Posts Tagged ‘Fiscal Cliff’

Tax Roundup, 1/14/2013: Big webcast today! Meanwhile, outlook bleak for Iowa income tax policy.

Monday, January 14th, 2013 by Joe Kristan

20130114-1New law webcast today!  I will be participating in a webcast today on the new Fiscal Cliff law and other recent tax developments.  The webcast, sponsored by the Iowa Bar Association, will start at noon.  I will join Roger McEowen of the ISU Center for Agricultural Law and Taxation, and IRS Taxpayer Liason Christy Maitre.   Cost:  $35 for IBA tax school attendees and attendees of any 2012 CALT Farm and Urban Tax School; $35; $75 otherwise.  Agenda here, registration page here.  2 hours of timely CPE and Tax Update fun!

 

No good will come of this.  The 2013 session of the 85th Iowa General Assembly begins today, and the outlook for improvement in Iowa’s tax system is bleak.  Iowa business groups have firmly embraced a state tax incentive policy based on taking money from all of us to bribe well-connected businesses to do things they would do anyway.  From the Sioux City Journal:

Business groups like the Iowa Chamber Alliance, a non-partisan coalition representing 16 chambers of commerce and economic development organizations, are supporting a variety of tax credits to retain, grow and attract investments in the state. Those credits include restoring the $185 million cap on economic development tax credits that currently stands at $125 million for fiscal 2013.

Jason Hutcheson, chief executive officer of the Greater Burlington Partnership, said tax credits are a highly effective tool that deliver a high return on investment and are essential to retain, expand and recruit businesses and to attract technology and research. ICA members also are lobbying legislators to spend at least $25 million for business development incentives after the line item was shrunk to $15 million for the current fiscal year.

The politicians shed crocodile tears about just being forced to go along with a system based on them granting special favors:

Senate GOP Leader Bill Dix of Shell Rock said there is opposition to government choosing winners and losers with taxpayer-funded incentives, but he added, “There’s no question in my mind that an incentive policy is the world we live in. I don’t appreciate that and wish it wasn’t the case, but we do need a policy that includes incentives.”

You know what would be a real incentive to grow a business in Iowa?  A much simpler tax system with lower rates, one eliminating the corporate income tax altogether.  Something like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

Instead, Iowa has a horrible system built around complexity and high rates, made less painful — even lucrative — for those with the connections and lobbyists to score targeted tax credits.  The legislators hear from those people — not from the more numerous businesses  who quietly set up shop in South Dakota or other more friendly tax climates.

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The Iowa Research Credit is refundable, so Iowa writes a check when the credit exceeds the computed tax. The $45.2 million in corporate research credits claimed in 2010 resulted in $43 million in refunds.

The best we can hope for from the legislature is prompt action on “coupling” legislation to conform Iowa’s 2012 tax law to the federal changes passed earlier this month.  The 2012 filing of many Iowa returns is on hold until they do so.  We’ll see if they can even accomplish that much.

 

What does the Worst IRS Commissioner Ever do for an encore?  He becomes a guest scholar at the Brookings Institution, which may never recover (TaxProf)

Scott Drenkard, Governor Jindal’s Bold New Tax Plan  (TaxPolicy Blog).  Could you live with a higher state sales tax if the income tax goes away?  Even if it taxes accounting services?  Tempting.

Paul Neiffer, Good News – Certain Credits Offset AMT

Jack Townsend, The Big Boys Get Better Treatment in Our Tax System Than Do Minnows

Joseph Thorndike, Peggy Noonan and the Beleaguered 1 Percent

TaxGrrrl, Ask the taxgirl: Filing Your Tax Return Early

News you can use: States to seniors: Good times may be ending, and more (Patrick Temple-West, Tax Break)

The Critical Question: Your Money Or Your Life – Which Can You Deduct ? (Peter Reilly)

That’s what they say, anyway.  White House says no to Death Star.  (Kay Bell)

At least she knows her constitution.  Miss Iowa takes fifth! (TheBeanwalker.com)  UPDATE!!!  Miss America Contestant Says Marijuana Should Only Be Legal For “Recreational Use and Health Care” (Mike Riggs, Reason.com).  So don’t smoke at the office.

 

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Tax Roundup, 1/9/2013: E-filing gets underway January 30. Also: 79 year-old lady pleads to tax crimes.

Wednesday, January 9th, 2013 by Joe Kristan

20130109-1The IRS announced yesterday (IR-2013-2) that it will begin processing 1040s January 30.  From where I stand that’s right on time, as very few of our clients have their 1099s, W-2s and K-1s before then anyway.

The IRS will be unable to process some returns that soon.  From the IRS press release:

There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.

The key forms that require more extensive programming changes include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit). A full listing of the forms that won’t be accepted until later is available on IRS.gov.

Form 8582, used to report passive losses, is one of the forms that will cause delays.

State taxes, that will be another matter.  As the legislature has to decide whether to accept the retroactive changes to the tax law, many Iowans will have to wait awhile to know what the 2012 Iowa rules are.

 

Tax Update on Iowa Cable Network tomorrow.  I will be giving a rundown Thursday at 6:00 pm on the Fiscal Cliff tax bill and other recent tax developments in an ICN broadcast (is that the right word for a closed-circuit presentation?) for the Institute of Management Accountants.  There will be a live audience at 6500 Corporate Drive, Johnston and viewing sessions at Grinnell High School, Marion High School, Keystone AEA (Dubuque) and St. Ambrose University.  Contact Kathy Smith, ksmith4dlord@gmail.com, if you are interested.

 

The TaxProf gives a non-subscriber link to Ethan Yale’s Taxing Market Discount on Distressed Debt, which appeared in Tax Notes yesterday.  The paper talks about the weird and ugly issues that arise when a third party buys bad loans and tries to collect.  The market discount rules treat the debt as having a real high interest rate, with all payments principal first, based on the difference between the discounted purchase price and the face amount of the debt.  The rules also can cause the income on collections to be ordinary, but the losses to be capital.

The paper talks about why these rules don’t make sense for deeply-discounted debt.   If you buy a debt at 50% of face due in one year, it doesn’t make sense to assume that it will cash out at a 100% APR return, but that’s how the regulations would work.  The paper also covers arguments taxpayers can make to try to ameliorate the harsh treatment that the market discount rules would apply, but there’s no assurance the IRS would buy them.

 

A 79 year-old widow pleads guilty to concealing overseas bank accountsShe agrees to pay over $20 million in penalties in the plea deal and faces up to six years in prison, according to a Department of Justice press releaseJack Townsend has more.

 

Fiscal Cliff Notes

Problem solved!  Well, not really.  You know how the tax increases in the Fiscal Cliff legislation won’t begin to solve the $1.2 trillion deficit?  The Congressional Research Service reports that it’s even worse: it will increase the current fiscal year deficit by $330 billion and the cumulative 10-year deficit by $4 trillion.  ($link through Tax Analysts)

Howard Gleckman, Grim Predictions about the Fiscal Cliff II and Deficit Reduction (TaxVox):

I spent lunchtime today moderating a thoroughly discouraging Urban Institute panel discussion  on the fiscal cliff. The consensus of the speakers—all highly-regarded budget experts—was that the New Year’s cliff deal was pretty lame and the coming round of self-imposed budget crises will be even worse.

Oh, goody.

Roger McEowen on the Fiscal Cliff bill: A short summary of the most significant provisions. 

Paul Neiffer,  Reprieve For S Corporations With Built-in Gain

Patrick Temple-West,  Insiders benefited from special dividends, and more (Tax Break)

William McBride,  Taxes Up, Stocks Up, What Can Go Wrong? (Tax Policy Blog)

Jana Luttenegger,  Filing for 2012 Taxes Delayed Until January 30 (Davis Brown Tax Law Blog)

TaxGrrrl, IRS Announces Delayed Tax Filing Season

Russ Fox,  IRS Announces Tax Season to Start on January 30th

 

David Brunori, Good — and Not so Good — Corporate Tax Ideas from New Mexico (Tax.com):

New Mexico Governor Susana Martinez, a rising star among GOP politicians, is calling for a steep reduction in the corporate tax rate.   She proposes cutting the rate from 7.6 to 4.9 percent. That is good news. The corporate income tax is — and will likely remain — one of the worst ways to raise revenue for state governments. The tax is inefficient, ineffective, and distorts economic decision making. It would be better if Governor Martinez called for the repeal of the tax, but whittling it down is okay as well.

Repeal of the corporate income tax would be a good idea in Iowa as well, but the influential corporations that get big checks from the state via the tax law aren’t going to jump on the repeal bandwagon.

 

Jason Dinesen, The IRS — Putting Paperwork Ahead of People.   Doug Shulman’s legacy of identity theft nightmares lingers.

Kay Bell, Tax Carnival #110: Happy New Tax Year

It’s Wednesday, so it’s Buzz Day at Robert D. Flach’s place.

Socially-awkward, that’s something else.  Great News: Accountants Are Less Likely To Be Psychopaths (Going Concern)

News you can use:  The Problem With Libertarian Women is Not Libertarian Men (Megan McArdle)

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Tax Roundup, 1/7/2013: Economist says Iowa’s problem is income tax, not property tax. And: thieves don’t report all of their income?

Monday, January 7th, 2013 by Joe Kristan

O. Kay Henderson reports that maybe the Branstad focus on property taxes is misplaced in Economist: Iowa income taxes not competitive:

A Midwestern economist says Iowa policymakers should focus on cutting income taxes rather than property taxes. Ernie Goss, an economist at Creighton University in Omaha, says Iowa’s income tax rates are fifth highest in the country.

“In terms of what Iowa needs to look at, in my judgement, given what’s going on in Kansas, what’s about to go on in Nebraska — Iowa’s neighbors — you need to look at income taxes, in terms of being more competitive,” Goss says.

Iowa property taxes are too high, but income taxes  matter more for many taxpayers.  While property taxes are a big deal to companies that own real estate, like a manufacturer or a big insurance company, income taxes can mean a lot more to a start-up or a tech company.  Fortunately the Tax Update’s Quick and Dirty Iowa Tax Reform Plan is ready to go!

 

Making a dent in the deficit!  A chart shows how much the tax increases on “The Rich” will reduce the $1.2 trillion federal deficit (new taxes in green, deficit in red)

Fiscal cliff taxes vs deficit

Either the government spends a lot less, or taxes go up a lot for everyone. The rich guy isn’t buying

 

The IRS isn’t buying, either.   Tax Analysts reports Better IRS Enforcement Could Net $1 Billion More a Year, Says GAO ($link).   $1 billion is less than 1/1000 of the deficit.  They won’t audit their way to solvency.

