Is this the Tax Reform Obama and the New Congress can Agree on?

The mid term elections are over and both President Obama and Congress are going to have to decide on a few tax laws in the next few weeks. Earlier today Reuters published an article bringing attention to a non-partisan tax proposal from Senator Ron Wyden, a Democrat from Oregon, and Senator Judd Gregg, a Republican from New Hampshire, that many expect the President and Congress to consider.

The proposal would simplify income tax rates for individuals and businesses, and change laws so that businesses could immediately write off capital investments. It would also raise capital gains tax rates, but would reduce the federal budget deficit, while reducing the average family's tax liability by around $4,000.

Reuters reports:

President Barack Obama’s bipartisan deficit commission has a mandate to cut the U.S. budget gap. But the White House panel may surprise in another area: tax reform. Democrats and Republicans are taking a hard look at a plan that would simplify the code and cut corporate taxes. Although not perfect, it would be a big improvement.

Much of the public focus on the commission, which is expected to vote on any recommendations it makes next month, has been on its efforts to slash spending. Two areas that could suffer the knife are tax breaks and Social Security, analysts say. But panelists are also assessing ways to reform America’s labyrinthine tax code to promote economic growth, and thereby more tax revenue to help pay down the debt.

Smartly, members won’t recommend a total scrapping of the current system in favor of some ideal tax code concocted by academics. No politically unfeasible value-added or flat taxes here (though a flat consumption tax would be ideal). Instead, they’re examining a plan devised by politicians — Senator Ron Wyden, a Democrat from Oregon, and Senator Judd Gregg, a Republican from New Hampshire and panel member — that uses the current system as a baseline and then tweaks it a whole lot.

The Wyden-Gregg idea mostly succeeds. For individuals, it would reduce the number of tax rates from six to three and dump the alternative minimum tax. It would also combine several existing government savings plans into one. For business, Wyden-Gregg would combine multiple rates, including a 35 percent top rate, into a flat, 24 percent corporate rate. Small businesses could immediately write off capital investments. And companies could only deduct part of their interest payments, making equity financing more competitive. All great, great stuff.

There are some downsides, which is to be expected of a plan meant to win votes on both sides of the aisle. It would raise the top capital gains tax rate to 23 percent from 15 percent (not counting what happens with the Bush tax cuts or the new Obama Medicare tax). It would also subject the foreign income of U.S. multinationals to immediate taxation. Most advanced economies tax only income earned domestically.

Read more here

Voters Split on Tax Initiatives

Yesterday when voters across the country headed to the poles they had to decide on 44 tax related measures. This represents more than a quarter of the total initiatives being considered across the nation. According to this article from CNN Money, there were three "big" show downs in Colorado, Washington and California. You can find a snippet of their article explaining the tax initiatives from each state below, or the full text here.

Colorado: A trio of fiscal measures in the Centennial State that would have drastically changed the way it funds itself went down to defeat.

Currently, public education in Colorado is paid for through a mix of property taxes and state aid. But a ballot initiative would have cut property taxes in half over 10 years and then use state money to fund schools.

The measure would require the state to come up with $1.5 billion for public schools each year, eating up most of the state's budget, according to state estimates.

Another ballot measure would have banned all state borrowing and require voter approval for localities to borrow money by issuing debt. Colorado currently borrows about $3 billion annually, while local governments issue $5 billion in new debt each year.

The final initiative that failed for slashing the state income tax rate to 3.5%, down from 4.63%, and for reducing or eliminating taxes and fees on cars and telecommunication services. This would cut state revenues by $2.9 billion.

Washington: Earlier this year, state lawmakers voted to subject candy and bottled water to sales taxes to help close a projected $3 billion budget shortfall. The legislature also imposed a 2 cent tax on carbonated beverages.

Continue reading at CNN.com...

The New Threat To Your IRA: An IRS Crackdown

IRS rules and regulations surrounding IRAs frequently confuse taxpayers, but until now minor slip-ups were often overlooked or forgiven with a small fine. However, the IRS has been cracking down on IRA account holders lately. According to this Forbes.com article, you should be careful to avoid excessive IRS penalties.

After years of haphazard enforcement, the Internal Revenue Service is starting to systematically search out violations of the convoluted rules governing individual retirement accounts. There's a lot at stake. Americans hold $4.3 trillion in IRAs, and the cost of even innocent mistakes can be steep; if you miss taking a required payout from your IRA, Uncle Sam will demand half of the amount you forgot to take as a penalty.

