Converting an IRA into a Roth? How's Your Crystal Ball?

Ron Lieber of the New York Times recently published an article discussing the unpredictable future of Roth IRAs. At one point, Lieber even proposes the possibility of taxes on withdrawals from Roth IRAs. Lieber predicts that “at the most extreme end, the federal government might try to tax the earnings on a Roth after all, say through the capital gains tax, which is currently at 15 percent for long-term gains but could go up in the next few years.”

You’ll be hearing a lot in the next six months about Roth Individual Retirement Accounts — but not as much as you should about a long-term threat that hangs over them.

Starting Jan. 1, you’ll be able to take a regular IRA, say, one that you have in a brokerage account after having rolled an old 401(k) into it, and turn it into a Roth. You’ll be able to do this no matter how much money you make, though you’ll have to pay income taxes at your current rate on whatever you move. Currently, you can’t make the conversion at all if your household has more than $100,000 in modified adjusted gross income. (That’s a technical Internal Revenue Service term, which it defines in Publication 590, available on its Web site).

Why would you want to make such a swap? Because you think you or your heirs could end up with more money over the long haul by investing in a Roth instead of a regular IRA.

With a Roth IRA, you pay no taxes on your earnings in most instances when you take money out; distributions from regular IRA’s are taxable the same way that income is, though the basic IRA does offer a tax deduction when you first deposit money into the account. The Roth offers no such deduction when you contribute money to it.

So if you think your tax rate will be higher during retirement than it is now, say if you’re fairly young for instance, making the conversion early in 2010 looks sensible.

Continue reading here…

US State Budgets Hit by Shrinking Tax Take

From FT.com:

Sharply falling tax revenues across the US have left states facing fresh budget shortfalls and threatening further painful spending and service cuts following previous multiple rounds of belt-tightening.

In the first quarter of the calendar year, tax collections dropped by 11.7 per cent, the largest fall on record, according to the Rockefeller Institute of Government. Of 50 states, some 45 reported declines.

Early figures for April and May show an overall decline of nearly 20 per cent for total taxes, “a further dramatic worsening of fiscal conditions nationwide”, says the institute.

Billions of dollars of federal stimulus funds, combined with cuts to state employee jobs, school districts, healthcare and even the US prison system, have so far failed to close the budget gaps.

“The states are constantly trying to recalibrate their budgets to deal with a shrinking revenue base,” said Susan Urahn, managing director of state policy initiative at the Pew Center on the States.

It raises questions about how deep the decline in services may go, the direction of tax rates, and whether the federal stimulus measures are working.

Bailouts Could Cost U.S. $23 Trillion

According to a new estimate from Politico.com the Federal bailouts from the past year could end up costing a staggering $23 Trillion. However, the author admits that this number is a “worst-case scenario.” Neil Barofsky, the special inspector general for the government’s financial bailout programs, also asserts that this total is unlikely and that a number of problems would need to emerge forcing the government to spend more. According to Barofsky, the government has spent about $2 Trillion so far.

Still, the enormity of the IG’s projection underscores the size of the economic disaster that hit the nation over the past year and the unprecedented sums mobilized by the federal government under Presidents George W. Bush and Barack Obama to confront it.

In fact, $23 trillion is more than the total cost of all the wars the United States has ever fought, put together. World War II, for example, cost $4.1 trillion in 2008 dollars, according to the Congressional Research Service.

Even the Moon landings and the New Deal didn’t come close to $23 trillion: the Moon shot in 1969 cost an estimated $237 billion in current dollars, and the entire Depression-era Roosevelt relief program came in at $500 billion, according to Jim Bianco of Bianco Research.

The annual gross domestic product of the United States is just over $14 trillion.

Treasury spokesman Andrew Williams downplayed the total amount could ever reach Barofsky’s number.

“The $23.7 trillion estimate generally includes programs at the hypothetical maximum size envisioned when they were established,” Williams said. “It was never likely that all these programs would be ‘maxed out’ at the same time.”

Questions for the Tax Lady: July 20th, 2009

As I mentioned last Monday, I am now doing a weekly feature on my blog titled “Questions for the Tax Lady.” Throughout the week, I am going to gather questions from friends and followers of mine on Twitter, MySpace, and Facebook that I will answer in this new weekly feature. In addition to answered questions asked of me directly, I also found a few other users on Twitter who posted random tax questions. Check out the questions and answers from last week below, or click one of the links to ask me your own question!

Question #1: How do I get an IRS levy released?

The IRS must release your levy if ANY of the following occur:

1. You pay the tax, penalty, and interest you owe (please see Full Pay Service).

2. The IRS discovers that the time for collection (the statute of limitations) ended before the levy was served (please see Tax Account Review).

