Latest Good Reads

2010 tax year-in-review

Derivatives: greater transparency is needed

To whom should people give their tax cuts?

Getting ready to prepare your 2010 IRS Form 1040

Why do working moms make less?

Questions for the Tax Lady: December 20th, 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: I bought a home in 2008 and took advantage of a $7,500 incentive. I recently got a letter saying the money was a 0% interest loan from the government and that I must pay back $500 per year. I can barely pay my bills and have to get food from the good bank. Is there any way to get this lowered or removed?

Answer: You are in good company. Many people who received the First-time Homebuyer Credit in 2008 did not realize they were going to have to pay back the credit. Unfortunately, there really isn’t a work around. Since the IRS considered this an interest-free loan, they will come collecting.

Your best bet is to increase your income tax withholding by $42 a month. I know times are tough, but trust me, $42 a month is a lot less than the interest and penalties that would result from failure to pay back the credit.


Question: Since Obama signed the tax cut deal, does that mean my tax rate is going down next year?

Answer: Isn’t that the question of the week? Everyone is desperately trying to figure out what the tax deal means for them. Here’s the basic breakdown:

The short answer is no, your tax rate will not change. This means your official marginal tax rate will be the same that it was last year. That being said, there are other changes to the tax laws that might affect your overall tax liabilities. The most obvious example is the payroll tax deduction.

The Making Work Pay Tax Credit is gone, however, the tax deal reduced Social Security tax withholding by about 2%, so you might get a better tax break in the long run. If you earn $40,000, you’ll end up saving $800 in payroll taxes.

Dems: Tax Cut Package Will Kill Social Security

Is the tax deal the beginning of the end of Social Security? Some Democrats in Congress sure think so.

The Hill.com reports:

Rep. Peter DeFazio (D-Ore.), who voted against the legislation, said on Thursday that “this [vote] is the beginning of the end of Social Security.”

“Next year Republicans are going to want to continue to undermine Social Security, and we are not going to be in any position to borrow the money under whatever new rules the Republicans adopt to make it whole,” he said.

Rep. Jim McDermott (D-Wash.) told The Hill that the tax bill -- which passed the lower chamber on Thursday night -- is a “trojan horse” designed to kill the Social Security program.

“My view is this is like the magician. He has got people looking at the estate tax. Meanwhile, he is putting his hand in your pocket and taking your Social Security,” McDermott said.

In the tax bill that the White House hailed on Friday as a "big win," workers will get a two-percent tax break for one year on their payroll taxes -- a tax that funds Social Security. The cut will leave Social Security with a $112 billion short fall. To make up the difference, the government will need to borrow the money.

Proponents of the bill contend the payroll tax holiday will provide a significant boost to the economy.

Read more here

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.

Tax Cut Timing is Proving Problematic for Democrats

From NY Times.com:

When one party controls the White House and Congress, it controls the calendar for what gets done and when. So how is it that Democrats ended up in such a fix over what to do about the expiring Bush-era tax cuts?

That is what many Democrats are asking.

By dint of calculation and miscalculation, after mixed messages and missed signals, President Obama and Congressional Democratic leaders delayed debate until before the midterm elections. They dared Republicans to fight for extending the tax cuts for the rich and, in so doing, “hold hostage” those for the middle class. But it was Democrats who blinked as their ranks splintered in the heat of a worsening electoral climate, and they delayed any vote until after the elections.

Now, with the tax cuts due to expire Dec. 31, the debate finally commences next week in a lame-duck session, with Democrats weakened, Republicans emboldened by the election results and the tepid economy continuing to provide some argument against letting rates rise even for the highest income levels.

For every election since the Bush tax cuts became law in 2001 and 2003, a central plank of Democrats’ campaign platforms has been to repeal them for high-income brackets — to pay for other programs, like expanded health care, or to reduce budget deficits.

Republicans Oppose Compromise with President Obama on Tax Cuts

From Chicago Tribune.com:

In another ominous sign of new political gridlock developing in Washington, House Republican leaders Sunday took a hard line on compromising with President Obama on extending tax cuts that are due to expire at the end of this year.

"I really want to see that we can come together and agree upon the notion that Washington doesn't need more revenues right now," Rep. Eric Cantor of Virginia, the No. 2 House Republican, said on "Fox News Sunday."

"And to sit here and say we're just going to go about halfway, or we're going to send a signal that it's going to be uncertain for job creators and investors to put capital to work, that's exactly what we don't need right now."

