Senate Bill Removes ‘Botax,’ Adds Tanning Tax

The Democratic leadership decided to remove the 5% plastic surgery tax from the latest draft of their health care reform bill. The tax was expected to generate $5 billion in federal revenue, and to make up for the loss they have replaced it with a 10% tax on indoor tanning services.

According to the Wall Street Journal, the change is a victory for the American Medical Association, which urged lawmakers to remove the cosmetic-surgery tax after Sen. Reid included it in a draft of the bill he unveiled in November. The medical industry argued that the tax effectively discriminated against women, since they’re more likely to undergo such procedures.

The tanning tax is part of a last-minute package of amendments that are expected to be included in the final bill. It grants an exception for “phototherapy” services that are performed by licensed medical professionals.

Federal Employees Owe $3 Billion in Taxes

Last week the IRS reported that over 276,300 current and retired federal employees owe approximately $3.04 million in unpaid taxes from 2008. Although high, this number is actually down from $3.59 million in unpaid taxes in 2007.

According to Washington Post.com, the list includes White House and Congressional staffers and current and former active-duty and reserve members of the military.

In a sign that the IRS practices what it preaches, the Treasury Department, which includes the tax-collecting agency, had the best compliance rate of Cabinet-level departments. Less than 1 percent of employees were delinquent with their taxes.

The Department of Housing and Urban Development fared worst among Cabinet departments, with slightly more than 4 percent of workers owing a combined $4.76 million.

Among all government agencies and departments, the U.S. Postal Service had the greatest number of tax delinquents. The government's second-largest employer had 28,913 workers -- or just under 4 percent -- owing roughly $298 million.

Fifty White House staffers owed a combined $812,917 in 2008, the IRS said. Up on Capitol Hill, slightly more than 4 percent of House staffers owed Uncle Sam $5.8 million, compared to 3.2 percent of Senate employees that owed almost $2.5 million.

Surviving an IRS Audit with Minimal Losses

There is nothing more frightening to a taxpayer than checking your mail and seeing a letter from the IRS letting you know that you are being audited. Fortunately, if you follow a few basic tips, you will find that an audit does not need to be as scary as you might think.

1. Always be Prepared

The best way to survive an IRS audit is to always be prepared for one. You never know when the IRS is going to send you a letter informing you of an audit, so it is a good idea to always file an honest tax return. Gather and retain receipts of all claimed expenses and deductions. And hold onto all of your tax records and important financial documents for at least 6 years.

2. Do not Ignore the Problem

When you get an audit letter from the IRS, it is important that you do not just ignore the problem. You will generally have 30 days to respond to the letter, otherwise the IRS can take drastic actions such as adjusting your total tax liability. If they find you owe them more money, then the IRS will send you a notice regarding the back taxes owed and will begin collection activity.

3. Organize Documents in Advance

The IRS’s letter should include a list of items they would like to see such as canceled checks, receipts, bank statements, etc. Before the actual audit, you should go through the list and collect documentation of everything the IRS is requesting.

4. Get any Documentation you Might be Missing

If you find out that you are missing an important document the IRS auditor wants to see, then it is a good idea to get extra copies ahead of time. You can contact your bank and credit card company to get copies of statements or receipts. It is important to bring all of the documentation that has been requested when you show up for the audit. If you do not, then odds are you will see your tax liability increase.

5. Bring Only what is Required

You should only bring documents to your audit that the IRS has asked for. If the IRS did not ask you to verify your home office or a business expense, then that means you do not need to worry about it. There is no need to overwhelm the auditor with unrelated receipts or documents, as this could only lead to additional questions.

6. Make Copies, and Keep the Originals

Before the audit, you should stop by an office store or Kinko’s and make copies of all of your documentation to give to the auditor. You should make absolutely sure that you keep all of the original copies in your file cabinet in case you ever need them again in the future.