The IRS was prodded to act by the Treasury Inspector General for Tax Administration. In a report earlier this year it concluded that IRA violations have been growing and estimated that more than half a million taxpayers either missed required payouts or contributed more than allowed to IRAs during 2006 and 2007.

"No one was auditing this stuff. Now the IRS is cracking down,'' says Seymour Goldberg, a Woodbury, N.Y. lawyer who serves on a committee of tax pros who meet with the IRS on pension issues. Here are some IRS targets and ways to keep your retirement stash out of its sights.

Missed Required Payouts

You put pretax money into a traditional IRA, where it grows tax-deferred. But Uncle Sam wants his cut eventually. So the law requires IRA owners to begin taking "required minimum distributions" from traditional IRAs after they turn 701/2. Roths work in reverse. You contribute already taxed cash to a Roth, and distributions are tax free. Owners of Roths, no matter how old, don't have to take RMDs. Nonspousal heirs of both traditional and Roth IRAs must generally take RMDs regardless of their age. To complicate matters, Congress suspended all RMDs for 2009 to give retirement accounts depleted by the 2008 market crash time to recover. But RMDs are back for 2010. That change will likely trip up additional taxpayers in 2010.

Continue reading here…

The Dumbest Financial Laws Of All Time

As we all know, lawmakers do not always get it right when they draft and support new financial laws. However, as this Forbes.com article shows, some times the bills they pass are so ridiculous that it is surprising they ever become law. In a new “Gallery of Pain,” Forbes.com has collected a slideshow of the dumbest financial laws of all time. You can find the text regarding some of the laws included in their list below, but be sure to view the slideshow at Forbes.com.

How worried should the world be about the new regulatory reform bill wending its way through the U.S. Congress? Given the country's track record on looking after the financial services industry, the answer is: plenty worried.

Even the staunchest believers in free enterprise would agree that a modicum of regulation is necessary for a functioning economy. The new bill, which Congress aims to get on President Obama's desk before the July recess, looks to be chock full of ways to ward off yet another financial crisis. These include: audits of the Federal Reserve; the dismantling of lucrative banking divisions devoted to crafting and trading complex securities called derivatives; an agency that would take quick control of troubled financial institutions; and the so-called Volcker rule, after former Federal Reserve chairman Paul Volcker, that would prohibit banks from making speculative trades with depositors' money.

Whatever ideas end up on the books, three things are certain.

First, regulation--no matter how well intended--comes with a whole heap of unintended consequences. Some laws have invited, or at least exacerbated, full-blown financial crises. (For a round-up of the most ill-fated legislation, see our slide show.) "Regulations are fixed in time and can't adapt," says David Weiman, a professor of economics history at Barnard College.

The second certainty: No matter what the rules are, the financial industry will figure out how to innovate around them. "New regulations often let people find ways within the letter of the law to do whatever they wanted to do in the first place," says Edward Kane, a professor of finance at Boston College.

Recent Tax Law Changes that Might Affect your Business

Our recent RDTC Tax Help Blog entry discusses recent tax law changes that might affect your business. To learn more about these new changes that have been put in to place in the past year, you can read a segment of the entry below, but be sure to read the full text at the RDTC Tax Help Blog.

W-2 Changes

Starting next year, employers will need to make an adjustment to their employees W-2 Forms. Due to the recent health care reform package, employers are now required to list the value of provided health insurance plans on employees’ W-2 Forms.

New Business Expenses

When a new business opens, the owner is allowed to take advantage of first year expense deductions on all business property up to a certain amount. In 2009, the limit was $250,000 but in 2010 the amount was drastically reduced to $134,000. This limit is also expected to drop again in 2011— to only $25,000.

Capital Gains Opportunity

2010 could be the last year for thousands of business owners to benefit from low capital gains tax rates. Currently, the rates are as low as 0% on the sale of assets held longer than one year for self-employed taxpayers in lower income brackets. In 2011, these capital gains rates will increase to align with income tax rates, which can be as high as 35%.

Charitable Property Deductions

In 2008 and 2009, there were temporary tax laws that provided enhanced charitable deductions to business owners who donated items such as computer equipment or office supplies to qualifying charities. Unfortunately, these enhanced deductions were not extended into 2010.