3. You provide documentation proving that releasing the levy will help the IRS collect the ta owed.

4. You have an Installment Agreement, or enter into one, unless the agreement says the levy does not have to be released (please see Installment Agreement).

5. The IRS determines that the levy is creating a significant economic hardship for you (please see Currently Not Collectible).

6. The fair market value of the property exceeds such liability and release of the levy on a part of such property could be made without hindering the collection of such liability.

For more information check out this article on RoniDeutch.com.

Question #2: What are the tax legalities of an eBay business?

An eBay business should be treated just like any other home business. In fact, all income you make from eBay should be reported to the IRS, regardless of the amount you make. However, just like having a garage sale, you will only need to report the money you make if it is in fact income. Therefore, if you bought a computer for $1000 and sold it on eBay (or at a garage sale) for $100 then it is not income since you did not make any profit. However, if you make and sell products on eBay for a profit, then you should report the income to the IRS.

Although many people fear that eBay is required to send the IRS data for its users, their spokesperson Chris Donlay says this is not the case. “The IRS would need to provide us with a subpoena for a specific individual before we would provide any data. I don't believe this is something that would be typically done for a routine audit, though it theoretically could happen.”

However, just because eBay is not reporting the income does not mean it is ok not include it on your tax return. Remember that the IRS now has the ability to monitor bank accounts and if you are making regular deposits then they might get suspicious. To learn more about eBay and tax issues, check out this interesting article I came across this weekend.

Question #3: When did April 15 become tax day?

According to Wikipedia:

The {tax} filing deadline for individuals was March 1 in 1913 and was changed to March 15 in 1918 and again to April 15 in 1955. Today, the filing deadline for U.S. federal income tax returns for individuals remains April 15 or, in the event that the 15th falls on a Saturday, Sunday or holiday, the first succeeding day that is not a Saturday, Sunday or holiday.

Question #4: Is Schaumburg, IL Restaurant Sales Tax the Highest in the Nation at 12%?

Yes, the 12% sales tax levied on foods and beverages in Schaumburg, IL make it the highest sales tax rate in the nation. In addition to the state’s general sales tax the small tourist town also levies a 2% Village of Schaumburg Home Rule Food & Beverage Tax.

Schaumburg’s neighbor Chicago, IL has the highest sales tax rate of any major metropolitan city at 10.25%. However, these rates are based off of a relatively low state sales tax. California has the highest statewide sales tax at 8.25%, but nearly every city and town levies additional sales taxes. In fact, in the South Gate and Pico Rivera, CA the total sales tax is also 10.25%.

Examples of How Tax Increases could Hit the Rich

Over the weekend, I came across this informative article from the Associated Press explaining how families would be impacted if the House’s new tax increate were to become law. As you can see from the examples below, some taxpayers could face a huge tax bill next April.

• A family of four making $450,000 a year would pay $103,600 in federal income taxes, an increase of $1,000.
• A single filer making $450,000 a year would pay $112,200 in federal income taxes, an increase of $7,100.
  
• A family of four making $800,000 a year would pay $220,800 in federal income taxes, an increase of $30,000.
  
• A single filer making $800,000 a year would pay $231,300 in federal income taxes, an increase of $30,700.
  
• A family of four making $5 million a year would pay $1.81 million in federal income taxes, an increase of $443,500.
  
• A single filer making $5 million a year would pay $1.83 million in federal income taxes, an increase of $452,000.

CBPP: House Health Bill’s “A Reasonable Approach”

Last Friday, the Center on Budget and Policy Priorities released a study examining the House of Representative’s much-discussed proposal for funding health care reform. They call the plan “a reasonable approach” and assert that the “impact on small businesses would be modest.” However, as the recession continues, even a small tax increase could delay recovery. Check out a snippet from their study below, but be sure to check out the full explanation of the study (including graphs) at CBPP.org.

Reforming the health care system to provide universal health coverage is an urgent priority. But, facing huge projected budget deficits that have the nation on an unsustainable fiscal path, the White House and Congress must enact a health reform plan that is also fully financed and that reduces the growth rate of health care costs over the long term.

Policymakers have been considering two major proposals to help finance health care reform that represent sound tax policy: (1) limiting the tax exclusion for employer-provided health benefits, and (2) capping the value of itemized deductions at 28 percent or a somewhat higher level. Capping the exclusion has the added benefit of helping slow the growth of health care costs. House Democrats have now advanced a third major proposal that also represents sound tax policy: imposing a graduated surcharge on high-income taxpayers.