 

Breaking tax news from the Eisenhower administration:

Amity Shlaes,   Think Obama’s Tax Hikes Are Low Compared With Rates Of The 1950s? Think Again.  (Via Instapundit)

Andrew Biggs,  Were taxes really higher in the 1950s?

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It’s Monday.  Do you know if your payroll taxes have been remitted?  Another sad story of a payroll service provider who decided he needed taxes withheld from his clients more than the IRS did.  Digtriad.com reports that Arthur Weiss of Winston-Salem, North Carolina is going away for 15 years:

Case documents show Weiss operated professional employer organizations (PEOs), which provided payroll-related services to client companies. For his client companies, Weiss agreed to pay the employees, withhold and remit federal and state taxes, prepare and file the federal and state employment tax returns  and provide workers compensation insurance (WCI).

Weiss did pay the employees and withhold the employment taxes, but he failed to remit the employment taxes, keeping them for his personal use.

PEOs that file taxes under their own names and ID numbers have a hidden danger: their clients can’t verify that the IRS has received their payments via the Electronic Federal Tax Payment System (EFTPS).  Employers can use EFTPS to monitor payments when they use a payroll service that reports employee taxes under the employer’s own name and Tax ID number.  This makes it necessary for taxpayers to investigate PEO-type providers very carefully before trusting them with payroll services.  If your payroll taxes are stolen by your payroll provider, the IRS will come after you to collect.  Not many employers can afford to pay payroll taxes twice.

Russ Fox has more.

 

Few thieves report their income honestly.  From WHOTV.com:

Disgraced former Peregrine Financial CEO Russell Wasendorf Sr. is in jail awaiting sentencing for embezzling over $200-million in customer funds, fraud, and lying to federal regulators.

Now the state says he may have also cheated on his taxes.

Records show the [Iowa Department of Revenue] filed an assessment in November against Russ  and Connie seeking $14.1-million in unpaid taxes and penalties to Iowa.

Good luck collecting anything.

 

Fiscal Cliff Notes:

TaxProf,  WSJ: The Stealth Tax Hike — Why the New $450,000 Income Threshold Is a Political Fiction

Elected representatives at work.  Tim Carney: Baucus rewards ex-staffers with tax breaks for their clients:

Tax breaks for Hollywood, NASCAR, windmills, algae and multinational corporations ended up in the “fiscal cliff” bill thanks to President Obama, according to Senate Republican sources. But they were spawned by a web of lobbyists, donors and staffers surrounding Democratic Sen. Max Baucus of Montana.

Baucus’ Finance Committee passed a bill in August extending 50 expiring deductions and credits for favored industries. At Obama’s insistence, the Baucus bill was cut and pasted word for word into the cliff legislation.

But it’s all for our own good, I’m sure.

William Perez, President Signs the American Taxpayer Relief Act into Law

The ‘fiscal cliff’ bill and Iowa entrepreneursMy new post at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs.

Paul Neiffer,  Up to Ten Capital Gains Tax Rates for 2013!

Janet Novack,  The Forbes Guide To The Fiscal Cliff Tax Deal

TaxGrrrl,  10 Things You Should Know About The Fiscal Cliff Deal

 

Kay Bell,  Ravens, Redskins and tax revenue

Brian Strahle,  Minimize Restructuring Costs with State Tax Due Diligence

Peter Reilly,  War Tax Resisters – Don’t Call Them Frivolous.

Patrick Temple-West,  Inquiry into tech giants’ tax strategies nears end, and more (Tax Break)

Kaye A. Thomas,  American Taxpayer Relief Act

Tax Trials,  Senate Confirms Two New Tax Court Judges

Robert D. Flach ponders whether he should rename his Buzz roundup of tax news.  Don’t do it, Robert!

 

Make up your minds!

Tax Analysts, New Congress’s Partisanship, Inexperience May Hurt Chances for Tax Reform 

The Hill:  Tax reform more likely after ‘fiscal cliff’ agreement, say House Republicans. (Via Instapundit)

 

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Tax Roundup, 1/4/2013: How many seconds of federal spending do you cover? And more debris from the bottom of the Fiscal Cliff.

Friday, January 4th, 2013 by Joe Kristan

20130104-1Spending, by the numbers.  Local radio guy Brian Gongol asks, Why do we baffle ourselves with huge numbers instead of talking about budgets in per-person terms?  Why, indeed?  You could ask 100 people on the street how much money the government spends and how big the deficit is, and you would be lucky to get the size of the budget within a trillion dollars.  The numbers are hard to comprehend.

The ability of the politicians to get away with talk about “millionaires and billionaires” proves this — a billion is 1,000 million, and while there are likely people on your street with a net worth of $1 million, you probably haven’t met anybody worth $1 billion.  They aren’t remotely the same thing.

In doing year-end tax projections for a client with a once-in-a-lifetime gain from a business sale and a huge resulting tax liability, I wondered how long his enormous (to me) liability would keep the government running.  Dividing the 2012 fiscal year spending of $3.796 trillion by the 31,536,000 seconds in a 365-day year, I figure that the federal blob spends $120,370.37 per second.  The biggest tax liability I’ve ever seen comes well short of funding 2 minutes of government operations.  I probably will never cover a second.  Where do you fit?

 

Fiscal Cliff Webinar!   I will be appearing with Roger McEowen on the “Tax Notes From the Fiscal Cliff” webinar at Noon January 14.  We will be covering the new legislation and the proposed 3.8% “Net Investment Income Tax” regulations.  Register today!

 

The IRS has published new withholding tables for the Fiscal Cliff Legislation (Accounting today)

 

Fiscal Cliff Notes:

Wall Street Journal:  Cliff Fix Hits Small Business; Many Small Entities or Firms May Face Higher Taxes This Year After the Deal

David Henderson, Pssst:  Someone tell the Republicans they won:

So here’s the big news: the anti-tax side won.  Sure, Obama would love
to raise taxes even more, especially on people making between $200K and $450K.  But now he has almost zero leverage to do that. 

I think that’s about right.  And now the President has lost his ability to distract attention from the ongoing fiscal calamity with arm-waving about “millionaires and billionaires.”

Derek Thompson, Sorry, Middle Class: In a Few Years, Your Taxes Will Have to Go Up, Too (via Going Concern).  You know, we could try spending less.  In any case, the rich guy isn’t buying.

Tim Carney: How corporate tax credits got in the ‘cliff’ deal

Katrina Trinko, Hollywood, Electric Scooters Benefit From Tax Breaks in Fiscal Cliff Bill (The Corner)

Brad Plumer, From NASCAR to rum, the 10 weirdest parts of the ‘fiscal cliff’ bill (Wonkblog, via Tyler Cowen).

Chris James, Fiscal Cliff Deal Adjust Capital Gain Rates and Qualified Dividend Rates (Davis Brown Tax Law Blog)

Paul Neiffer, Some More Goodies Buried in the Fine Print

Kay Bell, Redefining ‘wealthy’ for tax purposes

Tax Trials, Fiscal Cliff Legislation – American Taxpayer Relief Act of 2012

Patrick Temple-West, Cliff fix hits small business, and more

Nick Kasprak, 2013 Tax Brackets (Tax Policy Blog)

Roberton Williams, TPC Tax Calculator Shows What Avoiding Fiscal Cliff Means for Taxpayers (TaxV0x)

Howard Gleckman,  What the Fiscal Cliff Deal Really Means for Taxes and Spending

TaxProf,  More Fiscal Cliff Tax Commentary

 

In other news…

Jack Townsend, Wegelin & Co. Pleads Guity to Conspiracy

Lynnley Browning, Swiss bank Wegelin to close after guilty plea.  They opened in 1741.

Jason Dinesen, Tax Predictions for 2013

Trish McIntire, Disclosing Prisoner Returns

Taxdood, Intrastate iGaming: Federal Reporting and Withholding Tax Obligations

Robert D. Flach, WTF IS THIS AMT EVERYONE IS TALKING ABOUT?

News you can use: “Have Fun and Don’t Be Bored” (Brian Strahle)

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Tax Roundup, 1/3/2013: Now Iowa’s filing season is a mess.

Thursday, January 3rd, 2013 by Joe Kristan
The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Fiscal Cliff Bill complicates Iowa tax returns for 2012.  Iowa doesn’t automatically adopt federal tax law changes, so some retroactive tax law provisions in the Fiscal Cliff bill won’t apply to Iowa state income taxes absent action by the Iowa General Assembly.  From an Iowa Department of Revenue e-mail to practitioners yesterday:

The federal legislation passed on January 1, 2013 to avert the “fiscal cliff” included provisions for what are commonly referred to as the federal “extenders.” The federal “extenders” are not currently reflected on Iowa tax forms for 2012 and will require approval by the Iowa legislature before being allowed for Iowa tax purposes. Should legislative approval be given, Iowa online forms will be updated accordingly. The federal extender provisions include:

  • Educator Expenses (Line 24; IA 1040)
  • Tuition and Fees (Line 24; IA 1040)
  • Itemized Deduction for State Sales /Use Tax Paid (Line 4; IA Schedule A)
  • Treatment of mortgage insurance premiums as qualified residence interest (line 11, schedule A)
  • The federal section 179 expensing limit of $500,000 for 2012 and 2013 

Iowa income tax returns must be filed based upon current Iowa law. Therefore, the extenders should not be included on Iowa returns at this time.

Let’s hope the legislature acts quickly to pass conformity legislation, or we will have another messy Iowa tax season.

 

Why 12%?  Today’s Des Moines Register story on reactions by Iowa business people to the Fiscal Cliff bill quotes me as saying that Iowa businesses may face a 12% reduction in their after-tax income.  Where did I get that number?

I started by computing the after-tax amount of a dollar earned by a top-bracket taxpayer under 2012 law, assuming full detectability of Iowa taxes on the federal return and vice-versa.  That results in a combined rate of 38.92%, leaving 60.18 cents in the taxpayer’s pocket.  Under the same assumptions using the 2013 39.6% top rate and the 3.8% surtax on “passive” income, the combined federal-state effective rate goes up to 46.39%, leaving 53.61 cents after-tax.  That’s a 7.48 cent reduction in after-tax income — 12.24% of the 60.18 cent 2012 after-tax number.

The 12.24% number is actually too low because it doesn’t account for the phase-out of itemized deductions for high-income taxpayers in the new bill.  For top-bracket taxpayers, itemized deductions will be reduced 3 cents for each additional dollar of income.  The result is a hidden 1.188% additional tax.  Plugging that into our tax computation gives a combined federal and Iowa rate of 47.46%, leaving 52.54 cents after-tax.  That reduces after tax income from 2012 law by 8.54 cents, or 13.99%.