Statement of IRS Commissioner Doug Shulman on the Filing Deadline for Small Charities

According to the IRS’s newest press release, many small tax-exempt organizations have not filed the required information tax exempt return on time. As such, Commissioner Doug Shulman has put out the following statement regarding the issue.

The IRS has conducted an unprecedented outreach effort in the tax-exempt sector on the 2006 law’s new filing requirements, but many of these smaller organizations are just now learning of the May 17 deadline. I want to reassure these small organizations that the IRS will do what it can to help them avoid losing their tax-exempt status.

The IRS will be providing additional guidance in the near future on how it will help these organizations maintain their important tax-exempt status — even if they missed the May 17 deadline. The guidance will offer relief to these small organizations and provide them with the opportunity to keep their critical tax-exempt status intact.

So I urge these organizations to go ahead and file — even though the May 17 deadline has passed.

Filing a tax return for the small organizations is easier than you’d think. It just takes a few minutes to fill out the electronic notice Form 990-N (e-Postcard). This is available for small tax-exempt organizations with annual receipts of $25,000 or less.

2nd Circuit Rejects Firm's 'Bold Attempt' to Contest IRS Levy

The 2nd U.S. Circuit Court of Appeals made a significant ruling last Thursday when they decided that a law firm partner’s advances on partnership profits are subject to administrative levies imposed by the Internal Revenue Service.

As Mark Hamblett explains in this Law.com article, the circuit found that the advances, or partner "draws," at personal injury firm Moskowitz, Passman & Edelman constituted "salary or wages" under §6331(e) of the Internal Revenue Code. The firm will now have to pay the government nearly $1.5 million.

The circuit said it was unpersuaded by Moskowitz Passman's "bold attempt to evade the levies" as it also upheld a statutory fine imposed in United States v. Moskowitz, Passman & Edelman, 08-3017-cv.

Judges Pierre N. Leval, Robert D. Sack and Richard C. Wesley decided the appeal. Wesley wrote the opinion.

According to the ruling, managing partner A. Sheldon Edelman had an oral partnership agreement with Jeffrey Motelson, under which Edelman received 60 percent of the profits and Motelson received 40 percent.

Edelman was responsible for handling the checkbook and he wrote checks to both himself and Motelson on close to a weekly basis.

The IRS sought in 1996 to collect Edelman's unpaid taxes from 1990 through 1994 using administrative levies.

Continue reading at Law.com…

Client Confidentiality: an Important Aspect of Legal Representation

Last week, my law firm’s blog posted a new entry explaining why client confidentiality is such an important aspect of legal representation. As the entry explains, client confidentiality is the foundation of the attorney client relationship and is essential for the effective representation of a client. I have included a snippet of the article below, but be sure to head over to the RoniDeutch.com Tax Relief Blog for the full text.

Attorney Client Privilege

Attorney-client privilege and confidentiality are often mistaken as being one in the same; however, they are in fact different. While the attorney-client privilege protects communications between a client and his or her attorney from disclosure before a court, confidentiality protects a client from any information a client chooses to share with his or her attorney.

Policy

Why is confidentiality such an integral aspect of legal representation? The answer is trust—to effectively represent a client, an attorney needs the client’s complete trust. Think of it this way, we are all more willing to share information that may be embarrassing or difficult to talk about with someone that we know we can trust. This is why attorneys are held to a high standard of protecting a client’s confidential information.

Confidences and Secrets

With respect to client confidentiality, the definition of a secret is anything either the client has requested to be held in confidence or anything that, if told, would be detrimental to the client. Confidential information is any information related to the representation of the client. Furthermore confidential client information can only come from the client, whereas a client’s secrets can come from any source.

IRS Debunks Frivolous Tax Arguments

According to their new press release, last week the IRS “released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.”

Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 80-page document, The Truth about Frivolous Tax Arguments.

The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

IRS highlighted in the document about 40 new cases adjudicated in 2009. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.

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IRS Tightens Rules on Tax Preparers

The IRS is starting the New Year out with a bang, with an announcement on Monday that they plan to roll out a series of new regulations on tax preparers. These changes will benefit taxpayers, as they IRS will begin targeting offices with high rates of erroneous returns. The Sac Bee posted a good article about how these changes will affect the tax preparation industry; you can find a clip of their story below.

With millions of Americans turning to paid tax preparers each year, the IRS marked the launch of the 2010 tax season Monday by announcing sweeping changes in how tax preparers conduct their business.