The House surcharge proposal is reasonable and well targeted. In recent decades, incomes have grown disproportionately for households at the top of the income scale, while their tax burden has fallen substantially. Moreover, despite charges to the contrary, the proposal would have only a small impact on small businesses. The congressional Joint Tax Committee estimates that it would have no impact at all on 96 percent of small business owners — broadly defined as any taxpayer with as little as $1 of business income — and that only half of the 4 percent of small business owners who would be affected derive more than a third of their income from a business. At the same time, the House plan would enhance the ability of small businesses to offer affordable, quality health insurance to their employees.

High-Income Households Have Far Outpaced Others in Recent Decades

The surcharge would affect only the highest-income 1.2 percent of taxpayers, according to the Joint Tax Committee. Very high-income households have benefited handsomely — both absolutely and compared to the rest of the population — from both recent trends in pre-tax incomes and recent changes in tax policy. Congressional Budget Office data show that between 1979 and 2006 (the most recent year for which these data are available): [3]

The before-tax income of the top 1 percent of U.S. households increased by 226 percent, on average (after adjusting for inflation), compared to an increase of just 15 percent for families in the middle fifth of the income spectrum.

Lawyer Could Face Jail for Voir Dire Question

From ABA Journal.com:

A federal magistrate has found patent lawyer John van Loben Sels in contempt of court and threatened him with a 48-hour jail sentence for a question he asked during voir dire.

Van Loben Sels asked potential jurors in a patent infringement suit whether they had "a problem with a company that puts its headquarters offshore on a Caribbean island in order to avoid paying U.S. taxes," the Recorder reports. He is a partner with Wang, Hartmann, Gibbs & Cauley of Mountain View, Calif.

U.S. Magistrate Judge Charles Everingham IV of Marshall, Texas, had prohibited Van Loben Sels and other lawyers for Beyond Innovation Technology Co., a defendant in a patent suit, from saying anything about the tax motivation for the Cayman Islands home of the plaintiff, O2 Micro.

Everingham said Van Loben Sels would not have to serve the sentence if he behaved for the rest of the case, according to the story. But he granted a mistrial and imposed other sanctions on Beyond Innovation Technology Co., known as BiTEK. It will have to foot the bill for new jury selection, will get half the voir dire time of its opponent and will get two peremptory challenges instead of four, according to the Recorder.

Van Loben Sels had defended his question, saying it was hypothetical and he didn't refer to O2 Micro by name.

Tax Tips for Teachers

Summer break is—unfortunately—winding down for students and teachers alike. While teachers all over the country will soon start planning their lessons, this is also the prime time to get your tax files in order. Teachers are in a great position to reduce their tax burden, but it takes time, effort and some thought.

Like anyone else, the best way for teachers to save money on their taxes is to get educated and get organized. If you know what tax breaks you are entitled to, you can actually claim them. And if you have all your tax documentation organized, you’ll be able to prove that you are entitled to each credit, deduction and exemption.

Teachers in particular have a great way to save money on their taxes: the Educator Expenses Deduction. The IRS recognizes that teachers often spend their own money on classroom supplies. Therefore, this deduction is good for up to $250 every year ($500 if your spouse is also a teacher and you file jointly).

While you do not have to itemize deductions to get this deduction, you do have to be organized. Too many teachers keep sloppy records, then can not find their receipts. To help you get organized, here is what I recommend. Create a file labeled “Classroom Expenses”. Keep the file handy so it is easier to properly file receipts than to throw them on the counter. You can go a step further and attach your receipts to a piece of paper with the purpose of the expense written in. You probably will not remember that you spent $5.89 on pencils for your classroom 9 months from now and some receipts are a little difficult to read. This extra step can save you a lot of squinting at receipt tape come tax season.

If you get your system in order now, you will be all set to file your receipts when you go shopping for supplies next month.

Mortgage Firms Struggle to Redo Hard-Hit Loans

At a time when struggling homeowners need it most, new studies are showing that mortgage firms are struggling to negotiate loan modifications fast enough to keep up with demand. The change comes with new government pressure to negotiate more loans under their Home Affordable Modification Program, or HAMP, where the Federal government encourages these firms to help keep families in their homes. Check out the following story on the issue courtesy of the Wall Street Journal.

Morgan Stanley chief John Mack recently made a new friend, he told shareholders in April -- a Southern woman who had benefited from the big bank's stepped-up efforts to modify loans under a new federal program aimed at keeping borrowers in their homes.

"I'm now invited -- if I ever visit Memphis, Tennessee -- to drive two hours south to have dinner with her and her family," Mr. Mack said.

But by some measures, Morgan Stanley's mortgage-loan servicing firm, Saxon Mortgage Services Inc., has a long road to go. An April Credit Suisse Group analysis of how quickly companies have renegotiated loans ranked Saxon last among 18 mortgage-servicing firms. Saxon has modified just 6% of the loans it oversees that originated between 2005 and 2007. By contrast, Litton Loan Servicing, a Goldman Sachs Group Inc. unit, modified 28% of its loans.