Should I assume the 3.8% passive income tax, like I do in the above examples?  It won’t apply to K-1 income if all owners “materially participate” in a pass-through business.  Those taxpayers face “only” an 8.41% reduction in their after-tax income.  If you don’t think that’s significant, consider whet your reaction would be if your employer said that your after-tax pay was going down that much.

But the 3.8% tax will apply to family members that don’t participate in the business, like out-of-town siblings, retired founders, or children of owners.  The business has to distribute at least enough to let owners pay their taxes, which means the taxpayer in the highest bracket has to be covered.  For that reason many family-owned businesses will have to distribute enough to cover the 3.8% Obamacare net investment income tax, making the combined 47.46% rate their real rate.

 

Fiscal Cliff Notes

TaxProf,  House Approves Fiscal Cliff Tax Deal

Megan McArdle, After the Fiscal Cliff: What do Democrats Want?  “I submit that just as Republicans are more interested in entitlement cuts as talking points than as actual new laws, Democrats will prove much more interested in tax hikes in theory than in practice.”

Robert D. Flach, THE AMERICAN TAXPAYER RELIEF ACT OF 2012

William McBride, Fiscal Cliff Resolved, Still Likely to Get Downgraded

TaxGrrrl, The World Will Keep Turning, Even With The Expiration Of The Payroll Tax Cuts

Patrick Temple-West, Cliff bill means some pay more taxes, and more

Trish McIntire, American Taxpayer Relief Act of 2012

Paul Neiffer, Help! What Is My Capital Gains Tax Rate?!

Kay Bell,  What’s your 2013 tax rate and other fiscal cliff tax bill questions

Margaret Van Houten,  Estate and Gift Law Tax Aspects of Fiscal Cliff Legislation (Davis Brown Tax Law Blog)

Courtney A. Strutt Todd,  A Permanent Fix to the AMT Problem (Davis Brown Tax Law Blog)

Jana Luttenegger, Individual Tax Rates, Deductions, and Credits (Davis Brown Tax Law Blog)

 

Greg Mankiw has a pithy post that I hope he doesn’t mind me reproducing in full:

Here are the effective federal tax rates (total taxes as a percentage of
income) for 2013 under the new tax law, as estimated by the Tax Policy Center, for various income groups:

Bottom fifth: 1.9
Second fifth: 9.5
Middle fifth: 15.6
Fourth fifth: 19.0
Top fifth: 28.1

80-90 percentile: 21.5
90-95 percentile: 23.4
95-99 percentile: 26.3
Top 1 percent: 36.9
Top 0.1 percent: 39.6

 

Russ Fox,  Your Mileage Log: Start It Now!  Great advice.  If you travel on business and the IRS comes by, you’ll be glad you have that log.

David Brunori,   Only Tax Professionals Benefit from the State Corporate Tax.  (Tax Analysts Blog) Well, the loophole lobbyists do pretty well by it too.

Peter Reilly, Form 8332 – Don’t Let The Kids Live In Another Home Without One ?

TaxTV, IRS Penalty Relief-First Time Penalty Abate Program

Robert Goulder, The Unspoken Tax Expenditure (Tax Analysts Blog)

Jack Townsend, New Article on the Emerging Consensus for Taxing Offshore Accounts

William Perez,  Social Security Tax For 2013

 

Career planning news you can use:  Life After Public Accounting: Harassing Auditors For a Living Isn’t a Bad Gig If You Can Get It  (Going Concern)

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Tax Roundup, 1/2/2013: Yay, we didn’t fall off the cliff! Too bad we’re still doomed.

Wednesday, January 2nd, 2013 by Joe Kristan

So tax season can go on.  The IRS will have to activate some of the “reserved” boxes on its forms, but with the passage of HR 8 yesterday, filing season should be able to continue without catastrophic disruption.  I summarized the key pieces yesterday here.

So what did they accomplish?  They permanently “patched” the alternative minimum tax, and that is a real accomplishment.  Far better to repeal a deeply dishonest tax, but at least now they have stopped placing a time bomb in the tax law set to go off every year or two.

They raised the top marginal rate on “the rich” to something over 40%, with a stated top rate of 39.6% and the dishonest phase-outs of itemized deductions and personal exemptions.  They redefined “rich” as single filers with incomes over $400,000 and married taxpayers over $450,000.

They raised the top dividend and capital gain rate to something over 24%, taking into account the 3.8% Obamacare levy, the 20% rate on the rich, as newly defined, and the phase-outs of deductions and personal exemptions.  In doing so, they left the top rate at 15% (or 18.8%) for other taxpayers.

They delivered another kick in the teeth to successful entrepreneurs.  Taxpayers who operate successfully as pass-through entities represent much of the income hit by the new tax rates, and much of business income in general.  They have that much less after tax income to take chances on new locations, new employees, new products.  That means there will be less of all of these.

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Source: Tax Foundation, “Putting a Face on America’s Tax Returns: A Chartbook

Most people don’t realize just how big a part of the economy pass-throughs run by “the rich” are.  This might give you an idea:

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Source: Tax Foundation, ‘Putting a Face on America’s Tax Returns: A Chartbook”

This isn’t exactly going to help hiring.

They once again passed the dishonest batch of “expiring provisions.”  These provisions, from the windmill subsidy and research credits to special breaks for speedways, are passed with annual expiration dates, enabling the politicians to pretend that they are temporary so they don’t have to face the real costs of these breaks for their freinds.

What they failed to accomplish is just as important.  They failed to pass the wretched ideas of dollar caps on itemized deductions or a limit on the rate benefit of the deductions.  They failed to apply the top rates to incomes of $200,000 and up, which was their initial plan.

Most importantly, they utterly failed to address the ongoing fiscal catastrophe.  The new revenues will barely touch the $1.2 trillion annual deficit.  It’s not clear whether there will even be any deficit reduction when all of the pieces of the deal are added together.  That means we careen almost immediately to a new debt-ceiling battle and ultimately to a confrontation with arithmetic.

Perhaps that will ultimately be the benefit of this deal, though not one that is intended.  The President finally got his tax hikes on “millionaires and billionaires,” and they won’t do a thing to deal with the fiscal crisis.  If people finally realize that the choice is between bringing spending and entitlements under control or higher taxes on everybody, there might actually be some value to this mess.  After all, the rich guy isn’t buying.

 

Fiscal Cliff Notes

TaxProf, House Approves Fiscal Cliff Tax Deal

Tyler Cowen, Ross Douthat asks

If a newly re-elected Democratic president can’t muster the political will and capital required to do something as straightforward and relatively popular as raising taxes on the tiny fraction Americans making over $250,000 when those same taxes are scheduled to go up already, then how can Democrats ever expect to push taxes upward to levels that would make our existing public programs sustainable for the long run?

Greg Mankiw, President rejects his bipartisan commission

Stephen Entin, Measuring the Economic and Distributional Effects of the Final Fiscal Cliff Bill (Tax Policy Blog)

Howard Gleckman, Congress Kicks the Fiscal Can off the Front Stoop (TaxVox)

William Perez,House Approves the American Taxpayer Relief Act of 2012

Journal of Accountacy, Congress passes fiscal cliff act

Andrew Mitchel, Senate Fiscal Cliff Bill Includes Retroactive Reinstatement of CFC Look-Thru Rule

Kay Bell, House passes tax bill to avoid fiscal cliff

Paul Neiffer, Some Major Tax “Goodies” in Senate Bill For Farmers!

Robert D. Flach, SURPRISE! SURPRISE! SURPRISE!

Joseph Thorndike, Is Obama the Worst Legislative Negotiator of the Last Century?

Finally, this from Daniel Shaviro, a tax man of the left, on the fiscal cliff and the larger budget picture:

The biggest problem, as others have noted, is that Obama appears to be a once-in-a-generation lame and inept bargainer, who can take even a strong hand and not get all that much, because he is so predictably ready to fold.  But again this is not mainly an issue about the New Year’s Eve deal itself, which is more or less defensible as a one-off solution.  Rather, it’s about the debt ceiling crisis to come in a few weeks.

That is the one that really counts.  I think the Administration should play that, not merely as hard as they are saying they will now, but about 20 levels harder.  I would not just refuse to negotiate, but would have Administration officials use words such as treason, sabotage, and terrorism.

Mr. Shaviro is a very bright man.  He knows that the present fiscal course is unsustainable.  The solutions are some mix of spending less or taxing more.  If a guy that smart is ready to equate “spending less” with “treason, sabotage and terrorism,” the debate will get very ugly.  Maybe we aren’t far behind Argentina and Greece.

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Tax Roundup, 1/1/2013, New Year’s Day Special: Senate passes fiscal cliff bill in wee hours; House acts today.

Tuesday, January 1st, 2013 by Joe Kristan

While decent people were celebrating a new year, the Senate passed a “Fiscal Cliff” compromise early this morning.  The Wall Street Journal reports20121116-1iabiz:

President Barack Obama and Senate leaders Monday reached a New Year’s budget agreement that would let income-tax rates rise for the first time in nearly 20 years, maintain unemployment benefits for millions of people and blunt the impact of spending cuts that were looming as part of the so-called fiscal cliff.

The long-sought compromise, which will raise taxes on income over $450,000 for couples, was approved by the Senate in the early morning hours Tuesday. The House was expected to consider it later in the day.

The legislation, HR 8,:

  • Raises the top marginal rate to 39.6% for single filers with taxable income over $400,000 and joint filers over $450,000.
  • Raises the capital gain rate to 20% for taxpayers subject to the 39.6% rate, but retains the 15% top rate for other taxpayers.
  • Permanently “patches” the alternative minimum tax retroactive to 2012.
  • Permanently extends the $5 million estate tax extension, including the transfer of the unused exemption of a deceased spouse, but increases the estate tax rate to 40% (from 35%)
  • Re-enacts the phase-outs of personal exemptions and itemized deductions for taxpayers with AGIs exceeding $250,000 (single filers) or $300,000 (joint filers), providing a hidden and dishonest rate increase for taxpayers under the $400,000/$450,000 thresholds.
  • Extends 50% bonus depreciation and the $125,000 $500,000  Section 179 deduction limit through 2013 (retroactive to 2012!)

The bill also miraculously extends most of the “expiring provisions” that technically died a year ago today through at least yesterday.

The one notable expiring provision that was allowed to die: the 2% reduction in employee FICA taxes (see here).  This will reduce take-home pay for everyone starting with the first paycheck of 2013.

