Posts Tagged ‘tax credits’

Tax Roundup, 3/7/2013: Consultant says Iowa should do more of what he consults about. Also: how not to file a lawyer’s tax return.

Thursday, March 7th, 2013 by Joe Kristan the wrong questions.  The Iowa Chamber Alliance asked a consulting firm that makes money playing the corporate location incentives game whether Iowa should sweeten its corporate location incentives.  Guess how they answered it.

From an Iowa Chamber Alliance press release:

“Iowa has a solid base of state – level economic development incentives tools upon which to build. However, to become more competitive, Iowa may wish to increase the funding level and flexibility of some of the State’s key incentive programs” states Darin Buelow, a Principal with Deloitte Consulting LLP.

It’s hard to imagine the study coming to a different conclusion considering what they were looking for:

At the request of the Iowa Chamber Alliance (ICA), Deloitte Consulting (Deloitte) benchmarked incentives programs in Iowa and in five alternate states, focusing on a high-level analysis of state-level incentive programs, their value, and overall effectiveness in attracting investors.

In other words, they were to look at whether Iowa has more and better giveaways than its neighbors.

I looked for the study in vain for any analysis of the value of Iowa’s tax credits to the economy vs. alternative uses for the funds — like lowering the tax rates of the rest of us who pay for them.  There is no mention of opportunity cost.”  In looking at the “value” of the programs, it makes unsupported conclusions like this one about the “High Quality Jobs Program:”

Considered effective and competitive in providing benefits to mitigate corporate income tax, refunding sales tax for construction and providing a supplemental refundable research credit.

Considered effective by whom?  On what basis?  It doesn’t say.

The study says Iowa should enrich its data center corporate welfare — where the rest of us subsidize the infrastructure of Microsoft and Apple.  They also recomment Iowa “consider allowing sale, refund or transfer” of tax credits.

A few years ago, after the film tax credit disaster, Governor Culver tasked a panel with reviewing the effectiveness of Iowa’s dozens of tax credits.  Their report failed to come up with a clear benefit for any of Iowa’s tax credits.  The panel also had this to say about transferable tax credits: (my emphasis)

Transferability of tax credits complicates the projection of revenues and the tracking of credits, creates uncertainty about when credits will be claimed because the purchasing entity may utilize a different fiscal year than the entity awarded the credit, and siphons resources from awarded entities through brokerage fees… Once tax credits are transferred, it creates limited recourse for the State to recover funds claimed in instances where the business awarded the original credit does not fulfill the contracted obligations or if the credit was awarded in error.  Additionally, transferability has also resulted in abuses in some tax credit programs.

It would be better Iowa to not “compete” in taxing its current taxpayers to lure and subsidize their competitors.  Instead Iowa should enact a tax system good enough that we don’t have to pay people to be our friends.   The Quick and Dirty Iowa Tax Reform Plan would be better for Iowa businesses than any number of pocket-picking tax credits.


Poor legal move.  From

Former Kirkland & Ellis LP senior partner Theodore Freedman pleaded guilty to fraud in connection with the filing of false tax forms.

Freedman changed his plea yesterday from not guilty to guilty of four counts of tax fraud. U.S. District Judge Deborah Batts in Manhattan accepted the plea and set sentencing for Sept. 17. Freedman’s lawyers reached a plea agreement with U.S. attorneys.

Indicted in July 2011, Freedman misrepresented his income as a partner at the law firm by about $2 million, the U.S. said. He also claimed more than $500,000 in expenses for a sole proprietorship that didn’t exist, the government said.

It’s hard to imagine how he thought this would work.  K-1s get matched against tax returns, at least occasionally.  The IRS matching system is cumbersome and inefficient, but it works well enough that you can’t habitually ignore K-1s with six-figure income.  Furthermore, claiming big bogus Schedule C losses like that is practically an engraved invitation for the IRS to visit your return.

Related:  Former Kirkland & Ellis Partner Pleads to Tax Crimes (Jack Townsend)


The Colonel knows why your business might have to file returns in other states.  My new post at, The Des Moines Business Record blog for entrepreneurs.

William McBride, The Carried Interest Debate: Funding Government for 3.1 Hours (Tax Policy Blog).

Patrick Temple-West,  Cadbury gets tax bill in India, and more (Tax Break).