Such firms are at the center of a grand government experiment aimed at halting foreclosures and the collateral damage they cause neighboring homes. New foreclosure notices will total 2.4 million this year, which could trigger price drops in 69.5 million nearby homes, estimates the Center for Responsible Lending, a financial-services research and policy firm. At an average decline of $7,200 a house, that translates to a potential drop of $502 billion in total U.S. property values.

The government plan, rolled out in February and called the Home Affordable Modification Program, or HAMP, will pay mortgage-servicing firms to modify mortgages and find other ways to keep people in their homes. But the program's sheer scale and the speed with which it was rolled out have created a new set of problems for some of the 27 firms charged with carrying it out.

Continue reading…

Personal Finance: Now's The Time To Plan Tax Savings

This morning Reuters.com posted a new article stressing the importance of starting to plan for tax season now, and I could not agree more! By planning early you can make a conscious effort throughout the year to reduce your total liability! You can read a segment of the article below, or check out this article I posted on the topic earlier this year: Tax Planning for 2009 - How to Benefit from Recent Tax Law Changes.

High debts and recession anxiety have prompted many consumers to cut their expenses to the bone. But there's one other place they could be saving, and that's taxes.

Mid-year is the best time to start planning a year-end tax strategy. Accountants and other tax preparers aren't as busy as they are in the spring and the winter, so they have more time to meet with you and look over your financial situation. If you use a professional to help you at tax time, consider setting up an appointment this month. You'll get a lot of personal attention.

If you're a do-it-yourself tax planner and filer, it's still a good time to check out your status and lay plans for the remainder of 2009. You'll have five months to make the financial moves that will save you money when you file your income taxes for this year. And it's not just about income taxes: This year there are some sales and property tax moves that can put more cash in your pocket quickly.

Here's a grab bag of summer maneuvers -- from renegotiating your property taxes to grabbing the car tax break -- that you can use now to keep more money for yourself through 2009 and into 2010.

Appeal your property taxes. In the last three years, average U.S. home prices have fallen by about a third, according to the S&P/Case-Shiller Home Price Index. But it's unlikely your local or state government has been dropping your home's assessment or property taxes by the same percentages. It may be too late for this year's tax bill, but most states do have relatively easy procedures to follow if you want to appeal your assessment or the amount of your taxes. There's no reason not to do it. Check the website of your county or state treasurer's office to see how to do this.

Get organized early. Take a look at your year-to-date earnings and compare them with last year's. Remember that there is a Making Work Pay tax credit in play that will pay individuals $400 and couples filing jointly $800 for 2009. If you haven't already cut your withholding at work for this, you may be able to trim your withholding for the rest of the year. You may also be able to reduce your estimated tax payments if you typically earn a lot of money in interest income and find yourself earning less than usual this year. Start collecting and keeping all pertinent receipts. For example, you can get a child-care tax credit for the cost of day camp for kids under 13 if you are busy working while the kids are being bussed to the pool and park.

Health Bills To Increase Federal Costs

From CQ Politics:

The health care overhauls released to date would increase, not reduce, the burgeoning long-term health costs facing the government, Congressional Budget Office Director Douglas Elmendorf said Thursday.

That is not a message likely to sit well with congressional Democrats or the Obama administration, and House Speaker Nancy Pelosi, D-Calif., said Thursday she thinks lawmakers can find ways to wring more costs out of the health system as they continue work on their bills.

The chairman of the Senate Finance Committee, Democrat Max Baucus of Montana, who has not yet released a bill, said his panel is acutely aware of the long-term cost concern. “Clearly our committee will do what it can,” he said. “We are very seriously concerned about that issue. We very much want to come up with a bill that bends the cost curve.”

But Baucus suggested the White House is making the task difficult with opposition to one cost-cutting approach Elmendorf cited — limiting or even ending the tax exclusion for employer-provided health benefits.

The Democrats and President Obama have cited two goals in their overhaul proposals — expanding coverage to the estimated 47 million Americans who currently lack it and bringing down long-term costs because the growth in Medicare and Medicaid spending threatens to swamp the federal budget in coming years.

California Lawmakers Scramble to Keep State's Last Car Factory Open

Lawmakers are struggling to save California’s last remaining car factory, NUMMI plant, in Fremont. The plant is operated by both GM and Toyota, and employs over 5,000 Californians. Legislators are hoping to push through a bill that will give the plant increased tax breaks, and a decision is expected this afternoon. Check out the following article from the LA Times discussing the issue.

