Tax Bill has Lots of Breaks for Special Interests

Hidden inside the $858 billion Obama tax compromise legislation is a plethora of tax incentives, or "tax earmarks" in addition to the extension of the Bush tax cuts and another unemployment benefits extension. These earmarks range from energy and education tax credits to tax-exempt bonds for areas damaged by Katrina.

The big question is: are we really surprised? What bill has come through our legislature without myriad tax gimmicks sprinkled throughout?

SF Gate reports:

California's Democratic Sens. Dianne Feinstein and Barbara Boxer joined an overwhelming 83-15 vote Monday to move forward on the tax bill, the biggest bipartisan victory of the Obama administration so far. A Senate vote on final passage is expected today.

Ethanol subsidies are among the biggest earmarks. Feinstein waged a last-ditch effort Tuesday to reduce them, even as she sought to add tax breaks for wind and solar developers. She and Boxer and a dozen other Senate Democrats and 81 House members demanded the alternative-energy tax breaks in exchange for their votes for the tax bill.

An amendment by Feinstein to cut ethanol subsidies and extend a tax credit for alternative-energy manufacturers, which was part of the 2009 stimulus, failed. The $2.3 billion program has made nine awards to California companies, including Stion and Nanosolar in San Jose.

One program survives

But one big alternative-energy program that survived under pressure from Democrats would extend a subsidy to cover nearly a third of the cost of new wind and solar installations. It was the top goal for alternative-energy industry lobbyists.

Read more here

Bid to Curb Mortgage Tax Break Falters

Although there have been effectors recently in congress to reduce the tax deduction for mortgage interest, the cause is finding little support in Congress. President Obama’s newest budget proposal aimed to shrink deductions for mortgage interest, property taxes, charitable contributions for married couples earning more than $250,000, or individual taxpayers earning more than $200,000 per year.

But the proposal has gained no traction in Congress so far. Members from both parties are concerned about how it would affect both the housing market and charitable contributions, says Matthew Beck, a spokesman for the Democratic majority on the House Ways and Means Committee.

The administration believes the proposal would reduce the deficit and "distribute the cost of government more fairly among taxpayers of various income levels," says a Treasury spokeswoman.

But lobbyists for the real-estate industry say scaling back the deduction would hurt demand for housing at a time when the market remains fragile. "It seems very counterintuitive to impose this kind of pain on an industry that's already suffering more than any industry in America," says Jerry Howard, chief executive of the National Association of Home Builders.

Continued at Wall Street Journal.com…

IRS Reminds Car Shoppers about 2009 Tax Break

In their new press release, the IRS reminded taxpayers looking to buy a car before the year is over that they still have time to take advantage of a 2009 tax break that may not be extended next year.

Taxpayers who buy a qualifying new motor vehicle this year after Feb. 16 can deduct the state or local sales or excise taxes they paid on the first $49,500 of the purchase price. Qualifying motor vehicles include new passenger automobiles, light trucks, motorcycles, and motor homes.

Individuals who itemize and those who take the standard deduction can benefit from this tax break. In states without a sales tax, other taxes or fees can qualify if they are assessed on the purchase of the vehicle and are based on the vehicle’s sales price or as a per unit fee.

The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher incomes do not qualify.

Taxpayers who take the standard deduction need to complete Schedule L and attach it to Form 1040 or Form 1040A to increase the standard deduction by the allowable amount of state or local sales or excise taxes paid on the purchase of the new vehicle. Also, check the box on line 40b on Form 1040 or line 24b on Form 1040A. Individuals who itemize should include the allowable amount of state or local sales or excise taxes from the purchase of the vehicle on Form 1040, Schedule A.

Does Fido Deserve a Tax Break?

From BloggingStocks.com:

There is a bill making rounds on Capitol Hill that would provide a tax break for up to $3,500 for pet expenses. Does Fido really deserve a tax deduction? Do we really need to subsidize pet ownership in this country?

The recession has been extra hard on pets as people have abandoned pets at shelters they are no longer able to properly care for them. Pet can be very expensive between food, visits to the vet and increased rent. Those of you who think dog food is expensive should try to feed a horse sometime!

While pet lovers may point to all the positive aspects a man's best friend can bring to a family; if there are tax benefits people may start to get a pet just for the tax benefits. This brings up a lot of interest scenarios. I wonder if the benefit will be per pet or per pound? Would you get the same benefit for a pet mouse as you would for a pet horse? If someone adopts 76 cats do they get to pick up $266,000 in tax breaks? And what happens when you feed the pet mice to the pet snake?

If the bill were to pass it would certainly be good for companies in the Pet Care Industry like PetSmart (NASDAQ: PETM), Petmeds Express (NASDAQ: PETS), and Tractor Supply (NASDAQ: TSCO).

Some Congressman may have written this bill just to please some a pet loving constituent knowing it is unlikely to pass. I thought there were some real issues like a recession, unemployment and $1.4 trillion deficit that lawmakers could keep busy with.

While everyone loves Fido and Fluffy, should they really get a tax break?

