Tax Roundup, 1/18/15: Popular wisdom and tax rates. And more Monday goodness!

January 18th, 2016 by Joe Kristan
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Math is hard.

Vox Populi. It’s a slow tax news day, with schools and government offices closed and e-filing not beginning until tomorrow. That enabled me to spend a little time with Peter Reilly’s coverage of Disparate Tax Views At Opening Of Bernie Sanders Worcester Office. Peter chatted up Sanders volunteers about their views on the proper top marginal tax rates. He was surprised by his first conversation:

Deb Bock, my first victim, said 15%.  I hadn’t gotten into the listening groove yet so I failed to hide my shock and asked her why she wasn’t backing Ben Carson – “Because he is an idiot.”

Those of us who live in the tax world can easily forget how poor the knowledge of actual tax law, including rates, is among the general public. The Tax Foundation has printed some fascinating surveys about what people think tax rates should be. Here is some information from their 2009 survey, the most recent available on the Tax Foundation website. It shows that Peter’s friend Ms. Bock is close to the  consensus view of what the effective combined federal, state and local effective rate on taxable income should be: 15.6%:

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Source: Tax Foundation

Of course, effective rates are much higher than this, as The Tax Foundation explains in its 2015 Tax Freedom Day explanation:

In 2015, Americans will pay $3.28 trillion in federal taxes and $1.57 trillion in state and local taxes, for a total tax bill of $4.85 trillion, or 31 percent of national income.

That’s just about twice the average effective rate that people think should apply. Because the tax law is very progressive, many taxpayers pay a much higher percentage.

Still, politicians like Mr. Sanders continue to get votes by convincing us that taxes are too low. Of course, they do so by telling people that those taxes will be paid by somebody else.

Related:

Tony Nitti, Bernie Sanders Releases Tax Plan, Nation’s Rich Recoil In Horror. “Democratic Presidential hopeful Bernie Sanders took a break from yelling at clouds long enough to release his tax plan today, and it’s, how should I put this…aggressive.”

Me, The rich guy can’t pick up the tab.

 

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Kyle Pomerleau, Congressman Nunes Introduces Business Tax Reform (Tax Policy Blog):

Details of the plan:

-Cutting the corporate income tax to 25 percent;

-Limiting the top tax rate on non-corporate business income to 25 percent;

-Allowing businesses to deduct investment costs when they occur (full expensing);

 

-Eliminating most business tax credits and many deductions;

 

-Moving to a territorial tax system like most developed nations;

 

-No longer letting nonfinancial businesses deduct interest costs but no longer taxing them on interest receipts;

 

-Applying the same tax-rate limitation to individuals’ interest income as now applies to their capital gains and dividend income; and

 

-Eliminating the individual and corporate alternative minimum taxes (AMTs).

This would be a big improvement.

 

Russ Fox, Those “Extra Services” Were Great for Business. A massage business.

Jason Dinesen, Choosing a Business Entity: Wrap-up Post

Robert D. Flach, COME IN TO THE OFFICE AND WALK OUT WITH CASH!

Kay Bell, Finding a charity to volunteer with on MLK Day 2016

Jack Townsend, Prosecuting Corporate Employees and Officers, with Focus on Swiss Banks. “Corporations cannot go to jail; individuals can.”

Jim Maule, Birthdays in the Tax Law (and Obituaries?).

Actually, the tax law uses the phrases “attain the age of” and “attain age” far more often that its occasional use of the word “birthday” but few of us talk about “attaining an age” when we are conversing about the anniversaries of our arrival on the planet.

When was the last time you ever said “attain” out loud?

Robert Wood, IRS Lax Controls Enable Targeting Based On Religion + Politics, Claims Report

 

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Len Burman, Ted Cruz’s Business Flat Tax is a VAT. “It’s also important to point out—as Cruz did in the debate—that his plan also repeals the payroll and corporate income tax.”

TaxProf, The IRS Scandal, Day 982Day 983Day 984.

Tax Justice Blog, Obama Policies Curbed Tax Break for 400 Richest Americans; Choice of Next President Will Reverse or Continue This Shift. Once again Tax Justice Blog entirely misses the point that it’s never the same 400 people who pay tax in any given year.

Career Corner. Let’s Review: Side Gigs, Email, Lunches and Logos (Caleb Newquist, Going Concern).

 

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Tax Roundup, 1/15/16: Tax credits and their opportunity costs. And: a turnaround in IRS service!

January 15th, 2016 by Joe Kristan

haroldReport: Tax credit for me would benefit me. Report: Tax credit would help Iowa biochemical industry (Des Moines Register).

The argument that this industry, above the thousands of industries out there, deserves funding at the expense of other businesses in the state, and that Iowa’s elected officials are just the ones to figure that out, is hard to credit. It might almost be plausible if it came at the end of a careful and systematic process where the state looked at all of the possible industries that would be good for the state to have and then carefully selected finalists based on objective and unbiased review.

That never happens.

Instead, the Bio-renewables credit is following a path blazed by the film industry and other credit recipients. Somebody decides a tax credit would be a good thing. It’s never hard to get the industry that would receive the subsidy on board. Local business boosters climb on because they know of a local business that would benefit. They fund studies to prove that this industry offers extraordinary benefits. Economic development officials join in, because that’s what they do. Politicians like giving away money, and soon you have amazing results.

I don’t fault businesses for using state tax credits. If somebody gives you money, you take it. But that doesn’t make it good policy for the rest of us.

There are two little words that credit boosters never bring up: opportunity costs. The money spent on the favored industry isn’t conjured into existence out of thin air. It is taken from somebody else. This year it’s taken from every Iowa business that uses the $500,000 Section 179 limit, which the Governor says the state can no longer afford. There are businesses in every county that will pay higher taxes if Iowa reduces its Section 179 limit to $25,000. Those businesses lose the opportunity to use funds to grow their own businesses and hire their own employees.

If there is to be any benefit here, it’s that it might actually teach the General Assembly about the opportunity costs of benefiting sympathetic industries. Here, it’s the cost of the lost Section 179 benefit to constituents statewide.

Related:

LOCAL CPA FIRM VOWS TO SWALLOW PRIDE, ACCEPT $28 MILLION

List of Iowa incentive tax credits budgeted for 2017.

 

Service: It’s in our nameA new report from the Government Accountability Office documents the decline in IRS service that we’ve all experienced under Turnaround Artist John Koskinen:

The Internal Revenue Service (IRS) provided the lowest level of telephone service during fiscal year 2015 compared to prior years, with only 38 percent of callers who wanted to speak with an IRS assistor able to reach one. This lower level of service occurred despite lower demand from callers seeking live assistance, which has fallen by 6 percent since 2010 to about 51 million callers in 2015. Over the same period, average wait times have almost tripled to over 30 minutes. IRS also struggled to answer correspondence in a timely manner and assistors increasingly either failed to send required correspondence to taxpayers or included inaccurate information in correspondence sent.

The picture they draw isn’t pretty:

 

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When you turn around, it’s important to turn in the right direction.

Related: TaxProf, GAO:  Only 38% Of Taxpayers Who Called IRS Got Through In 2015 (Down From 74% In 2010); Wait Time Increased From 11 To 31 Minutes

 

buzz20150804Robert D. Flach has your Friday Buzz! He covers ground from choosing a tax professional to extenders to a certain presidential candidate.

William Perez, How to Know if You Should Hire a Tax Attorney

Matthew McKinney, Iowa’s open records law – who, what, when, and why? (IowaBiz.com).

Kay Bell, N.J. Gov. Chris Christie kills film & TV tax credits. Good. 

Jack Townsend, Updated FAQs for SFOP and SDOP Streamlined Processes. “The IRS has updated the FAQs for the Streamlined Domestic and Streamlined Foreign Offshore Procedures.”

Leslie Book, State of the Union: Tax Administration a Small But Important Part of the Speech

Robert Wood, Beware: IRS Now Has Six Years To Audit Your Taxes, Up From Three. “The three years is doubled to six if you omitted more than 25% of your income.”

Peter Reilly, Conservation Easement Tax Deductions And Valuation Abuse. “I think this is another instance of what Joe Kristan calls using the Tax Code as the Swiss Utility Knife of public policy.”

 

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Megan McArdle, Gaming of Obamacare Poses a Fatal Threat. “The problem: People signing up during ‘special enrollment’ (the majority of the year that falls outside of the annual open enrollment period) were much sicker, and paying premiums for much less time, than the rest of the exchange population.”

Scott Greenberg, The Cadillac Tax will Now Be Deductible. Here’s What That Means. (Tax Policy Blog)

TaxProf, The IRS Scandal, Day 981. “Today, the Government Accountability Office (GAO) released two new reports regarding serious flaws in the Internal Revenue Service’s (IRS) audit selection processes. GAO confirmed that these flaws mean the IRS could continue to unfairly target American taxpayers based on their political beliefs and other First Amendment protected views.”

Robert Goulder, India’s Long Journey to a VAT (Tax Analysts Blog)

Renu Zaretsky, Winners, Losers, and Movers. Today’s TaxVox headline roundup covers last night’s presidential debate, Missouri earnings taxes, and  innovation boxes.

 

Jim Maule, Powerball, Taxes, and Math:

The expectation that widened my eyes is a meme circulating on facebook, and elsewhere, I suppose, that claims splitting the $1.4 billion evenly among all Americans would give each person $4.33 million. Good grief! This is just so wrong. The responses pointing out the error are themselves amusing, with the best one pointing out that it would generate $4.33 per person, enough to buy a calculator.

This meme:

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This explains more about the political process than I care to contemplate.

 

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Tax Roundup, 1/14/16: Branstad budget omits $500,000 Section 179 deduction for Iowa; no 2015 conformity.

January 14th, 2016 by Joe Kristan

IMG_1291Priorities. Governor Branstad yesterday told a business group that he is leaving Section 179 conformity out of the new Iowa state budget. That means Iowans will be unable to claim the $500,000 maximum Section 179 deduction for 2015 returns, assuming the legislature doesn’t override this.

The Governor dropped this little bomb after touting a new $15 million incentive tax credit for “bio-renewable chemical production” to members of the Iowa Association of Business and Industry. He said the new credit will be “revenue neutral,” taking its funding from existing incentive credit programs. (Note: I was there, so this is all firsthand). He said that there just isn’t room for it in the budget.

The Governor has inadvertently highlighted the priorities of a tax policy dedicated to directing economic activity using tax credits. My my count, the Governor budgets $277.3 million in fiscal year 2017 to steer economic activity towards favored activities via tax credits:

Iowa credits fy 2017

Presumably the new bio-renewables credit is buried in here somewhere.