While the big-ticket expiring provisions were permanently extended, the Senate ensured continuing work for their friends in the lobbying industry by passing the “expiring provisions” only temporarily.  Some of the notable extensions include

Oh, and the special depreciation break for “qualified motor sports entertainment complexes” was extended another year, so the republic is saved.

While the bill could require a scramble by payroll providers to update withholding tables, it should prevent the disruption of tax season; the AMT patch was the key to that.

Some bad ideas that had been tossed around failed to make the bill, including a cap of $25,000 or $50,000 on itemized deductions and a restriction on the value of itemized deductions to 28%.

The House still needs to pass the bill, so you have something to watch on C-Span today if you don’t care for parades or football.

Other coverage:

Robert D. Flach, A LAST MINUTE AGREEMENT

Kay Bell, Senate passes fiscal cliff deal

Janet Novack, The U.S. Is Going Over The Fiscal Cliff, But A Tax Deal Might Cushion The Landing.

Business Insider,  5 Things You Won’t Believe That Are In The Fiscal Cliff Bill That The Senate Passed At 2 AM While Most Americans Were Drunk

TaxProf, CBO on Fiscal Cliff Deal: $1 in Spending Cuts for Every $41 in Tax Increases

TaxGrrrl, No, Virginia, There Isn’t A Tax Cut Deal – Yet

Dean Zerbe, Fiscal Cliff Tax Deal: What Does It Mean for Small Business?

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Tax Roundup, 12/31/2012: No cliff deal yet. And Branstad won’t try to fix income tax this year.

Monday, December 31st, 2012 by Joe Kristan

No cliff deal.  As of this morning, the President and Congress continue to fail to to make a “fiscal cliff” deal.  Rest assured, though, that even when they cobble together a lame and harmful deal, as they will today or weeks from now, they won’t even begin to address the real fiscal calamity — the government’s incontinent spending.

The unforgivable sin of the current president, and the last one, and their Congressional enablers, is spreading the idea that the government can buy us all free stuff, and the rich guy will pick up the tab.  Sorry.  The rich guy isn’t buying.

 

Income taxes: the redheaded stepchild of Branstad tax policy?  It looks more and more like the Branstad agenda for the 2013 Iowa legislative session  won’t include income tax reform.  From the Sioux City Journal:

Asked during a recent interview if there was room in all that for income tax reductions during the 2013 session, Branstad replied: “Probably not.”

“Honestly, property tax would be my priority and I’d love to do income tax, too, and maybe, if revenues exceed expectation, we could provide some income tax relief in addition,” Branstad said. “But I think I would rather focus and get something permanent done on the property tax. That’s the place where we’re the least competitive.”

That’s a shame.  Given the economically unwise attitude of the Senate leader, maybe nothing is possible:

Senate Majority Leader Mike Gronstal, D-Council Bluffs, said he would need more details but at first blush he doubted it would go very far in the legislative process if it proved to be “just a way for the wealthiest Iowans to cut their taxes dramatically” while middle-class families picked up a greater share of the tab for the cost of state government.

That’s just silly.  The rich guy isn’t buying for Iowa either.  The wealthiest Iowans always can dramatically cut their taxes with a moving van, until Senator Gronstal figures out a way to keep them from escaping to zero-tax South Dakota or Florida.

Iowa’s income tax is way overdue for replacement.   Instead, it will get more Bondo and bumper stickers.

If Iowa's tax law were a car, it would look like this.

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

 

Fiscal Cliff Notes:

Greg Mankiw, New York Times:

When President Obama talks about taxing the rich, he means the top 2 percent of Americans. John A. Boehner, the House speaker, talks about an even thinner slice. But the current and future fiscal imbalances are too large to exempt 98 percent or more of the public from being part of the solution.       

Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans.

Think Finland.  Unless we choose to be Greece or Argentina.

Gongol: Fiscal Cliff…not resolved. I note a false choice:

The people who make the decisions at the highest level in this republic are either dishonest or utterly economically incompetent if they don’t say the following out loud: “We are demanding more out of our government than we can presently afford. We need to pay more, get less, or both.”

“Either?”  I say “both.”

Kay Bell: Senate ready for some football; adjourns Sunday without reaching fiscal cliff deal

TaxGrrrl, Budget Talks Stall As Reid Calls Latest GOP Move A ‘Poison Pill’

Kevin Drawbaugh, Fiscal cliff talks down to the wire (Tax Break)

Nick Kasprak, 2012 Likely to be First Year Without AMT Patch

Peter Reilly, Dysfunctional Congress – At Least They Are Not Maiming One Another.  If they don’t, maybe we should.

 

The roundup:

Cara Griffith, What Will Become of Physical Presence? (Tax.com)

Paul Neiffer,  Be Careful Of Fiscal Year Section 179 Issues!

Jason Dinesen,  6 Tax Predictions for 2012 — How Did I Do?

Tres Bien. French Court:  75% Tax Rate on Millionaires Is Unconstitutional (TaxProf)

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

TaxGrrrl, Congress Hasn’t Fixed The Budget Yet, Getting A Raise Anyway.  Courtesy of the President, who maybe thinks they make him look good by comparison.

Chris Sanchirico, New Ways to Think About a Tax on Public Companies

Insureblog,  Cavalcade of Risk #173: Post-Mayan Apocalypse Edition

The Critical Question: Is This Tax Preparation Nightmare Reawakening? (Jim Maule)
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Tax Roundup, 12/28/2012: Last tax planning weekend of 2012. Also: the crisis of unreported pretend income!

Friday, December 28th, 2012 by Joe Kristan

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

Some last-minute rules to keep in mind:

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

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

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

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

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

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

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

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

 

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

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

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

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

Fiscal Cliff Notes

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

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

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

Trish McIntire, Tax’s Perfect Storm:

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

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

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

20121228-1

 

 

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

Paul Neiffer,  Farm Income Not Cash Rent!

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

TaxGrrrl, 12 Days of Charitable Giving 2012: ShelterBox

Robert D. Flach, 2012 – THE YEAR IN TAXES

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

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

 

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

He says sure, the income tax code is progressive:      

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

Ah, but what are they hiding?

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

So what does he propose to do?

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

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

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

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

So what is his point?

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

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

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Tax Roundup, 12/27/2012: Why the rich don’t like being soaked. And how to make a fortune by copyrighting your name!

Thursday, December 27th, 2012 by Joe Kristan

 

From a Tax Foundation chartbook, “Putting a Face on America’s Tax Returns”

What happens as you ratchet up the top rate. A timely explanation of the effect of raising already high tax rates from Megan McArdle:

Taking your tax rate from 5% to 10% decreases your after tax income by 5.26%.  But by the time your tax rate is 50%, you’re only keeping half of your income.  So increasing the tax rate by 5% decreases your after-tax income by 10%: you used to take home 50 cents out of every dollar, but now you only take home 45 cents.  

If you were surprised that Gerard Depardieu decided to leave France rather than pay the new 70% top rate, think of it this way: the rate increase was only 30%, but it was going to cut his income in half. Yes, that would still leave him with more money than you and I live on.  But people don’t think this way: if the government came and took half your after-tax income away, that would still leave you with more money than a middle-class family in Bangalore lives on, and you would still be hopping mad, not to mention panicking about how the mortgage was going to get paid.  Even if they only took half of your marginal after-tax income away–an extra 50% of every dollar you made over $40,000 say–you would be pretty upset, because you’ve probably already earmarked uses for those dollars.

With the people in the highest-income states already pushing a 50% marginal rate under current law (and also, under what I take to be the negotiation outcome desired by most of the Democratic Party), every 10% tax hike is a 20% decrease in the after-tax value of extra work.

Applying that analysis to Iowa, the combination of the fiscal cliff and the Obamacare 3.8% “net investment income” tax can reduce the after-tax value of additional income of a top-rate Iowa taxpayer by 12.24%  — about 1/8.   For Iowa businesses that pay their taxes on owner returns — that is, partnerships, LLCs and S corporations — that’s a 1/8 reduction in their cash flow, their ability to finance expansion, their ability to service new debt.  It’s also a 1/8 reduction in the returns to taking a chance on a new product, a new location, a new employee.  That makes for fewer chances taken.

Worse, soaking the rich doesn’t even begin to solve the spending problem or close the deficit, no matter how hard you try.  The rich guy isn’t buying.

 

Fiscal Cliff Notes

Veronique de RugyA Little Symbolism to Fight Fiscal Denial (The Corner)

TaxGrrrlTreasury Advises That U.S. Will Hit Its Debt Limit In 5 Days

 

Cara Griffith,  The Promise of Tax Stability (Tax.com).  For one company, anyway; tough for the rest of Oregon.

Peter Reilly,  Retired IRS Officer Launches Petition Against Clergy Tax Benefit

Robert D. FlachWHAT’S NEW FOR NJ INCOME TAXES FOR 2012

Anthony NittiThe Top Ten Tax Cases Of 2012, #1: Obamacare Is Constitutional Because The Individual Insurance Mandate Is Both A Penalty And A Tax. Wait…What?

Romney won?  How You Can Lose Money on Paper And Still Win at Tax Time Like Romney (TaxGrrrl). 

As bad as today’s news is, it could be worse.  And it was, actually, as Don Boudreaux reminds us in  Cataloging Our Progress: Men’s Business Wear (Cafe Hayek)

 

Yeah, that’ll work.  Man jailed in federal tax fraud, bills paper for using his ‘copyrighted’ name.   A convicted tax cheat sent a $6 million invoice to the local paper for using his name twice in a news story reporting his guilty plea on tax charges.  Doesn’t he know that if he collects they’ll send him a 1099? (vindy.com)

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Tax Roundup, 12/26/2012: legislator wants a $310 million train set for Christmas.

Wednesday, December 26th, 2012 by Joe Kristan

Iowa’s legislators get $800 million to play with for Christmas. Naturally, many of them think they can spend it better than those of us who gave it to them, based on a Des Moines Register report today quoting a bunch of prominent state politicians.

For example, Joe Bolkcom, Iowa City Democrat and Chair of the Senate Ways and Means Committee:

“We have a silent crisis in the number of kids and the number of our children living in poverty in our state,” Bolkcom said. “One of my top priorities will be addressing that crisis as a matter of tax policy. We need to use some of this tax surplus to make a substantial boost in the earned income tax credit.”

Bolkcom also favors appropriating $20 million as a state match to help  secure an $87 million Federal Railroad Administration grant to establish passenger train service between the Quad Cities and Iowa City, a move he says would create hundreds of jobs.