Among the new requirements: tax preparers must register with the IRS, undergo tax competency exams and annual education classes.

"Tax return preparers help Americans with one of their biggest financial transactions each year. It's vital we ensure all tax preparers are ethical," said IRS Commissioner Doug Shulman in a conference call with reporters.

Calling the new requirements a "monumental shift" in IRS tax strategy, Shulman said they're designed to protect consumers, alleviate fraud and bring in more tax revenue.

Paying for the Affordable Health Care for America Act

Over the weekend, the U.S. House of Representatives passed HR3962: the Affordable Health Care for America Act of 2009. The legislation is thousands of pages long, making it difficult for regular taxpayers to understand how the bill will affect them. To help all the readers of my blog, I have analyzed the bill and put together the following explanation of how it will be funded.

The Public Option

Although it was rumored that reform legislation would not include a public option, HR3962 does set the groundwork for a public option that will take full affect in 2013. Supporters of the legislation assert that it will target those who have been uninsured for several months or were denied because of pre-existing conditions. The Health Insurance Exchange will setup to offer four different plans (basic, enhanced, premium, and premium-plus), and will limit out of pocket spending to $5,000 for an individual and $10,000 for a family. This new program will not replace Medicare, which will still be available to those who qualify. Instead, the Health Insurance Exchange will aim to provide coverage to those caught in loopholes for insurance companies. Such as low waged workers employed by small businesses that cannot afford to provide benefits.

Tax Penalties

The new legislation is very expensive, and Congress has come up with a number of ways to pay for it. First of all, there will be a shared responsibility provision that basically forces taxpayers who cannot establish acceptable health care coverage to pay an additional 2.5% tax. There will be a hardship exception though, for taxpayers who cannot afford to pay the tax.

Payroll Penalty

In addition to a penalty on taxpayers who cannot afford coverage, the government will also assess an 8% payroll tax on businesses that do not offer health insurance to their employees. However, it is widely expected that the penalty will be reduced to 5% when the Senate revises the bill.

Millionaire Surtax

One of the largest sources of funding for the reform bill is a new surtax on individuals making more than $500,000 per year, of couples making over $1 million. In the House’s bill, beginning in 2010 all taxpayers making a qualifying amount will be subject to a massive 5.4% tax increase.

Inflation Increases

In addition to adding heft tax increases, the bill also partially repeals tax indexing for inflation. This will result in more money for the Federal government as the years go by. According to the Joint Tax Committee the surcharge is only expected to generate $30.9 billion in 2011, but nearly $70 billion in 2019.

Passage into Law?

The present version of this bill is not likely to get passed into law. Despite President Obama’s optimistic stance, some Senators are already pronouncing the bill dead on arrival. Although there has been a lot of discussion about this health care reform bill, it could be months before even a highly amended version of it becomes law. The Senate is not going to vote on the bill until at least 2010, and since they are expected to make numerous modifications it will likely need to return to the House for another vote. It could be six months from now before a health care bill goes to President Obama’s desk for a signature.

Questions for the Tax Lady: October 12th, 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: I owed the IRS thousands, and I want to hire an attorney but I am afraid I will not have enough money to afford the retainer fee. How much does it usually cost to hire an attorney?

Answer: The amount you will pay is going to depend on the attorney you hire. Typically an attorney, or law firm, with a lot of experience helping taxpayers settle their debts will cost a little more then an inexperienced lawyer or enrollment agent. Additionally, the amount of time it takes the attorney to work on your case will also influence fees.

Question #2: Is it true that I can use my federal tax credit to help pay for closing costs on my new house?

Answer: Yes. If you do not want to have to wait until April to collect your Federal tax credit, then you can elect to use it to pay for your closing fees or even part of your down payment. However, it can be a tricky process, and not all loan companies can handle it. If you do want to use your credit upfront then be sure to speak with your loan agent as soon as possible. For more information on the topic, check out the following article from Lending Tree.com.

How to use tax credit at closing

To use the tax credit at closing, home buyers must obtain a loan that's insured by the Federal Housing Administration (FHA). To obtain an FHA-insured loan, be sure to apply through an FHA-approved lender. Keep in mind that not all lenders can accommodate using the tax credit at closing. If you're interested in applying the tax credit to your closing costs, ask your lenders in advance. You may also want to consider working with a state housing finance agency that enables the tax credit to be applied towards closing.