Daniel Shaviro,  Skepticism about “fundamental tax reform”

Angie Picardo,  Grads – Filing for First the Time (Missouri Tax Guy guest-post)

Brian Strahle,  D.C. Combined Reporting – Transition Rules for 3/15 and 4/15!

Janet Novack,  New IRS Data: Rich Got Richer, But Paid Lower Tax Rate As Stocks Gained

William Perez,  Child Tax Credit for 2012


There’s a new Cavalcade of Risk up at Health Business BlogIt’s always worth the ride at the blog world’s roundup of insurance and risk management!


Is that an argument for or against intelligent design?  The Sequester: ‘Designed to be Stupid’ (Cara Griffith,

Because they aren’t in a position to speak for themselves: Ellen DeGeneres Speaks Out For Spanish-American War Widowers (Peter Reilly). 

The Critical Question: Why Is Amy Poehler Going To Hell? And What Does Taylor Swift Have To Do With It? (TaxGrrrl)



Programming note: This site was pretty much shut down part of yesterday afternoon.  Our valiant hosting service says it was a comment spam attack on the pre-2012 archived posts.  Sorry about that.



Tax Roundup, 3/6/2013: Tax return numerology, and similar economic development science. Plus rapper tax tips!

Wednesday, March 6th, 2013 by Joe Kristan

20130306-1Tax tip: IRS doesn’t buy this numerology stuff.  A strange story out of New York:

A tailor who counted star athletes including Rickey Henderson and Wilt Chamberlain among his clients has pleaded guilty to skirting about $2 million in sales and income taxes.

Mohanbhai Ramchandani pleaded guilty on Tuesday, state Attorney General Eric Schneiderman said. His company, Mohan’s Custom Tailors Inc., also has had local stars Patrick Ewing and Darryl Strawberry among its clients and made an appearance on Bravo’s “The Real Housewives of New York City.”

The charges say that he failed to pay $1.7 million in sales taxes starting in 2001, and he failed to pay $256,000 of income taxes from 2007 through 2009.  I didn’t know tailoring could be so lucrative.  But this is unusual:

Authorities said a whistle-blower first raised concerns over Ramchandani’s tax practices. They said one indication of fraud was the use of numbers on his tax forms that added up to multiples of 10, an outgrowth of his belief in numerology.

Once in a while you prepare a return that happens to foot to a round number somewhere.  It looks funny, but it will happen occasionally just by chance.  But when they are all round, apparently the tax people might notice.


As strange as Mr. Ramchandani’s approach to numbers is, Iowa gives him a run for his money.   Iowa’s lead tax credit pusher, Debi Durham, has issued a press release touting the economic wonders of enormous tax credits granted Orascom, an Egyptian company, to build a fertilizer plant in Southeast Iowa.  The release bases its conclusions on ” the Regional Economic Modeling Inc. (REMI) analysis for the Iowa Fertilizer Co. project.”  From the release:

“The  REMI analysis of the Iowa Fertilizer Co. project speaks for itself,” said Debi Durham, director of the Iowa Economic Development Authority (IEDA).  “On the front end, Iowa Fertilizer Co. will inject $1.4 billion of capital investment into our state and create at least 165 permanent jobs and thousands of construction-related jobs.  Now we know that the benefits of that project will serve Iowans for years to come.”

It speaks for itself and it says nothing.    It says nothing about whether the project would have gone ahead without the credits, but Iowa’s claims that Illinois was hot after the plant with its own incentives lack credibility.

The analysis really betrays itself by omitting two key words: “opportunity cost.”  It claims every projected benefit from the project without asking whether any benefits would be available if the money were used for something else.  It certainly doesn’t say what Iowa loses by having a complex tax system with high rates to pay big subsidies to the well-connected.

I’ve said it before: using taxpayer money to lure businesses is like a guy taking his wife’s purse to the bar to buy drinks for the girls.  It’s not impressive.  They might let the guy buy the drinks, but they realize he’ll treat them like he is treating his wife if he gets the chance.  And anybody he goes home with isn’t likely to be much of a prize.


Egypt taking a different approach to Orascom.   The Orascom executives do better in Iowa than back home, reports

An Egyptian billionaire behind one of the largest and most controversial projects in the state is being investigated for tax evasion and has been barred from leaving his country.

According to an article published Tuesday in Construction Week Online, Orascom Construction CEO Nassef Sawiris and his father, Onsi Sawiris, are barred from travel until a resolution is reached regarding the sale of an Orascom subsidiary and the taxes from that sale.