"We believe that plant is a public good," said state Sen. Roderick Wright (D-Inglewood), who co-wrote the Senate bill. He added that his own Los Angeles County district is home to parts suppliers that would be affected should NUMMI close. "The fact that we could lose our last car manufacturing facility is unconscionable."

But amid Sacramento's grinding budget crisis, there is considerable doubt about how much money would be available to provide tax cuts to one of the world's largest companies -- and whether any amount of taxpayer-funded goodies would be sufficient considering the depths of the auto industry's woes.

"How many extra millions do taxpayers have to give Toyota to stay?" said Lenny Goldberg, executive director of the California Tax Reform Assn., who questions whether those kinds of incentives even work. "If you're going to give it away, give it away right."

Manufacturers have long complained about the cost of doing business in California. The legislation proposed this week would, in part, reduce that burden for the auto industry, sponsors said.

The bills, ABX4 31 and SB 830, would exempt NUMMI and other auto plants from sales tax on improvements and retooling of the plant, a process that can cost hundreds of millions of dollars. Toyota is not currently retooling NUMMI, but it could in the future to build fuel-efficient vehicles such as hybrids.

The Senate bill goes further. It would designate the plant and the area around it an enterprise zone, which provides a variety of other tax benefits. In addition, the bill would cut state fees that NUMMI pays for utilities, and it would encourage state and local agencies to buy vehicles made at the plant.

Legislators say they will urge Gov. Arnold Schwarzenegger to use the incentives as leverage with Toyota to keep the plant operating.

Tax Preparer Review; Public Forums to Gather Input this Summer

According to their newest press release, the IRS will put together a series of public forums “at which individuals and representatives of diverse constituent groups will be able to provide input on the development of tax preparer performance standards.”

The public forums, a crucial part of an effort launched in June by IRS Commissioner Doug Shulman to help ensure tax preparers are qualified, ethical and provide a high level of service, will kick off on July 30 in Washington, D.C.

“These public meetings will be an important part of the dialogue as we move toward a set of comprehensive recommendations by the end of this year,” Shulman said. “We want an open discussion on how to strengthen the overall integrity of our tax system.”

Two panels are scheduled for a forum on July 30. The first panel will give consumer groups an opportunity to provide recommendations. These groups include the AARP, Consumer Federation of America, Center on Budget and Policy Priorities, National Community Tax Coalition and Low Income Tax Clinics.

The second panel will be made up of tax professional groups, including the American Institute of Certified Public Accountants, the National Association of Enrolled Agents, the National Association of Tax Professionals and the National Society of Accountants.

The two panels will take place at the Ronald Reagan Building amphitheater in Washington starting at 9 a.m. on July 30. People interested in attending should confirm attendance by sending an e-mail message to: CL.NPL.Communications@irs.gov.

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Justice Sonya Sotomayor: The Future of Taxes in the United States

Over the past week, President Obama’s first nomination to the U.S. Supreme Court, the Honorable Sonya Sotomayor, has been making headline after headline as she moves through the nomination process. As such, I thought it would be a good time to take a look at some of her tax related opinions, and predict how the future of taxation in the United States might change if she were to become a Supreme Court Justice.

Lack of Tax Related Cases

Unfortunately the Supreme Court does not hear many cases on tax issues, which makes predicting how a new Justice will influence the court all the more difficult.

According to the Tax Girl, whom I follow on Twitter, during the term beginning in October 2007, the Supreme Court only agreed to hear five tax-related cases. They are all listed below, along with a brief note on the issue. As you can see, none of them were very note worthy.

• Kentucky Department of Revenue v. Davis, No. 06-666 (state bond issue)
• Knight v. Commissioner, No. 06-1286 (trust administration fees)
• CSX Transportation Inc. v. Georgia State Board of Equalization, No. 06-1287 (railroad property valuation)
• MeadWestvaco Corp. v. Illinois, No. 06-1413 (state gain issue)
• Boulware v. United States, No. 06-1509 (diversion of corporate funds to a shareholder of a corporation)

Most Cited Tax Case

Unfortunately, Judge Sotomayor has not written extensively on tax law. In fact, there is really only one tax related case that she has drafted an opinion. Although the case does not provide enough information to determine how she would decide on future issues, it can provide some hints.

In the case of Knight vs. Commissioner, 467 F.3d 149 (2006) Sotomayor’s court unanimously upheld a lower tax court ruling that said some fees paid by a trust are only partially tax deductible. Although they upheld the decision, the rejected the lower court’s reasoning and Sotomayor authored the deciding opinion.

