Friday, March 18, 2011
- Atlantic, GOP Bill Would Force IRS to Conduct Abortion Audits, by Garance Franke-Ruta
- Bloomberg, Appliance Tax Credit for Whirlpool, GE Gets Higher Price Tag, by Richard Rubin
- Bloomberg, Camp’s Push for Lower Rates Forces Deduction Choice, by Richard Rubin
- Bloomberg, Technology Companies Lobby for Lower Corporate Taxe Rates, by Alison Fitzgerald
- Broadway World, Love, Sex and the IRS Opens
- Business Week, Apple, Google May Profit on a Tax Holiday, by Peter Coy & Jesse Drucker
- CBS MoneyWatch, Avoid These Tax Return Errors That Trigger an IRS Audit, by Ray Martin
- Citizens for Tax Justice, Tax Justice Digest
- CNN, Why Taxes Can be Patriotic, by Nicolaus Mills
- Forbes, IRS Wins Big In Six Year Audit Push, by Robert W. Wood
- Forbes, What's Your IRS Audit Risk?, by Robert W. Wood
- MarketWatch, Estate Tax Tips for Singles
- Mother Jones, The Limits of Tax Jihadism, by Kevin Drum
- New York Times, A Few Tax Tips for the Elderly, by Patrick Egan
- New York Times Editorial, Amazon v. the States
- tax.com, Presidents Paying Taxes, Abraham Lincoln Edition, by Joseph J. Thorndike
- tax.com, Tax Minutia Gone Crazy, Chapter 1099, by David Cay Johnston
- Wall Street Journal, A Matter of Trust: Giving Away a Home, by Anne Tergesen
- Wall Street Journal, E-File of Else: What's New for Tax Season?, by Laura Saunders
- Washington Post, Social Spending v. Corporate Tax Cuts, by Ezra Klein
On today's Fresh Air, Bloomberg News reporter Jesse Drucker, who has written extensively about corporate tax-dodging, explains how companies like Google, Pfizer, Lilly, Oracle, Facebook and Microsoft have managed to reduce their tax rates by hundreds of millions — and in some cases, billions — of dollars by taking advantage of offshore tax havens.
- Fox News, Pastor Accused of Denying Communion to Churchgoers Who Didn't Give Tax Refunds
- Jonathan Turley, Pay and Pray: Pastor Accused of Withholding Communion After Parishioners Refuse To Hand Over Their Tax Refunds
Thursday, March 17, 2011
- House Ways & Means Committee, Subcommittee on Select Revenue Measures, Hearing Announcement
- House Ways & Means Committee, Subcommittee on Select Revenue Measures, Testimony of Thomas A. Barthold Chief of Staff, Joint Committee on Taxation
- Accounting Today, Congress Deliberates on Taxes and Abortions
- Bloomberg, Abortion Foes Collide With Tax Obstacle in Attempt to Cap Federal Funding
The aim of this proposal is to significantly reduce the administrative burden, compliance costs and legal uncertainties that businesses in the EU currently face in having to comply with up to 27 different national systems for determining their taxable profits. The proposed Common Consolidated Corporate Tax Base (CCCTB), would mean that companies would benefit from a "one-stop-shop" system for filing their tax returns and would be able to consolidate all the profits and losses they incur across the EU. Member States would maintain their full sovereign right to set their own corporate tax rate. The Commission estimates that, every year, the CCCTB will save businesses across the EU €700 million in reduced compliance costs, and €1.3 billion through consolidation. In addition, businesses looking to expand cross-border will benefit from up to €1 billion in savings. The CCCTB will also make the EU a much more attractive market for foreign investors.
(Hat Tip: Omri Marian.)
Tuesday, March 15, 2011
9,700 other Ohio taxpayers also received letters promising inflated tax refunds The Department of Taxation blames a "software error."
My colleague Kevin D. Williamson has a piece today about how hard it would be to close the $1.1 trillion budget gap by taxing “the rich.” I spent some time this weekend going through more detailed IRS data, and they support his conclusion.
Liberals believe, more or less, that once someone’s income reaches the “rich” threshold, they have little right to keep any additional dollars they make. Starting with that assumption, I set out to find how much “extra” money people really have. You can see my results here.