That’s two awful ideas.  As we have pointed out, increasing Iowa’s earned income credit would impose a brutal combined effective income tax rate of over 50% on low income workers — rewarding dependency and punishing taxpayers for emerging from poverty.

20121226-1And for the passenger rail plan — that’s ten kinds of crazy.  With the Megabus making three daily runs between Chicago and Iowa City for no more than $39.50 — and for as little as $1.50 — it’s hard to imagine a less urgent priority than pouring $20 million into a $310 million federal-state boondoggle to establish rail service that will lose millions annually selling $42 tickets for slower service.

Unfortunately, none of the politicians quoted by the Register proposes using the surplus to overhaul Iowa’s dysfunctional and business-hostile income tax. There is a better way:  Lower the rates, simplify the system, repeal the job-killing corporation income tax, and eliminate the corporate welfare deductions and tax credits.  In other words, The Quick and Dirty Iowa Tax Reform Plan.

Related:  You’d better waste your $20 million, or we won’t waste our $80 million!

 

Fiscal Cliff Notes

Kay Bell,  With the Mayan end of world threat over, it’s time to focus on the fiscal cliff

Can I return it?  AMT, the Gift You Don’t Have to Wrap!  (Trish McIntire)

 

Paul Neiffer,  One Week to Go Checklist

Missouri Tax Guy, Can an LLC be Taxed as an S Corp

Jason Dinesen,  Dinesen Tax Greatest Hits – The 5 Most Popular Blog Posts of 2012

Scott Hodge,  Taxing Guns to Pay for Cops in Classrooms? A bad idea to fund another bad idea.

That’s the way to bet, anyway.  Sometimes the Cynics Are Right  (Russ Fox)

Loss carryforwards?  Why Santa Won’t Owe Any Income Taxes This Year (TaxGrrrl)

Robert D. Flach won’t let the post-holiday letdown kill his Buzz!

Because I want to finish reading the phone book first?  Why Not Read the Entire Sales Tax Statute? (Jim Maule)

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Tax Roundup, 12/21/2012: Plan B breaks, Tiger tamed.

Friday, December 21st, 2012 by Joe Kristan

20121221-1Plan C through Z?  House Speaker Boehner’s effort to pressure the White House into compromise with “Plan B,” a proposal to retain 2001 tax rates on incomes below $1 million, died last night.  The Speaker cancelled a vote on the plan when it was clear that it lacked enough support to pass.  The Wall Street Journal reports:

After pulling his bill without taking a formal vote, Mr. Boehner  unexpectedly disbanded the House until after Christmas, leaving behind
uncertainty about whether Congress and President  Barack Obama would be able to avoid $500 billion in spending cuts and tax increases that begin in January.

So what now?

“The House did not take up the tax measure today because it did not have sufficient support from our members to pass,” Mr. Boehner said in a written statement after a brief meeting with House Republicans. “Now it is up to the president to work with Senator Reid on legislation to avert  the fiscal cliff.”

Is it time to panic?  Will we see a filing season delayed until the end of March, a big 2012 AMT hit, and tax increases all around?  Joe Weisenthal at Business Insider says we aren’t over the cliff yet:

Indeed. If Boehner couldn’t even get the GOP to support a law that would let taxes revert on millionaires, how is he going to get GOP support on a deal that would let taxes revert on those making $250K or $400K, as the President would like to sign?

Here’s the thing with that. Boehner doesn’t need to get all of his caucus, because in the end, if Obama supports the ultimate compromise, then it’s safe to say that the Democrats will bring about 100+ votes in the house to support the bill. And this was always true. It was always the case that the eventual compromise would see Boehner lose 70 or more Republicans, to be made up with Democrat support. So nothing changes on that front.

There’s 10 days left before 2012 expires.  Even then it’s possible that they will make a retroactive deal next year with the new Congress.  The legislative and leadership malpractice continues.

Fiscal Cliff Notes:

TaxProf,  The Competing Obama and Boehner Tax Plans

Kay Bell, Republicans reject Boehner’s fiscal cliff Plan B, House breaks for Christmas

TaxGrrrl, Boehner Fails To Push Through Plan B Before House Walks

Christopher Bergin,  Fiscal Surrender (Tax.com):

So, I would suggest that while General Boehner wants things to look like  he is negotiating a budget deal, he is actually seeking the best surrender terms that he can get. And if the President is a good enough general to understand his position, he will not try to over-exploit it.

Paul Neiffer,  Farmers Might Delay Higher Tax Rates for Three Years?  Thanks to income averaging, a trick available only for farmers,  “…you might be able to earn $1 million from farming and have most of it still subject to the old lower tax rates” if rates go up next year.

Nanette Byrnes,  Blue states lose: how avoiding the U.S. fiscal cliff hits some states harder than others (Tax Break)

Tax Policy Blog, Tax Cut Expiration Would Impact States Unevenly

Janet Novack,  A Closer Look At Boehner’s Plan B: Tax Hikes For Parents And Workers

Howard Gleckman,  Should Working Class Families Pay Higher Tax so High Income People Can Pay Less? (TaxVox)

Jim Maule, The Postponed Pain of Foolish Tax and Spending Decisions

 

St. Louis area preparer “Tiger” Zerjav pleads guilty to tax crimes.  A St. Louis-area CPA who survived an IRS effort to shut down his practice through a civil suit lost a much bigger fight yesterday.  Frank “Tiger” Zerjav pleaded guilty to four tax crime counts in Federal District Court. Courthouse News Service reports:

Frank L. “Tiger” Zerjav Jr., 39, of Wildwood, Mo., pleaded guilty to  four counts of tax evasion from 2001 to 2004, prosecutors said.
     He  and his father, Frank L. Zerjav Sr., were principals in two entities:  Zerjav & Company, a full service accounting firm, and the Advisory  Group USA, which offered tax planning and asset protection strategies.      Zerjav admitted that he funneled his income into several S-corporations and failed to include that income on his tax returns.

The IRS attempted to enjoin the Zerjavs from tax practice in 2008, alleging that they set up S corporations for their clients and then deducted personal expenses on corporation tax returns — including a “Precious Moments” figurine collection.   The Zerjavs settled under what appeared to be favorable terms in 2010.

The plea agreement is not yet public.  Sentencing is set for March 26RelatedCopy of indictment.

 

Jason Dinesen, New Preparer Requirements on Earned Income Credit = Higher Fees for Clients.  That’s on top of the increase in fees that will result from the massive contraction of the preparer industry that we may be in for thanks to the IRS preparer regulation regime.

News you can use:  Pot Business May Be Legal In Washington State But There Are Still Rules (Peter Reilly)

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The Critical Question:  Are Holiday Weddings a Form of Tax Planning? (Jana Luttenegger, Davis Brown Tax Law Blog):

Your  marital status for tax purposes is determined as of December 31. That means if you get married on New Year’s Eve, you are considered married for the entire year and can file as a married couple. Likewise, if a divorce is finalized by the end of the year, you will be considered unmarried for the entire year. Trust me, I am not the  only one that has wondered if certain people getting married on New Year’s Eve did it for tax purposes.

It’s a special Friday Buzz at Robert D. Flach’s place!

Madoff’s brother sentenced on tax charges (Wall Street Journal, via Going Concern)

 

Not so Fat Joe not so good at taxes.  A rapper who performs as “Fat Joe” is in tax trouble, reports AP.  The story says Joseph Cartagena pleaded guilty yesterday to not reporting nearly $3 million in income over two years.

Oddly, he’s not so fat, according to the story:

Wearing a navy suit, Cartagena looked fit and considerably slimmer than the former size that had earned him his rapper nickname. He has been very public about his efforts to shed weight after fellow rap stars died from obesity-related issues and was recently in Newark to speak to schoolchildren about health and fitness.

It’s nice that the schools find such good role models for the kids.

 

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Tax Roundup, 12/20/2012: Blizzard! And meeting interesting people via social media.

Thursday, December 20th, 2012 by Joe Kristan

20121220-3Yes, the blizzard came.  It’s still snowing at 6 a.m., with up to 14 inches.  Here’s what happens next:

* WINDS/VISIBILITY…NORTHWEST WINDS WILL BECOME VERY STRONG AND CONTINUE THROUGH THIS AFTERNOON. SUSTAINED WINDS OF 30 TO 40 MPH WITH GUSTS OVER 50 MPH ARE LIKELY. BLIZZARD CONDITIONS WILL BE WIDESPREAD BY 6 AM WITH BLOWING AND DRIFTING SNOW LEADING TO WHITEOUT CONDITIONS AT TIMES THROUGH THE DAY.

* IMPACTS…LIFE-THREATENING BLIZZARD CONDITIONS ARE EXPECTED INTO THURSDAY MORNING. TRAVEL WILL BECOME DIFFICULT…IF NOT IMPOSSIBLE DUE TO BLOWING AND DRIFTING SNOW. THE IOWA DEPARTMENT OF TRANSPORTATION ADVISES NO TRAVEL! POWER OUTAGES MAY BECOME MORE PREVALENT BY MORNING AS HEAVY SNOW IS WEIGHING DOWN TREES AND STRONG WINDS BY MORNING AND AFTERNOON MAY FELL TREES ON POWER LINES…RESULTING IN POWER OUTAGES.

So, telecommuting.

Still dancing on the edge of the cliff.  The President has threatened to veto House Speaker “Plan B” tax bill (see yesterday’s Tax Roundup).  The House is planning to vote on the bill today.  The Wall Street Journal reports ($link):

The talks remained frozen Wednesday as both sides awaited the outcome of Thursday’s vote. Messrs. Obama and Boehner (R., Ohio) have not negotiated since Monday and continued to take shots at each other in public.

“There are a lot of gyrations, tensions and difficulties, and this could still go awry,” said Rep. Tom Cole (R., Okla.). “But we are closer on Wednesday than we were on Friday. All the other major budget deals were all last-minute deals.”

Peter Suderman has tweeted:

20121220-1

Maybe so.  Forgive me if I’m not reassured.  Not when the acting IRS Commissioner has this to say (my emphasis):

As I stated in my letter dated November 13, 2012, the IRS has maintained the programming of its systems assuming that the AMT will be patched as it has been in previous years. I also indicated that if an AMT patch is not enacted by the end of this year, the IRS would need to make significant programming changes to conform our systems to reflect the expiration of the patch. In that event, given the magnitude and complexity of the changes needed, I want to reiterate that most taxpayers may not be able to file their 2012 tax returns until late in March of 2013, or even later.

