income form auction sites are small businesses and self-employed individuals who do not have taxpayer identification numbers. Therefore, they will have to provide the sites with their SSNs, which will be stored and maintained by the individual sites in massive data banks of personal information. Although the IRS claims the sites will only need to collect data from high volume users, it is very likely that the sites will have to collect data from all of their users.

Having the proposed amount of personal data exchanged over the Internet could prove to be very problematic. Illegal phishing scams already target sites collecting personal data. Phishing is already problematic for eBay, where scammers create fake re-direct sites that retrieve users' personal data.

With so many issues of identity theft online, many people are going to be reluctant to provide their SSNs to sites like eBay. According to the Center for Democracy and Technology, "forcing businesses to collect SSNs could have a chilling effect on legitimate e-commerce if consumers balk at providing their SSNs for simple transactions -- something most people are not accustomed to doing."

In addition, the government is putting the entire financial burden on the Internet businesses. Collecting and safely maintaining this confidential data could cost millions of dollars. These large costs might not be a problem for huge companies like eBay, but it might be too much to bear for small businesses. More than likely, they will have to take on an additional and sizeable expense to store and secure the data.

Scott Weber, owner of GunrunnerAuctions.com, a site that auctions about 400 guns per month, said the additional paperwork would be a huge burden and additional cost. "I'm pretty much a one-horse operation here," Weber said. "I do everything myself. I would have to hire a whole bunch of people. I would have to hire someone full-time to do this. You'd need to track people all over the country, and you'd have to get their SSNs."

Some sites are already beginning to make changes with anticipation of this new proposal. Just a few days after the IRS’s announcement, Yahoo! Auctions announced they would close their auction sites in the United States and Canada effective June 16, 2007. Though Yahoo! Auctions only account for under 1% of total online auctions and they recently established an alliance with eBay, many are still wondering if Yahoo’s decision had anything to do with the IRS’s recent announcement.

Currently no lawmaker has come out for or against the new proposal. However, it is likely to go unnoticed as part of the President’s 2008 budget plans. As part of a representative democracy, it is the job of the citizen to notify their member of Congress when they disagree with an important issue. If you want your voice heard, you can write your representative through House.gov.

For more information on this topic, please see the following suggested readings:

News.com -Selling stuff online? Here comes the IRS
Center for Democracy and Technology
Yahoo! US Auction Sites Are Retiring
Written Statement of Nina E. Olson

Tax Evader Sentenced to 63 Months in Prison

Earlier today a federal judge sentenced convicted tax evader Elaine Brown to 63 months in prison. She and her husband Ed Brown were both convicted of tax evasion. He is expected to receive a similar sentence later this afternoon. The two were found guilty by a jury of hiding Elaine’s income from 1996 to 2003, which was $1.9 million, as well as using $215,890 in postal money orders to purchase a compound for Elaine’s dental office. The couple has defended themselves by saying that federal tax laws do not exist, but the prosecuting attorneys claim their theories are "contrary to common sense," and that Elaine "had no excuse for not paying her taxes." Source: BostonHerald.

More Last Minute Filers E-file

According to IRS data, as the tax deadline approaches more and more last minute filers are choosing to e-file. Historically more people e-file at the beginning of tax season, and typically those people are expecting a refund and want to get it fast. Late filers traditionally owe the government money and have more often used paper tax returns. But new statistics are showing that many taxpayers are choosing to pay electronically through credit card or direct debit. According to the IRS nearly 57 million returns have already been e-filed this year. Nearly one-third of those returns were e-filed during March alone, up more than 10 percent over last March. For more information check out the IRS’s website.

Tax Friendly States

CNN has put out a list of the most tax friendly states for 2007. The list was put together by comparing each states total state and local tax burden in 2006. That burden was determined by what residents pay in state and local income taxes, property taxes, sales taxes, luxury taxes and fuel taxes, among others. States that top the list include: Alaska, New Hampshire, Tennessee, Delaware, and Alabama. For the full list go to CNNMoney.com.