As hard as it is to deal with Iowa and federal tax authorities, they are probably downright reasonable compared to Egyptian revenuers.  I suspect that the “resolution” being sought is much like that sought by a kidnapper.


The TaxProf links to this from the New York Times Dealbook: Why Carried Interest Is a Capital Gain.  It is as good an explanation as I’ve seen of why capital gain on private equity isn’t a crime against humanity:

Typically private equity investors are paid a 2% management fee, on which they pay ordinary income tax rates, and a 20% carried interest of the partnership’s profits that is only paid after limited partners receive a preferred return of 8%.

Carried interest, therefore, is the profits share on the sale of a capital asset and not “ordinary income” as some would have it treated.  In other words, it is a capital gain within a partnership and is rightfully taxed at the long-term capital gains rate  — provided that  the asset, or company, is held for more than one year.

The underlying principle is no different than two friends who partner together to purchase a restaurant.  One might bring capital and the other brings expertise.  The restaurant could be in disrepair or a great concept that needs additional capital to expand.  The chef identifies the restaurant to buy and possesses the skills to manage the restaurant and add value to the enterprise over time.  The friend has the capital to invest, but doesn’t possess the operational or investment skills to generate a return.

When they sell the restaurant years later, both partners receive capital gains treatment on their long-term investment.  A private equity partnership works in the same way.  This is Partnership Law 101.

Exactly.  And it’s not like a salary, where somebody writes you a check.  The private equity investor is taking a risk, and on any given investment is likely to get nothing.  It’s not like, say, a tenured law school faculty paycheck that comes every two weeks.



It’s not just the rich guy?  Obamacare Tax Increases Will Impact Us All (Andrew Lundeen, Tax Policy Blog).

Howard Gleckman, Changing Government’s Inflation Measure Would Raise Taxes as Much as it Would Cut Spending (TaxVox)

Jason Dinesen,  Greatest Hits: Enrolled Agents, The Liechtenstein of the Tax World.  “When people hear ‘enrolled agent,’ they think either ‘what the hell is
that?’ or ‘he must work for the IRS, flee for your lives!'”

Anthony Nitti,  Business Owners Could Find Their Tax Deferral Backfiring.  Deferring income into higher-rate years works badly.

Russ Fox,  Did the IRS Write Law?  “I suspect the IRS has erred.”  I agree, the IRS can’t change statutory rates to deal with budget issues.


Jack Townsend,  Proposed New FBAR Form And Explanation

Brian Strahle,  Will Maryland Match Virginia’s Corporate Income Tax Rate?

Patrick Temple-West,  Tax-exempt bonds get scrutiny, and more

TaxGrrrl, Taxes From A To Z (2013): C Is For Carpooling

Robert Goulder, Will EITI Kill Transfer Pricing? (  First ask yourself: what is EITI?


David Brunori, Remember the Alamo, Buy a Gun (  On the unwisdom of sales tax holidays, even for guns.

ProTip: Don’t take your tax advice from rappers.  This from Going Concern:

As you might expect, TMZ has the scoop and it quotes a number of artists who are currently considering tips for strippers as a legit deduction and therefore a serious tax strategy. And who doesn’t love creative tax planning? But how might they rationalize this idea? 

Well, Bizzy Bone considers these young ladies to be like his family:

Bizzy Bone tells TMZ, “I’m giving charity to females who need their light bills paid.  So, of course, that’s a write-off.  You write off your kids, don’t you?”

Um, no.  Mr. Bone might want to ponder the stories of Ja Rule, Fat Joe, and Beanie Sigel, to name a few, before he gets too smug about his tax deductions.



Angels over Iowa

Wednesday, March 28th, 2012 by Joe Kristan

If you define “angel” as “somebody who gets a subsidy when he invests in a company,” Iowa has them.  Drew Larson explains in Silicon Prairie News.

Related: Fields of dreams and cash cows: the Iowa legislature at work on the tax law


What happens when politicians ‘invest’ your money in your competitors

Wednesday, January 18th, 2012 by Joe Kristan “Surprise: ‘Tax Breaks for Jobs: Half fall Short'”
From the story:

The South has long led the country in public incentives dished out for corporate relocations. Yet far from increasing jobs and economic growth, such effects have the opposite outcome. They suck money out of the economy and screw over other businesses and taxpayers (who have to pick up the tab).