The credit can't be used toward the first 3.5 percent of the down payment on an FHA loan. That means borrowers who want to use the tax credit as a down payment must still bring at least that amount to the transaction in addition to the tax credit. The 3.5 percent down payment must come from the buyer's own funds or a gift, subject to FHA rules. However, if the borrower obtains a loan through a state housing finance agency, the minimum down payment requirement to use the tax credit at closing may be waived.

A California Tax On Oil Drilling? Why Not?

Los Angeles Times writer Michael Hiltzik recently posted an interesting article on how taxing California oil drilling could be highly lucrative for the state’s struggling economy. You can find a clip of his story below, or check out the full post here.

The most persistent misconception about Californians is that we hate to raise taxes. The truth is that we adore raising taxes—as long as someone else is paying, that is.

So nonsmokers vote to raise cigarette taxes, teetotalers to raise liquor taxes. The middle and working classes want to hike taxes on the rich, who are happy to return the favor.

Yet this only compounds the mystery of why we're so resistant to raising taxes on perhaps the biggest, fattest target of all: the oil industry.

At least twice since 1981 Californians have considered proposals to impose a so-called severance tax on oil -- a levy on every barrel that drillers take out of the California ground. Both times they went down to defeat -- most recently in a $150-million initiative campaign that set a new standard for obscenity in campaign finance, thanks to Chevron and its fellow oil companies. The 2006 defeat of Proposition 87, which would have steered the tax proceeds to alternative fuel programs, preserved California's status as the only one of the 22 major oil states to give the industry a free ride. And we're the third-biggest producer in the country.

How embarrassing is it for California to be hanging out there alone? That outstanding anti-tax crusader, Alaska Gov. Sarah Palin, in 2007 raised her state’s tax to 25% of the value of extracted oil and gas. Proposition 87 would have capped California's levy at 6%. So even if it had passed, we'd still be suckers.

With the state's fiscal disaster having concentrated the minds of political leaders as never before, the oil severance tax is back on the table in Sacramento. We can expect the oil industry to trot out the same arguments it employed to defeat the tax the last time, so to save time it might be helpful to deflate them now.

At the current world benchmark price of about $70, the 6% tax contemplated by Proposition 87 would have generated more than $1 billion a year from that haul.

Consider some "what if" scenarios: At last year's peak benchmark price of $130 for California crude, the take would be nearly $2 billion. Palin's tax rate of 25% would generate $4 billion at a $70 price and nearly $8 billion at the top.

An important aspect of the severance tax is that we'd better collect it now, while there's still something to tax. California oil production has declined steadily from its 1985 peak of 424 million barrels. Since 2002, according to federal statistics, the state’s known reserves have been depleted to about 3.3 billion barrels from more than 3.6 billion.

The severance tax might be offset by reductions in property and corporate income taxes paid by oil companies. But an analysis of Proposition 87 prepared in 2006 by the nonpartisan Legislative Analyst's Office found that such offsets would amount to a mere fraction of the severance tax, so the state would still come out way ahead.

Let's be candid about the rationale for the severance tax. States levy it because they can: The oil's not going anywhere. Oil companies can't pack it up and move it to a state where rates are lower. It creates wealth -- enormous wealth at times of elevated market prices, like now -- and any jurisdiction in need of funds to cover services it provides to its residents has a perfect constitutional right to claim a piece of it, as it claims a percentage of the value of real estate and income (earned, unearned and inherited).

NC Legislature Approves Tax Law Change For Apple

From BusinessWeek.com:

The General Assembly on Monday approved changing the state's tax law with hopes it will result in Apple Inc. announcing a $1 billion investment within days.

The Senate voted 40-8 to go along with conditions including that the company invest in a rural area. The final round of debate lasted less than a minute.

Sen. Tom Apodaca, R-Henderson, urged rejection. He had previously lambasted business recruiters and lawmakers for focusing on high profile, big companies and ignoring small businesses. Sen. David Hoyle, R-Gaston, said small companies near the site of a promised data center would benefit by providing services.

"There is a lot in this for small businesses," Hoyle said.

The legislation was sent to Gov. Beverly Perdue, who was expected to sign the bill into law quickly.

An Apple spokeswoman said the company had no comment.

The bill would give the qualifying company a break on state corporate income taxes. The tax break could be worth about $46 million in the next decade, assuming the lone, unnamed company projected to qualify reaches its $1 billion investment target within nine years of starting, according to a memo by legislative fiscal staffers.

