Tax Roundup, 12/28/2012: Last tax planning weekend of 2012. Also: the crisis of unreported pretend income!

December 28th, 2012 by Joe Kristan

20121228-2There’s not much time.  There are 366 days in 2012, but only four left.  It’s asking a lot of the last four days of the tax year to fix the tax problems of the other 362, but there are a few things you can still do.  You can still make charitable contributions that count this year.  You can get your last mortgage payment paid this year, making the interest on it deductible.  You can pay cash-basis business expenses.  You can even start a qualified pension plan, technically (good luck getting it drafted and in place by Monday, though).

Some last-minute rules to keep in mind:

Timely-mailed is timely-paid.  If you make a deductible payment by check, the postmark date is the date for deduction.  If the check is big enough to matter, take it down to the post office and send it Certified Mail, Return Receipt Requested.

Electronic payments count.  The nice thing about an electronic payment is that there is no dispute about when it happened, and it won’t get lost in the mail.

Credit card payments count.  If you make a payment – say, a charitable contribution – by credit card before the ball drops Monday night, it counts as a 2012 deduction, even though you won’t pay your credit card bill until next year.

Gifts of stock have to be completed by the end of business Monday.  If you want to make a gift of appreciated stock, it needs to be nestled in the recipient charity’s account by the end of the day Monday.  That might require some quick action by both your broker and your charity.

Many related parties are on cash basis for deductions, even for accrual taxpayers.  If you owe your nephew money out of your S corporation, you need to get him paid by Monday to get the deduction this year.

Capital gains and losses count on the trade dateExcept for short sales, which count on the settlement date.

Remember, this year is a bit crazy with the tax increases coming down next year, and with the Fiscal Cliff uncertainty.  Income tax rates are rising for higher-income folks, so the usual year-end deferral of income might not be a great idea.  With higher rates next year, business deductions might well be worth more then, so the usual frenzy of paying cash-basis business expenses may not be your best bet.

With itemized deductions, it’s very hard to tell.  While higher tax rates usually would mean deduction will be worth more next year than this year, plans have been floated to either cap the total amount of itemized deductions — $25,000 and $50,000 have been thrown out — or to cap the tax benefit at, say, 28%, regardless of the top rate.  Some taxpayers with big charitable pledges have moved them up to this year to hedge against a deduction cap.

 

The House of Representatives reconvenes Sunday.  Is a Fiscal Cliff deal going to happen before this year closes?  Don’t hold your breath, if this story from Tax Notes is any guide ($link):

     As President Obama and senators returned to Washington December 27, aides to House Majority Leader Eric Cantor, R-Va., announced that the lower chamber will not return for legislative business until December 30 and that the House may be in session through January 2.

     The House schedule suggests that a fiscal cliff deal, if there is one, will not come until sometime between 6:30 p.m. December 30, when first House votes are expected, and late January 2. The 113th Congress is scheduled to convene January 3 at 12 p.m.

The best we can hope for is that they pass something with an AMT patch so that the upcoming tax season isn’t thrown into chaos.  There’s no hope that they’ll actually address the incontinent spending that is leading the government to fiscal catastrophe.

Fiscal Cliff Notes

TaxProf,  CNBC: Will ‘Fiscal Cliff’ Accelerate Millionaire Deaths?

Kay Bell, Fiscal cliff is important, but don’t forget some 2012 tax laws need attention ASAP

Kevin Drawbaugh, Factbox: Corporate tax breaks in play at “cliff” and beyond

Trish McIntire, Tax’s Perfect Storm:

Congress only has 4 days to do something about taxes (if they’re willing to work the weekend). And the situation has gotten more complicated with Treasury Secretary Geithner’s announcement that the US will reach our debt ceiling on December 31st.  4 days to do what they refused to do earlier in the year and haven’t been able to do in the last few weeks. I’m not hopeful.