By definition, these credits go to a few lucky taxpayers. The largest one, the refundable research credit, goes overwhelmingly to a few big companies — and mostly as cash grants. The Department of Revenue’s calendar 2014 research credit report showed that $42.1 million of the $56.9 million in credits claimed went to 16 taxpayers. About 2/3 of the 2014 credits were “refunds,” meaning that the credit exceeded the taxpayer’s liability for the year, so the state issued a check for the difference.

20120906-1The Section 179 deduction, by contrast, is available to any non-rental business that buys fixed assets and has taxable income. It requires no negotiation with the Department of Economic Development. It’s available regardless of whether your business is bio-chemical, renewable fuels, or whatever else is the economic development flavor of the month. It’s simple to administer – you just use the number you claim on your federal return. But it has one dreadful flaw: it provides no opportunities for politicians to issue press releases or attend ribbon cuttings.

While I don’t have exact numbers for the tax revenue cost to the state for FY 2017, the Legislative Service Bureau estimated an $88.5 million revenue loss in fiscal year 2015 from the last Section 179 conformity bill.

Of course, all Section 179 revenue losses are a matter of timing. By denying Section 179 deductions, the state has a revenue gain in the first year of the asset’s life, but gives it all back through depreciation over the rest of the asset life. By contrast, tax credits are forever. They never turn around.

There is so much disheartening about this development. Failure to conform on the $500,000 Section 179 limit — after doing so for a number of years — suddenly increases the Iowa tax for thousands of Iowans who purchased equipment in 2015. Because Congress made the Section 179 deduction permanent, it signals that Iowa will permanently de-couple and use its own computation — an inherently bad policy. It requires Iowans to maintain a separate Iowa fixed asset schedule for assets that would otherwise have been written off. And, if the legislature tries to reverse the Governor’s decision, it leaves Iowans uncertain of their 2015 tax law until well into the filing season.

But perhaps most disheartening is the stark way that it shows how Iowa’s tax system, with its high rates and special favors for the well-connected, mistreats the regular taxpayers who are just going about their business, hiring people, and paying their taxes. Lots of taxes.

Related: Hide the spoons, hold your wallets. The General Assembly is back.

 

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Robert D. Flach reports that a certain national tax prep outfit has A NEW GIMMICK.

Robert Wood, Powerball Losers Make Lemonade By Selling Losing Lottery Tickets

Paul Neiffer, Planted Vines and Trees Qualify for Bonus Depreciation

Kay Bell, Final 2015 estimated tax payment is due Friday, Jan. 15

 

TaxProf, The IRS Scandal, Day 980

Cara Griffith, Waiting on the Court to Figure Out How to Tax Remote Sales (Tax Analysts Blog)

Jared Walczak, What Percentage of Lottery Winnings Would Be Withheld in Your State?

Howard Gleckman, Clinton and Sanders Face Off Over Who Should Pay for New Social Programs (TaxVox).

 

Career Corner. An Introvert’s Guide to Surviving Team Lunches (Leona May, Going Concern)

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Tax Roundup, 1/13/16: Considering the “small partnership exception.” And lots more!

January 13th, 2016 by Joe Kristan
Today in Helsinki. Photo: Sini Hämäläinen

Today in Helsinki. Photo: Sini Hämäläinen

Small partnerships, big risks. A venerable voice in Iowa tax, Neil Harl, has for some time touted the “small partnership exception” as a way for partnerships with 10 or fewer members to avoid filing tax returns, and the operation of the partnership rules in general. A version of it appeared at Tax Analysts yesterday ($link), where he argues that a tax case defeat for a non-filing small partnership does not call his argument into question. Non-subscribers can read his basic argument here.

I find it unconvincing as a legal matter. Dr. Harl’s argument is that a provision that applies by its terms to the Code subchapter covering how partnership examinations are conducted (“For purposes of this subchapter,” meaning Chapter 63, Subchaper C) creates a blanket exemption to the filing requirement imposed in a different part of the code (Chapter 61, Subchapter A). Time has resolved the argument after 2017 as the Code section Dr. Harl relies on has been repealed effective in 2018.

1065 2015 cornerStill, even assuming Dr. Harl is correct on the law, he is unconvincing on the practicalities. Dr. Harl himself says that partnership failure to file penalties are proper unless “all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.”

That puts any managing partner at the mercy of his least responsible partner. There’s no practical way to force a partner to file. In a ten-person partnership, one non-filing partner triggers $1,950 in monthly failure to file penalties. That’s a big risk for a partner to take on just to save filing a return, and it was a losing bet for the South Dakota Battle Flats partnership.

Dr. Harl summarizes the advantages he sees in his approach (my emphasis):

The availability of the exception generally means a lower annual cost for income tax return preparation and freedom from the onerous penalties for failure to file a timely or complete Form 1065, not to mention the advantage of sidestepping the complex rules that apply to partnerships generally such as the depreciation rules applicable to partnerships after transfer of depreciable assets to the partnership.

The Battle Flats case disposes of the “freedom from onerous penalties” bit. As far as return prep costs, Dr Harl himself notes that the income of a small partnership has to be reported somehow:

So how do the small partnerships report their income? The statute is not clear on that point but the definition of “partner” implies that each partner is to take into account the “partnership items” which would include income, gains, losses and credits. Those items would be reported on Schedule C, F or E as would be appropriate for that partner.

That means the partnership has to provide each partner with the income from operations sorted in a way that enables the partner to properly file their 1040s. That’s exactly what Form 1065 and its Schedule K-1 do. Either you prepare a homemade document to do what the K-1 does, or you do a K-1. It’s hard to see why it’s cheaper to design a homemade K-1 than to use the one the IRS provides.

Tax pro Chris Hesse responds to Dr. Harl in the comments to his Tax Analysts piece:

Readers who carefully read Rev. Proc. 84-35 will conclude that Dr. Harl’s position is not sustainable. Those who follow Dr. Harl’s path will find themselves not only subject to the penalties for late filing, but incurring the professional costs of defending a losing argument. Advisors should counsel that it is less costly to comply.

I think that’s correct.  Even if you are convinced that Dr. Harl has the law right, I don’t see why it makes sense for a partnership to place its tax compliance, and the risk of severe non-filing penalties, in the hands of its least responsible partner.

Related: Roger McEowen, IRS Guidance on Reasonable Cause Exception to Penalties for Failure to File Partnership Return Upheld.

 

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Kristine Tidgren, DMWW Court Certifies Questions to Iowa Supreme Court (AgDocket). Developments in the Des Moines Water Works environmental lawsuit against upstream farming counties.

William Perez, New Rules for Deducting Repairs and Maintenance

Tony Nitti, IRS Continues To Whipsaw Taxpayers: Sales Of Land Generate Ordinary Income, Capital Loss

Robert D. Flach recaps THE FAMOUS STATE TAX SEMINAR last weekend in New Jersey.

 

Jim Maule offers Another Reason Tax Professors Don’t Need to Invent Hypotheticals. If you made up a case like the real one he discusses, everyone would say it was too far-fetched.

Question, answered:

Peter Reilly, How To Cash Your Powerball Winning Ticket Anonymously.

Robert Wood, Copy Hillary Clinton: Transfer Powerball Tickets Now Before Win, Avoid Taxes.

TaxGrrrl liveblogged the State of the Union. State Of The Union 2016 – LIVE. That’s dedication.

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David Brunori, Montana’s School Credit Is Unconstitutional, but Not for Obvious Reasons (Tax Analysts)

Joseph Henchman, Pretend You Won the Powerball. What Taxes Do You Owe? (Tax Policy Blog).

TaxProf, The IRS Scandal, Day 979

Renu Zaretsky, Tax Hikes, Relief, Dedication, and Resurrection. Today’s TaxVox headline roundup covers State of the Union tax talk, campaign tax proposals, and lots more.

 

Career Corner: Let’s Get Worked Up About: Email Pet Peeves (Caleb Newquist, Going Concern). Hey, Caleb sent me one yesterday!

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Tax Roundup, 1/12/16: IRS wants to shoot more jaywalkers. And: the benefits of IRS ethics training.

January 12th, 2016 by Joe Kristan

20120912-1They think it’s expensive because it is. Tax Analysts reports ($link) on a speech given by an IRS international tax deputy commissioner that shows how little the IRS cares about wreaking havoc on the lives of taxpayers who inadvertently fail to comply with the weird and obscure foreign account reporting rules. The talk by David Horton shows that the IRS continues to assume anybody who has failed to file FBAR forms is a bad actor. For example:

The IRS’s 2014 OVDP (Offshore Voluntary Disclosure Program) guidance provides transitional rules for non-willful taxpayers who entered the OVDP earlier, but could have been eligible for the streamlined program. [Robert] Panoff wondered why they were incurring lower penalties than similarly situated taxpayers who completed the OVDP. 

Horton explained that these taxpayers are still in the OVDP, so they will get criminal clearance and a closing agreement, while streamlined participants get neither. Criminal clearance and a closing agreement are worth paying for, the thinking goes. A streamlined participant could later get a notice of deficiency for penalties that are assessed as taxes.

So a non-willful failure to file still benefits from “criminal clearance?” That’s a funny thing to need for a non-willful violation, and it shows an “it’s all criminal” mindset. Shoot all the jaywalkers!

The article has this:

Every practitioner hopes to shoehorn his offshore-account-holder clients into the streamlined program. Indeed, the only taxpayers who don’t welcome the streamlined program are recent immigrants who think that 5 percent of a home-country bank balance is a stiff price to pay for a green card.

That’s because it is ridiculously expensive.

Nowhere in the piece is any evidence that they (or the author) are aware that accidental Americans and compliant taxpayers can be financially ruined for failing to meet a requirement unknown to 95% of the populace. There’s certainly no awareness of the fundamental injustice of hitting taxpayers with 5-figure fines for committing personal finance abroad without an FBAR.

There is a crying need for foreign financial reporting reform. Two good first steps:

  1. Increase the FBAR foreign account thresholds to the amounts that apply for reporting foreign financial assets on Form 8938. These don’t begin to apply until the assets exceed $50,000, or $200,000 for taxpayers abroad. Using this threshold for foreign financial account filing would eliminate the vast majority of filings, leaving them only for taxpayers who actually have enough income to justify the hassle.
  2. Provide an automatic and penalty-free option to enable taxpayers to come in out of the cold, as long as they file before they are contacted by the IRS and any unreported tax required is relatively small. This would work much like the programs states have for businesses who want to come into compliance. The states benefit from getting the taxpayers in the system, and the taxpayers get in from the cold without financial ruin.