As we consider the impact of the current policy uncertainty on the upcoming tax filing season, it is becoming apparent that an even larger number of taxpayers — 80 to 100 million of the 150 million total returns expected to be filed — may be unable to file.

That would make tax season even more fun!

Fiscal Cliff Notes:

Nick Kasprak, How do Personal Income Tax Increases Affect Small Business?  (Tax Policy Blog).  The post shows how much income that will be taxed under the President’s proposals and “Plan B” will be business income.  In Iowa, 25.1% of the adjusted gross income on returns with AGI over $200,000 is business income; the percentage is 37.24% on returns with AGI over $1 million.  In other words, increases in taxes on “the rich” punish Iowa employers.

Elaine Maag, Toppling Over the Fiscal Cliff Could Cost low-Income Families $1,000 in Reduced Tax Credits (TaxVox)

Patrick Temple-West, Boehner’s backup tax plan shakes up ‘fiscal cliff’ negotiations, and more (Tax Break)

Year-end techniques from the edge of the Fiscal Cliff.  My new post at IowaBiz.com, The Des Moines Business Record’s blog for entrepreneurs.

 

Cara Smith, Just Do It. A bad idea when a big company comes to the state looking for a special tax break.

Russ Fox, “Tax Guys” Get Taxing Result.   It seems that two Michigan preparers specialized in inventing earned income for clients to commit earned income tax credit fraud.

Paul Neiffer,  Annual Exclusion Update  Paul explains the annual gift tax exclusion.

TaxProf, Ninth Circuit: NOL ‘Carryover’ Does Not Include NOL ‘Carryback’

Jack Townsend,  More Swiss Bank Enablers Indicted

Peter Reilly,  No Bankruptcy Escape From Bad Tax Shelter And Compound Interest

William Perez,  Tax Software for Planning Out Your Year-End Tax Moves.

Kay Bell, Donder says harvest investment losses; Reindeer Year-end Tax Games Tip #7

 

Oversharing.  Social media experts caution us to be discreet in what we share on our Facebook pages.  A Florida woman failed to follow that advice, reports Tampa Bay Times:

TAMPA — Rashia Wilson all but dared investigators to catch her, court records show.

“I’m Rashia, the queen of IRS tax fraud,” Wilson said May 22 on her Facebook page, according to investigators. “I’m a millionaire for the record. So if you think that indicting me will be easy, it won’t. I promise you. I won’t do no time, dumb b——.”

It’s also bad form to make promises you may not be able to keep:

Grand jurors apparently got the message and responded with a 57-count indictment charging Wilson, 27, of Wimauma and her boyfriend, Maurice Larry, 26, of Tampa with mail fraud, filing false tax returns, conspiracy, aggravated identity theft and theft of government property.

She is charged with stealing over $1 million.  If the case is like many others coming out of the Tampa area, it involves identity theft.  It shows that the IRS is just sharp enough to go after you if you go out of your way to tell the world that you are tax fraud royalty.

 

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Tax Roundup, 12/19/2012: B is for Boehner. And Blizzard.

Wednesday, December 19th, 2012 by Joe Kristan

20121219-1Plan B.  House Speaker Boehner has proposed a “Plan B” that would increase the top rate to 39.6% for taxpayers with taxable income over $1 million.  Tax Analysts reports ($link):

Boehner’s Plan B would also permanently extend the alternative minimum  tax patch and the current-law estate and gift tax rules with a portable  $5 million individual exemption and a 35 percent top rate. Dividends and  long-term capital gains would be taxed at 15 percent for income below  $1 million and at 20 percent above that threshold. The bill would not  renew any tax extenders, emergency unemployment insurance, or the 2 percentage point payroll tax cut, and would not raise the federal debt limit.

It’s nice to see a permanent AMT fix in both the Boehner and Obama plans.  I like not renewing any of the “extenders,” but I suspect he plans to do that separately next year anyway.  An estate tax fix is also welcome.  It looks like there is no hope continuing the 15% rate for dividends or capital gains.

 

Meanwhile, a blizzard approaches.  From KCCI.com:

Six to 12 inches of snow is expected by Thursday morning. The heaviest snow axis will be along a line from near Des Moines to Tama. The lowest amounts are expected near the Missouri border. Snow drifts several feet deep will be possible given the strong winds.

Winds/visibility:

Winds will become very strong Wednesday night from the north northwest. Sustained winds of 25 to 35 mph are expected with gusts over 45 mph possible.

I know what I’m doing tomorrow morning.  Hello, shovel.

 

Fiscal Cliff Notes

Wall Street Journal,  Boehner Weighs ‘Cliff’ Backup Plan

Janet Novack,  Strange Bedfellows: Boehner, Buffett And Obama All Support Millionaires Only Taxes

Andrew Lundeen,  How Many Days of Christmas Could the Fiscal Cliff Buy? (Tax Policy Blog)

Joseph Thorndike,  Republicans Shouldn’t Pin Their Hopes on The Origination Clause.  “In practice, the Origination Clause is more a nuisance than an obstacle to tax-happy senators.”

Howard Gleckman, What Adjusting the Price Index Would Mean for Taxpayers (TaxVox)

Rudy Penner,  How to Control Entitlements: A Challenge Ike Did Not Face (TaxVox)

 

TaxProf,  Fleischer: How Local Tax Rates Affect High-Income Professionals:

The study finds that an increase in the marginal income tax rate leads to a decrease in the average skill of the NBA free agents that migrate to that team. Unlike in baseball, basketball teams in high-tax jurisdictions actually end up with a worse free-agent talent pool, all else equal. …

These papers do serve as a useful reminder that if the goal is to remedy income inequality, state and local taxes are a weak policy instrument. To the extent that tax policy is used to achieve redistribution, redistribution should take place at the federal level.

Despite what Warren Buffett, the President, and the Speaker of the House say, marginal rates matter.  That’s also true at the state level; when you have to bribe businesses to locate in your state, as Iowa likes to, you have a sick tax systemRelated: David Brunori, If the Shoe Fits: Oregon Lawmakers Get Rolled (Tax.com)

 

Kay Bell,  Cupid says note year-end marital status; Reindeer Year-end Tax Games Tip #6

Paul Neiffer,  Annual Exclusion Does Not Eat Into Lifetime Exclusion.

Trish McIntire,  Identity Theft PIN

Peter Reilly,  Tax Court Not Quick To Find Abuse In Innocent Spouse Case

TaxGrrrl,  Lawmakers, Guns and Money: Where Do We Go After Sandy Hook?

Robert Goulder,  Starbucks Pays More Tax Than It Owes (Tax.com).  That’s silly.

It’s Wednesday, so it’s time for a fresh Buzz.  Robert D. Flach obliges.

 

The world is saved from its most dangerous criminals.  Quebec Police Arrest 3 in Maple Syrup Heist

 

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Tax Roundup, 12/18/2012: Fiscal cliff rumors — higher threshold for rate hikes; deduction benefit limits.

Tuesday, December 18th, 2012 by Joe Kristan

20121116-1iabizThe “Fiscal Cliff” negotiations seem to be heating up.  The inane haggling over the final version of the inevitably awful tax law that we will have for this year and next year seems to have heated up a bit yesterday.  Details are cloudy and could change, but here’s what it looks to me like they are talking about for taxes:

  • An increase of the top ordinary income tax rate to 39.6%, but at a level of $400,000 or higher; the President had been holding out for a $250,000 threshold.
  • Some stupid restriction in the tax benefits of itemized deductions — perhaps capping the value of the deductions at 28%.
  • An AMT patch retroactive to last year and extension of all of the “expiring provisions.”

The President’s most recent offer includes some surprisingly good tax policy in the midst of the general awfulness of the tax increase plans.  From the Wall Street Journal:

On the tax side, the administration’s biggest proposal would permanently
extend relief from the alternative minimum tax. That’s a provision
designed decades ago to target the wealthiest Americans that now hits
tens of millions of middle-class households, in part because it wasn’t
indexed for inflation.

That would be great news.  The politicians play with fire by temporarily increasing the AMT exemption every year or two as a cheap ploy to pretend they will receive additional AMT revenue after the temporary “patch” expires — allowing them to appear slightly less irresponsible.

Also:

The administration’s new proposal also would permanently extend a raft
of temporary tax breaks that Congress has passed over the years,
benefiting businesses as well as individuals. Notable examples include
the research and experimentation credit for businesses, as well as the
deduction for state and local sales tax for individuals.

While I would prefer just letting these expiring provisions expire, I’d rather they be made permanent than going through the charade of re-enacting them every year or two just to play stupid budget games.

Fiscal Cliff Notes:

Nick Gillespie & Veronique de Rugy,  Obama and Boehner, Both Reckless Spenders

New York Times,  Obama’s New Offer on Fiscal Crisis Could Lead to Deal

Russ Fox,  Fiscal Cliff Deal Near?

Kay Bell,  Boehner offers Obama a $1 million top income tax bracket in fiscal cliff talks

Ashlea Ebeling,  Millionaires Are Doing Roth Conversions Before The Fiscal Cliff Hits, Should You Too? (Forbes)

Jason Dinesen,  An Example of What Could Happen if an AMT Patch Isn’t Passed

 

IRS extends employee – independent contractor settlement program.  The IRS yesterday announced (Announcement 2012-46) that it is extending its program to resolve the classification of workers as employees or independent contractors.

 

Rudy Penner,  How Eisenhower and Congressional Democrats Balanced a Budget (TaxVox).  They spent a lot less, that’s for sure.

Dan Alban,  IRS Rule Threatens Tax-Preparing Entrepreneurs

Jeremy Scott,   Democrats Should View Japan as a Warning (Tax.com)

Joseph Henchman,  IRS Reverses Course, Will Continue Providing Migration Data (Tax Policy Blog)

Paul Neiffer,  What Does Unified Credit Mean?

Robert D. Flach,  WHAT’S NEW FOR NEW YORK STATE INCOME TAXES FOR 2012

TaxGrrrl,  Actor Called Out As Unpatriotic For Move Over Taxes Fires Back.  So patriotism means letting them pick your pocket?

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Tax Roundup, 12/17/2012: Ames! And fixing the cliff by fudging withholding.

Monday, December 17th, 2012 by Joe Kristan

The expectant crowd gathers in Ames, Iowa for the final 2012 session of the ISU Center for Agricultural Law and Taxation Farm and Urban Tax School. 

 20121217-1

350 practitioners are signed up, and the coffee’s on!