Tax credits and special breaks always end up favoring those with friends in high places, at the expense of the rest of us.


You can’t buy discount research credits on the internet…

Thursday, December 29th, 2011 by Joe Kristan

…but that didn’t keep an Orange County, California man from trying to sell them. Yesterday the Department of Justice announced:

A federal court in Los Angeles has permanently barred Lamar Ellis of Brea, Calif., from promoting a scheme involving sales of bogus federal tax credits, the Justice Department announced today. According to the government


Cedar Rapids tax preparer gets two years for helping clients report too much income

Friday, December 23rd, 2011 by Joe Kristan

You can go to jail for reporting too much income on client tax returns? Indeed you can, as a Georgia woman who once prepared tax returns in Iowa learned yesterday. Demetries Johnson was sentenced to two years in prison after pleading guilty to four counts of Earned Income Tax Credit fraud. All four counts involved overstating client income to boost their EITC, which gives low-income taxpayers more cash as their income increases, to a point. Two of the counts also alleged improper use of dependents.
Fraud has long been a big problem with the EITC, and with other refundable credits. The attraction of filling out some forms incorrectly and getting government cash, even when no tax is due, is irresistable to fraudsters. The IRS is requiring preparers to file a checklist with returns filed in 2012 showing that they have done “due diligence” when claiming the EITC, but don’t expect EITC fraud to disappear just yet.
Case documents:
Acceptance of guilty plea
Original indictment
Somewhat related: Earned income credit veto: heartless, or good policy?


Tax credit fraud: all for a good cause

Friday, May 6th, 2011 by Joe Kristan

Supporters of tax credits to fix up old buildings like to say the credits are important for fixing up old neighborhoods. Taxdood reports that such credits have other uses:

Such was the case of Justin Glynn French, of Richmond, Virginia. Mr. French was the owner of French Consulting Company, a Richmond-based real estate development company. One of his company


Tax ‘coupling’ bill at top of Iowa Senate agenda today

Tuesday, April 5th, 2011 by Joe Kristan

UPDATE, 11:11 AM The Senate passed SF 512, but after attaching an amendment. It looks like uncontroversial R&D credit stuff, but it still requires another vote in the House. We’ll see if they take it up today. I feel good that they will get it done now that both houses have approved pretty much the same thing, but I never trust them.
UPDATE, 1:35 p.m. I was right not to trust them. Apparently the Senate bill had something about “transfer authority,” a non-tax provision, that the House didn’t like, so they refused to pass the Senate bill as amended. Back to the Senate.
DONE! 4:20 PM The Iowa Senate blinked. They “receded” from their amendment to the version of the bill passed by the House yesterday and passed the House-passed SF512, 49-0. So:

-For years beginning in 2010 and 2011, Iowa adopts $500,000 federal Sec. 179 limit.
-Iowa does not adopt bonus depreciation for 2010 or 2011.
-Iowa conforms with other federal tax changes up through 1/1/2011.

Governor still has to sign, but I’d be shocked if he didn’t.

6:00 p.m. OK, maybe I’ll be shocked. From O. Kay Henderson: Branstad will likely veto House GOP plan to pay state


Reverse role models

Tuesday, April 5th, 2011 by Joe Kristan

Some people find their purpose in life is making mistakes so we don’t have to. Russ Fox celebrates these intrepid bad examples in his Bozo Tax Tips series:

Congress has decided to legislate through the Tax Code. There are hundreds of tax credits that now exist. These range from the Earned Income Credit, education credits, electric vehicle credits, and adoption credits. Some of these credits, such as the Earned Income Credit, are refundable credits: You can get a refund based on the credit even if you don


April Fools fun

Friday, April 1st, 2011 by Joe Kristan

While the Tax Update is too humor-impaired at this point in tax season to play April Fools jokes, those crazy Tax Foundation guys are up to the job:
Obama Urges Biden Gaffe Tax to Close Budget Deficit
New York Demands Income Tax from Orbiting Astronauts
D.C. Predicts Sales Tax Holiday Will Boost Baseball Wins
Parody is hard in the tax law, as their Congress Choosing Between Big-Government Newspaper Subsidy and Free-Market Newspaper Tax Credit shows. The story says a congresscritter named Papershill is proposing a 50% subsidy for publishing newspapers. Other critters come back with a “free market” alternative:

The counterproposal would provide a tax credit to each newspaper equivalent to 50% of expenses. Newspapers would submit their expenses for approval by a a subcommittee of elected officials to be eligible for the tax credit.
“Our idea is completely different from Papershill’s,” the sponsors said. “We’re giving tax cuts, not a subsidy program, while still saving newspapers, creating lots of jobs, and making sure newspapers are supportive of what we in Congress say and do.”
Early indications are that, while Papershill’s plan is doomed to failure, the compromise is likely to pass.
“If it lowers someone’s taxes, I’m all for it,” said one congressman. “Those who are opposed to this tax credit are just big government lackeys who want to tax America’s newspapers to death.”

While the Tax Foundation is engaging in satire, Grover Norquist is supposed to be serious. Yet he sounds a lot like the fictional Tax Foundation congresscritter when he acts as though just because the ethanol subsidy is run through tax returns, it is no longer a subsidy:

Mr. Norquist said his group opposed revoking the ethanol measure unless it was offset with another tax break, because that would constitute a net tax increase. He said that is the purpose of the group’s pledge, which dates from the mid-1980s.

By that logic, all you have to do is call any spending measure a tax credit, and any future cut in the subsidy becomes a tax increase. For Mr. Norquist and Americans For Tax Reform, that makes every day April Fools Day.


Iowa can’t decide what your 2010 tax rules are, but they can still give it away

Tuesday, March 29th, 2011 by Joe Kristan

There’s no news to report from the Capitol on the impasse over Iowa’s fixed asset cost recovery rules for 2010. Last week I was told that if they didn’t fix it by last Thursday, it could drag on, and that seems prescient.
While they can’t tell us how to do our 2010 Iowa tax returns yet (heck, it’s not even April — why are we so antsy?), they can sure spend it. The Iowa Department of Revenue has released its latest “Tax Credits Contingent Liabilities Report.” Some highlights:
– In the last full fiscal year, 23 tax credits awarded by various state agencies added up to almost $182 million.
– For 2008, the last full year for which they have published statistics, Iowa awarded over $81 million in “refundable” tax credits. If you have refundable tax credits in excess of your tax for the year, the state writes you a check for the difference. The only difference between this and straight-up corporate welfare is that no legislative appropriation is needed to collect a refundable tax credit.
– The “Historical Preservation and Cultural and Entertainment District” tax credit has gone through the roof, with awarded credits rising from $15 million in 2009 to $50 million in 2010.
– Just five credits – the Historical credit, the High Quality Jobs Program, the Industrial New Jobs Training Program, and the two Enterprise Zone program credits — add up to $145 million in 2010. If that has fired up an Iowa economic revival, it’s an invisible one.
– When you count all of the tax credit programs, including the economic developments programs, research credits, earned income tax credit, and ethanol and biodiesel promotion, Iowa ran up a $243 million tab in fiscal 2010.
And it doesn’t look like it’s going to get much better:
Click to enlarge chart.
Rather than running hundreds of millions in futile tax credits through the economic development bureaucracy, Iowa ought to try something different — let us keep our money and invest it without their help. The Quick and Dirty Iowa Tax Reform Plan is ready to go!


Hiding government spending by running it through tax returns

Tuesday, November 23rd, 2010 by Joe Kristan

When you buy a cell phone with a mail-in rebate, the guy at the store will tell you that your price is the list price minus the rebate. And he


The Iowa Tuition Credit: a strain on the Treasury?

Friday, August 13th, 2010 by Joe Kristan

Does Iowa’s 65% private school tuition organization tax credit drain the state’s coffers to no good effect? That’s the question raised in a long-form article by The Iowa Center for Public Affairs Journalism, an outfit that’s news to me.
They point out how the credit, which rewards contributions to organizations that subsidize tuition to private schools in Iowa, can make such contributions nearly cost-free to donors:

One donor, who gave $175,000 to scholarship funds, received a credit of $113,750 from the state and was eligible for a $61,250 federal tax reduction, amounting to virtually no out of pocket costs.

The article says the program is touted as reducing government costs by reducing public school enrollment, and that the evidence is scanty that it has done so. The article also says:

-Almost all of the tuition grants benefit religious schools, putting Iowa civil libertarians on the lookout for a church-state suit against the state.