Unfortunately, the IRS apparently wants to go the other way: “Horton reported that while the IRS is still getting a steady flow of offshore voluntary disclosure program filings every month, that program has to end eventually.” Then it will be a choice to either stay out of compliance and risk financial disaster, or come into compliance and guarantee it.

 

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But preparer regulation will help prevent preparer fraud! From a U.S. Attorney press release:

Yolanda Castro, 48, an employee of the U.S. Internal Revenue Service in Fresno, pleaded guilty today to aiding and assisting in the preparation of a false tax return, United States Attorney Benjamin B. Wagner announced.

According to court documents, Castro was employed by the IRS for approximately 20 years, including as a tax examiner and contact representative. Between 2007 and 2013, she prepared and filed false federal income tax returns for herself, her family members and others in which she fraudulently claimed tax deductions and credits. For instance, on her own 2008 tax return, Castro claimed a credit for education expenses that she did not incur, and provided the IRS phony textbook receipts to support the claim. Likewise, in tax returns she prepared for herself and others, Castro claimed child care expenses that had not been incurred.

Surely some ethics continuing education would have saved her.

 

Robert D. Flach has a little Buzz for your Tuesday. “Not much BUZZ today – but, as I always say, some BUZZ is better than no BUZZ.”

Russ Fox reminds us that it’s 1099 Time for 2016. “The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice.”

William Perez, What You Need to Know about Reporting Payments Using Form 1099-MISC

TaxGrrrl, No, You Can’t Actually File Your Tax Return Early (And More Info About Tax Refunds). “Some tax preparers are suggesting in ads and on social media that they can somehow help you skip the line and get you a refund before anyone else. Don’t be fooled.”

Robert Wood, 12 Surprising Items IRS Says You Must Report On Your Taxes. You won’t believe number 2!

Jason Dinesen, Glossary: Social Security Wage Base. “The term Social Security Wage Base refers to the maximum amount of wages or self-employment income on which the 6.2% Social Security tax is based.”

Paul Neiffer, Relief for Older Farmers with IRAs. And not just farmers.

 

Keith Fogg, Improving Payroll Tax Compliance (Procedurally Taxing). “From my perspective working on these cases within the IRS, the failure of employers to pay over the collected taxes usually resulted from poor cash management.”

Renu Zaretsky, New Taxes, Excess Profits, and a Windfall. Lots of cynical posturing by desperate politicians in today’s TaxVox headline roundup.

 


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TaxProf, The IRS Scandal, Day 978. The process of running out the clock continues.

Scott Greenberg, Which Tax Extenders are Left? (Tax Policy Blog):

Looking over the list below of remaining tax extenders, none of them seem like “must-pass” policies. As a result, the pressure is off of Congress to renew all of the tax extenders as a package. Instead, Congress should take the time to evaluate the remaining tax extenders one by one, making the good provisions permanent and letting the bad ones expire. Temporary tax policy is bad tax policy, and it’s about time that Congress laid the ritual of tax extenders to rest once and for all.

Let’s hope so.

 

The Critical Question. Would a cuddly mascot make the IRS lovable? (Kay Bell). That would look like a stuffed Cthulhu

The Critical Question II: Accounting Firms Allowing Side Gigs: Good Idea or Independence Mine Field? (Caleb Newquist, Going Concern).

 

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Tax Roundup, 1/11/2016: Hide the spoons, hold your wallets. The General Assembly is back.

January 11th, 2016 by Joe Kristan
If Iowa's income tax were a car, it would look like this.

If Iowa’s income tax were a car, it would look like this.

Same recipe, same dish. The 2016 session of the 86th General Assembly of Iowa convenes today. As the membership is about the same as last year’s session, we can expect pretty much the same tax policy results. There will be no fundamental reappraisal of Iowa’s dysfunctional income tax this year. If anything, it might get a little worse.

Iowa’s tax system is a rat’s nest of high rates and complexity, full of special-interest loopholes, feel-good spiffs for sympathetic groups, and subsidies for the well-connected. It’s a great deal for the insiders who can work the system, paid for by high rates on those of us without lobbyists and tax credit consultants.

What Iowa needs is an overhaul that lowers the rates significantly, paying for them by simplifying the rules and swearing off subsidies like the notorious Orascom deal and the now-defunct film tax program. In other words, something like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

What Iowa is likely to get is more special interest tax subsidies. In a story about 10 issues likely to spark debate in Iowa Legislature, The Des Moines Register reports:

A host of Iowa business and farm groups are lobbying for state tax credits to attract investment in renewable chemical manufacturing and advanced bio-refining. The goal is to build upon Iowa’s renewable fuels industry. Iowa needs to move swiftly because of competition for businesses looking to invest in the industry, business lobbyists say.

“If we are looking at a game changer for this session, this is it. It is absolutely huge,” said Jay Byers, chief executive officer of the Greater Des Moines Partnership. Legislation to provide renewable chemical manufacturing tax credits was approved by the House last session, but failed to pass the Senate.

20120906-1A “game changer?” New tax credits? The dozens of tax credits we already have haven’t done the trick, so we need more?

Think about it. The idea that the state can constructively direct investment capital assumes that the insiders that make up the Greater Des Moines Partnership and the small town politicians who run the state legislature have some unique insight on what the industries of the future are. If so, they should be investing their own money in these “game changers,” because there’s obviously a great profit opportunity to be had. Instead they want to spend your money, and mine, on it. That tells you something important.

Remember, these are the same people who told us it would be a great idea to subsidize Iowa’s film industry with tax credits (page 6 at the link), and that worked out just great.

The only constructive thing likely to come out of the legislature is a “code conformity” bill that updates Iowa’s 2015 income tax rules for the retroactive passage of the federal “extenders” bill in December. The Department of Revenue cautions taxpayers to not file returns using the extended provisions until the conformity bill is passed. The Section 179 deduction, the educator expense deduction, and tax-free IRA gifts are key provisions that are affected. Last year the code conformity bill was one of the first bills passed, in mid-February.

 

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TaxGrrrl, Taxpayers Get A Breather On Passport Requirement For Domestic Travel As REAL ID Requirement Delayed:

The key date to know is January 22, 2018. That’s the date on which air travelers with a driver’s license or identification card issued by a state that does not meet the requirements of the REAL ID Act (unless that state has been granted an extension to comply with the Act) must present an alternative form of identification acceptable to the Transportation Security Administration (TSA) in order to fly domestic. Acceptable identification would include a passport or passport card, Global Entry card, U.S. military ID, airline or airport-issued ID, federally recognized tribal-issued photo ID.

Congress last year passed a provision allowing IRS to revoke passports for non-payment of taxes. And of course the IRS never makes mistakes.

 

William Perez, How Soon Can We Begin Filing Tax Returns?

Annette Nellen, PATH and Many Tax Changes – PL 114-113

Kay Bell, 24 top taxpayer problems of 2015. “IRS electronic approach to customer service tops National Taxpayer Advocate’s annual list”

Jack Townsend, Hawaii Businessman Sentenced to 46 Months

Peter Reilly, Poor Return Preparation Kills Facade Easement Tax Deduction. “Often the buildings already have so much restriction on them already that promising not to alter them is a little like me renouncing my super powers

Robert D. Flach has thoughts on FINDING A TAX PROFESSIONAL.

Russ Fox, Fraudster Tries Alchemy; Will Have 20 Years to Think That Over:

Joseph Furando of Montvale, New Jersey thought he had the perfect way of performing alchemy. He took biodiesel fuel that wasn’t eligible for two tax credits and magically turned it into biodiesel fuel that was eligible for the tax credits:

Tax Credits, fraudulent? Unthinkable!

 

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Scott Drenkard, Businesses Love Texas, Except this One Tax that Holds the State Back (Tax Policy Blog)

Renu ZaretskyLooking ahead to 2016 and beyond? It’s blurry. (Today’s TaxVox headline roundup covers the upcoming State of the Union Address, the Taxpayer Advocate report from last week, and more.

TaxProf, The IRS Scandal, Day 977

 

Something to look forward to. Winner Of $1.3 Billion Powerball May Face Suits By Friends, Co-Workers, Family (Robert Wood).

Career Corner. Unhappy Accountants: Go Get a 10% Raise (Caleb Newquist, Going Concern).

 

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Tax Roundup, 1/8/16: A look at Iowans and their federal income taxes.

January 8th, 2016 by Joe Kristan

20160108-1aSoak the rich? Iowa’s soaking in it! The Iowa Legislative Service Bureau this week published a report on the federal taxes paid by Iowans in 2013. It’s a useful reminder that the politicians running around Iowa talking about how “the rich” pay no taxes are talking nonsense.

This table covers a lot of ground:

 

 

 

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Source: Iowa Legislative Service bureau. Click to enlarge.

Note that for the >$1 million filers, the biggest category is “other income.” Given that they also pay the highest effective rates, it’s clear that this isn’t tax-preferred capital gains or dividends. It’s K-1 income from partnerships and S corporations, or business income from farms or schedule C businesses. In other words, its taxes paid by employers. When you soak the rich, you are soaking employers.

It’s also clear that “the rich” in Iowa are paying a bigger share of their earnings than everyone else. If we count “the rich” as taxpayers with gross income over $200,000, their average federal tax rate as a percentage of gross income — before any deductions — is 22.4%, compared to 7.3% for all other taxpayers.

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Tax Update Chart using Iowa Legislative Service Bureau data. Dollars in millions.

The taxes paid at the top end are a much larger share of the tax paid than of their share of the income: they have 20.8% of the gross income, but pay 44.7% of the taxes. While some politicians may say that’s not enough, remember that much of that is income earned by employers from their businesses. If they have to pay more to the IRS, that’s money they don’t have to hire people, give raises, or grow their business.

Another lesson is that even with the disparity towards the high end, 59.2% of the taxes paid are paid by those in the $25,000-$200,000 gross income range. When the politicians promise to give you stuff paid for by someone else, they lie. They intend to take your money, give you some back, and expect you to thank them.

 

Last night I gave a presentation to IMA chapters across the state over the Iowa Cable Network, mostly on the newly passed extenders bill. You can download the Powerpoint slides I used here.

 

It’s Friday! It’s Buzz Day! At Robert D. Flach’s place. Links all around, including commentary on Turbo Tax ads.