The Associated Press reported last month that the unidentified company being targeted by the tax break is Apple, which is seeking a site for its East Coast data warehouse. These facilities, also called server farms, are huge, climate-controlled computer warehouses that can process vast flows of data needed as business functions and everyday life increasingly depend on Internet traffic.

Data centers are heavy users of power and water and are usually spread over large spaces. Google Inc. opened one last year near Lenoir in the western North Carolina foothills. In 2007, state and local governments offered Google an incentives package worth up to $260 million over 30 years, one of the largest in state history, to land the $600 million data complex.

If the Apple project also remained active for 30 years, its server farm could save more than $300 million on its corporate taxes, based on legislative staffers' estimates.

Sites in western North Carolina also are under consideration for the Apple facility, including in Catawba and Cleveland counties. Both counties posted April unemployment rates of about 15 percent.

Construction of the Apple site would be expected to employ hundreds of workers for more than a year, but the initial full-time work force of the data center would total fewer than 100, lawmakers said last week.

If ultimately approved by the General Assembly, the change would mean a significant tax break only to the rare company that meets all the conditions. The conditions are a sign the Legislature remembers a bad decision 21 years ago when the formula for calculating corporate income tax was changed to attract a single big company.

Qualifying companies would have to invest $1 billion within nine years, locate in one of North Carolina's poorest counties, provide health insurance, meet a wage standard, and forego other state grants or tax breaks. If a company met those criteria, it would benefit from the change if it had a relatively large share of its nationwide property and payroll in the North Carolina, but a small share of U.S. sales in the state.

The last time North Carolina changed how it calculates corporate income taxes was in 1988, and it was done to satisfy RJR Nabisco's plans to build a large cookie plant in Wake County and create 600 high-paying factory jobs.

Nabisco never built the plant. But the revised calculation meant a tax break that wasn't targeted, but primarily helped manufacturers, said Greg Radford, director of the state Revenue Department's corporate tax division. He said he could not estimate how much companies have saved as a result of the 1988 revision, which remains in effect.

Lawmakers Consider $1.50-Per-Pack Cigarette Tax Hike

California lawmakers are considering a controversial new cigarette tax increase as a solution to bring in some much-needed state revenue. Check out the following article on the debate surrounding the issue courtesy of the LA Times.com.

For years tobacco companies have successfully fought off attempts by California lawmakers and health groups to increase the cigarette tax. But next month, as the state grapples with the worst financial crisis in recent history, that may change.

Lawmakers will consider a proposal to hike cigarette taxes by $1.50 per pack and raise $1.2 billion annually. During the last decade, cigarette makers have spent tens of millions of dollars to kill 14 straight attempts to make smokers pay more.

But with the state facing a staggering $21.3-billion deficit and due to run out of cash in July, the tobacco tax could have a better chance of passing the Legislature.

"Given the serious budget shortfall we face, this is the year to pass the tobacco tax," said Sen. Alex Padilla (D-Pacoima). "It is needed now more than ever."

Padilla wrote the current proposal with Senate leader Darrell Steinberg (D-Sacramento), but even with Steinberg's support, it faces an uphill battle. The tobacco industry sees California as a crucial market and a trendsetter for anti-tobacco ideas that can spread through the country, said Beverly May, regional director of Campaign for Tobacco Free Kids, a Washington anti-smoking group.

"The tobacco companies view California very much as a battleground state," she said. "California is a state that they look at as important to do everything they can to have influence in any way they can."

Frank Lester, a spokesman for Reynolds American Inc., said proposals to raise tobacco taxes in California have failed in part because the state's residents are compassionate and see the tax as unfair.

"When people realize who the burden falls on -- the tax tends to be one of the more regressive taxes, meaning it falls on people of lesser means and working families -- they tend to think twice about it," Lester said.

He also said California voters are "dubious" about how past tobacco taxes have been spent. He cited media reports about the use of Proposition 10 tobacco proceeds, approved by voters in 1998 for childhood development programs, to pay for political ads promoting another ballot measure.

Forty-five states have raised tobacco taxes during the last decade, but not California.

Despite California's health-conscious image and laws that ban smoking just about everywhere, including bars and beaches, the state's cigarette tax of 87 cents per pack is lower than such taxes in other states. In Rhode Island, where tobacco taxes are highest, the levy is $3.46 a pack.