Well, yes, the secular humanists haven’t gotten the Christopher Hitchens Happy Day School off the ground yet.

-The state does not have information to determine whether the tax credits are merely benefiting parents with children already in private schools;
-The law does not require the state collect sufficient data to allow it to ensure only eligible students


Low-income housing tax credits: the federal subsidy for well-connected developers

Monday, June 7th, 2010 by Joe Kristan

20100607-2.jpgRoxanne Conlin is likely to roll to an easy win tomorrow in her bid to be crushed by Chuck Grassley in November’s U.S. Senate race. On the way to her victory, though, she has had to deal with pesky questions about her husband’s tax credit-financed real estate development business. The Des Moines Register reports:

The Des Moines Register reported Friday that Conlin, who has campaigned against tax breaks that benefit wealthy Americans, is a part-owner of 27 low-income apartment complexes that were financed through the sale of millions of dollars in federal tax credits.
The rental developments, all located in the Des Moines metropolitan area, were built in the past 19 years using $64.2 million from federal low-income housing tax credits, the Register reported after a review of state and federal records.
Conlin, a Des Moines lawyer, told the Mason City audience: “I know people might think just from reading the headline that I took $65 million from the federal government, and nothing could be further from the truth.”

Of course she didn’t take $65 million from the federal government. Her husband just distributed it, for a fee.
Low-income housing tax credits are supposed to be a way for the government to supply low-income housing to the poor. In real life they are a way for well-connected developers to obtain and distribute tax credits for investors needing some tax shelter — typically banks, insurance companies and wealthy individuals. Each state gets an allocation of credits from the U.S. Treasury, and the states pass the allocation to developers. The process favors insiders with connections who know how to pull the levers of the allocation bureaucracy: people like the Conlins and Senator Jack Hatch. There’s nothing illegal about this. They are playing the credit allocation system the way it is designed. But does this system make sense? Not surprisingly, Ms. Conlin is a fan:
“I’m very proud of what my husband and my family have done to house people and create jobs,” she said.
Since 1991 those projects have created about 2,400 jobs, mostly in construction, she said. The result was “very nice places where people can live safely and with dignity,” she said.

The center-left Tax Policy Institute is less enthused. They find that running subsidies through developers is less effective than providing direct vouchers to the needy:
If the supply of low-income housing is very elastic in the long run, then production of limited amounts of subsidized housing will simply replace other housing that would otherwise have been provided. Housing supplied or subsidized by the government might increase the average quality of housing available to low-income tenants, but it would have little lasting effect on the quantity or price of housing available to poor people. (See Weicher and Thibodeau 1988 for a discussion of the effects of subsidized housing on the housing market as a whole.) Moreover, because new and substantially rehabilitated housing is expensive to produce, it is likely to be worth far less to tenants than an equal cash supplement, such as housing vouchers. Furthermore, DiPasquale, Fricke, and Garcia-Diaz (2003) estimate that the average cost of producing a tax credit unit exceeds the cost of the average voucher unit by 19 percent.

But while vouchers help the poor, they do nothing for the fixer class. That’s where the tax credits come in:
Conlin said she opposes income tax cuts that benefit the top 1 percent of the wealthiest earners. In contrast, she supports tax credits that help small businesses, manufacturers and housing programs create jobs.

In other words, wants small business taxpayers to pay higher rates to subsidize her. Because that $75 million legal fee she won in the Microsoft litigation won’t last forever, you know. When she loses to Senator Grassley in November, as seems probable, she at least will have the consolation of losing to someone else who favors taking money from you and me and giving it to the well connected.
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Why politicians like corporate welfare tax credits

Monday, May 3rd, 2010 by Joe Kristan

Iowa State University economist Peter Orazem:

“You can’t hold a ribbon-cutting event at an across-the-board tax cut”

Let alone call a press conference.