7. Be Nice & Friendly

During the audit, you want to make sure that you are nice and friendly to the auditor. No one likes paying taxes and everyone hates being audited. However, being rude to the IRS representative will do nothing positive for your case.

8. Admit your Mistakes

Everyone makes mistakes and tax returns are no exception. It is always hard to admit a mistake, but when you are faced with evidence from the IRS auditor, it is in your best interest to acknowledge the error as opposed to arguing with the representative.

9. Get Help if Needed

If you are worried about facing the IRS on your own, or feel like your finances are over your head, then you might want to enlist help from a CPA or qualified tax professional. Just make sure that you find someone who is experienced in dealing with IRS audits.

10. Know your Rights

Although an IRS audit can be very intimidating, you should not let the auditor walk all over you. Taxpayers have a specific set of rights when it comes to audits, such as the right to decide when and where it will tax place. For a full list of your audit rights checkout this page on IRS.gov.

White House To Unveil Loans To Bring Broadband To Rural Areas

According to Nasdaq.com, the White House announced a new plan to issues $182 million in grants and loans to bring broadband access to rural areas across the country. The Obama administration claims the move will expand education and communication across the county, as well as create thousands of jobs. Over the next two and a half months the White House is expected to award over $2 billion in broadband awards.

The loans, part of a broader $7.2 billion Recovery Act program, are designed to create jobs and spur economic development, the White House's top economic priority. Vice President Joe Biden will announce the first investments later Thursday at Impulse Manufacturing in Dawsonville, Georgia, a community that will benefit from the program.

The initial $182 million in funds will go toward 18 broadband projects in 17 states, and has been matched by more than $46 million in private capital. Administration officials declined to break down which states or companies would receive the initial funds, saying details would be available later Thursday.

Jared Bernstein, Biden's top economic adviser, said the initiative would " support tens of thousands" of jobs, initially for specialists connecting the networks and workers building towers and other infrastructure. Eventually, he said, jobs would be created indirectly as the new technology allows companies to expand and communities to attract new businesses.

"When you get right down to it, this is about jobs," Bernstein said. However, he said he couldn't provide any precise forecasts on the initiative's job- creating potential.

Unemployment Claims Rise Unexpectedly

Despite predictions of a decline, unemployment claims in the U.S rose by 7,000 last week for a total of 480,000. Leading economists had expected the number of claims to decrease to 465,000, however the opposite turned out to be true. This news is especially trouble as holiday season usually brings additional employment opportunities. Checkout the following article from CNNMoney.com on the startling announcement.

There were 480,000 initial job claims filed in the week ended Dec. 12, up 7,000 from the previous week's revised 473,000, the Labor Department said.

A consensus estimate of economists surveyed by Briefing.com expected claims to decline to 465,000.

The 4-week moving average of initial claims totaled 467,000, down 5,250 from the previous week's revised average of 472,750.

This marks the second consecutive week that claims have climbed. But weekly claims have proven to be volatile with some pops but overall maintaining a downward trajectory. Analysts say that's normal for this time of year.

"With all the seasonal factors in play at this time of year, I'm not going to get too concerned over a couple of weeks of increases," said Robert Dye, senior economist at PNC Financial Services Group. "I expect the downward trend to steadily continue, but it wouldn't surprise me if we get another erratic week or two."

That Health-Care Tax Pledge

From the Wall Street Journal.com:

'If your family earns less than $250,000 a year, you will not see your taxes increased a single dime. I repeat: not one single dime." So spoke Barack Obama at his first address to Congress in February. We're about to find out if the President cares about that promise as much he does passing a health-care bill.

Congressional Democrats have loaded up their health bills with provisions raising taxes on the middle-class by stacks and stacks of dimes. And Senate Democrats on Tuesday made clear they won't be bound by the President's vow; 54 voted to kill Idaho Republican Mike Crapo's amendment to strip the bill of taxes on families earning less than $250,000 and individuals earning less than $200,000.