William McBride, The Fiscal Cliff in History (Tax Policy Blog):

As the chart below shows, it will result in the highest tax rate on individual income (39.6 percent) since 2000, the highest tax rate on capital gains (23.8 percent) since 1997, and the highest tax rate on dividends (43.4 percent) since 1986.

20121228-1

 

 

David Brunori, Michael Moore and Film Tax Credits (Tax.com)

Paul Neiffer,  Farm Income Not Cash Rent!

Russ Fox, Is It Time to Take a Casualty Loss on Absolute Poker/Ultimate Bet?

TaxGrrrl, 12 Days of Charitable Giving 2012: ShelterBox

Robert D. Flach, 2012 – THE YEAR IN TAXES

Robert Goulder, Gérard Depardieu: Tax Exile (Tax.com)

Oh, Goody: 2013 May Be the Year of Perpetual Fiscal Crisis (Howard Gleckman, TaxVox).

 

Let’s make people file lots of extra forms because I think they’re getting away with something.  The TaxProf links to an odd piece in the Washington Post by a Ray D. Madoff. who seems to think the rich are up to something.  He’s not sure what, though, so we should have everybody file a bunch of extra tax forms so he can figure it out.

He says sure, the income tax code is progressive:      

 The IRS recently released its analysis of 2010 tax returns,  which shows the allocation of taxes over different income groups. This information is both informative and misleading. According to these latest figures, in 2010 the top 1 percent of earners (those with adjusted gross incomes of at least $369,691) paid about 37 percent of all income taxes but reported just less than 19 percent of all income. Based on these data, the U.S. income tax system looks truly progressive.  This lends credence to the view that the wealthy are paying even more than their fair share.

Ah, but what are they hiding?

But statistics can be only as good as the information on which they are based, and here the data are fundamentally misleading. People pay income  tax only on amounts that Congress counts as income. This excludes the sources of revenue most commonly enjoyed by the richest Americans: gifts, inheritances, distributions from trusts and proceeds of life insurance.

So what does he propose to do?

It is time for Congress to shine a light on the types of income most enjoyed by the wealthy. Individuals should be required to report all sources of income, including gifts, inheritances, life insurance and distributions from trusts so that we can begin to assess the impact of these exclusions.

First, to point out an obvious error: most distributions from taxable trusts are already reported on two income tax returns.  Trust income follows trust distributions.  Trusts get a deduction when they make a distribution, so they have to file a K-1 with their 1041 to report the distribution and the allocation of distributed income.  The beneficiary reports the K-1 amounts on Form 1040.  Income from revocable trusts is reported directly on the grantor’s return, so distributions are irrelevant.

Second, the big inheritances and gifts are already reported — just not on income tax returns.  Gifts over the annual exclusion amount are already reported on Form 709, and large estates file Form 706.  Does he really want everybody to have to keep track of their birthday presents and gifts from Grandpa for 1040 reporting?

Finally, this stuff isn’t income.  A gift is a distribution of wealth; it reduces the donor’s wealth as much as it increases the recipients.  It’s a wash, a nothing.  Same thing for trust distributions — they are funded by reducing the grantor’s wealth, and the distributions are either income distributions or delayed transfers from the donor.  Life insurance proceeds are arguably income, but they are already normally reported on 1099-R.

So what is his point?

Everyone agrees that fairness matters when it comes to income taxes. But we cannot have an honest discussion about tax fairness when we are kept in the dark about how much income people actually receive. Only when full reporting is required can we have an accurate picture of people’s true income. Then we can begin to fashion a tax plan that is fair for all Americans.

It’s nice that he wants to have an “honest” discussion.  He could start by honestly saying that he really just wants to raise income taxes on “the rich”, but is hampered by statistics inconveniently showing that they are already paying a lot of taxes.  He wants to try to drag in a lot of things that aren’t actually income into the mix to make it look like the rich should be paying more.  Sorry: the rich guy isn’t buying.

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