Russ Fox, Substance Over Form. “So today’s petitioner, who represented himself in Tax Court, won that he was an independent contractor, not an employee”

TaxGrrrl, When It Comes To Taxes, Where Not To Win Powerball.

Robert Wood, To IRS, ‘Willful’ Means Penalties Or Jail

Jason Dinesen, How Often Should a Budget Be Updated?

Kay BellRecently issued tax identity theft PINs are valid for 2015 filings despite wrong date in IRS letters to taxpayers

 

 

Alex Durante, New NBER Paper Underscores Need for Corporate Integration (Tax Policy Blog). By “corporate integration, they mean “stop taxing corporation income twice.”

For the convenience of the politicians all concerned how corporate taxes have declined as a share of all federal taxes, they illustrate the obvious:

c corp share of entities

The high C corporation rate and the second tax imposed when corporate earnings are withdrawn as dividends or cashed out on a share sale explain why people set up their businesses in other ways.

 

Howard Gleckman, If Banning Negligent Low-Income Households From Taking Tax Credits Is Such a Great Idea, Why Stop With Them? (TaxVox). Good point.

TaxProf, The IRS Scandal, Day 974. Today’s link discusses the proposal abandoned by the IRS yesterday to make charities collect social security numbers of their donors.

 

If you are a regular reader, you know better than to click on the link if you get an email like this:

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Be careful out there, people, and be smart.

And have a great weekend.

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On TV!

January 7th, 2016 by Joe Kristan

I will be offering a closed-circuit Iowa Cable Network broadcast tonight to IMA affiliates around Iowa. Click here for the Powerpoint slides I will be using.

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Tax Roundup, 1/7/16: Taxpayer Advocate report describes IRS “pay to play” plans. And: IRS nixes plan to make charities collect tax ID numbers.

January 7th, 2016 by Joe Kristan

20150107-2Have you heard about the IRS “Future State Plan?” Or “CONOPS?” Me neither.

The latest annual Taxpayer Advocate Report to Congress is the first I’ve heard about this mostly-secret IRS initiative. The report explains (my emphasis):

During the past year-and-a-half, the IRS has devoted significant resources to creating a “future state” plan that details how the agency will operate in five years. The plan is explained and developed in a document known as a Concept of Operations (CONOPS). There are many positive components of the plan, including the goal of creating online taxpayer accounts through which taxpayers will be able to obtain information and interact with the IRS.

However, the CONOPS also raise significant questions and concerns. Implicit in the plan — and explicit in internal discussion — is an intention on the part of the IRS to substantially reduce telephone and face-to-face interaction with taxpayers. The IRS is hoping that taxpayer interactions with the IRS through online accounts will address a high percentage of taxpayer needs. It is also developing plans to enable third parties like tax return preparers and tax software companies to do more to assist taxpayers for whom online accounts are insufficient — an approach that will increase compliance costs for millions of taxpayers.

Nina Olson, Taxpayer Advocate

Nina Olson, Taxpayer Advocate

The IRS, as usual, is cooking this all up in secret, with only well-connected insiders in on the plan. Tax Analysts describes the report ($link):

A major concern is the aura of secrecy around the CONOPS documents. Despite the fact that the IRS is conducting internal discussions about its “future state” plans, Olson’s report says the Service has repeatedly declared CONOPS data elements and documents “official use only” and not for public dissemination. “Never before has the IRS made this assertion in so many instances,” the TAS report says. One area where the IRS has shared its CONOPS plans — the Large Business and International Division — caters to a group of taxpayers that can afford to “pay to play,” the TAS said, while future service plans remain under wraps for the roughly 150 million individual taxpayers and 54 million small business taxpayers.

If you look at it from the viewpoint of most taxpayers, this plan seems incomprehensible. But if you believe that the IRS is really trying to serve the interests of the national tax prep franchise outfits, national accounting firms, and the biggest law firms, it completely makes sense.  It actually fits in well with the IRS preparer regulation efforts to eliminate competition for the national tax prep firms — a regulation effort that the Taxpayer Advocate still regrettably and unwisely supports. Those who are drafting the new taxpayer service labyrinth can be expected get nice raises by going out into the tax industry to help their new employers navigate through it.

Related: Leslie Book, The National Taxpayer Releases Annual Report to Congress (Procedurally Taxing); Accounting Today, Taxpayer Advocate Concerned about IRS Plans for ‘Pay to Play’ Taxpayer Service,

 

Another IRS screw-up averted. I just received a Tax Analysts breaking news email saying:

The IRS has withdrawn proposed regulations that would implement the statutory exception to the contemporaneous written acknowledgement requirement for substantiating charitable contribution deductions of $250 or more.

These rules would have required donors to provide charities with their social security numbers — a horrible idea in the identity theft era. Expect the IRS to try to sneak them back in when they think people aren’t looking.

 

Nicole Kaeding, American Migration in 2015 (Tax Policy Blog).
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Four of the ten states with the most inbound migration have no personal income tax. Most of the states where the population is fleeing have very hign income taxes, including Illlinois, Connecticut, New York and New Jersey. To be fair, high-tax Vermont seems to be attracting people, probably from dysfunctional New York.

This won’t help inbound migration. Illinois Announces Plans To Delay Tax Refunds Through March (TaxGrrrl)

Kay Bell, Delayed state tax refunds in Illinois, Louisiana & Utah because of tougher tax identity theft procedures. And because Illinois is broke.

Robert Wood, Obama Executive Action? Tax Hikes Could Be Next. “President Obama has stretched executive authority with immigration and gun law changes. And he is “very interested” in executive action on taxes too.”

Jack Townsend, Government Asserts Wylys’ Fraud in Bankruptcy Court. It’s a multibillion dollar tax case involving offshore trusts and a “blame the tax pro” defense. Mr. Townsend goes deep on the cases being made by both sides.

Paul Neiffer, “BIG” Might Not Be a Problem. Paul discusses the now-permanent five year “recognition period” for S corporation built-in gains.

William Perez lists Tax Deadlines for 2016

Robert D. Flach posts MY ANNUAL POST FOR JOURNALISTS AND BLOGGERS, reminding us all that he doesn’t care for conflating “tax professional” with “CPA.”

Peter Reilly, No Foreign Income Tax Exclusion For Army Civilian In Afghanistan

Tony Nitti, Love In The 21st Century: Bad Breakup Leads To Form 1099, Lawsuit. I’m not a trained relationship professional, but I think its safe to observe that issuing a 1099 to your ex-girlfriend burns all the bridges.

 

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Megan McArdle, Closing Tax ‘Loopholes’ Would Choke the Middle Class. “If you want to pay for any major new program by “closing the loopholes,” it is these loopholes that you will need to close, because the amount of revenue raised by, say, doing away with carried interest treatment of sweat equity partnership stakes works out to a rounding error on the federal budget.”

David Brunori, Taxing Guns Is Just Wrong (Tax Analysts Blog). “The fact is that a gun tax will have no effect on gun violence.”

TaxProf, The IRS Scandal, Day 973. A dispatch from the denialist front.

 

News from the Profession. #BusySeason Has Arrived (Caleb Newquist, Going Concern).

 

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Tax Roundup, 1/6/16: Oh, I meant that other year. And: IRS won’t rule on truck rehab “glider kits.”

January 6th, 2016 by Joe Kristan

20160106-1Better increase their budget. The IRS provides a special “Identity Protection Personal Identification Number,” or “IP-PIN,” to identity theft victims to help them with future tax filings. The IP-PIN lets them tell the IRS that the return being filed is being filed by the real taxpayers, rather than by some grifter in Tampa (Florida) or St. Petersburg (Russia).

Now, after the IRS has already screwed up things for innocent taxpayers by sending their refunds to thieves, they have added insult to the injury. TaxGrrrl reports IRS Sends IP PIN Letters With Wrong Tax Year, Stresses It Will Not Affect Returns Filed In 2016.

Letters sending out IP PINs for the 2016 filing season (for the 2015 tax year) were mailed out at the end of December 2015 (but dated January 4, 2016) marked with the incorrect year. The letter, also referred to as a CP01A Notice, incorrectly indicates the IP PIN issued is to be used for filing your 2014 tax return when the number is actually to be used for your 2015 tax return. 

The IRS isn’t sending correction letters.

The funny thing: the IRS gets really mad if impatient taxpayers use forms for the wrong year and cross off the year at the top of the form, writing in the right year. Do as we say, not as we do…

Related:

IRS Notice on Your Identity Protection PIN.

Russ Fox, IRS Errs on Identity Theft PIN Letters. “One would think that the IRS proofed important letters and notices before they’re finalized.”

 

ice truck“Glider kit” guidance grounded. The IRS will decline to issue rulings on whether the excise tax on over-the-road tractors applies when a new cab, chassis, frame and axle — a “glider kit” is applied to an old engine and power train. Tax Analysts reports ($link):

Section 4052(f)(1) provides that if a modification to the chassis or body doesn’t exceed 75 percent of the retail price of a comparable new chassis or body, then it won’t incur the section 4051 tax. The IRS decided that it will not rule on whether a modification using a glider kit qualifies for the 75 percent exception under section 4052(f)(1).

A more recent legal memorandum (ILM 201403014) makes clear that the IRS has evolved its thinking on the issue, determining that when an outfitter combines an old engine and transmission with a new cab, chassis frame, and axles, the excise tax applies and the exception isn’t applicable. It also explains that taxpayers must include a 4 percent markup in the price of the refurbished truck for purposes of computing the tax, minus the value of used components if they’re customer provided.

The article adds:

The Iowa Motor Truck Association, in an alert (http://goo.gl/IXnYaS) issued to its members following the release of ILM 201403014, also warned that “the memo probably indicates that IRS auditors will now be more aggressive about glider-kit transactions, and that at least some transactions that have been regarded as exempt may turn out not to be.”

This is obviously a big deal to dealers and their customers. It’s terrible that the IRS is making this sort of policy by internal memos rather than through published guidance, leaving taxpayers hanging.

 

The income tax, the Ultimate Swiss Army Knife of public policy. Flickr Image courtesy redjar under Creative Commons license.

The income tax, the Ultimate Swiss Army Knife of public policy. Flickr Image courtesy redjar under Creative Commons license.

Megan McArdle has some wise thoughts on the tax law in Why We Fear the IRS (my emphasis):

Legal complexity does not accumulate linearly; it accumulates exponentially. When you have one law on the books, and you add a second, the new law may (or may not) have some unexpected interaction with the old law. This would be one complexity point for regulators to manage. But with each new law, the number of potential interactions grows quickly, until it passes the ability of any layman to grasp it (and eventually, surpasses the professionals as well, which is why they’re increasingly specialized in narrow areas). We are long past that point with the tax code.