Those tax hits include a mandate of up to $750 a year for Americans who fail to purchase health insurance; new levies on small businesses (many of which file individual tax returns) that don't offer health care to employees; new tax penalties on health savings accounts and flexible spending accounts; and higher taxes on medical spending, including restrictions on medical itemized deductions, as well as taxes on cosmetic surgery. A Senate Finance Committee minority staff report finds that by 2019 more than 42 million individuals and families—or 25% of all tax returns under $200,000—will on average see their taxes go up because of the Senate bill. And that's after government subsidies.

This profusion of tax hikes is central to the Democratic fiction that the Senate bill is budget neutral. And because many Senate Democrats are cool to the House proposal to fund legislation with a surtax on the "wealthy," many of these middle-tax hikes will likely remain in final legislation. Yet President Obama is embracing the bill.

Democrats are instead trying to claim that some taxes really aren't taxes. The President in September engaged in a debate with ABC's George Stephanopoulos, with the President arguing that the individual mandate isn't a tax since it is for the good of America. Michigan Senator Debbie Stabenow says increasing the amount of medical expenses a person must accumulate before deducting them also isn't a tax because "most Americans" don't itemize. Except the millions of middle-class Americans who do. Democrats have argued their restrictions on health savings accounts simply close "tax loopholes" and therefore also aren't new taxes.

IRS Reminds Car Shoppers about 2009 Tax Break

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

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

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

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

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

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A First-in-the-Nation Tax on College Tuition

Tuition fee increases are fairly common on college campuses lately, despite the uproar they usually provoke from students. However, the city of Pittsburgh is considering a different way to increase revenue from college tuition. They are hoping to impose a 1% local tax on tuition, which would make Pittsburgh the first place in the country to ever tax college tuition fees.

This announcement has frightened students, and taxpayers across the nation who fear that if the measure is passed that it will set an example for other government agencies to follow suit. According to the New York Times the Pittsburgh City Council is set to vote on the tax on Monday, which is expected to generate over $16 million in additional revenue for the city.

“It’s really a disappointment that we’re in this situation,” Mr. Ravenstahl said. “Our colleges and universities are giving less and less while they increase tuition and executive pay and expand their campuses, removing high-value land from the tax rolls. The cost to provide public safety and public works services continues to increase, but our revenue continues to decrease.”

The tax, which would take effect as early as July, would range from about $20 a year for students at cheaper schools like the Community College of Allegheny County to just over $400 for students at the city’s priciest university, Carnegie Mellon.

Other cities, like Boston and Providence, R.I., have also considered taxing college tuition, Mr. Urbina reports.

California Taxes Fall Short of November Target by $439 Million

My home state of California seems to find itself in one financial mess after another. Reports emerged yesterday that the state’s estimated tax revenue for November was $439 million less then the government had expected. With the fiscal year only have over, the state’s revenue is already short by an astonishing $1 billion. Some financial experts assert the decline is only a preview of what is to come, and that the upcoming year will be even more difficult on California’s budget.

Schwarzenegger is due to release his budget for the coming fiscal year in January. California Legislative Analyst Mac Taylor said in November the state will face a deficit of $14.4 billion beginning in July. That’s in addition to a $6.3 billion gap opening up in the current year as several projections within the budget falter or miss revenue projections.

“In many respects, the steps to close next year’s budget gap will be even more difficult and more challenging than what we’ve just had to do this year,” Department of Finance spokesman H.D. Palmer said yesterday.

California has been among the most affected by the recession as a wave of home foreclosures, rising unemployment and the 2008 stock market tumble dissipated expected tax receipts. From February through July, lawmakers worked to close a record $60 billion deficit with spending cuts, temporary tax increases and other one-time fixes. The unemployment rate rose to 12.5 percent in October from 8 percent the year before and 4.8 percent in July 2006.

Continue reading at Bloomberg.com…

Congress Settles for $300B Increase in Debt Ceiling Until Next Year

From the Examiner.com:

House Democrats settle for a $300 Billion increase in the national debt ceiling in order to avoid limits on spending.