Apple Wins North Carolina Tax Break For $1 Billion Data Center

According to CNN.com a town in North Carolina has just given the green light to Apple Computers to build a giant data center in their county. The local government has agreed to provide the technology giant with over $46 million worth of tax incentives over the next decade, which undoubtedly led to the agreement.

The decision Monday helped spur Apple's plans to expand its network of data centers, which are warehouse-sized buildings that house vast numbers of giant computers known as servers. Data centers are usually used to manage the flow of Internet traffic. In Apple's case, the Maiden, NC data center could be used to bolster its iTunes music store business.

Apple has already agreed to invest $1 billion in the structure in Maiden, which is about 30 miles northwest of Charlotte, according to the agreement. If Apple invests an additional $1 billion into the data center, the county and town will provide another $20.7 million in incentives over another 10-year period.

"There is no commitment beyond the billion dollars," said Scott Millar, president of the Catawba County Economic Development Corp.

Tax Deductions For Car Purchases Now Apply To All States

From the Boston.com:

[T]he American Recovery and Reinvestment Act (ARRA) passed earlier this year, provides a tax deduction for the purchase of a new qualified vehicle. The Treasury announced last week that this incentive now applies to all states – including those that do not impose a sales or excise tax. This includes Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.

Purchasers of a new qualified vehicle in the states mentioned above can now take an above-the-line tax deduction for fees and other taxes that are imposed by the state or local government. These fees and other taxes must be based on the vehicle's sales price or as a per unit fee in order to qualify for the deduction.

All of the other provisions of this incentive are the same for all states including:

• New vehicles include cars, light trucks, motor homes, or motorcycles.
• The deduction is only available for purchases made on or after February 17, 2009 and before January 1, 2010.
• The deduction is limited to the sales tax, excise taxes, or fees paid on vehicles with a maximum purchase price of $49,500 dollars.
• If you are married and you file a joint tax return have, the deduction gets phased-out once your modified adjusted gross income (MAGI) reaches $250,000 dollars and is completely gone if your MAGI is more than $260,000 dollars. For all other taxpayers, the phase-out range is a MAGI of $125,000 dollars to $135,000 dollars.
• The deduction is available whether or not you itemize your deduction on your tax return.
• The deduction must be taken on your 2009 tax return (which is filed in 2010).

Time Warner's Well-Timed Tax Break

From the WashingtonPost.com:

You don't often get to use "Time Warner" and "hot stock" in the same sentence, given the company's horrible investment performance over the years.

But Time Warner's pending deal to unburden itself of AOL by dumping the ailing firm onto its shareholders is one of those times, thanks to an insight I got from tax guru Bob Willens of Robert Willens LLC. Willens, who lives and breathes (and probably dreams about) the tax code, says that Time Warner's plan to distribute AOL stock to its shareholders in a tax-free transaction is benefiting from a little-noticed change last year in the rules governing "hot stocks."

In this case, "hot stock" doesn't mean shares with a rapidly rising price; it means shares that can trigger a tax liability.

The "hot stock" here would be Google's 5 percent stake in AOL. Time Warner sold those shares to Google in 2005, and plans to buy them back by the end of this year, then distribute them (along with the other 95 percent of AOL) to Time Warner shareholders in a tax-free deal.

Without last year's change, Willens says, the Google stake in AOL would have been a "hot stock" to both Time Warner and its shareholders because Time Warner would have been distributing the stock to its holders within five years after buying it from Google.

How much in tax savings are we talking about? Call it $200 million or so. The exact amount depends on the market value of AOL stock when Time Warner distributes it. Should AOL be valued at $5.5 billion, the value that Google placed on AOL in February, the "hot stock" rule change would save Time Warner and its shareholders from having to report $275 million each in taxable income. (I'm assuming that Time Warner's cost of AOL for tax purposes is close to zero.) At federal, state and local tax rates totaling 40 percent, Time Warner and its shareholders each save about $110 million.

Willens says the "hot stock" rule was changed last December when the Treasury tweaked the appropriate regulations. A Time Warner spokesman said the company played no role in the change. Spokesmen for the Treasury and Google declined to comment.

Under the previous rules, there would have been a "hot stock" liability because Google decided to invoke its right under the AOL stock-purchase agreement to sell back its AOL stake to Time Warner. The price is currently being negotiated.

I suspect that taxes play a big role in Google's decision to sell. If Google, which paid $1 billion for its AOL stake, sells the stake for the $274 million at which it's now carried on its books, it gets a $726 million tax loss. That would reduce its income-tax bill by about $290 million.

Time Warner and its shareholders avoid taxes, perfectly legally, and Google gets to save some taxes, also perfectly legally. All other taxpayers, in effect, pick up the tab for those savings.

'Twas ever thus, when it comes to big-time dealmaking. And 'twill always be thus.

(Full disclosure: many of my Fortune colleagues have stakes in the stock price of Time Warner, our employer. I joined Fortune in 2007 and have a minor, indirect stake in Time Warner's stock price.)