The best numbers I could find came from IRS returns in 2008. ... [T]he cutoff the IRS uses is $200,000. ... The first question is: How much do these folks make in total? The answer is about $2.5 trillion. If we wanted, we could stop here: You’d need to grab almost half that to finance the deficits Obama’s talking about.
Monday, March 14, 2011
According to the petitioner, the respondent "was convicted of conspiring with others to create and implement illegal tax shelters for clients of Ernst & Young as well as for his own personal tax benefit. This scheme included making false statements and providing false documents to the IRS as well as understating his personal income." Further, the respondent "was convicted of filing a fraudulent U.S. Individual Income Tax Return, Form 1040, which substantially understated his taxable income." The respondent does not object to this description of the offense, but points out that he "was not convicted of filing a false tax return which substantially understated his taxable income. Rather, the tax evasion counts of [the] conviction[s] related to the tax returns of clients of . . . Ernst & Young." Further, the respondent consents to his name being stricken from the roll of attorneys.
See Legal Profession Blog, Disbarred For Tax Shelter Advice.
Sunday, March 13, 2011
Shaw said the IRS audited the alliance's tax returns for 2008 and 2009 and disallowed all of its business deductions. She said that although dispensaries throughout the state are being audited by the IRS, the alliance is the first to be told it can't deduct business expenses. "Every dispensary in the nation, past, present and future is dead if this is upheld," Shaw said. ...
Shaw said the IRS disallowed her deductions — for buying marijuana, hiring employees, securing office space and more — based on § 280E of the federal tax code, which states that no deduction shall be allowed for any business trafficking in controlled substances.
Under federal law, marijuana is classified as a schedule I controlled substance, a category of drugs not considered legitimate for medical use — despite voters' 1996 approval of Proposition 215, which legalized the use of marijuana for medical purposes in California.
(Hat Tip: Bob Kamman.) The title is courtesy of Country Joe and the Fish:
Don't bogart that joint, my friend
Pass it over to me.
Don't bogart that joint, my friend
Pass it over to me.
Monday, March 7, 2011
A range of economists have come to Capitol Hill to sing the praises of a value-added tax (VAT), but their song is falling on deaf ears.
While some elected officials have pledged to keep an open mind about the VAT, many lawmakers from both parties remain far from convinced, with concerns ranging from how regressive VATs can be to the prevalence of consumption taxes elsewhere in the world. ...
At a string of congressional hearings and think-tank events over the last month or so, economists with experience at the highest levels of government — including in Republican White Houses — have showered kind words on the VAT. The tax’s efficiency, they have said, comes because it does not particularly penalize savings and makes what is subject to taxation less of an opinion, among other reasons. ...
Economists who favor introducing the VAT as part of a reform of the tax code realize it would have an uphill climb in Congress, though they continue to stress that consumption taxes are a much more resourceful way to collect revenue than taxing areas like income.
(Hat Tip: Bryan Weng.)
You've probably never heard of these write-offs, but they could save you a lot of money and make your April easier. Why send the IRS any more than you need to?
Sunday, March 6, 2011
It's official: A type of trust used by the wealthy to shelter assets from estate taxes for hundreds of years, or even forever, is under fire.
The proposal, which first appeared a few weeks ago on a hit list of estate provisions in President Obama's 2012 budget, would limit tax-free "dynasty trusts" to 90 years.
The chances of passage are practically zero this year, say experts. But taxpayers should know that the idea is in play—and act accordingly. As proposed, the change would apply to new trusts or additions of money to existing ones, but not to those already funded.
Bottom line: If you are considering setting up a dynasty trust, move swiftly. ...
Dynasty trusts have gathered steam since the 1986 tax overhaul installed the current version of the "generation-skipping tax." This levy imposes taxes that would be avoided if taxpayers left assets to heirs who are more than one generation below. ... Dynasty trusts push [the] generation-skipping tax exemption to the max, putting the exempted amount beyond the reach of estate taxes for the life of the trust. That, in turn, means the heirs don't have to "spend" their own exemptions on those assets. These trusts are now allowed in 23 states and the District of Columbia (see table), to the delight of companies that charge fees to manage them. Taxpayers don't have to live in a state to put a trust there.