Tax Planning for 2009 - How to Benefit from Recent Tax Law Changes

With a new president in charge, and the economy in a full recession, there are lots of changes being made to the US tax code. It can be confusing trying to deconstruct some of these changes. It is even more difficult to figure out which ones will benefit you. To help the readers of my blog plan for the 2009 tax year, I have broken down some of the recent tax law changes.

Make Work Pay

There are a lot of misconceptions going around regarding the new Making Work Pay credit. In order to benefit fully, it is important to understand how you can take advantage of the credit. The most common myth is that the credit will be delivered to qualifying taxpayers through the mail, similarly to the stimulus check last year. However, it is actually distributed through a taxpayer’s check in the form of a reduced tax rate. Because of this, it is your job to check you paychecks and make sure the amount is being added (note that you may need to adjust your withholding to reflect the change).

The First Time Homebuyer Credit

A lot of people are talking about the federal government’s credit for people to purchase a home in the 2009 tax year. However, it is important to remember that the credit is only available to first time homebuyers. To be more specific, the IRS defines a new homebuyer as a person who has not owned a principal residence during the three-year period prior to the purchase. The IRS also specifies that you need to purchase the home between January 1 to December 31, 2009. For more information, check out the IRS’ press release titled “First-Time Homebuyers Have Several Options to Maximize New Tax Credit.”

Energy Conservation Credit

For those of you hoping to upgrade some of your appliances this year, the IRS is giving you even more incentive to go “green.” If you make an energy efficient upgrade to your home—such as installing double-paned windows or buying an approved washer and dryer—you can take a deduction for up to $1,500. However, you must divide the deduction between the 2009 and 2010 tax years, so you will only be able to claim $750 this year. Please note that according to EnergyStar.gov, “geothermal heat pumps, solar water heaters, solar panels, fuel cells, and small wind energy systems... are not subject to this cap.”

Automobile Breaks

Although many hybrid vehicle tax credits are beginning to expire, there are plenty of new ones being announced. The IRS just released new information on the new tax credits being made possible by the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. The credits apply to low speed electric vehicles, as well as cars with at least four wheels that draw propulsion using a rechargeable battery. Depending on the height and weight of the vehicle the value of the credit can range from $2,500 to $15,000.

Flood Victims

The IRS unveiled some new tax law changes to assist flood victims this year. One big win for flood victims was the removal of some loss limitations. Whereas in 2008, flood victims could only claim a certain amount of losses, now they can deduct the entire amount. However, it is important to remember that this full amount can only claimed by taxpayers who itemize their deductions. Another less popular tax law change affects individuals who helped victims displaced from their homes. According to the IRS these charitable taxpayers can claim an additional exemption of $500 for each displaced individual they help, with a maximum of $2,000.

Unemployment

With more and more Americans losing their jobs, changes have also been made to the way unemployment benefits are taxed. The key to benefiting from these new changes is by knowing exactly what you are entitled to. According to the newest changes to the tax law, the first $2,400 worth of unemployment benefits is income tax free. Therefore, you could expect an increase on each check you receive by around $25. Additionally, 20 more days have been added to the duration of unemployment.

The American Opportunity Tax Credit

Thousands of students have already applied for this credit, but unfortunately many taxpayers do not fully understand it. As opposed to the old Hope Credit, the new tax credit can be claimed for up to 4 years. However, in order to qualify, a student’s parents cannot make over $80,000 ($160,000 for joint filers). The student must be also taking at least half a load of courses, and have no record of felony drug charges. For more information, check out this entry I posted breaking down the American Opportunity Tax Credit back in March.

Varnum Tax Attorneys Feel the Impact of New IRS Settlement Offer

Tax attorneys from the Law Offices of Varnum recently published a press release on the impact the IRS’s new settlement offer is putting on their business. Check out a portion of the release below, or you can read the full text here.

Varnum tax attorneys are taking calls and client engagements, due to IRS offers of settlement with offshore income, as overseas banks begin to turn over tens of thousands of names and account information to the IRS.

Paul L.B. McKenney, who specializes in federal taxation for Varnum, said between phones calls, “We are stressing to most of the callers two points: first, the IRS settlement penalty of a onetime 20% of account balance versus up to 50% per year is a great deal. Second, you better bite-the-bullet because it is only a matter of time before the IRS receives the investor’s names and other identifying information. If you do not take advantage of this once-in-a-lifetime offer, you will likely face criminal prosecution at some point and it will not be in a Martha Stewart federal facility.”