20121217-2 

Fiscal Cliff Notes

 Because writing big checks in April is always popular.  A few commenters have said that the Treasury Secretary can prevent Fiscal Cliff disaster by just setting the withholding tables to pretend that the tax law isn’t changing January 1.  Marie Sapirie of Tax Notes says it’s not that simple ($link)

Commentators have suggested that Geithner may even be able to prospectively implement the administration’s policy of raising taxes on taxpayers making more than $250,000 per year by increasing withholding only on income above that level. That is almost certainly wishful thinking. Whatever the “most appropriate” amount of withholding to reflect the tax rates in section 1 may be, section 3402(a) does not give the Treasury secretary the power to create withholding tables that have no basis in current or recently expired law.

Of course Secretary Geither hasn’t always been big on following the tax law.

TaxProf,  NY Times: Itemized Deduction Cap: Popular, But Unfair 

KayBell,   National Taxpayer Advocate Nina Olson discusses fiscal cliff tax complications

TaxGrrrl,  Budget Resolution May Come Down To One Question

Steven Rosenthal,  Paying Taxes on Capital Gains Early: How Investors are Avoiding Tax Hikes (TaxVox): “All of this planning suggests that sophisticated taxpayers are outracing Congress again.” 

Nick Kasprak,Alternative Minimum Tax Increase Looming Over Fiscal Cliff Negotiations (Tax Policy Blog)

Robert D. Flach,  WHAT FOOLS THESE POLITICIANS BE!

Remain calm, all is well.  Deficit Hysteria and Debt Denialism (Joseph Thorndike, Tax.com)

 

TaxProf,  Sullivan: Why the SALT Deduction Is Always Under Attack

Megan McArldle discusses an interesting pension funding approach:

Big news in pensions today: Silverdex, a major US-based conglomerate with fingers in just about every economic pie, from mining to solar cells, turns out to have been stuffing its main pension fund full of… it’s own corporate bonds

Just kidding. 

I don’t really know how to say this, but sorry, I lied a little bit.  I’m not talking about a private company at all, because of course, if a private company did this, it would be completely and totally illegal.  Regulators would have shut this down decades ago and probably at least a few lower-level executives would have spent a little time in the pokey.  Instead this is, of course, a description of how the United States Social Security “trust fund” works.

Like so many things: private sector does it, it’s scandal and ruin.  Government does it, it’s Tuesday.

Courtney A. Strutt-Todd,  Tax Law Blog: Attacks on the Exemption for Municipal-Bond Interest and Why it is Important to the Average Taxpayer (Davis Brown Tax Law Blog)

Paul Neiffer,  Another Nice Feature of a Living Trust

Brian Strahle,  D.C. Combined Reporting: How Much Will it Cost Your Company?

Missouri Tax Guy,   Capital Gains, What you need to know 

Trish McIntire links to the annoying new 2013 EIC Interview Sheet, so practitioners can double up as welfare caseworkers.

Russ Fox,  What Happens When Cigarette Taxes go Through the Roof?

Martin Sullivan,  Capital Gains Frustration for Tax Reformers (Tax.com).  His “reformers” want to increase the problems inherent in capital gains taxes by increasing them.  May their frustrations endure.

The Critical Question:  Naming Spousal IRAs After Senator Hutchison – Is That A Priority ?  (Peter Reilly)  I still think Roth & Company should get royalties for the Roth IRA…

Linda Beale,   Goggle’s Bermuda hideaway/HSBC’s too-big status: time to rein in the corporations!  Too big, eh?  Google’s entire market capitalization is about $234 billion this morning.  That’s how much the federal government spends in 23 days.  And it’s Google that’s too big? 

 Sorry, I think there’s already a mortgage on it.  A New Way to Reduce Our National Debt – Sell Alaska. (Greg Mankiw)

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Tax Roundup, 12/7/2012: You can’t soak the rich without soaking employers. And: Baby Insane Crips?

Friday, December 7th, 2012 by Joe Kristan

When you tax “the rich,” you tax business.  That’s not going to help a struggling economy, but that’s where we’re going.  The TaxProf reproduces a great Congressional Budget Office chart that shows how how business income has moved from corporate returns to individual returns, mostly through the use of “pass-through” entities like S corporations, partnerships and LLCs:

 

Remember when the IRS Commissioner said they are up against sophisticated criminals?  Not so much,  From the LA Times:

Authorities arrested 11 people and seized piles of cash, guns and vehicles Thursday following an investigation into an alleged $1-million tax fraud scheme operated by a Long Beach street gang.
Thursday’s arrests were the result of “tedious investigative work,” and targeted the Baby Insane Crips, as well as family members and acquaintances, according to Long Beach Police Chief Jim McDonnell. Gang members allegedly used stolen Social Security numbers and other personal information to file false tax returns and then funneled refunds to family members and acquaintances.

When the “Baby Insane Crips” can defeat your financial controls, your controls aren’t that good.  Related: Russ Fox,  Why Rob Banks?

 

Indictment of St. Louis CPA unsealed.  The indictment of St. Louis-area CPA Frank “Tiger” Zerjav has been made public.   Mr. Zerjav survived an IRS attempt to shut down his practice via civil injunction.  This is much more serious, alleging the use of falsified Quickbooks files to conceal taxable income.

Bill Straub,  5 Ways The Fiscal Cliff Drama Could Play Out. (Via Instapundit)

Anthony Nitti,  The Top Ten Tax Cases Of 2012, #4: S Corporation Reasonable Compensation – How Much Is Enough?.  The much discussed Watson case.

 Jack Townsend,  Is Restitution a Criminal Penalty Requiring the Jury to Speak?

 

Patrick Temple-West,  Some in GOP urge lawmakers to back tax hikes for changes in safety-net programs, and more

David Brunori, The Rich Will Pay for Our Sins.  For now.  But not forever; the rich guy isn’t buying. (Tax.com)

Christopher Bergin,  Fool’s Gold and Loopholes:

There are no silver bullets that can fix the fiscal distress facing our nation. The fact that our politicians are trying to convince us to the contrary is not productive and shows that they are small leaders. Unfortunately for us, the chances that leaders who think small can solve big problems are not good.

It’s not about solving our problems, to them.

 

It would make putting up with the politicians easier, anywayDude, Should Marijuana Be Legalized and Taxed?  (Howard Gleckman,  TaxVox)

That makes it a better Friday: Robert D. Flach’s Buzz, SPECIAL FRIDAY EDITION

 

News you can use: The Simpsons’ Montgomery Burns explains (sorta) the fiscal cliff (Kay Bell)

Cruel and unusual punishment:  Brazil Prison Gang Conducted 10-Hour Conference Call (Via Going Concern).   Egads.  I’d rather face thumbscrews.

If she were in Congress, I would believe it.   Ex-Chelsea selectwoman accused of tax fraud claims she is illiterate.  A novel tax evasion defense.

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Tax Roundup, 12/3/2012: Medicare 3.8% tax guidance issued. Meanwhile, to the cliff!

Monday, December 3rd, 2012 by Joe Kristan

The IRS issued proposed regulations for the 3.8% Obamacare tax on investment income Friday.  I will do detailed posts on the in the coming days as I study them.

I’ll note two important items from my first overview of the proposed rules:

  • The rules allow taxpayers a free opportunity to redo their activity “grouping” elections for the passive loss rules for 2013. “Passive” business activities are subject to the the 3.8% tax.  Because “passive” status often depends on how much time a taxpayer spends working in a business, how different operations or locations are grouped can determine whether they are passive.
  • The rules appear to allow you to pro-rate state income taxes in determining “net” investment income.  That’s taxpayer-friendly, but it adds another level of complexity.

For an initial take on the rules, see Anthony Nitti at Forbes.

Related:   Obamacare: it’s a tax!

 

David Brunori of Tax Analysts on the fiscal cliff discussion:

     Everyone knows that taxing the very rich will have no perceptible effect on the deficit. It’s all for show. The president and Democrats in Congress can say they stuck it to the millionaires and billionaires. Fairness will abound. The Republicans can tell the world that they are reasonable people willing to compromise on issues as important as taxes. But Americans will still get more government than they are willing to pay for.

     Some liberals have called for us to go over the cliff and to raise taxes across the board. Like Norquist, they are miscalculating. If everybody had to start paying more, there would be a lot more questioning of massive defense spending, egregious subsidies for industries, and entitlements run amok. But for now, we must be content with the rich paying more so we can get more than we deserve from our government.

You can’t pay for mass welfare benefits with a class tax.  The mania for taxing “the rich” is a distraction from the enormous tax increases on everybody that will be required.  The Rich Guy’s not buying.

 

Why the fiscal cliff is such a big fall.  The Bush Tax Cut Issue in One Chart (Ed Krayewski, Hit and Run):

He adds:

And for those who would say “well of course the government has to spend more when the economy is hurting” only one question applies: has it helped? If you think so, I’ve got a tiger-repellant rock to sell you.

Related:  ‘Fiscal Cliff’ follies: Why it may pay to take deductions early.  My latest post at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs.

Nobody’s serious I:  No ‘fiscal cliff’ deal without higher rates, Geithner says (CNN via Going Concern)

Nobody’s serious, II: Grassley and King push for extension of Wind Energy Tax Credit

 

Iowa admits its capital gain forms were a mess.  A protest rejection released by the Iowa Department of Revenue highlights how badly the Iowa 1040 has been designed with respect to the Iowa deduction for capital gains on the sale of businesses an business real estate.

The taxpayer had excluded regular capital gains from a brokerage account on her tax return.  Iowa properly rejected the deduction, but admitted her mistake was understandable:

Your position relies on the Department’s instructions for completing the tax return.  We found that you are not the only one that made this mistake, so our instructions now clarify that these types of capital gains do not qualify for the deduction as shown above.  In any event, the instructions are not controlling.

Iowa now has better wording on the deduction line and a flow chart to walk taxpayers through whether they should claim the deduction.  It’s a big improvement, but it should be better.  There should be a separate form to compute the deduction, with a checklist to complete to demonstrate eligibility.

The state examines every capital gain exclusion claim.  Taxpayers should be able to submit the information the state asks for with their returns to preclude the examination; even if it would have to be paper-filed, it would save the state the time and money spent on unneeded exams.

Related:  Iowa Capital Gain Break: how it works when you rent property to your business

 

NY Times: States and Cities Shovel $80 Billion/Year in Tax Incentives to Companies, With Little Proof of Their Effectiveness  (TaxProf):

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.

It’s a chump’s game, and we taxpayers are the unwilling chumps.  These things are to economic growth what steroids are to long-term fitness.