That’s a point universally ignored by politicians who use the tax law as the Swiss Army Knife of public policy. A Swiss Army Knife the size of a railcar is interesting, but it’s not much good as a knife.

Her post also covers important ground on why the tax law has gotten so bad. Recommended.

 

Paul Neiffer, Is Section 179 a Ticking Tax Time Bomb?. The ability to deduct up to $500,000 in new equipment may have unintended consequences:

On the face, this sounds like a great tax deduction for farmers, however, with continued low commodity prices, might this be a ticking tax time bomb for many farmers.  This is due to a farmer having to liquidate some farm equipment due to the bank requiring additional liquidity be put into the farm operation or perhaps the farmer has lost some ground and no longer needs the equipment.   This sale of equipment causes the Section 179 to be “recaptured” as ordinary income and since the farmer probably does not have sufficient liquidity to prepay additional farm expenses, causes the farmer to be in a high tax bracket.  This leads to a large tax bill which then requires the farmer to sell additional equipment or grain to cover the tax bill.  This is especially harsh when the equipment was financed 100%.

In theory, the tax savings from the original deduction should be available to cover that tax bill, but if you are having to liquidate to pay the bank, the savings have already been spent on other things.

 

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Robert D. Flach, THE PATH ACT OF 2015 AND TAX PLANNING FOR 2016

William Perez, What Is the Alternative Minimum Tax? “Essentially, this is a tax based on a person’s adjusted gross income if they aren’t itemizers.”

Kay Bell, Seattle gun & ammo taxes drive gun seller out of town.  The criminals, they get to stay.

Jason Dinesen, What is Form 1023-EZ? “Form 1023-EZ is a new IRS form used by some not-for-profits to apply for tax-exempt status as a 501(c)(3) organization.”

Jim Maule, Is This Proposed Tax Necessary or Even Sensible?:

Several days ago, in a New York Times editorial, Max Frankel proposed “a relatively simple new tax – officially called a user fee – “ based on “the grandeur of each lofty view” from the apartments being built in very tall luxury skyscrapers along the southern edge of Central Park. He suggested it could informally be called a “window tax” and he suggested various dollar amounts for windows and doors based on height, the existence or absence of obstructions, and the nature of what can be seen.

Gee, what could go wrong? A little history shows some problems with Mr. Frankel’s proposal:

The window tax was a property tax based on the number of windows in a house. It was a significant social, cultural, and architectural force in England, France and Scotland during the 18th and 19th centuries. To avoid the tax some houses from the period can be seen to have bricked-up window-spaces (ready to be glazed or reglazed at a later date).

Prof. Maule rightly criticizes the proposal.

 

Robert Wood, As Offshore Banks Agree To U.S. Tax Evasion Deal, Account Holders Must Deal With IRS. Betting on foreign bank secrecy is a bet against the odds.

Keith Fogg, Fulfilling the Requirements of Section 6751 When the IRS Imposes a Penalty (Procedurally Taxing). “In Legg v. Commissioner, the Tax Court issued a division opinion concerning this little known provision that serves as a gatekeeper to the assertion of many penalties.”

Peter Reilly, Tax Court Sorts Out Basis On Russian Fast Food Merger. “The IRS can argue that what you said you did – the form – is not what actually happened – the substance.  You can’t generally do that yourself, because you got to choose the form, so you are stuck with it.”

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Renu Zaretsky, The Case of Tax Scams, Private Debt Collectors, and Wishful Thinking (TaxVox). “There is one way Congress could make tax compliance and collection easier and tax avoidance harder, while improving the public’s perception of the IRS. It could simplify the tax code. Unfortunately, that’s a call Congress has not chosen to make.”

Stephen J. Entin, Michael Schuyler, Are Dividend Taxes Harmless? Don’t Bet On It!

TaxProf, The IRS Scandal, Day 972

 

Career Corner. New Year’s Resolutions That Will Make Busy Season Less Awful (Leona May, Going Concern). It’s hard to argue with “Stop stealing co-workers’ lunches”

 

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Tax Roundup, 1/5/16: Start your year-end planning today! And: private tax audits for fun and profit!

January 5th, 2016 by Joe Kristan

IMG_1182Welcome to 2016. We’ve just finished another round of 2015 year-end planning. It’s too soon for most of us to be working on our 2015 filings, given the need for 1099s, W-2s, K-1s, etc. But it is a good time to start getting things in order for 2016.

Too many people want to know the last day they can do something for their tax planning. It’s better to worry about the first day to do something. Many tax moves are best done at the beginning of the year. If you fund a tax-deferred account at the beginning of the year, you start sheltering the investment income from taxes 15 1/2 months sooner than somebody who waits until the end of the year.

Here are a few 2016 tax planning moves you can make right now:

Fund an IRA. You can fund a 2016 IRA to the extent of the lesser of your 2016 earned income or $5,500 – or $6,500 if you are going to be 50 years old by year-end. You don’t have to wait until you have earned that $5,500 or $6,500; if you are still working, you’ll get there. And don’t forget a spousal IRA, same limits.

Health Savings Accounts for 2016 can be funded up to $6,750, or $7,750 if you will reach age 55 by year-end.

A 55 year-old working couple with a high-deductible health plan can stash $20,750 in tax-deferred IRAs and HSAs today and shift the earnings on those funds to the non-taxable category now, instead of waiting until April 2017. Not only do they start their tax savings right away, but they aren’t tempted to spend that money between now and then.

While Section 529 plans can’t generate deductions like HSAs and traditional IRAs, they do shelter investment earnings like HSAs and IRAs, and they have more flexible contribution limits. The IRS explains:

Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year.

Taxpayers filing in Iowa can deduct their contributions to the College Savings Iowa Section 529 plan up to $3,188 per beneficiary, per donor on their Iowa income tax return. A married couple funding plans for their two children can therefore deduct up to $12,752 in 2016 CSI contributions.

So start that 2016 year-end planning right away!

 

Tax Analysts reports ($link) that a Chicago Whistleblower Has Filed 938 FCA Tax Cases, Attorney Says. It quotes the director of the Illinois Department of Revenue, Connie Beard, talking about False Claims Act lawsuit trolling:

Beard told the lawmakers that the suits “are not true whistleblower lawsuits,” wherein an insider who has knowledge of a company’s fraudulent behavior seeks to report it to the state. “These are lawsuits that simply accuse business taxpayers, big and small, of incorrectly collecting and reporting tax,” she said.

As if Illinois wasn’t hopeless enough.

 

nytchart20151229-7Scott Hodge, IRS “Fortunate 400” Report Shows Evidence of Significant Income Shifting to Avoid Fiscal Cliff Tax Rate Hikes (Tax Policy blog). They show how taxpayers shifted income to beat the 2013 tax hikes:

Finally, we get to the bottom line and can see that taxable income declined 23 percent in 2013 to $85 billion from $111 billion in 2012.

So what explains this? Well, the more interesting narrative to come out of the IRS report is the evidence of income shifting in 2012 as the 400 wealthiest taxpayers anticipated the eventual tax increases on personal and investment income that would result from the fiscal cliff tax legislation.

Nearly all the major sources of income for these 400 taxpayers were up significantly in 2012 compared to 2011, as they pulled income from the future into a lower-tax year…

The lesson here is that high-income taxpayers have considerable flexibility as to how and when they report income. Headlines reporting that the rich are paying higher average tax rates as a result of the fiscal cliff deal don’t really tell the whole story.

People aren’t stupid. If they have a choice between recognizing income in a low-tax or a high-tax year, a sensible person picks the low-tax one. As the biggest source of income of the “400” is capital gains, there was a lot of pressure to beat the 2013 rate hikes from 15% to 23.8%.

Related coverage here.

 

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Robert D. Flach gets 2016 started with a bang Buzz! A tremendous link fest to start they year.

William Perez, How Soon Can We Begin Filing Tax Returns?

Andrew Mitchel, Flowchart – Section 267(a)(2) & (3) Related Party Matching Rules (International Tax Blog). Andrew’s charts are a wonderful resource.

Annette NellenTop Ten Items of Tax Policy Interest for 2015 – #10. The “gig economy.”

Kay Bell, 2016’s first tax tip: Filing season starts on Jan. 19

Jason Dinesen, Choosing a Business Entity: LLC. “LLCs provide legal protection much like a corporation, but LLCs are easier to form and are generally easier to administer.”

Jack Townsend, Judge Criticizes Prosecutor’s Use of Language Directing Secrecy for Receipt of Grand Jury Subpoena. “I hope that all readers of this blog know that grand jury proceedings are generally secret and the grand jurors and government actors in the process must keep them secret.  FRCrP 6(e)(2), here.  But the obligation of secrecy is not imposed on witnesses before the grand jury.”

Jim Maule, Taking (Tax Breaks) Without Giving (What Was Promised). “Too many tax breaks are handed out in exchange for promises by the recipients to do something beneficial for the community at large.” Once the politicians issue the press release and cut the ribbon, they have what they want, and they don’t much care what happens next.

Peter Reilly, Family Partnership Valuation Discounts Approved By Tax Court. A big year-end Tax Court case is discussed.

Leslie Book, NY Times Article Today Highlights Why People Pay Taxes as Well as Some of My Favorite PT Posts of 2015 (Procedurally Taxing)

Robert Wood, 2016 Brings IRS Power Over Passports, Use Of Private Debt Collectors

TaxGrrrl, 100 Things You Absolutely Need To Know About Money Before You’re 35

Tony Nitti, Ben Carson Releases Tax Plan, Promises End To Mortgage Interest, Charitable Contribution Deductions.

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TaxProf, The IRS Scandal, Day 967Day 968Day 969Day 970Day 971.

Howard Gleckman, What Can Congress and President Obama Accomplish in 2016? Pray they don’t define “accomplish” the same way.

2015 top news from the profession. Going Concern Editor’s Picks for 2015: Relationships at Work, Bad Auditing, Women in Accounting and More (Caleb Newquist, Going Concern)

Russ Fox, My Day on Jury Duty. Congratulations to Russ on getting it out of the way January 4.

 

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Happy New Year!

January 4th, 2016 by Joe Kristan

The Tax Update is taking off Monday, January 4. See you tomorrow!

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Tax Roundup, 12/31/15: Still time to give. Still time to count inventory.