Obama has proposed permanently extending tax cuts for American households making less than $250,000 a year, but he has argued that the country cannot afford to extend those cuts for the wealthiest Americans.

The president repeated that proposal in his weekly address this weekend.

"At a time when we are going to ask folks across the board to make such difficult sacrifices, I don't see how we can afford to borrow an additional $700 billion from other countries to make all the Bush tax cuts permanent, even for the wealthiest 2% of Americans," he said.

Republicans and Democrats Spar Over Tax Cuts, Economy as Election Nears

From AdvisorOne.com:

As the hours dwindle down to the election on Tuesday, the talk Sunday was still about the economy and the two-sided coin of tax cuts and the deficit. On This Week with Christiane Amanpour, Sens. Robert Menendez, D-N.J., and John Cornyn, R-Texas, squared off about both.

Amanpour’s question to Menendez about whether this election would be “as bad as 1994” brought a resounding no. He stated that the Republican brand’s “image was much better [in 1994] than it is today,” and that Democrats are faring better than they did then. He added that the Democrats’ “goal is to have them understand and channel their anger on election day against the Republican Party that brought us to the verge of economic collapse in November of 2008, when financial institutions in this country were ready to collapse.”

Amanpour challenged him about that. “A recent Bloomberg poll found that most Americans think that taxes have gone up since President Obama took office;” she said, “that the economy has shrunk; that TARP, the corporate bailout, won't be mostly paid back. I mean, all of those are untrue. Why is the messaging so bad?”

Menendez replied that “I think the challenge is, when you're hurting economically—and we have gone from negative job growth to positive job growth, from negative GDP growth to positive GDP growth—but if you're still unemployed, none of that news makes that much difference to you.”

Cornyn agreed about the cause of voters’ reactions, but disagreed about the cause of the economic problems. Amanpour turned the conversation to the subject of taxes and asked him about Obama’s plan “to raise taxes on the wealthiest and preserve them for the middle class.” Cornyn replied, “I don't believe we ought to raise taxes on anyone during a fragile economic recovery. …”

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Surprise! You got a Tax Cut! (You Just Didn't Notice.)

From the Christian Science Monitor:

Michael Cooper over at The New York Times stopped off at the Pig Pickin and Politickin rally in North Carolina the other day to ask folks about the Obama tax cuts. Their response, not surprisingly, was “What Obama tax cuts?”

This despite the fact that about one-third of the much-reviled 2009 stimulus—or almost $300 billion--came in the form of tax reductions. According to Tax Policy Center estimates, 96.9 percent of households enjoyed a tax cut that averaged almost $1,200. Just one measure—Obama’s Making Work Pay tax credit—put more than $116 billion into people’s pockets in 2009 and 2010.

Yet, a Times poll found that fewer than 10 percent of those surveyed had any clue. Remarkably, fully one-third thought their taxes went up—even though the actual number was about zero.

How could so many people have missed it? After all, $1,200 ain’t nothing. In large part, it was due to the design of Obama’s tax plan. Earlier stimulus tax cuts often came in the form of ostentatious checks from the Treasury. In 2008, for example, President Bush proposed a tax reduction only half the size of Obama’s (about $145 billion). But it was delivered to households in the form of rebate checks—generally $600 per adult and $300 per child.

However, conventional economic wisdom argues that increased withholding over time is more effective stimulus than a single big check. The theory is that people will bank a one-time rebate but spend the extra bucks they get in their weekly pay.

Obama Signs Bill Giving Tax Cuts, Loan Help to Small Businesses

President Obama signed the fourth job creation measure of the year in to law yesterday, which is expected to be the last before the midterm elections November 2^nd. The bill will provide tax cuts to small businesses, and aims to promote job creation.

BusinessWeek.com reports:

Obama signed the Small Business Jobs Act during a ceremony in the East Room of the White House. It is the fourth jobs measure to clear Congress this year and is likely the last before the Nov. 2 midterm congressional elections.

The bill, which won final congressional approval last week, provides billions of dollars worth of tax cuts over the next 12 months, with the bulk coming through “bonus depreciation,” which allows companies to more quickly write off the cost of purchases. It also revives stimulus provisions cutting fees and increasing limits on loan guarantees offered by the Small Business Administration.