To enable these trusts, most of the states allowing them had to get rid of an old common-law principle called the "rule against perpetuities," which allowed trusts to exist only for about 90 years. The Obama administration proposal would reinstate this old principle in a way by removing the federal tax exemption after 90 years. So the trust can go on indefinitely, but the exemption can't....
Opponents of dynasty trusts often object to them on policy grounds. Prof. Ray Madoff of Boston College Law School fears they will help create a new aristocracy with access to tax-free, creditor-proof wealth. She also worries they benefit bankers as much as families: "Bankers are using these trusts as a decoy to line their own pockets."
States That Allow Dynasty Trusts: Alaska, Delaware, District of Columbia, Idaho, Illinois, Kentucky, Maine, Maryland, Michigan, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Virginia, Wisconsin, Wyoming
Friday, March 4, 2011
Whirlpool Corporation recorded $18 billion in global sales and $619 million of earnings in 2010 but won't pay anywhere near the U.S. statutory tax rate of 35% on those profits. Its effective tax rate will be 0%.
As Bloomberg first reported last week, Whirlpool has stockpiled more than $500 million in tax credits for making energy-saving "energy star" appliances—washers, dryers, refrigerators and so on. The firm gets a production tax credit of up to $200 per refrigerator, $75 per dishwasher, and $225 per washer and dryer. General Electric has also collected about $200 million of these credits.
Think of these energy efficiency tax carve-outs as a version of the earned income tax credit for corporate America. Except Whirlpool and GE aren't poor.
The deal gets sweeter. Those credits can be carried over from one year to the next for up to 20 years. Whirlpool is collecting so many credits that it may not have to pay a dime of corporate income tax for years. The lost revenue from GE and Whirlpool alone far exceeds the $78 million revenue "cost" over 10 years that Congress's Joint Committee on Taxation predicted for the credits. ...
Special favors like these also create a business constituency against tax reform that would benefit the overall economy. Whirlpool carries its $500 million of unused tax credits as an asset on its balance sheet, so cutting tax rates shrinks the book value of that asset. "This is why so many companies actually oppose lowering tax rates," says Scott Hodge, president of the Tax Foundation.
The White House claims to want to reduce corporate tax rates in a "revenue neutral way" by closing loopholes. Yet it's hard to take that commitment seriously when its new budget proposes to extend the green-credit windfall for another year. Whirlpool is one more case study in the case for corporate tax reform.
- Tax Policy Blog, Cash for Washers and Dryers Undermines Corporate Tax Reform
Thursday, March 3, 2011
If the claims by the IRS are true, Ambac has managed to pull off something that Lehman Brothers could not: force the government to provide a bailout. Ambac got its bailout by receiving more than $700 million in tax refunds that the IRS now argues were unwarranted.Ambac slide
- Bloomberg, Bankrupt Ambac Fights U.S. Tax Collectors in Three Courts
- Wall Street Journal, IRS Seeks Federal Court Ruling Over Ambac Back Taxes
Wednesday, March 2, 2011
Imagine a parallel universe where the Great Crash of 2008 was followed by a Tea Party of a very different kind. Enraged citizens gather in every city, week after week—to demand the government finally regulate the behavior of corporations and the superrich, and force them to start paying taxes. ... As people see their fellow citizens acting in self-defense, these tax-the-rich protests spread to even the most conservative parts of the country. ...
Instead of the fake populism of the Tea Party, there is a movement based on real populism. It shows that there is an alternative to making the poor and the middle class pay for a crisis caused by the rich. It shifts the national conversation. Instead of letting the government cut our services and increase our taxes, the people demand that it cut the endless and lavish aid for the rich and make them pay the massive sums they dodge in taxes.
This may sound like a fantasy—but it has all happened. The name of this parallel universe is Britain. ...