December 31st, 2015 by Joe Kristan

20150811-1Beat the clock gifts. The hours of 2015 dwindle to a precious few, but there is still time to get some important things right in your tax planning, many of which we have covered in our 2015 year-end planning tips series. Today’s tip is for those who would like to make a small gift to an outfit that has made the world a little better this year. These are organizations I support.

Iowa Donor Network, the Iowa organ procurement organization. Good people who save lives by providing donor organs and tissue, saving and improving lives every day. Donate here.

Institute for Justice, the public-interest law firm that stands up for the little guy against big government and crony capitalists. It was IJ attorneys who recovered the life savings confiscated from the Northwest Iowa restaurant owner from the IRS, and who won the fight against the IRS preparer regulation power grab. Donate here.

Salvation Army. They work tirelessly to help the down and out in the inner city, and when disaster strikes, they are quietly on the ground providing food and shelter while the politicians are busy showing their concern for the cameras. Donate here.

Tax FoundationThe good people at the Tax Foundation are a doughty little brigade fighting the battle for good tax policy against the armies of lobbyists and politicians who do everything possible to screw things up even more. Donate here.

Reason Foundation, supporting liberty against all comers.

Alzheimers Association, fighting an awful disease.

Sertoma, little platoons working to prevent hearing loss through education and awareness.

Cornell College, my undergraduate alma mater.

Southern Illinois University, where I got my accounting degree.

Des Moines Community Jazz Center.

If these don’t do it for you, TaxGrrrl Kelly Phillips Erb has been running her annual 12 Days of Giving series, highlighting the following worthy causes: Big Cats Initiative, Women’s Center & Shelter of Greater PittsburghFender Music FoundationRed Paw Emergency Relief TeamThe Innocence ProjectWounded Warrior ProjectPACT For AnimalsFamily Hope FoundationCops For Kids With CancerLiberty’s Promise and The Jahri Evans Foundation.

Remember, gifts made to these organizations on your credit card by midnight tonight are 2015 tax deductions.

 

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Russ Fox “honors” his 2015 Tax Offender of the Year. You may be surprised that Commissioner Koskinen only came in second. But the winner is a good old Midwesterner.

William Perez, How You Can Deduct Up to $4,000 in Tuition Costs Per Year

Tony Nitti, IRS Rejects S Corporation’s Ordinary Deduction For Worthless Subsidiary Stock

Keith Fogg, 9th Circuit Bankruptcy Appellate Panel Decision on Unfiled Returns Takes Issue Back to the Future (Procedurally Taxing). On tax discharges in bankruptcy.

Peter Reilly, How Much Is That Picasso In The Window? Tax Court Says Quite A Bit.

Jason Dinesen reviews his Top 5 Blog Posts of 2015

Annette Nellen, Top Ten Items of Tax Policy Interest for 2015 – #9. The sharing economy is discussed.

 

Kay Bell, Hard cider makers toasting new tax law changes

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Scott Greenberg, Regarding the “Private Tax System” of the Wealthy (Tax Policy Blog). “The most important reason why the 400 highest-income taxpayers pay an income tax rate of 17 percent is not a loophole; it is the lower rate on long-term capital gains and qualified dividends (20 percent in 2012, 23.8 percent since 2013).” Like I said yesterday, but with more and better explanation.

Richard Auxier, What you can learn about the tax policies of governors running for president (TaxVox).  See more at:

TaxProf, The IRS Scandal, Day 966

 

Career Corner. Auto Supplies, a Condescending Partner and Chick-fil-A: An Inventory Count Horror Story (Leona May, Going Concern).

 

Happy New Year, everyone! Thanks for reading in 2015, and best wishes for 2016 for you and for all my tax fellow bloggers, few of whom I’ve met, but who all make every day of writing the Tax Update enjoyable and rewarding.

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Tax Roundup, 12/30/15: What needs to be paid by tomorrow. And: NY Times has fun with a chart.

December 30th, 2015 by Joe Kristan

20141226-1Things that have to be paid for by the end of the day tomorrow. The unforgiving calendar is nearly ready to turn, and that leaves only today and tomorrow to do some things to help lower 2015 taxes. Some expenses are only deductible if they are paid by the deadline.

For cash basis business taxpayers, payment needs to be made for most business expenses by the end of the day tomorrow. “Payment” means the check is written and postmarked, or a wire transfer is completed, or a legitimate liability has been incurred. If it’s on the credit card by the end of the day tomorrow, it’s considered paid for.

The only business expenses that normally can be paid and deducted after year-end for cash-basis taxpayers are pension and profit-sharing contributions. these are deductible this year if paid by the due date of the 2015 tax return, including any extensions.

For accrual-basis taxpayers, any expenses owed related parties are deductible only if paid by the end of the day tomorrow (Section 267). For C corporations, this generally includes expenses owed to 50% owners and their family members, and to corporations and partnerships owned by 50% owners. For S corporations and partnerships, any ownership at all makes you “related,” and the definition of “family” goes beyond ancestors, descendants and siblings to include aunts, uncles, nephews and nieces.. These rules can get complicated, so be sure to pay by tomorrow or consult your tax advisor if you aren’t sure.

Gifts are a different story. It’s not enough to mail a check by tomorrow to count as a 2015 gift; the check actually must be cashed. If you are trying to get an annual exclusion gift under the wire by tomorrow, consider a wire transfer or a cashiers check.

Charitable contributions can deducted this year if mailed this year, but be sure to get a certified mail postmark if it’s a big one — or better yet, use a credit card. If you are making a gift of appreciated stock, it has to be in the charity’s brokerage account by the end of the day tomorrow to count.

Finally, if you are spending money on depreciable property, even if you plan to use the Section 179 deduction, it’s not enough to buy and pay for the property by tomorrow. It must be “placed in service.” That means on-site, ready to go, not at the dealership or in crates on the dock.

This is the penultimate entry of our 2015 year-end planning tips series. Come back tomorrow for the finale!

 

The New York Times yesterday ran an article headlined For the Wealthiest, a Private Tax System That Saves Them Billions: The Very Richest Are Able to Quietly Shape Tax Policy That Will Allow Them to Shield Billions in Income. It offers a lot less than it promises. It pretty much establishes that really rich people can afford expensive tax advice, and they buy it.

The article includes this misleading chart:

 

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This shows that those 400 people are really putting one over on the IRS with their clever planning, doesn’t it?  Well, not really. I’ll superimpose the top capital gains rates that applied for the years on the chart (sourced here):

 

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Funny how that income tax rates of those sneaky 400 people correspond with the top capital gain rates. Why would that be — because those dastardly 400 rich people conspire to incur capital gains?

No. As we’ve pointed out here, capital gains are what get people on that top 400 list. They normally hit the top 400 only once, by having a once-in-a-lifetime capital gain, like the sale of a business.

You also may notice that the New York Times cuts off the chart conveniently right before two big increases in the capital gain rate — the 2013 expiration of the Bush 15% capital gain rates and the 2013 effective date of the 3.8% net investment income tax. You can bet that the line goes right back up starting in 2013.

Update, 12/30/15, 4:25 pm, from The Washington Post:

On Wednesday, the Internal Revenue Service published an update to its annual assessment of how much the 400 highest-earning Americans pay in taxes. It showed that the effective tax rate paid by those Americans jumped in 2013 to nearly 23 percent.

Gee, amazing how that works! I’ve updated the chart to show the new number.

Correction: this post originally stated in error that the Net Investment Income Tax took effect in 2014, instead of 2013.

Related: Scott Hodge, New Treasury Data Shows How Progressive America’s Tax Code Really Is (Tax Policy Blog):

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More coverage: TaxProf, NY Times:  How The Ultra Wealthy Buy Tax Policy

Robert D. Flach, THE YEAR IN TAXES 2015

TaxGrrrl, 12 Days Of Charitable Giving 2015: The Innocence Project

Robert Wood, Tax Double Whammy: IRS Can Revoke Passports And Uses Collection Agencies

Peter Reilly, World Class Rider Does Not Insure Allowable Tax Losses In Horse Case

Kay Bell, IRS seeks tax pros’ input on fighting tax ID theft fraud

William Perez, Forgiven or canceled mortgage debts could be nontaxable

Paul Neiffer, 50% Bonus Depreciation Applies to More Property. “Any interior improvement made to non-residential real estate will qualify for bonus depreciation with certain exceptions for (1) elevators and escalators, (2) internal structural framework, and (3) enlarging a building.”

 

TaxProf, The IRS Scandal, Day 965:

Donors listing the IRS as their employer have donated roughly $453,800 to Democratic candidates and causes and $221,400 to Republican candidates and causes since 1990. About one in four of the dollars for Democrats, or roughly $117,500, went to President Barack Obama.

But IRS employees since 1990 have also donated $203,000 to the National Treasury Employees Union, which in turn has given about 95 percent of its $6 million in political contributions to Democrats over the last 25 years, OpenSecrets.org data shows.

Yet we are asked to believe the IRS operates in a fair and neutral manner towards all political persuasions.

 

Harvey Galper, Five Questions to Ask When You Look at a Presidential Candidate’s Tax Plan (TaxVox). How about, “Should I seek counseling?”

 

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Tax Roundup, 12/29/15: No year-end basis, no S corporation loss. And: ACA 1095 deadlines extended.

December 29th, 2015 by Joe Kristan

S-SidewalkBasis or bust. With the re-enactment of bonus depreciation for 2015, some S corporations find themselves with taxable losses for 2015. That won’t do much for the 2015 tax returns of S corporation shareholders who have no basis in their stock at year-end. While they also have to get by the “at-risk” and “passive loss” limits, they don’t even get to those problems without basis.

A taxpayer’s initial basis in an S corporation is the amount paid for the stock. It is increased by capital contributions and by undistributed income of the S corporation. It is reduced by distributions of S corporation earnings and by S corporation losses. If there have been 2015 distributions, they count before the losses do.

A shareholder with no stock basis can still get deductions by loaning money to the S corporation by year-end. The loan has to meet the at-risk rules (it can’t be funded by another shareholder or by the corporation, for example), but if it meets those requirements, it can create basis for S corporation losses. But don’t do anything hokey like making a loan on December 31 and having the corporation repay it on January 3.

It’s a trap! Well, it doesn’t have to be, but remember that any losses you take against a loan reduce the basis of the loan. That means that if the loan is repaid before the losses are restored by S corporation income, the repayment will be taxable gain to the extent of the unrestored losses.

This is another installment of our 2015 year-end planning tips series running through December 31. Collect them all!