President Obama’s Tax Plans

As expected, President Obama’s speech from Cleveland last night unveiled his desire to expand and make permanent the business research and development tax credit, institute a tax deduction for any business capital investment, and to extend the Bush tax cuts for taxpayers earning under $250,000 a year. Furthermore, President Obama has introduced plans to invest $50 billion into public works and infrastructure projects.

Of course the big question is will tax cuts help our economy recover? The short answer: we don’t know. These tax cuts could end up like the Cash for Clunkers or the First Time Homebuyers Credit – meaning they spur people, who were already planning to make such purchases, to buy during a small window of time. In essence, it only changes the timing of the purchase, and when the window of time ends, sales fall off the deep end.

Some would argue that these programs were helpful to the economy, and softened the home and new car sales slump our nation was facing last year. At the end of the day, like any economic activity, it’s impossible to say what would have happened without the Cash for Clunkers or First Time Home Buyer’s credit. For all we know, the downturn could have been much worse.

Taxpayers who were able to take advantage of those programs were helped by the extra tax break, and likely used the money they saved on other purchases, adding more economic activity.
I can tell you that business owners will happily utilize any tax break we can get. I am a fan of incentivizing research and development, and the jobs that come along with it. Our nation should be at the forefront of new technologies and ideas.

While we don’t know what the end result will be, or if Congress will even take action on President Obama’s proposals, we can take this as a jumping off point for a discussion about how to encourage our economy.

Obama Considering Tax Cuts to Boost Economy

Earlier today new reports emerged predicting that the Obama administration will propose a set of new cuts to Congress. These tax incentives are said to be aimed at helping small business owners to help with the country’s ongoing unemployment problem.

CBS News reports:

On the morning after President Obama told Americans in a primetime address from the Oval Office on Iraq that getting the economy moving again was his "central responsibility as president," The Wall Street Journal ($) reported the administration is considering tax cuts to give the economy a boost.

Unnamed sources tell the newspaper that Mr. Obama's economic team might ask Congress for additional tax cuts for small businesses in addition to the $30 billion of similar cuts awaiting a vote in the Senate.

The Journal reports there's not a clear view of what kinds of small businesses would benefit from the yet-to-be-proposed cuts or how much revenue the government would lose.

The administration might also propose a payroll tax cut for businesses and individuals, the sources told the newspaper. Tax cuts passed during the president of George W. Bush are scheduled to expire at the end of the year, which would make income taxes rise.

Whether any major proposal will receive congressional approval between now and the pivotal mid-term elections is uncertain. The House and the Senate aren't scheduled to convene again until Sept. 13. Democratic aides on Capitol Hill told the newspaper that there's not much of a chance for any immediate action with the party's majorities at stake.

Read more here

High-Income People Would Benefit From Extension of “Middle-Class” Tax Cuts

According to the Center on Budget and Policy Priorities, the media seems to ignoring a set of tax incentives for middle class Americans when discussing the expiration of the Bush tax cuts. In addition to helping taxpayers with average incomes, they would also provide tax breaks to taxpayers making over $200,000 per year.

This is because the 2001 tax law’s reductions in the lower tax brackets benefit not only people whose incomes fall within the lower brackets but also those whose incomes exceed those brackets. In fact, high-income people actually receive much larger benefits in dollar terms from the so-called “middle-class tax cuts” than middle-class people do.

Specifically, recent estimates from the Joint Committee on Taxation show that extending just the middle-class tax cuts would provide more than $6,300 in tax cuts to households with incomes above $200,000, on average, compared to $1,132 in tax cuts for households with incomes between $50,000 and $75,000. The Joint Tax Committee estimates show:

• Households with incomes exceeding $1 million will receive an average tax cut of $6,349 in 2011 if the middle-class tax cuts are extended while the high-income tax cuts are allowed to expire. (They will receive an average tax cut of nearly $104,000 if the high-income tax cuts are extended as well.)
• The story is similar, if not quite as dramatic, for households that make between $500,000 and $1 million. They will receive an average tax cut of $6,701 if the middle-class tax cuts are excluded (and of $17,467 if the high-income tax cuts are also extended).
• For all other income categories, by contrast, the size of the tax cuts are about the same whether the high-income tax cuts are extended or not. Even for households with incomes between $200,000 and $500,000, the effects are similar. The Joint Tax Committee figures show that they would receive an average tax cut of $6,743 if only the middle-class tax cuts are extended, and of $7,152 if the high-income tax cuts are extended, as well.