Moderate Democrats had intended to attach amendments to the initial $1.8 Trillion increase that would have required congress to pay for any new legislation by either cutting spending in other areas, or raising taxes. In order to avoid what seemed like a responsible reaction to out of control spending Democratic leaders changed the debt hike to $300B for the next two months, and intend to debate for the rest of the increase next year when congress returns to session.

In an uncharacteristic move Democratic leaders have also said they would not attach the debt hike to the defense spending bill, as it was initially thought. It is doubtful that this is a trend, but for a change congress seems to be letting a bill stand or die on its own merits.

U.S. Gave Up Billions in Tax Money in Deal for Citigroup's Bailout Repayment

Taxpayers everywhere are fuming over the news that the recently bailed-out financial giant Citigroup is being granted permission to withhold billions of dollars in potential tax payments to the IRS. Usually when the government takes partial ownership of a company through a federal bail-out they are forced to give up many of the tax breaks they were used to receiving. However, in this case Citigroup is being allowed to take advantage of these breaks with the hope that it will outweigh the expected losses when the government begins selling their shares of the company to private investors.

While the Obama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.

The IRS, an arm of the Treasury Department, has changed a number of rules during the financial crisis to reduce the tax burden on financial firms. The rule changed Friday also was altered last fall by the Bush administration to encourage mergers, letting Wells Fargo cut billions of dollars from its tax bill by buying the ailing Wachovia.

"The government is consciously forfeiting future tax revenues. It's another form of assistance, maybe not as obvious as direct assistance but certainly another form," said Robert Willens, an expert on tax accounting who runs a firm of the same name. "I've been doing taxes for almost 40 years, and I've never seen anything like this, where the IRS and Treasury acted unilaterally on so many fronts."

Continue reading at Washington Post.com…

Bank of America Pledges $5 Billion More for Small Businesses

After a White House meeting encouraging U.S banks that received large bailouts to increase lending, Bank of America has announced they would be lending out $5 billion in 2010 to small and medium sized businesses. This is a good sign for the Obama administration, which is hoping that other large banks will follow suit. If small business lending does increase in the next year, it could certainly help slow down the ever climbing unemployment rate.

"Bank of America is determined to do our part to help the economy grow next year and reduce unemployment by making every good loan we can make," CEO Ken Lewis said in a statement.

Lewis acknowledged the key role that small businesses play in creating jobs, calling them the "lifeblood" of the U.S. economy. "Our improved financial condition and our optimism about the economy will allow us to step up lending to support these clients," he said.

Bank of America (BAC, Fortune 500), based in Charlotte, N.C., is currently the second largest small business lender in the U.S., behind only Wells Fargo (WFC, Fortune 500), according to reports filed to the Treasury Department. Bank of America ended September with $41.9 billion in small business loans outstanding. That tally includes credit lines, credit cards, traditional loans and other financing.

But like most other big banks, Bank of America has pared back its lending through the recession. Since April, when top banks began submitting monthly reports on their small business lending, Bank of America has shaved its outstanding loan balance by 5%, or $2.2 billion.

Continue reading at CNN.com…

Hawaii's Version of Sales Tax Hides Costs

For those of you who follow me on Twitter, you may already know that I just got back from a vacation in Hawaii last week. Which is why I was surprised to see that my home away from home was in the news this morning for their sales taxes that are likely to increase.

Currently, Hawaii’s sales tax on services is around 5%, however there are additional taxes on items that arrive by cargo ship. Since many items are shipped to the island, the actual tax paid on most products is significantly higher. Additionally, the state’s government is hoping to increase the standard 5% sales tax to a staggering 11-17%. Unfortunately, it seems to me that this drastic increase would hurt the massive tourism industry and thus harm the state’s economy more than it would help.

"We cannot tax ourselves out of this economic situation," said Carol Pregill, president of Retail Merchants of Hawaii. "When you increase costs to a retailer, the costs have to be passed on to the consumer."