American citizens should ask themselves: I work hard and pay my taxes, so why don’t the richest people and the corporations? Why should I pick up the entire tab for keeping the nation running? Why should the people who can afford the most pay the least? If you’re happy with that situation, you can stay at home and leave the protesting to the Tea Party. For the rest, there’s an alternative. For too long, progressive Americans have been lulled into inactivity by Obama’s soaring promises, which come to little. As writer Rebecca Solnit says, “Hope is not a lottery ticket you can sit on the sofa and clutch, feeling lucky…. Hope is an ax you break down doors with in an emergency.” UK Uncut has just shown Americans how to express real hope—and build a left-wing Tea Party.
Enjoying record profits and taxpayer-funded bailouts as the economy slowly recovers from a financial crisis, nearly two-thirds of US corporations don't pay any income taxes, instead opting to abuse tax loopholes and offshore tax havens. According to this study from the non-partisan Government Accountability Office, 83 of the top 100 publicly traded corporations that operate in the US exploit corporate tax havens. Since 2009, America’s most profitable companies such as ExxonMobil, General Electric, Bank of America and Citigroup all paid a grand total of $0 in federal income taxes to Uncle Sam. Tax havens alone account for up to $1 trillion in tax revenue lost every decade, money that could be invested in K-12 education, colleges, public health, job creation and hundreds of other worthy public programs.
If we pay our taxes, why don’t they? If corporations profit here, shouldn't they pay here?
It’s time for ordinary Americans to fight back and demand an end to the corporate tax avoidance. Join US Uncut and together let's make corporate tax avoiders pay.
(Hat Tip: Jeremy Bearer-Friend.)
Friday, February 25, 2011
The Obama administration is seeking to widen the scope of its proposal to overhaul the corporate tax code, urging Congress to also change rules that allow some businesses to take advantage of tax laws governing individuals.
U.S. Treasury Secretary Timothy Geithner told the Senate Finance Committee Feb. 15 that Congress should “revisit” long- standing rules that give businesses a choice of paying taxes as a corporation or through a structure such as a partnership through which they can report business income on individual tax returns.
The recommendation, which Geithner repeated in a meeting with reporters this week at Bloomberg News in Washington, would affect income earned by the nation’s largest law firms, investment partnerships and so-called S corporations. It would more than double, to about $3 trillion, the amount of business income potentially affected by tax-law changes.
On Schedules A of her Federal income tax returns for the years at issue, petitioner claimed deductions for unreimbursed employee business expenses of $20,713, $18,604, $22,602, and $21,759, for 2005, 2006, 2007, and 2008, respectively. ....
During the years at issue petitioner was employed as a morning and noon television news anchor. As a television news anchor petitioner is required to maintain a specified professional appearance as described in the Women's Wardrobe Guidelines (guidelines). The guidelines provide that the "ideal in selecting an outfit for on-air use should be the selection of 'standard business wear', typical of that which one might wear on any business day in a normal office setting anywhere in the USA." ... The general guideline is that petitioner maintain a professional and conservative appearance. ...
Although a business wardrobe is a necessary condition of employment, the cost of the wardrobe has generally been considered a nondeductible personal expense pursuant to § 262. The general rule is that where business clothes are suitable for general wear, a deduction for them is not allowable. Such costs are not deductible even when it has been shown that the particular clothes would not have been purchased but for the employment. .
There are recognized exceptions to the general rule where, for example, the clothing was useful only in the business environment in which the taxpayer worked. The rules for determining whether the cost of clothing is deductible as an ordinary and necessary business expense are: (1) The clothing is required or essential in the taxpayer's employment; (2) the clothing is not suitable for general or personal wear; and (3) the clothing is not so worn.
During the years at issue petitioner purchased clothing for her position as a news anchor. She wears her business clothing only at work and maintains her business clothing separately from her personal clothing. She explained that the requirement to wear conservative clothing makes her business clothing unsuitable for everyday wear.
Petitioner purchased most of her business clothing and accessories from typical clothing stores such as Nordstrom's, Kohl's, Victoria's Secret, Macy's, Old Navy, JCPenney, Sportmart, Casual Corner, DSW, Ann Taylor Loft, Dick's Sporting Goods, Marshall's, Charlotte Russe, and other local clothing stores.