Continue reading at CBPP.org…

Geithner Favors Allowing Tax Cuts for the "Wealthy" to Expire

From Examiner.com:

In another move sure to up the ante in the perceived class warfare being waged by the Obama administration, Treasury Secretary, Timothy Geithner has said that he is favorably disposed to allowing the present tax cuts for the "wealthiest people" to expire.

He calls it the "responsible thing to do", although most Blue Dog Democrats and Republicans would disagree, as they see it as a failed economic policy (increasing taxes on the wealthiest people) that would only hurt economic growth, in the long run.

While speaking on ABC's "This Week" this morning, Geithner professed that allowing the tax cuts to expire would send a signal to the world that the United States was willing as a country, to take concrete steps, necessary to reducing long-term budget deficits.

What he however failed to propose was how exactly the government intended to make up for the still expected shortfall, as the so-called wealthiest people already pay close to two-thirds of the taxes.

The truth is that invariably, higher taxes on the wealthiest people, will end up hurting the economy in the long run as the latter will withdraw or significantly reduce their charitable donations, thus negatively impacting the non-profit sector of the economy.

House Prepares To Renew Expiring Tax Cuts For One Year

After voting to extend the homebuyers credit just a few weeks ago, Congress is already making plans to extend $37 billion in tax cuts for individuals and businesses in 2010. Leaders of the House of Representatives have been working on legislation and assert that they plan to pass the legislation by the end of the year as part of an effort to create jobs.

According to a summary obtained by Dow Jones Newswires, the package will be offset by tax-raising provisions, but those provisions are not identified in the summary.

The draft bill omits a provision to temporarily shield middle-class taxpayers from the alternative minimum tax in 2010. Congress earlier this year passed an AMT "patch" for 2009.

Since the lack of an AMT patch for 2010 won't affect most taxpayers until they file tax returns in 2011, House lawmakers said they will likely wait until next year to pass it.

High-tech firms and manufacturers would gain a one-year extension of the research tax credit, while banks would get an extension of a tax break on their overseas business income.

NASCAR racetracks would win another year of more favorable depreciation rules under the House bill, as would retail stores and restaurants.

Continue reading at Nasdaq.com…

Preventing State Budget Crises: Redefining 'Tax Cuts' and 'Tax Hikes'

Earlier in the week, David Gamage of UC-Berkeley published a new paper on how state governments can address their recession related budget problems. You can find a section of the abstract below, courtesy of Tax Prof, or download the full PDF at Preventing State Budget Crises: Redefining 'Tax Cuts' and 'Tax Hikes'.

Forty-nine of the U.S. states have balanced budget requirements, and every state acts as though bound by such constraints. These constraints create fiscal volatility - the states must either cut spending or raise taxes during economic downturns, while doing the opposite during upturns. This paper discusses how states should cope with fiscal volatility on both the levels of ordinary politics and of institutional-design policy. On the level of ordinary politics, the paper applies principles of risk allocation theory to conclude that states should primarily adjust the rates of broad-based taxes as their economies cycle, rather than fluctuating public spending. States should raise their tax rates during economic downturns and lower them during periods of growth. On the level of institutional-design policy, the key question is how we define terms like “tax cuts” and “tax hikes.” By adopting a new baseline for defining these terms, states can increase the likelihood of using tax rate adjustments to cope with fiscal volatility rather than (more harmful) spending fluctuations.

Obama Would Keep $85 Billion in Tax Breaks for Working Poor

In the latest news from Capitol Hill, Obama has proposed to adding over $85 billion to the national deficit in order to extend two tax breaks for the working poor over the next two decades. Critics are saying this comes as a direct violation of Obama’s promise to only support fiscally neutral policies.

The tax breaks were included in the economic stimulus package Obama signed soon after taking office in January and are scheduled to expire in 2011. But last week, in its midyear update of the federal budget, the White House said it plans to extend the tax cuts through 2019 without covering the cost by cutting spending or raising taxes elsewhere.

The reason? Technically, the stimulus amended a series of sweeping tax cuts enacted in 2001 during the Bush administration. Obama has repeatedly said he does not expect Congress to cover the enormous cost of maintaining the Bush tax cuts past their 2010 expiration date. And because the stimulus provisions are now part of the Bush tax cuts, Congress shouldn't have to pay for them, either, White House budget documents say.

"Since these two policies… represent expansions of tax cuts first enacted in the 2001 tax bill, extension of the policies are incorporated in the baseline projection of current policy," the documents explain in a footnote.