The reason this case has gotten so much attention was because the U.S. Supreme Court heard the appeal, and rejected Sotomayor’s reasoning. They did unanimously uphold the decision, but Chief Justice Roberts noted that Sotomayor’s approach "flies in the face of the statutory language." I also found it especially interesting that one of the main areas the two courts disagreed on was what the term “would” meant under the statute in questions.

Other Relevant Cases

Although she has only authored an opinion on one tax related cases, Justice Sotomayor has ruled on a few other related cases. The first of which was Dabit vs. Merrill Lynch, 395 F.3d 25 (2005), where she overturned a lower court decision and allowed certain types of fraud lawsuits to be settled in state court, rather than federal. However, the U.S. Supreme court overturned the decision claiming that the federal government did have interest in overseeing such cases.

Empire Healthchoice Assurance, Inc. vs. McVeigh, 396 F.3d 136 (2005) was another interest case that has been discussed frequently over the past week. In it Sotomayor ruled against a health insurance company that sued the estate of a deceased federal employee who had won a settlement form a separate civil case.

U.S. Supreme Court Justice Sotomayor

Although it is impossible to predict how Justice Sotomayor would rule in a case as a Supreme Court Justice, we can make some predictions based on her history. According to the Congressional Research Service, Sotomayor’s “approach as an appellate judge has been an adherence to the doctrine of stare decisis,” meaning she has a tendency to uphold concepts decided by former justices. The report also found that her approach was “in line with the judicial philosophy of Justice Souter,” the judge she is nominated to replace.

From looking at the findings of the Congressional Research Service, and examining her history, it is quite difficult to determine how taxation in the United States would change if Sotomayor’s nomination was accepted. However, based on her decision against health care and investment companies, it seems likely that Sotomayor might be somewhat progressive in her approach to the tax code. Yet, with the Supreme Court only hearing a handful of select cases per year she might never even get the opportunity to rule on a meaningful tax case.

Nomination as a Distraction?

As the nomination hearings continue to make headlines, and media outlets debate Sotomayor’s use of the phrase “Wise Latina,” some bloggers are beginning to think that the Obama Administration and Democratic leaders are using the media fixation as an opportunity to “sneak through” a hefty tax increase. The bill in question was proposed in the House of Representatives as a way to generate funds to pay for health care reform. The 1% increase on families making $350,000 or more per year, and up to 5.4% increase on those making over $1 million would generate an estimated $540 billion in additional federal revenue. Although passing legislation while the American media focuses on another issue is a common tactic used in Washington, I hope it is not a sign of things to come for Justice Sotomayor and the Obama Administration.

Health Care = Tax Increases

This morning it seems like all the headlines are about the new plans for health care reform. For those of you who have not have heard, yesterday House Democrats unveiled their health care reform bill (H.R. 3200). To finance the massive project, they are hoping to raise taxes on the following taxpayers.

• 1.0% increase for married couples earning $350,000 - $500,000
• 1.5% increase for married couples earning $500,000 - $1,000,000
• 5.4% increase for married couples earnings > $1,000,000

Additionally, the 1.0% and 1.5% rates are scheduled to increase in 2013 to 2.0% and 3.0% unless the government can find $150 billion in health care savings. Understandably, many taxpayers are angered by the announcement, which would push the total tax rates in some states to nearly 60%.

As the Wall Street Journal points out, “Obama has promised to let the lower Bush tax rates expire after 2010. This would raise the top personal income tax rate to 39.6% from 35%, and the next rate to 36% from 33%. The Bush expiration would also phase out various tax deductions and exemptions, bringing the top marginal rate to as high as 41%.”

Then add the Rangel Surtax of one percentage point, starting at $280,000 ($350,000 for couples), plus another percentage point at $400,000 ($500,000 for couples), rising to three points on more than $800,000 ($1 million) in 2011. But wait, there's more. The surcharge could rise by two more percentage points in 2013 if health-care costs are larger than advertised -- which is a near-certainty. Add all of this up and the top marginal tax rate would climb to 46%, which hasn't been seen in the U.S. since the Reagan tax reform of 1986 cut the top rate to 28% from 50%.

States have also been raising their income tax rates, so in California and New York City the top rate would be around 58%. The Tax Foundation reports that at least half of all states would have combined state-federal tax rates of more than 50%.

The Associated Press also published an article on the new surtax, claiming that the “House Ways and Means Committee announced it would vote on the proposal beginning on Thursday. The panel is one of three that must act before the bill can go to the full House, probably later in the month.”

Their article also explains Obama’s involvement in the bill, noting that “the developments occurred one day after President Barack Obama met with key Democrats in a White House session in which he told a powerful Senate chairman he wants legislation by week's end in his committee.”

In a statement, Obama praised the proposal, saying it "will begin the process of fixing what's broken about our health care system, reducing costs for all, building on what works and covering an estimated 97 percent of all Americans. And by emphasizing prevention and wellness, it will also help improve the quality of health care for every American."