According to the Associated Press, Hawaii lawmakers will consider legislation in January that would increase the general excise tax by 1 percentage point and exempt food and medicine. Currently, food and non-prescription medicine are among the items that are taxed.

The bill, which was estimated to raise $200 million annually for education, passed the state Senate this year and is now pending before the House. It faces hurdles because of business opposition and politicians' fear of raising taxes in an election year.

The excise tax pays for nearly half the state's budget, and tourist spending accounts for about one-fifth of total excise tax collections.

The Aloha State is already one of the most taxed states in the nation, but labor union leaders have said a tax increase could save government jobs and help students, whose school year was cut by 17 days annually due to budget cuts.

"People have this perception that we have only a 4 percent tax, and they don't realize we're already on an apples-to-apples basis one of the highest tax states," said Ronald Heller, a tax attorney and former member of the state Tax Review Commission.

Financials Fade a bit as Wells Plans TARP Repayment

From MarketWatch.com:

The U.S. financial sector was down slightly in early trading Tuesday with Wells Fargo & Co. pricing an offering of nearly $11 billion of common stock as it became the latest big bank to unveil plans to repay the government's bailout loan.

Wells Fargo announced late Monday that it would raise the money to help fund a repayment of the $25 billion the firm received under the Troubled Asset Relief Program, or TARP. The company is the last of the original, large U.S. banks to agree to pay back the government. See earlier story on Wells Fargo's latest plan to repay TARP.

Wells Fargo shares were up about 1% at last check Tuesday morning.

In the broader sector, the Financial Select Sector SPDR Fund was off fractionally. The exchange-traded fund had risen the previous two trading sessions.

Citigroup Inc. shares were off a bit on heavy trading volume. The bank on Monday said it will sell about $20 billion in new securities to repay TARP as it tries to get out from under the government's thumb.

Exclusive: IRS Hires "Hundreds" for New Wealth Unit

Following the IRS’s recent announcement regarding the creation of a new wealthy tax cheats unit, they have reportedly already hired hundreds of employees to join the new division. The group is expected to use their skills to identify rich and famous tax cheats who have the ability to hide their money in complex tax shelters. You can find a section of a Reuters.com article discussing the new IRS unit below.

The IRS high wealth unit, part of a broader effort to combat international tax evasion, is focusing on "the entire web of business entities controlled by a high wealth individual," IRS Commissioner Doug Shulman told a tax conference this week.

Another IRS official told Reuters "hundreds" of people have already been hired to staff the new unit, including some from within the agency.

"We have drawn top talent within the IRS that have expertise involving wealthy individuals as well as examination of their related entities," said Mae Lew, an IRS special counsel.

The high-wealth unit is focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals.

While use of sophisticated legal structures can be legal, in other instances they "mask aggressive tax strategies," Shulman said.

Tax authorities in Japan, Germany and the UK have also created similar units.

The U.S. House of Representatives on Thursday approved a $387 million boost for the IRS for the fiscal year that started October 1, in part to fund the high-wealth unit. The Senate is expected to vote on the measure on Sunday.

Questions for the Tax Lady: December 14th, 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: My husband and I are purchasing a new home. We already own another property, so will we be eligible for the new $6,500 credit if we close before the end of the year?

Yes. The Homeownership and Business Assistance Act of 2009 was signed into law on November 6^th, 2009, and became effective immediately. As long as you and your husband have been living in your principal residence for five years you should qualify for the credit. However, keep in mind that the credit does begin to phase out for couples making $245,000 or more per year.

Question #2: My business had a really profitable month. Do you have any ideas on last minute expenses to help lower my taxable income?

Depending on how many purchases you want to make, you could consider office furniture or computer equipment. Alternatively if you are looking for something cheaper, you could pay your January office rent early, or any other major bills such as your telephone service fee. On the other hand, you could defer some of your income until next year by waiting until after the end of the month to cash a check or two.