Petitioner's clothing purchases for work consisted of such items as traditional business suits, lounge wear, a robe, sportswear, active wear, lingerie, cotton bikini and cotton thong underwear, and evening wear. She also deducted expenses for an Ohio State jersey, jewelry, bedding, running and walking shoes, and dry cleaning costs.
Petitioner used a self-described criterion for determining whether a clothing expense was deductible. She would ask herself "would I be buying this if I didn't have to wear this" to work, "and if the answer is no, then I know that I am buying it specifically" for work, and therefore, it is a deductible business expense.
Hynes v. Commissioner [74 T.C. 1266 (1980)], involved a taxpayer in circumstances very similar to petitioner's. The taxpayer in Hynes worked as a television news anchor and deducted business expenses for wardrobe, laundry and dry cleaning, haircuts and makeup, hotels and meals, and car expenses and depreciation. The taxpayer purchased a particular wardrobe that was restricted in terms of color and pattern that he was able to wear on the air. The Court reasoned that the restriction on the taxpayer's selection of business attire, however, was not significantly different from that applicable to other business professionals who must also limit their selection of clothing to conservative styles and fashions. The Court further reasoned that the fact that the taxpayer chose not to wear the business clothing while away from the station did not signal that the clothing was not suitable for private and personal wear. ...
Similarly, petitioner does not satisfy the requirement that her clothing not be suitable for everyday personal wear. Although she is required to purchase conservative business attire, it is not of a fashion that is outrageous or otherwise unsuitable for everyday personal wear. Given the nature of her expenditures, it is evident that petitioner's clothing is in fact suitable for everyday wear, even if it is not so worn. Consequently, the Court upholds respondent's determination that petitioner is not entitled to deduct expenses related to clothing, shoes, and accessory costs, as these are inherently personal expenses. Additionally, because the costs associated with the purchase of clothing are a nondeductible personal expense, costs for the maintenance of the clothing such as dry cleaning costs are also nondeductible personal expenses.
[The court also denied her claimed deductions for business gifts, cable television, car expenses, cell phone, contact lenses, cosmetics, gym memberships, haircuts, Internet access, makeup, manicures, meals, self-defense classes, satellite radio, subscriptions to newspapers and magazines (Cosmopolitan, Glamour, Newsweek, and Nickelodeon), and teeth whitening.]
- Daily Mail, TV News Anchor Lands in Tax Court After Trying to Claim Her Cotton Thongs and Gym Classes as 'Business Expenses'
- New York Daily News, Sad Thong Song: Ex TV Anchor Anietra Hamper Loses Tax Case After She Tried to Expense Thongs, More
- Tax Update Blog, Hey, It's Not Cheap to Look Good on HDTV
Thursday, February 24, 2011
The U.S. Treasury is giving up $14 billion in tax revenue because of a sweetheart deal it's giving General Motors.
The automaker is expected to post its first profitable year since 2004 when it reports fourth-quarter results on Thursday. But GM won't have to worry about being hit with a big tax bill because billions in previous losses will provide shelter for years to come.
That break will reduce GM's U.S. tax bill by an estimated $14 billion in the coming years, and its global taxes by close to $19 billion, according to a company filing. ...
While it's unclear why GM was allowed to carry over its losses, some experts insist that GM got preferential treatment.
"A lot of things were done differently here," said Heidi Sorvino, head of the bankruptcy practice at Lewis Brisbois Bisgaard & Smith. She said that the tax break was just another example of how GM's bankruptcy process was unlike any previous bankruptcies.
Officials with the Treasury Department and GM insist that the tax break was not special treatment, and that any company going through bankruptcy could have gotten the same breaks.
Treasury spokesman Mark Paustenbach said GM's ability to hang onto the tax breaks it had before bankruptcy "depends on the application of long-standing tax rules to GM's particular facts. The Treasury Department did not publish any guidance during the economic downturn that changed these rules either in general or for corporations that received government assistance."
- GM's Special $45 Billion NOL Provides Lucrative Tax Shelter (Nov. 3, 2010)
- GM's Tax Shelter Not Available to Other Car Makers (or Other Taxpayers) (Aug. 1, 2009)
(Hat Tip: David Herzig.)