In addition to Obama’s efforts to work with congress, his administration is also set to begin airing television commercials to generate more support for their plan. According to Yahoo Finance, “the 30-second ads will begin airing Wednesday in Washington, D.C., and on cable TV nationally. In the ads, private citizens describe problems they've had with the medical system and say it's time for action. The sponsor is Organizing for America, Obama's campaign organization, which has become part of the national Democratic Party. The group would not reveal the cost.”

Picking on the Swiss – the Obama Administration Blows up a Tax Treaty

As the IRS and Justice Department continue to work with USB, the largest bank in Switzerland, to hand over the names of 52,000 U.S. taxpayers with private accounts, some experts are beginning to wonder if this really is a good move by the new administration. Obama just returned from a diplomatic journey around the world, and now as the Federal Government puts pressure on UBS, they might end up ruining our long and peaceful relationship with Switzerland.

According to the Wall Street Journal, “this sort of fishing expedition expressly violates the U.S.-Swiss treaty on sharing tax information. The original treaty dates back 30 years, and under the pact the Swiss regularly provide the IRS with information on specific cases. But what the IRS is attempting here is a mass search of U.S. taxpayers merely for banking in Switzerland.”

This is not to say that everyone caught up in the IRS's dragnet is pure. But the American system of justice contains probable cause and reasonable search requirements precisely to prevent law enforcement from rounding up everyone who might conceivably be guilty of some crime. And while the Justice Department argues that UBS systematically marketed its private banking services in order to avoid U.S. taxation, the charges against UBS itself were settled in February, so this is not about the bank. It is about its customers, and an effort to grab perhaps a couple of billion dollars in allegedly unpaid taxes.

Those customers are protected by Swiss bank-secrecy laws that make it a felony to improperly disclose client identities. Those laws are very much in force, and the Swiss authorities have threatened to seize the client data demanded by the U.S. rather than permit UBS to comply.

Switzerland is a neutral country and so technically isn't an American ally, but it has long been a good friend, representing U.S. interests in Cuba and Iran, among other good offices. On Monday, Judge Alan Gold delayed until August a hearing on the case, giving UBS and the feds time to reach a settlement before the judge rules on the IRS demands. The Justice Department is nonetheless still threatening to indict UBS if it fails to comply.

Tax Court Rejects Gay Activist's Attempt to File Joint Return With Long-Term Partner

Earlier today, I came across this entry on the Tax Prof Blog about a recent ruling from the U.S. tax court against a California gay rights activist. According to a post from October of 2008, Merrill “filed papers with the U.S. Tax Court objecting to the Defense of Marriage Act (DOMA) based on the 1st Amendment Establishment Clause of the U.S. Constitution. He objects to not getting all the same benefits as other married couples” under the current tax code.

On Monday the Tax Court dismissed Merril’s claims, saying “we must decide whether petitioner, who was unmarried but in a committed relationship with another man during the years at issue, is entitled to married filing joint status. We hold that he is not.”

Petitioner and Mr. Boyle lived in North Carolina during the years at issue. They participated in a commitment ceremony in 2004, but North Carolina did not recognize same-sex marriages. Petitioner and Mr. Boyle were legally married in 2008 after moving to California.

Petitioner failed to file a tax return for either of the years at issue. Respondent contacted petitioner about filing income tax returns. Petitioner responded with a letter stating that he was not evading taxes, but refused to pay taxes as an act of civil disobedience advocating same-sex marriage equality. Respondent prepared substitutes for returns for the years at issue and issued deficiency notices to petitioner. In the substitutes for returns, respondent determined petitioner's filing status to be single. Petitioner resided in North Carolina when he filed the first petition regarding his return for 2004, and he resided in California when he filed the second petition regarding his return for 2005.

In both petitions, petitioner argued that he must be accorded married filing joint status, rather than single status, because of his long-term domestic partnership with Mr. Boyle. Respondent filed motions for partial summary judgment on whether petitioner is entitled to married filing joint status for the years at issue. Respondent argues that petitioner is not entitled to this status because he was not married in the years at issue and he did not file a joint return for those years. We agree and discuss each of respondent's arguments in turn.

Petitioner admits he was not legally married for either of the years at issue but argues, nonetheless, that he should be allowed to file joint returns because he was in a long-term committed relationship with his gay partner and North Carolina did not recognize same-sex marriage. Despite petitioner's argument, a taxpayer must file a joint return with his or her spouse and it must be signed by both spouses to claim the married filing joint status.

We conclude that respondent properly determined single filing status for petitioner. Accordingly, we hold that petitioner is not entitled to married filing joint status for the years at issue.