 

1095-C cornerIRS delays due dates for 1095-B and 1095-C reporting2015 is the first year many employers are required to file a new form documenting insurance coverage, or offers of coverage, for their employees. Apparently many employers are still scrambling to figure out how to comply with the complex rules, because yesterday the IRS announced (Notice 2016-4) a delay in the deadlines for providing these forms to employees and to the IRS. A summary:

2016-4 deadlines

Employers are encouraged to file under the old deadlines if they can, but they now have a blanket extension, with no need to file any extension request.

While the IRS will be processing forms starting January 16, this announcement tells us that millions of taxpayers will lack the forms they need to properly report their ACA tax credits or penalties for inadequate coverage. The IRS says that employees can rely upon “other information received” from employers or insurers, and do not have to amend returns if the 1095s they receive later show that their original amounts are incorrect. What could possibly go wrong with this? Aside from rampant errors and outright fraud, I mean.

We are now approaching six years since the enactment of the ACA, and it’s still a mess.

Related: Russ Fox, IRS: We’ll Trust You on Health Insurance for 2015 Because… “We won’t have delays regarding filing returns because taxpayers haven’t received Forms 1095-B or 1095-C as long as they’re aware of their health insurance coverage. That’s a very good thing for all.”

 

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If you are trying to lose weight added by holiday treats, go to Robert D. Flach’s place for a “slender” Tuesday Buzz!

TaxGrrrl, 12 Days Of Charitable Giving 2015: Red Paw Emergency Relief Team

Robert Wood, House Oversight Probes Hillary Speech Fees To Clinton Foundation. The assignment of income rules only apply to little people.

Leslie Book, PATH, CDP Venue and Berglund v Commissioner, A Recent Tax Court Case Where Venue Matters (Procedurally Taxing)

Jason DinesenFrom the Archives: Taxation of Emotional Distress Payments

Kay Bell, 10 tax-saving things to do by December 31

Jana Luttenegger WeilerLast Minute Tax Extenders – 2015 Edition (Davis Brown Tax Law Blog)

William Perez, Protecting Americans from Tax Hikes Act of 2015

Annette Nellen, Top Ten Items of Tax Policy Interest for 2015 – #6 and #7. Includes coverage of the return due date changes enacted this year.

Me, Forget April 15. Well, don’t, actually, but Dec. 31 matters more. My latest at IowaBiz.com, the Des Moines Business Record Business Professionals’ Blog.

 

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TaxProf, The IRS Scandal, Day 964.

Renu Zaretsky, Bans, Subsidies, Searches, and Bubbles. Today’s TaxVox headline roundup covers new EITC restrictions and Nevada’s corporate welfare cornucopia for Tesla, among other morsels.

Stephen Entin, Disentangling CAP Arguments against Tax Cuts for Capital Formation: Part 4 (Tax Policy Blog). “Most major tax bills of the last thirty years have provided serious tax reductions or refundable credits (resulting in negative taxes) for lower income families. These are extraordinarily expensive, but do next to nothing to promote capital formation to raise productivity, wages, and employment.”

 

Caleb Newquist, Opening Day of Tax Season Less Than a Month Away (Going Concern). “Anyone with a PTIN is due to report on January 4.” Haven’t renewed your PTIN yet? Get on it!

 

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Tax Roundup, 12/28/15: Harvesting without a combine. And: Tax Credits as a fiscal trap.

December 28th, 2015 by Joe Kristan

harvestThe corn’s in, but the harvest isn’t over. The tax law taxes capital gains for almost all individual taxpayers when you sell an appreciated asset, even though it shouldn’t. Still, if you’re like most of us, not everything you buy goes up.

The tax law allows individuals to deduct capital losses when they cash out a money-losing investment, up to the amount of capital gains plus $3,000. That means paying capital gain taxes is optional to the extent you have unrealized capital losses in your taxable portfolio. That’s a silly option to exercise. Here are some thoughts on loss harvesting:

You have to take the loss in a taxable account. A loss in an IRA or 401(k) plan doesn’t help you.

Normally the “trade date” is the effective date for tax purposes, so you can sell a stock as late as December 31 this year and still deduct the loss on your 2015 1040.

If you have a loss on a short sale, the tax law treats it as closing on the settlement date, not the trade date, so you can’t wait until the last minute to close a short sale to get a deduction. (See also Russ Fox, Harvesting Capital Losses: Act Quickly on Shorts!)

You don’t need to overdo it.  You can deduct your capital losses only to the extent of your capital gains, plus $3000.  But if you do overdo it, individual capital losses carry forward indefinitely.

Long-term losses can offset short-term gains, and vice-versa.

Harvesting losses helps taxpayers subject to the Obamacare/ACA Net Investment Income Tax to the extent it helps for regular taxes.

– Watch out for the wash sale rules. If you buy the same stock within the 30 days preceding or following the sale of a loss stock, your loss is disallowed. This is true even if you sell from a taxable account and buy in an IRA, according to the IRS.

See also

This is another installment of our 2015 year-end planning tips series running through December 31. 

Related — weekend tax tips:

Altaring your tax planning

Keep on giving! A high-end tax planning tip.

 

1916 Spaulding by The editors of Horseless Age. Public Domain via Wikimedia Commons.

1916 Spaulding by The editors of Horseless Age. Public Domain via Wikimedia Commons.

Tax Credits as a trapThe Sunday Des Moines Register this week told the story of a tax credit deal gone awry, leaving the small college town of Grinnell, Iowa in a financial pickle.

Grinnell once housed Spaulding Manufacturing Company, one of many small early Midwest automakers. The Spaulding story is told in my college buddy Curt McConnell’s fine book, Great Cars of the Great Plains.

There is only one known surviving Spaulding vehicle. It was to be a crown jewel of a transportation museum to be built around the dilapidated remains of the old Spaulding plant. But it hasn’t gone well, according to the Register:

Three years after it opened, the Iowa Transportation Museum has hit a dead end, losing its building to foreclosure and leaving the city of Grinnell on the hook to repay more than $4 million in federal aid for the project.

The museum, which had operated in a renovated portion of the old Spaulding manufacturing plant in downtown Grinnell, closed in October, unable to pay its mortgage to Iowa City’s MidWestOne Bank. The bank even took possession of the museum’s crown jewel, a rare 1913 Spaulding automobile built at the Grinnell plant.

It sounds as though the business plan of attracting auto tourists to Grinnell was hopelessly optimistic, but it was tax credit failure that finished things off:

The museum built its budget around receiving $900,000 in federal historic tax credits that never arrived. A 2012 federal appeals court ruling about a real estate project in New Jersey shook up the market for historic tax credits. A subsequent IRS memo explaining the ruling said, essentially, that investors should not stand to profit from historic tax credits without shouldering some of the risk. As a result, investors backed away from historic tax credit projects.

“That is where things really started to come apart on us, and it was just kind of a chain reaction from there,” Brooke said.

This is where I find myself puzzled. By their terms, federal historic rehab credits have never been transferable. A transferable tax credit can be sold by the original recipient to cash in on a tax break too big to use by itself. Tax credit middlemen tried to make them transferable by setting up “partnership” structures where investors were nominal partners, but really were in it only for the tax credits, with economic gains and losses from the rehab project allocated elsewhere.

To my surprise, the Tax Court had gone along with that structure, but the Third Circuit Court of Appeals reversed them in Historic Boardwalk Hall LLC (CA-3, No. 11-1832). The court held that because the tax credit investor didn’t share meaningfully in either potential income or loss from the project, it wasn’t a partner eligible for tax credits.

That was the risk I had always seen in these deals, and it came home to Grinnell.

The Moral? When it takes tax credits to make a deal work, it doesn’t really work. It’s just crony capitalism.

Enjoying a short Des Moines winter commute.

Enjoying a short Des Moines winter commute.

Robert D. Flach has started a new organization, TAX PROFESSIONALS FOR TAX REFORM. “We believe that the one and only purpose of the Tax Code is to raise the money necessary to fund the government.” A worthy cause.

William Perez, Understanding Canceled Debt Income and Taxes

Kay Bell, Uncommon charitable gifts still provide donors the typical tax deduction. A discussion of property donations. “As with all tax deductible donations, you also need to make these more uncommon ones by Dec. 31 in order to claim them on this year’s taxes.”

Paul Neiffer, Farm and Ranch Provided Housing. A partnership, sole proprietor or S corporation cannot provide and deduct employee related housing for any of its owners (unless they own less than 2% AND are not related to any other owners).”

TaxGrrrl, 12 Days Of Charitable Giving 2015: Fender Music Foundation

 

Seventh Avenue, Des Moines, this morning.

TaxProf, Hemel:  Taxes To Cause Vanguard Fund Fees To ‘Quadruple’? Not So Fast. We know the nosy busybodies would punish Vanguard’s small saver base with higher fees to feed the federal black hole. The only dispute is how much.

Tax Policy Blog, Apple CEO Tim Cook: We Need a Tax Code for the Digital Age. “The solution to ‘profit shifting’ is not a new patch to an already complicated tax code. The solution that the U.S. needs is a comprehensive tax reform that reduces both the corporate tax rate and the complexity of the entire tax code.”

TaxProf, The IRS Scandal, Day 961Day 962Day 963. The Day 961 post notes the obvious problems of giving one of the most aggressively secretive agencies power over passports. Day 962 inadvertently confirms one of the driving forces of the IRS scandal — ongoing bitterness over the Citizens United decision preventing bureaucrats from selectively restricting free speech rights.

Robert Wood, More Calls To Impeach IRS Chief Over Targeting, Bonuses, Obstruction

 

Stuart Gibson, Unlikely New Year’s Resolutions (Tax Analysts Blog). Like these:

-Citizens of Greece: Pay all the taxes they owe.

-Greek tax collectors: Pay all taxes they collect into the Greek treasury.

Unlikely indeed.

 

Peter Reilly, Did You Hear The One About Bernie Sanders And Kent Hovind Walking Into A Tax Blog? Well, Bernie is evidence of the co-existence of dinosaurs and hominids.

 

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Altaring your tax planning

December 27th, 2015 by Joe Kristan
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Margaret and John Kristan, Newlyweds, 1952.

Today is the 63rd anniversary of my parents’ wedding, so today’s post goes up in their honor.

Love is a many-splendored thing, but love is even better when it saves taxes. Your marital status at year-end is your filing status for the entire year, so maybe you want to run down to the courthouse and tie the knot before the ball drops before midnight January 1, local time. Sure, call me a hopeless romantic. The Tax Update just rolls that way.