Many See the VAT Option as a Cure for Deficits

From NYTimes.com:

Runaway federal deficits have thrust a politically unsavory savior into the spotlight: a nationwide tax on goods and services.

Members of Congress, like their constituents, are squeamish about such ideas, instead suggesting spending cuts or higher taxes on the rich. But with a lack of political will to do the former, and a practical ceiling to how much revenue can be milked from the latter, economists across the political spectrum say a consumption tax may be inevitable once the economy fully recovers.

“We have to start paying our bills eventually,” said Charles E. McLure, a tax economist who worked in the Reagan administration. “This strikes me as the best and most obvious way of doing it.”

The favored route of economists is known as a value-added tax, which is a tax on goods and services that is collected at every step along the production chain, from raw material to a consumer’s shopping bag. Similar to a sales tax, it generally results in consumers paying more for the things they buy. The revenues could be used to pay for health care or other social programs, or just to pay down existing debt.

Introducing such a tax would probably require an overhaul of the entire federal tax code, no small order, and something the government last did in 1986. At the time the goal was to simplify the tax system, to raise money more efficiently and with fewer headaches for taxpayers.

Senate set to Advance $1.1T Spending Bill

While the country focuses on the Tiger Woods scandal and the upcoming holidays, the United States senate is set to pass a filibuster proof end-of-year $1.1 trillion spending that will reward most federal agencies with a generous budget increase. It also includes a loan guarantee program for steel companies, and an improved arbitration process to challenge General Motors' and Chrysler's decisions to close more than 2,000 dealerships.

The $1.1 trillion measure combines much of the year's unfinished budget work - only a $626 billion Pentagon spending measure would remain - into a 1,000-plus-page catchall spending bill that would give Cabinet departments such as Education, Health and Human Services and State increases far exceeding inflation.

After a 60-36 test vote on Friday in which Democrats and a handful of Republicans helped the measure clear another GOP obstacle, the bill was expected to win on Saturday the 60 Senate votes necessary to guarantee passage. A final vote is expected Sunday.

The measure provides spending increases averaging about 10 percent to programs under immediate control of Congress, blending increases for veterans' programs, NASA and the FBI with a pay raise for federal workers and help for car dealers.

It bundles six of the 12 annual spending bills, capping a dysfunctional appropriations process in which House leaders blocked Republicans from debating key issues while Senate Republicans dragged out debates.

Just the $626 billion defense bill would remain. That's being held back to serve as a vehicle to advance must-pass legislation such as the debt increase.

Continued at ApNews.MyWay.com…

Why It May Pay To Convert to a Roth IRA

From the Wall Street Journal:

Investors and financial advisers are preparing to take advantage of a new tax law that makes it easier to gain access to Roth IRAs—even if it means breaking a sacrosanct rule about Roth conversions.

Starting, Jan. 1, the $100,000 income limit disappears for converting traditional individual retirement accounts and employer-sponsored retirement plans to Roth IRAs, one of the biggest changes on the IRA landscape in years. Roths, of course, have long been viewed as one of the best deals in retirement planning; after investors meet holding requirements, virtually all withdrawals are tax-free.

Just how many investors will make the leap is unclear. Converting to a Roth can be expensive; it requires paying income tax on all pretax contributions and earnings included in the amount converted. What's more, financial advisers have long argued that converting makes sense only if an investor can pay the tax from funds outside the IRA itself - an admonition that seemingly limits the strategy to the very wealthy.

That said, some financial advisers say growing numbers of their clients are leaning toward a Roth conversion, even if they have to tap their traditional IRAs to pay the taxes. The primary reasons: new, contrarian analyses of taxes and conversions—and a desire to gain more control over nest eggs in the years ahead. With a traditional IRA, investors must begin tapping their accounts after reaching age 701/2, which increases taxable income. With a Roth, there are no required distributions, giving retirees more flexibility in managing their investments and cash flow.