The tax group received numerous inquiries as countries started turning over US taxpayer account numbers and records over the past few months. But the “Last Chance Compliance Initiative”, just announced by the IRS, has really increased the number of calls into Varnum offices.

McKenney went on to say, "Those that have not disclosed the accounts and not claimed the interest or investment income of these overseas accounts better understand the wording of the IRS agreement before they sign on the dotted line. Phrases like, "fully cooperate with the IRS both civilly and criminally," sound simple but mean much more. So before you go in to meet with the IRS, you should see a good tax attorney. "

The IRS settlement offer is good for six months. Varnum strongly suggests that those who have not been reporting taxable income heed the advice of the IRS Commissioner, Doug Shulman, when warned that for those, “who continue to hide their heads in the sand, the situation will only become more dire.”

Take a Look At Tax Law When Converting An IRA

The News Tribune recently published a great article examining the tax laws surrounding the conversion of a Traditional IRA to a Roth IRA. You can check out a portion of the article below, but the full post can be found here.

Over the next two years, you are likely to see more people convert assets from Traditional Individual Retirement Accounts to Roth IRAs.

Three considerations make understanding the IRA to Roth conversion more important for many investors:

• Lower values of most IRAs as a result of the market correction.

• The prospect of increased taxes in our future.

• The elimination of an income limit in 2010.

With a Traditional IRA, when you take withdrawals of your contributions and earnings, they are subject to ordinary income tax. Also, once you reach 701/2 you are forced to take annual distributions. (These required minimum distributions have been waived for 2009.)

With a Roth IRA, as long as you’re over 591/2 and have held the account for five years, the assets grow tax free, there’s no tax on withdrawals and no requirement to take annual distributions if you don’t need the income. This way, more potential growth may be available for your later years or for beneficiaries of the account.

Determining whether or not to make this conversion can be complicated. You need to weigh the short-term consequences vs. the long-term impact. In order to make the conversion, you have to pay income tax on the amount converted. But if you can afford that hurdle, the long-term benefits may be worthwhile.

For many, a Roth conversion makes sense if you expect income tax rates, or those of your heirs, to rise. An increasing personal tax burden seems likely given the rapidly growing fiscal deficit due to bailout and economic stimulus packages.

There are different reasons driving Roth conversion decisions in 2009 and 2010. This year, investment declines during this recession have presented a more immediate opportunity. If your modified adjusted gross income is less than $100,000 in 2009 (filing jointly or single), you are eligible to make the move from Traditional to Roth IRA. And for many, the tax bill associated with the conversion will be significantly less than it would have been to make the same conversion at this time last year.

International Tax: The New Hunt For Tax Havens

From Web CPA:

Congressional leaders are looking to clamp down on offshore tax havens after a Government Accountability Office report found that 83 of the 100 largest publicly traded U.S. corporations have subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions, while 63 of the 100 largest publicly traded federal contractors reported having subsidiaries in such jurisdictions.

"This report shows that some of our country's largest companies and federal contractors, many of which are household names, continue to use offshore tax havens to avoid paying their fair share of taxes to the U.S. And some of those companies have even received emergency economic funds from the government," said Sen. Byron Dorgan, D-N.D. "I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that."

Sen. Carl Levin, D-Mich., echoed Dorgan: "We must get to the bottom of activities such as the following: Citigroup has set up 427 tax haven subsidiaries to conduct its business, including 91 in Luxembourg, 90 in the Cayman Islands, and 35 in the British Virgin Islands. Hundreds more tax haven subsidiaries operate under strict secrecy laws in places like Switzerland, Hong Kong, Panama and Maurituius."

Levin, who chairs the U.S. Permanent Subcommittee on Investigations, has made offshore tax abuse a major subject of its investigations.

Robert Gallagher, managing editor of WG&L Journal of International Taxation at Thomson Reuters, observed that the GAO study "correctly notes that there is no agreed-on definition or list of 'tax havens.' Instead, they cobbled together their list from three old ones."

The GAO said that while there is no agreement on a definition, various governmental, international and academic sources used similar characteristics to define and identify tax havens: "Some of the characteristics included no or nominal taxes; a lack of effective exchange of information with foreign tax authorities; and a lack of transparency in legislative, legal or administrative provisions."