A quick trip to the preacher may be in order in the following circumstances — assuming, of course, you have sufficient non-tax reasons to get married:

– One prospective spouse has a big capital gain, and the other has capital losses that would otherwise go unused.

– One of you has passive income, the other has passive losses. If you are married on the last day of the year, the losses can offset the income on a joint return.

– One of you has substantial income in 2013, and the other doesn’t. If you have only one income between the two of you, you’ll save taxes on a joint return because of the wider tax brackets on a joint filing.

– If you are Iowans, and one of you has pension income, marriage will enable you to exclude up to $12,000 from your Iowa income tax return. A single filer can only exclude $6,000.

– One of you has AGI over $200,000 and investment income, and the other has AGI under $50,000.  A quick wedding gets the higher-earning spouse out of the new Obamacare Net Investment Income Tax.

But it’s a complicated calculation, as this Tax Foundation chart illustrates:

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There are  other special circumstances that could lead you to tie the knot. A good tax marriage results when one partner has tax attributes, like capital losses, that can be used on a joint return but would not be useful on a single return. Other such items could include tax credit carryforwards and investment interest carryforwards.

‘Til death do us part, but you first! For the wealthy single taxpayer, the estate tax can also offer a more macabre tax planning opportunity. By marrying and surviving a poor spouse, the rich spouse can pick up an extra $5.4 million in estate tax exemption. That’s because a widowed spouse can now inherit the short-lived spouse’s unused exemption.

Of course these things apply to couples pondering divorce, too, but that’s too sad to dwell on this time of year. Oops, I just did. And some couples, particularly those where both have good incomes, are better off postponing marriage, or (shudder) accelerating divorce.

Anyway, you should marry for the right reasons. But if you can both be in love and cut your taxes, why not let IRS help pay for your honeymoon?

Check back tomorrow for another installment of our 2015 year-end planning tips series

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Keep on giving! A high-end tax planning tip.

December 26th, 2015 by Joe Kristan

20151226-1As the holiday giving frenzy morphs into the holiday return frenzy, many tax-wise folks are still thinking of giving. Taxpayers with enough net worth to worry about paying estate tax are considering their annual gifts to family (the estate tax kicks in for estates starting at $5.43 million in 2015). For such taxpayers, the basic tool is the $14,000 per-donor, per-donee gift tax exclusion. A couple with four kids maximizing annual giving can reduce their taxable estates by $560,000 over five years, not even counting appreciation of the gift.

Taxpayers often ignore the opportunities for annual giving, thinking “the annual exclusion will be there for me next year.” While true, that’s the 2016 exclusion. But then the 2015 opportunity is lost forever – for our hypothetical four-child couple, it’s a $560,000 tax-saving move lost.

If it’s worth doing, it’s worth doing right. To get the gift to count in 2015, here are some tips:

– If you’re writing a check, march the lucky recipient down to the bank to cash it by December 31. Checks not cashed by year-end normally won’t count as 2015 gifts.

– If you are donating private company stock, make sure the corporate secretary records the transfer on the company’s books by year-end. Also make sure the tax returns reflect the gift – if you make a December 28 gift of S corporation stock, make sure the donee gets a K-1 showing income for the 12/28 through 12/31 period.

– If you are donating public company stock, make sure it’s in the donee’s brokerage account before the end of the day December 31.

Personal gifts are neither deductible to the donor nor taxable to the recipient. For non-cash gifts, the recipient steps into the donors basis for a future sale if the property has appreciated.  If the value at the date of gift is less than the basis, the recipients basis for determining loss only is the date of gift value.

Plan on filing a gift tax return for any property gifts, even if you owe not gift tax; a properly prepared gift tax return starts the three-year statute of limitations, preventing any future IRS quibbling over the values.

Check back tomorrow for another installment of our 2015 year-end planning tips series

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Year-end tip: The Iowa Student Tuition Organization Tax Credit

December 24th, 2015 by Joe Kristan

20151224-1If you’re in a generous mood on Christmas Eve but want more out of your charitable gift than a straight-up deduction, consider a gift to an Iowa Student Tuition Organization. A gift to an STO yields a 65% non-refundable Iowa tax credit, in addition to the federal charitable deduction. You don’t get an Iowa charitable deduction, but that trades an 8.9-cent benefit for a 65-cent tax benefit, so that works.

Student Tuition Organizations exist to help make private K-12 schools affordable for lower-income families. Iowa has 12 STOs, listed here.

The credit is capped annually, though, so some STOs may have already used up their 2015 credits, and you would have to wait until 2016 to get one. Eligible donors get a certificate with a unique identification number that they use when they claim the credit. 

More information is available from Jason Dinesen or the Iowa Alliance for Choice in Education.

Programming note: The Tax Update is taking it easy the rest of this week. Tax Roundups resume Monday, but check back every day the rest of the year for another installment of our 2015 year-end planning tips series

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Tax Roundup, 12/23/15: The wisdom, or not, of paying taxes by year-end. And: Deep thoughts at Think Progress.

December 23rd, 2015 by Joe Kristan

dimeIs it wise to prepay deductible taxes? Paying 4th quarter estimated taxes before December 31 is a standard piece of the year-end tax planning toolkit. Sometimes taxpayers go further and pay in December all of their taxes that would be due in the following April. Is it wise to pay all of your taxes 3 1/2 months early to move a deduction up a year?

The first question you have to answer, with regard to payments of state and local taxes deductible on your federal return, is whether you will be paying alternative minimum tax this year or next year. For example, a taxpayer with an unusual lump of income this year who waits until next year to pay state taxes may trigger AMT next year, wasting those state tax deductions. On the other side of the coin, taxpayers who are in AMT this year get no value from prepaying deductible taxes, so they might as well put the money to work until the taxes are due.

If the taxes are just as deductible in either year, it’s a time value of money question. What is the present value of spending a dollar now to get a fraction of that back as a tax benefit a year earlier? I’ve run some numbers, using the top Iowa marginal tax rate and the rates at the different federal brackets:

2015 year-end payments pv2

This shows a benefit at all brackets from prepaying estimates due in January, but prepaying taxes due in April only makes sense at higher brackets, and it never works to prepay September property taxes in the prior year if AMT is not a factor.

This is another installment of our 2015 year-end planning tips series

 

Think Progress is an openly partisan agitation outfit, so we shouldn’t expect it to know much about taxes. Still, it is a regular source of talking points for a certain breed of politicians who promise to spend everything on everyone, all to be paid for by someone else. That makes it worthwhile to occasionally correct it for saying something half-baked like this (my emphasis):

There may be some truth to the, as no one has accused Apple of doing anything illegal. But while Cook has advocated for lowering the corporate tax rate and closing loopholes, corporate taxes are already a shrinking portion of the government’s revenue, getting replaced instead by payroll taxes paid by working people.

Yes, corporate taxes are a shrinking portion of government revenue. But it’s not because the corporate tax law has suddenly become lax. It’s because most businesses are no longer taxable as corporations in the first place.

entity forms chart

Source: Tax Foundation

The 1986 tax reforms made it sensible for most closely-held businesses to be partnerships or S corporations. Unlike C corporations, which pay corporation taxes, these “pass-through entities” don’t pay taxes; instead, the income is reported on their owners’ 1040s.

Think Progress says the C corporation taxes are being replaced by “payroll taxes on working people.” That’s demonstrably wrong. C corporation taxes are being supplanted by business taxes paid on 1040s, which are generally paid at high tax brackets. Perhaps Think Progress has developed a strange new respect for hard-working high-bracket individuals.

Tax foundation Distribution of Federal Taxes in 2014

Chart Courtesy Tax Foundation

Cracking down on C corporations, as Think Progress advocates, will do nothing but confirm the trend away from C corporation taxation. I suppose then they’ll just continue the beatings until morale improves.

Related: Individual Tax Rates Also Impact Business Activity Due to High Number of Pass-Throughs (Scott Hodge, Alex Raut)

 

WOWT.com, Former Omaha IRS Agent Arrested for Tax Fraud Scheme. And yet we are told that these people need to regulate preparers to stop tax fraud.

 

Jared Walczak, States Lag Behind Federal Government on Small Business Expensing (Tax Policy Blog). “Forty-five states and the District of Columbia allow first-year expensing of small business capital investment under Section 179. Of those, thirty-four states are in conformity with the now-permanent $500,000 federal expensing level.”

William Perez, How Do You Claim a Sales Tax Deduction on Your Federal Taxes?

Annette Nellen, Top Ten Items of Tax Policy Interest for 2015 – #3. Thoughts on the Quill decision.

Kay Bell, Home energy tax breaks are extended, just in time for the arrival of, for many, an unusually warm winter

Jack Townsend, U.S. Taxpayer Seeks Declaratory Judgment that Goevernment Must Prove Willfulness for the FBAR Willful Penalty by Clear and Convincing Evidence. Given the stakes, it seems only fair, but the IRS prefers to be able to cause financial ruin with cloudy and unconvincing evidence.

 

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Jason Dinesen, From the Archives: Taxpayer Identity Theft, Part 2

Jim Maule asks Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit? I say its a revenue grab combined with moral preening.

Stephen Olsen, Summary Opinions for November (Procedurally Taxing). A roundup of tax procedure headlines.

Robert Wood, 5 Things To Know About Year-End’s Massive Tax Bill

TaxGrrrl, Real Housewife Teresa Giudice Released From Federal Prison

Tony Nitti, Moving? Don’t Forget The Tax Deduction. “At 23 years old I packed up my life, and in a move made popular by members of the witness protection program, fled New Jersey for the quiet of the Colorado mountains.”

Robert D. Flach talks about priorities in A YEAR-END TAX QUESTION FROM A CLIENT

 

Cheer up! Social Security is Still Going Broke (Arnold Kling)

TaxProf, The IRS Scandal, Day 958

Howard Gleckman, Trump Would Slash Taxes for the Top 0.1 Percent By An Average of $1.3 Million, Add Nearly $10 Trillion to the Debt (TaxVox)

 

Thanks a bunch, Prof. Avi-Yonah. CBS News:  Vanguard Investors, Your Fund Fees Could Quadruple If Michigan Tax Prof Reuven Avi-Yonah Is Right (TaxProf). A great example of how with a little corporation-bashing, busybody do-gooders would screw millions of small investors.

 

Holiday Giving News from the Profession. This Flask-Calculator Is the Perfect Gift for the Accountant Who Drinks Everything (Caleb Newquist, Going Concern)

 

 

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