Continue reading at Washington Post.com…

Wash. Gov Oks Tax Cut For Newspapers

From the Seattle Times.com:

Gov. Chris Gregoire has approved a tax break for the state's troubled newspaper industry.

The new law gives newspaper printers and publishers a 40 percent cut in the state's main business tax. The discounted rate mirrors breaks given in years past to the Boeing Co. and the timber industry.

Newspapers across the country have resorted to layoffs and other cost-cutting moves to deal with a wounded business model and a recession-fueled drop in advertising.

The Seattle Post-Intelligencer printed its final edition earlier this year and was converted to an Internet-only publication with a much-reduced staff.

Obama: People Should See Tax Cut Help By April 1

From The Star Tribune:

The latest: President Obama said Saturday that most Americans will start seeing the benefits of the new tax cuts by April 1. "Never before in our history has a tax cut taken effect faster or gone to so many hardworking Americans," Obama said in his weekly address. In tandem, the Treasury Department began directing employers to reduce the amount of taxes withheld from people's paychecks as soon as possible.

His address: Obama said he was grateful to Congress, governors, mayors and all the people who supported the $787 billion economic stimulus measure, which including both tax cuts and new spending. Still, he added: "It is only a first step on the road to economic recovery. And we cannot fail to complete the journey." He said the country also must stem foreclosures, repair the banking system and revamp financial regulations.

What to expect: The tax credit -- up to $400 for individuals and up to $800 for married couples -- will be doled out through the rest of the year through a payroll tax cut reflected in paychecks. Most workers should see about a $13 per week increase in their take-home pay. But the credit is phased out for higher-income taxpayers. People who do not earn enough money to owe income taxes can file for their share.

New details: The IRS released new withholding tables on its website (www.irs.gov) to help guide employers in reflecting the new credit. It says more instructions about tax provisions in the law will be available soon and will be mailed to more than 9 million employers next month.

Ford to get $55 Million State Tax Credit for Battery Development

From Crain’s Detroit:

Some $55 million in tax credits for Ford Motor Co. to continue work in electric vehicle and battery development were among items that on Tuesday morning were to go before the Michigan Economic Growth Authority board.

In a news release, Ford said the refundable tax credits will be used to accelerate its plans to produce next-generation hybrids, plug-in hybrid electric vehicles and battery electric vehicles.

According to state briefing memos, other Southeast Michigan projects up for state tax breaks at the MEGA board include:

• A $17.2 million Macomb Township investment by aerospace industry supplier Global Tooling Systems. The Utica-based company plans to relocate operations to Macomb Township, creating 184 jobs, according to state documents.

• An $8.9 million expansion at McLaren Performance Technologies in Livonia. The firm, which specializes in the design, development, integration and validation of powertrain systems, plans to create 34 jobs in an expansion to support power transfer unit business.

• A $2.23 million investment by Patrick Energy Services Inc. in Livonia. The company, which provides services that support utilities, transmission system operators and industrial clients, proposes to relocate its offices in Livonia to a larger building in Novi, adding 90 jobs.

• A more than $1 million investment by Michigan Seamless Tube L.L.C. in South Lyon, a manufacturer of carbon and alloy seamless cold drawn pipe and tube. The company is entering a technology collaboration with OG Technologies Inc. in Ann Arbor, for a tube inspection system. OG Technologies plans to create 20 jobs.

• A $946,000 investment by Royal Oak-based RIIS, L.L.C., a consulting and services firm. The company plans to expand its headquarters in Royal Oak or Southfield to accommodate new software and application development contracts, creating 40 jobs.

• A defense-related business and development center being established in Sterling Heights by BAE Systems Land and Armaments L.P. The $44 million project, creating 460 jobs, was approved for a $22 million MEGA tax credit in April 2008.

The element of the project before the MEGA board Tuesday was a brownfield redevelopment work plan proposing nearly $1.5 million in local and school tax capture to support the project.

• A 7.4 acre redevelopment in Hazel Park to include a new retail center featuring a Save-A-Lot grocery store, restaurant and retail/commercial space. The project by Hazel Park Development Company L.L.C. is expected to create 250 jobs, 150 of which would be permanent.

The project was approved in early February for a $497,293 state brownfield tax credit and seeks approval of a brownfield work plan that includes more than $1 million in local and school tax capture to support the project.