To read the court’s full decision check out Merrill v. Commissioner, T.C. Memo 2009-166 (July 13, 2009).

The 0% Tax Rate Solution

From the Wall Street Journal:

The federal income tax code is now so mangled that we can probably increase federal revenues with a 0% income tax rate for a majority of Americans.

Long before President Barack Obama took office, the bottom 40% of income earners paid no federal income taxes. Because of refundable income tax credits like the Earned Income Tax Credit (EITC), in 2006 these bottom 40% as a group actually received net payments equal to 3.6% of total income tax revenues, according to the latest Congressional Budget Office data. The actual middle class, the middle 20% of income earners, pay only 4.4% of total federal income tax revenues. That means the bottom 60% together pay less than 1% of income tax revenues.

This actually resulted from Republican tax policy going all the way back to the EITC, which was first proposed by Ronald Reagan in his historic 1972 testimony before the Senate Finance Committee on the success of his welfare reforms as governor of California. Besides calling for workfare, Reagan proposed the EITC to offset the burden of Social Security payroll taxes on the poor. As president, Reagan cut and indexed income tax rates across the board and doubled the personal exemption. The Republican majority Congress, led by former House Speaker Newt Gingrich, adopted a child tax credit that President George W. Bush later expanded and made refundable, while also reducing the bottom tax rate by 33% to 10%.

President Bill Clinton expanded the EITC in 1993. But it was primarily Republicans who abolished federal income taxes for the working class and almost abolished them for the middle class. Now Mr. Obama has led enactment of a refundable $400 per worker income tax credit and other refundable credits, which probably leaves the bottom 60% paying nothing as a group on net.

Many conservatives are deeply troubled by this, arguing that everyone should be contributing something to the tax burden. They worry that, not paying for any of the tab, this majority will see no reason not to vote for limitless spending burdens. But are conservatives now going to campaign on increasing taxes on the bottom 60%, arguing that is good tax and social policy? Steve Lonegan recently demonstrated in the New Jersey gubernatorial primary that this is not a viable political position. He proposed a 3% state flat tax which, while very good tax policy, would increase taxes slightly for the bottom half of income earners. His victorious opponent Chris Christie pounded away in advertising on that point.

But what if Republicans proposed a federal tax reform with a 0% income tax rate for the bottom 60% of income earners? With that explicit 0% tax rate framing the issue, abolishing the refundable tax credits that actually ship money to lower income earners through the tax code would become politically viable. Trading an explicit 0% tax rate for the bottom 60% in return for eliminating the refundable tax credits would likely be at least revenue neutral, and probably result in a net increase in revenue.

Obama Says Jobless Rate Likely to Tick Up for Several Months

Just days after returning from a week of travel, President Obama is making headlines this morning with his announcement that the country’s unemployment problems are not likely to improve any time soon.

"My expectation is that we will probably continue to see unemployment tick up for several months," Mr. Obama told reporters after a meeting with Dutch Prime Minister Jan Peter Balkenende.

According to a new article from the Wall Street Journal, “unemployment stood at 9.5% nationwide last month, a rate that has prompted calls for additional stimulus measures, as well as criticism that the earlier $787 billion package has so far failed to create jobs. Mr. Obama, who has said he believes joblessness will soon hit 10%, will visit Michigan later Tuesday, a state already dealing with double-digit unemployment.”

While he said he doesn't have a "crystal ball," Mr. Obama said he anticipates unemployment will follow historical trends and lag "for some time" even after an economic recovery begins.

On the positive side, he said the U.S. has "seen some stabilization in the financial markets, and that's good because that means companies can borrow and banks are starting to lend again."

"The challenge for this administration is to make sure that even as we are stabilizing the financial system, we understand that the most important thing in the economy is people able to find good jobs that pay good wages," Mr. Obama said.

With the economy stalling, and the administration’s recent admission that they had underestimated the scope of the troubled economy it is no wonder that experts are beginning to question Obama. According to a story on CBS News, “Obama’s economic forecasts for long-term growth are too optimistic, many economists warn, a miscalculation that would mean budget deficits will be much higher than the administration is now acknowledging.”

Christina Romer, chairwoman of the White House’s Council of Economic Advisers, said in a POLITICO interview that the administration—like many independent economists—did not fully anticipate the severity and pace of this recession. She said the White House will be updating its official forecasts.

The new numbers will come as part of a semiannual review that, under ordinary circumstances, is the kind of earnest-but-dull document that causes many Washington eyes to glaze over.

This time, however, the new forecasts - if they are anything like what many outside economists expect - could send a jolt through Capitol Hill, where even the administration’s current debt projections already are prompting deep concerns on political and substantive grounds.