Monday, February 21, 2011
When you handed over your coupon, did the merchant collect tax from you? Did he calculate the tax based on the full face value of your purchase, or the discounted amount you paid for it? Did he force you to ante up any tax in cash, or did he allow you to apply your coupon towards the full bill, including tax?
These aren’t academic questions–the answers could affect the attractiveness of Internet-based social coupon programs to consumers, merchants, and state tax collectors. Ultimately, the question of how social coupons should be taxed is likely to end up in court. ...
In case you’ve missed this latest craze, in a typical deal you might pay $50 with your credit card to Living Social or Groupon over the Internet, and get via email a link to a coupon worth $100 at a local shop. (The social part comes in because in some cases the deal only goes through if a certain number of folks buy it. Plus, there are often incentives for referring your friends.) Neither coupon site collects taxes when you make your purchase and they warn their vouchers can’t be used for sales taxes or tips—unless the merchant allows otherwise. Groupon states in its Merchant Self-Service Agreement that the merchant “shall be responsible for paying all sales and use taxes related to the goods and services described in the offer.”
But just what are those? Spokesmen for tax administrators in three of the nation’s five most populous states—California, Florida and Illinois– told Forbes they expect merchants to collect sales tax on the face value of what you buy. In other words, they want their cut on $100 even though you only paid $50 and the local merchant collected maybe $25. By contrast, if a store printed up its own half-off coupon and allowed you to buy an $100 item for $50, the tax men would only tax the $50 you forked over. ...
There’s a nice irony here: If the states can legally charge sales tax on the full face value of the Groupon, this could be a rare case in which they get a windfall (as opposed to losing gobs of tax revenue) from e-commerce. They lose out from Internet shopping because web powerhouse Amazon.com, among others, doesn’t’ collect sales taxes from the residents of most states.
Earlier this month, Microsoft borrowed $2.25 billion in unsecured debt. What in the world possesses a company with $40 billion in cash and short-term securities to go out and borrow money?
Rock-bottom interest rates are one reason. But the bizarre, byzantine U.S. tax code seems to be another. ... [L]ike many purportedly cash-rich companies, Microsoft can't bring home much of its cash without writing a fat check to the IRS.
Politicians have been carping about the more than $2 trillion in cash sitting idle in corporate coffers even as unemployment remains high. But much of that cash isn't in the U.S.; it is abroad. And it isn't likely to come back home unless U.S. tax laws change.
David Zion, a tax and accounting analyst at Credit Suisse, estimates that the companies in the Standard & Poor's 500-stock index have "north of $1 trillion" in undistributed foreign earnings, or profits that have been parked overseas to avoid U.S. tax. ...
U.S. companies are taxed at up to 35% when they bring home the earnings generated through the operations of their overseas subsidiaries. They get a credit for any taxes paid to foreign governments—but, since the corporate-tax rate in the U.S. is one of the world's highest, most companies are in no rush to bring the money back onshore. By keeping those earnings abroad, U.S. companies can indefinitely defer their day of reckoning with the IRS.
That can put firms in the peculiar position of having tons of cash offshore that they might need but can't use at home without taking a tax hit.
The U.S. is the only major country that taxes foreign earnings of its own companies this way.
[I]n this case, it isn't just management that is making companies sit on too much cash. It is tax policy, too. Congress and the White House are discussing whether the U.S. should follow the rest of the world and stop taxing repatriated offshore earnings from companies that already have paid taxes to foreign governments. Some gnarly technical details will have to be worked out if the repatriation tax is to be reduced or eliminated.
Sunday, February 20, 2011
Thanks to a 1996 federal law aimed at preserving traditional marriage, thousands of same-sex couples in California, Nevada, and Washington state could get big tax bonuses on their federal returns starting this year. The bonuses are off-limits to heterosexual married couples—a sharp reminder of the "marriage penalty" that often dings two-earner couples. ...
All three states recognize domestic partnerships and also have what is known as community-property law. Community property refers to a system of ownership in nine states that usually attributes income and property acquired during marriage equally to both partners, regardless of who earned it. (The nine states are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin.)