Spring Break Tax Tip: team up with your student at return filing time

Saturday, April 3rd, 2010 by Joe Kristan

When you fledglings leave the nest for college, they naturally want to do their own returns (it’s like getting your first car, just a lot more glamorous). That’s normal and healthy, but it can complicate your return.
20100403-1.jpgIt’s also normal and healthy to want to claim the college tax credits we discussed yesterday. Sadly, while you or your student can claim the credit, you can’t both do so. But this can be a tax planning opportunity.
Many parents can’t use the credit — either because they have income in excess of the ceilings for the credit, or they have other tax issues — like other credits — that make the college credits meaningless. That might be an opportunity to throw the credit to the student. If the student has enough income to pay tax — maybe through a summer job, or your successful investments on their behalf when they were little — they might be able to use a credit that would otherwise go to waste.
IRS Publication 970 explains how this works:

IF you claim an exemption on your tax return for a dependent who is an eligible student, THEN only you can claim the American opportunity credit based on that dependent’s expenses. The dependent cannot claim the credit.
IF you do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption), THEN only the dependent can claim the American opportunity credit. You cannot claim the credit based on this dependent’s expenses.

So if the kid is home on break, have one of those touching heart-to-hearts and decide which of you will claim the credit.
Check back daily for a new 2010 Filing Season Tip through April 15! Photo Credit: Flickr image of Cornell College’s King Chapel by _dew_incognito under Creative Commons license.
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Tax tip: Got kids in College in Iowa? You might profit from disaster.

Friday, April 2nd, 2010 by Joe Kristan

The “American Opportunity Credit” reduces taxes by up to $2,500 for parents with college kids. But if your student goes to a child in a “Midwestern Disaster Area,” the credit could be as high as $3,600. Most schools in Iowa are in disaster zones; you can see the list of covered counties here.
So when you do your return, remember to fill out Form 8863 if your adjusted gross income is less than $180,000 on a joint return, or $90,000 for a single return. You might just find yourself getting some cash back from the government.
Link: IRS Tax Benefits For Education: Information Center
This is part of our daily series of 2010 filing season tips through April 15. Collect them all!

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‘Jobs’ bill provides hiring credit, extends $250,000 Section 179 limit

Friday, March 19th, 2010 by Joe Kristan

The President yesterday signed HR 2847, the latest “jobs” bill, into law. The centerpiece of the bill is a provision forgiving employer FICA (but not Medicare) tax on “qualified” employees hired after February 3 for payroll earned from today thorugh December 31, 2010.
A “qualified employee” is one who has worked less than 40 hours in the 60 days prior to employment. This gives employers a perverse incentive to make potential hires sit out a little while, getting a little more broke, before they start, just to make sure they’ve been out of work for 60 days. That’s stupid tax policy for you. The break is unavailable for employees who replace other employees, or for relatives of 50% owners. A $1,000 tax credit will also apply to qualified employees who stay on the payroll for 52 straight weeks.
Of course, these provisions will do little or nothing to encourage hiring. You hire new employees when you need them to take care of customers. No tax break will make you hire people to stand around. But for those fortunate enough to be hiring anyway, it will be found money.
The bill also extends the $250,000 limit for Section 179 deductions — the deduction for assets that would otherwise have to be capitalized and depreciated — through 2010. It had been slated to fall to $136,000 for this year.
The bill also has some offshore tax enforcement provisions, including some more shoot-the-jaywalker $10,000 minimum penalties for foot-fault violations.
The TaxProf Blog has a roundup, and Kay Bell has more.

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Iowa: Closed for business?

Thursday, March 18th, 2010 by Joe Kristan

The bill limiting some of Iowa’s economic development credits passed the Iowa Senate yesterday on a party-line vote. One opponent said that it was bad news for Iowa businesses, reports O. Kay Henderson:

Senator Randy Feenstra, a Republican from Hull, summed up the G.O.P.


Iowa tax credit haircut advances

Wednesday, March 17th, 2010 by Joe Kristan

The legislative Democrats’ plan to trim Iowa’s tax credits advanced out of committee this week. The tax committees in each house approved the bills, SSB 3250 and HSB 738, along party lines.
The main elements of the bills are:
– Halving the R&D credit for big companies
– Limiting the cap on certain business tax credits to $120 million, from the current $185 million
– Suspending the film credit for one year
– Setting up an “oversight committee” for tax expenditures, so when the next scandal comes around, they can say it was just an oversight.
As most of these credits are just government spending run through the tax return, they are a natural target when the state is low on cash. Still, the legislature isn’t addressing the real issues: are the tax credits worth keeping at all? There’s no evidence they do any good. Far better to scrap the credits, lower the rates, and let us keep our money without running it through the Department of Revenue first. Something like the Quick and Dirty Iowa Tax Reform Plan.
More coverage:
Iowa Independent
O. Kay Henderson