 

When you don’t remit withheld taxes, it might not just be a matter of getting your payments caught up.  A New Jersey couple that ran an engineering firm failed to remit over $500,000 in withheld taxes to the IRS.  They were sentenced last week to 44 months in prison after being convicted of charges arising out of the nonpayment.  From the Department of Justice Press Release:

Evidence was also introduced that the DeMuros converted withheld funds for their business and personal use, including more than $280,000 in purchases from QVC, Home Shopping Network and Jewelry Television.

No doubt it was of the best-quality.  Oh, and the couple still has to pay over $1.3 million in restitution to the IRS.

Doug Shulman is no longer IRS Commissioner, but his legacy remains:

 ABC News: Alarming Rise in IRS Refund ID Thefts, Few Prosecuted: GAO Report

Dayton Daily News,  IRS says tax fraud attempts up 39 percent

Greg Mankiw,   Some Advice on Tax Planning

Richard Morrison,   The Tax Rate Paid by the Top 1% Is Double the National Average (Tax Policy Blog)

The Critical Question:  Will the Payroll Tax Cut Fall Silently Off the Cliff? (Elaine Maag, TaxVox)

Kay Bell:  Time to spend down your medical flexible savings account (FSA)

Paul Neiffer,  Senator Baucus Urges Extension of Current Estate Tax Laws

Jim Maule,  Passing the Tax Responsibility Buck

Peter Reilly,  Who Should Be Accelerating Income Into 2012?

Patrick Temple-West,  Most Americans face lower tax burden than in 1980, and more (Tax Break)

Robert D. Flach,  DAMNED IF THEY DO AND DAMNED IF THEY DON’T.

Tragedy:  Lindsay Lohan Has Yet To Settle Tax Bills With IRS, Faces Account Seizures (TaxGrrrl)

The Tax Update is also on Twitter (@joebwan) and Facebook!

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Tax Roundup, 11/29/2012: Lemmings, cliffs and itemized deductions. And beating you until their morale improves.

Thursday, November 29th, 2012 by Joe Kristan

Maybe this is a good year to use itemized deductions after all.  Consider this story in the Des Moines Register,  Iowa GOP delegation may break anti-tax pledge:

Grassley said Republicans are willing to ignore the pledge and tap more tax money “from the same wealthy people (President Barack Obama) wants to get it from.”

Where they differ is that Obama would bump the marginal tax rate to 39.6 percent, Grassley said, while “we would suggest raising the same amount of revenue the president wants to raise by capping deductions for wealthy people.”

If Iowa Senator Grassley and the other tax increase lemmings get their way, it will be a big backdoor tax increase on owners of pass-through businesses that have their income taxed on their 1040s.  While corporations get to deduct their state income taxes on their businesses in full, individuals have to take their state income taxes on business activities “below the line” as itemized deductions.  Treasury Regulation 1.62-1T(d) explains:

To be deductible for the purposes of determining adjusted gross income, expenses must be those directly, and not those merely remotely, connected with the conduct of a trade or business. For example, taxes are deductible in arriving at adjusted gross income only if they constitute expenditures directly attributable to a trade or business or to property from which rents or royalties are derived. Thus, property taxes paid or incurred on real property used in a trade or business are deductible, but state taxes on net income are not deductible even though the taxpayer’s income is derived from the conduct of a trade or business.

This would be bad news for business owners in high-tax states or whose businesses operate in multiple states — one of their bigger business expenses would become non-deductible if itemized deductions are capped at, say, $50,000.  Somebody should mention to Senator Grassley that Iowa has a high state tax rate.

The push for deduction caps adds another wrinkle to year-end planning.  With rates going up, you would normally defer deductions to next year to get a greater benefit from them.   The cap changes that for taxpayers with high itemized deductions.  If a deduction cap is enacted, it is likely to be effective for 2013.  Better a lower-rate benefit this year than no benefit at all next year under a deduction cap.

The saddest thing about this is the whole game of “taxing the rich” is a stupid distraction.  The $80 billion or so it would raise annually is rounding error in a $1.2 trillion deficit.  Even taxing 100% of the income of “millionaires and billionaires” won’t cover the budget deficit.  The rich guy isn’t buying.

TaxProfTwo-Thirds of Millionaires Left Britain to Avoid 50% Tax Rate.  I doubt many of them headed to France.

Don’t worry, they’ll make it up in free health care.  Iowa’s part-time workers face cut in hours (Des Moines Register):

More than 50 uninsured part-time workers for the city of Cedar Falls will see their hours cut this week so the city can avoid paying for their health insurance under President Barack Obama’s signature health care law.

The move comes as a 12-month “look back” period begins under the new Patient Protection and Affordable Care Act. During the 12 months leading up to 2014, employees working more than an average of 30 hours a week must be offered health care insurance in January 2014.

Nothing is free.

Only time for a very quick roundup today.

Roberton Williams,   TPC’s New Tax Calculator Examines Fiscal Cliff Options (TaxVox)

TaxGrrrl,  Preparedness 101: What Not To Do In 2012 As Tax Rates Creep Up

Christopher Bergin,  The Other Cliff; Hint: It’s in Your Tax Return (Tax.com):

Just think of the insanity. Millions and millions of taxpayers, who every year plan on their refunds (the wisdom of which is an issue for another day) won’t get them on time. They get screwed (a technical tax term).

Paul Neiffer,  Don’t Forget Your Form 1099 Responsibilities!

Anthony Nitti,  Predicting The Future: What Will Your 2013 Tax Liability Be?

The Eagle has landed.  IRS deal means museum home for ‘Canyon,’ no tax bill for former owners (Kay Bell)

Going Concern:  Mo’ Money Taxes Founder Won’t Let Mo’ Problems Keep Him From Serving Clients

Scott Hodge,   Buffett’s Case for Minimum Tax on the Rich Fails on All Accounts  (Tax Policy Blog)

Your beatings will continue until their morale improves.   Warren Buffett: Tax Hikes on Rich Would ‘Raise Morale of the Middle Class’ (TaxProf)

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Tax Roundup, 11/28/2012: Did you report that 1099-K income? Also: tax deductions and giving levels.

Wednesday, November 28th, 2012 by Joe Kristan

IRS starts data-mining the 1099-Ks.  From Tax Analysts ($link):

     A new IRS compliance program aimed at finding underreporting of gross receipts by taxpayers who receive Form 1099-K information returns from credit card companies or third-party transaction networks launches this week, a senior IRS official confirmed November 27.

     Ruth Perez, deputy commissioner of the IRS Small Business/Self-Employed Division, told Tax Analysts that the first notices under the program will be sent out later in the week of November 26. “Our initial footprint in this area is going to be small while we learn,” she said, adding that the initiative will touch a variety of businesses of different sizes.

If prior matching programs are any guide, many of the notices will be incorrect, giving gray hairs to compliant taxpayers.  Even so, it’s likely to smoke out some eBay entrepreneurs who haven’t bothered to report their income.  If that sounds like you, now is a good time to get into compliance.

 

Learning From a Wrongful Criminal Tax Prosecution.  Tax Analysts has made available to nonsubscribers a great piece by a New York attorney who defended a business owner from a baseless state tax prosecution that was later recanted by the district attorney.  It’s the piece I mentioned earlier this week; kudos to Tax Analysts for making it more widely available.  Sobering reading for practitioners and entrepreneurs.

 

Via the TaxProfThe Millionaires Who Pay the Highest Tax Rate:

 The more your make, the more taxes you pay as a percentage of your income. According to new data from the IRS, people who make $1 million or more had an average tax rate of 20.4% in 2010. Tax filers who earned $30,000 to $50,000 paid an average rate of 4.8%, while those who made between $50,000 and $100,000 paid 7.7%. Those making under $30,000 had a negative effective rate, meaning they paid no federal income taxes after deductions and credits. Put another way, millionaires pay a rate that’s more than four times that of the middle class.

The millionaires pay a higher rate than Warren Buffett’s secretary, I’d wager.

 

Kay Bell,  Would a limit on tax deductions mean less charitable giving?  Of course it would.  The only question is how much.

The guy quoted by Kay doesn’t think it would have a big impact.  I think it would, especially for bigger gifts.   We can’t know for sure, but a paper in the December 11 National Tax Journal estimates that capping the rate benefit of contributions at 12% would reduce individual giving by 5.8% to 14.2%.  A hard deduction cap would reduce the tax benefits of large gifts much more drastically than the 12% credit.

 

Patrick Temple-West,  On ‘fiscal cliff,’ both sides lay groundwork, and more

Wall Street Journal, Dividends Come Early to Avoid Fiscal Cliff:

Faced with a possible tax increase on dividends next year, boards are approving bigger payouts and cutting checks faster to avoid 2013 rates.

On Monday, retailer Dillard’s Inc. and casino operator Las Vegas Sands Corp.  LVS -0.26% said they would pay new, one-time dividends next month. Dillard’s also broke with long practice to pay its regular fourth-quarter dividend in December after paying it in the new year for at least a decade.

Wal-Mart did the same thing last week.  (Via Tax Break)

 

Jack Townsend,  Daugerdas Denied Access to Funds Subject to Forfeiture.  Mr. Daugerdas, whose conviction on tax charges was thrown out based on juror misconduct, says he needs the money to pay for his defense in his retrial.

Jason Dinesen,   Are Donations to a 501(c)(4) Deductible? (No.)

Tax Trials,  Tax Court: Legal Fees Not Deductible for Conduct of S Corp. Sole Shareholder.  This is a great case that I plan to write up in the next few days.

Both?  Education Foundation Or Estate Tax Dodge – Remains To Be Seen (Peter Reilly)

 Jim MauleTithing and Taxing: What is (Gross) Income?

Andrew Mitchel,  Summary of Form 8938 Filing Thresholds

Joseph Henchman,  Connecticut Revenue Commissioner Admits that “Amazon” Tax Has Raised Zero Revenue

In other news, Wednesday ends with “y”:  Another South Carolina Politician Guilty of Tax Charges (Russ Fox)

 

David Brunori, Fetal Craziness:

The recent craziness in Michigan illustrates all that is wrong with tax policy in America. A group of Republican lawmakers have proposed (HB 5684 and HB 5685) a tax credit for unborn fetuses of 12 weeks gestation. What is wrong with such a measure? Everything. First, Adam Smith, who I doubt was pro choice, said that the tax laws should be used to raise revenue. They should not be used to make political statements.  Why do we know this is political statement? Because only a nincompoop would think the tax laws could be administered in such a manner.

I suspect the miscarriage rate would go through the roof, at least as reported on tax returns.

 

A 529 plan would have worked better:  Attorney Disbarred For Submitting Falsified Tax Returns For Financial Aid (TaxGrrrl)

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