The three states also now apply community-property laws to registered domestic partners. So the IRS—which must follow state property laws—has ruled that these couples should figure their total community income and split it down the middle, starting in 2010.
That is where the benefit comes in. Although domestic partners must divide their income equally, the federal Defense of Marriage Act prevents the IRS from treating these couples as married joint filers. So for 2010 and after, each partner will claim half the community income but still file as single or head of household.
The result, in many cases, is a federal tax savings because a couple will avoid the marriage penalty that often raises taxes for two-earner heterosexual married couples.
Tuesday, February 15, 2011
President Obama has reached out to the business community with talk of lowering the corporate tax rate and improving the tax treatment of profits earned abroad by American companies. That would certainly be an important improvement in our tax system. Unfortunately, his desire to use the elimination of "loopholes" to avoid any loss of corporate tax revenue means that he cannot possibly go far enough in reducing corporate tax rates.
Tuesday, February 8, 2011
The new law applies a top federal death tax rate of 35% with a $5 million exemption for 2011 and 2012. But it also changed a federal credit for state death tax rates into a federal deduction. The credit allowed a dollar-for-dollar reduction in federal taxes for state levies as high as 16%. This meant that every dime from state tax collections came from Uncle Sam. It was essentially a free tax for states.
By contrast, the deduction merely reduces the amount of federal taxable income and thus sharply reduces the amount of state tax that can be written off federal taxes. Many states have estate taxes at the old 16% threshold which now means an effective 10 percentage point or more surcharge above the 35% federal rate. This surcharge is even higher in states that also have an inheritance tax, which is levied on the value of specific property bequeathed to heirs, in addition to the estate tax (which is levied on the value of the entire estate).
Our friends at the American Family Business Foundation have done the math on the interaction between the new federal rates and these state taxes, and you can consult the nearby chart to see your state's fee for the privilege of dying. No wonder the battle over death taxes has suddenly moved to state capitals, with Indiana, Nebraska, Ohio, Pennsylvania and even Rhode Island looking to repeal their state levies this year. ...
Proponents argue that the death tax has minimal incentive effects because people can't change their behavior after they die. But every day people make decisions to minimize their tax bills before they die. In other words, estate taxes don't redistribute income among taxpayers. They redistribute income among states.
The federal death tax will revert with a vengeance to 55% in 2013 unless Congress acts in the next two years. But in the meantime, states like Indiana and Ohio, and especially New Jersey, can help their economic recovery by eliminating their death taxes and inviting lost wealth to return.
O'REILLY: Do you deny that you are a man who wants to redistribute wealth.
O'REILLY: You deny that?
OBAMA: Absolutely. I didn't raise taxes once. I lowered taxes over the last two years.I lowered taxes for the last two years.”
- Americans for Tax Reform, Obama Makes Super False Tax Claim: “I didn’t raise taxes once”; In Pre-Super Bowl Interview, President Obama Fumbles His Record on Taxes
- PolitiFact.com, President Barack Obama Says He Didn't Raise Taxes Once
- Wall Street Journal editorial, 'I Didn't Raise Taxes Once': Refreshing the President's Memory
NY Times (The Conscience of a Liberal), Ideas Are Not The Same As Race, by Paul Krugman:
Every once in a while you get stories like this one, about the underrepresentation of conservatives in academics, that treat ideological divides as being somehow equivalent to racial differences. This is a really, really bad analogy.
And it’s not just the fact that you can choose your ideology, but not your race. Ideologies have a real effect on overall life outlook, which has a direct impact on job choices. ...
It’s particularly troubling to apply some test of equal representation when you’re looking at academics who do research on the very subjects that define the political divide. Biologists, physicists, and chemists are all predominantly liberal; does this reflect discrimination, or the tendency of people who actually know science to reject a political tendency that denies climate change and is broadly hostile to the theory of evolution?
Now, I don’t mean to say that political bias in the academy is absent, although it’s not consistent: I can well imagine that it’s hard to be a conservative in some social sciences, but in economics, the obvious bias in things like acceptance of papers at major journals is towards, not against, a doctrinaire free-market view. But the point is that doing head counts is a terrible way to assess that bias.
NY Times (Freakonomics), Should We Be Surprised at Political Bias in Academia?, by Stephen J. Dubner:
The lack of diversity isn’t actually “statistically impossible” in a self-selecting group. But that of course is the point. How can it be that an academic field is so politically homogeneous? What kind of biases does such homogeneity produce? What sort of ideas get crowded out? And how homogeneous are other disciplines?
I have to say that I was surprised at the overt political (leftward) bias exhibited by several prominent economists at the recent American Economics Association meetings, although my sample set was quite small.
It is interesting — and sobering — that two fields, psychology and economics, that we rely upon to describe and amend bias in the world are themselves so susceptible to bias within the ranks of their practitioners.
Taxes too high? Actually, as a share of the nation's economy, Uncle Sam's take this year will be the lowest since 1950, when the Korean War was just getting under way. And for the third straight year, American families and businesses will pay less in federal taxes than they did under former President George W. Bush, thanks to a weak economy and a growing number of tax breaks for the wealthy and poor alike.
Income tax payments this year will be nearly 13% lower than they were in 2008, the last full year of the Bush presidency. Corporate taxes will be lower by a third, according to projections by the nonpartisan Congressional Budget Office. ...
"The current state of the tax code is simply indefensible," says Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee. "It is hemorrhaging revenue." ...
[I]n the third year of Obama's presidency, federal taxes are at historic lows. Tax receipts dropped sharply in 2009 as the economy sank into recession. They have since stabilized and are expected to grow by 3% this year. But federal tax revenues won't rebound to pre-recession levels until next year, according to CBO projections.
In the current budget year, federal tax receipts will be equal to 14.8% of the Gross Domestic Product, or GDP, the lowest level since Harry Truman was president. In Bush's last year in office, tax receipts were 17.5% of GDP, just below their 40-year average.
The lack of revenue, combined with big increases in spending, means the federal government will have to borrow 40 cents for every dollar it spends this year. The annual federal budget deficit is projected to reach a record $1.5 trillion.
(Hat Tip: Francine Lipman.) The article, however, omits the CBO's projection that, as the economy recovers, taxes (as a percentage of the economy) will surge to post-World War II highs (principally due to record individual income tax collections):
Saturday, February 5, 2011
Democrats now claim that the infamous 1099 business reporting mandate that the Senate repealed this week was an accident, as if they were as surprised as everyone else to learn that this destructive provision had crept by itself into law. The truth is that the 1099 rule emerged from the same core ideology as ObamaCare, and its overwhelming repudiation by Democrats may be an important inflection point in the health-care debate.
The 1099 rule is the first of the ballast to go over the side, and Democrats hope that such "improvements" will be enough to ride out the public storm. Then again, they also claimed that voters would learn to love ObamaCare once it had been stuffed through Congress, among many other misjudgments. The political history is revealing and instructive.
Less than a year ago, liberals couldn't see how anyone could possibly object to a rule requiring businesses to file 1099 tax forms with the IRS every time they spent more than $600 with a single vendor. Yes, this would result in a vast new paperwork and accounting burden for 30 million businesses and hit start-ups hardest, not to mention farms, charities and churches. But Democrats saw IRS surveillance of nearly all business-to-business transactions as merely an exercise in good government.
The point was to close the "tax gap," the largely mythological difference between the estimated taxes due under the business tax code and what the IRS actually collects. During the Bush years, Democrats and more than a few Republicans convinced themselves that businesses were cheating the government out of revenues through deliberate under-reporting and various tax shelters. ...
The 1099 ObamaCare footnote thus received no scrutiny at first because it was so mundane. Everyone in Washington agreed that corporations were stealing billions of dollars every year that rightfully belonged to Congress to spend. (The issue only blew up when the IRS's National Taxpayer Advocate Nina Olson, followed by the GOP and the business lobby, made it a priority last summer.) ...
[T]otal repeal sailed through the Senate on Wednesday, 81 to 17. The mystery is the 17 Democrats who continue to think this is a good idea ,,,
The larger political question is whether voters will be satisfied by this or that "improvement" to ObamaCare. The White House is trying to outflank public opposition with a controlled burn, but wildfires often move in surprising and unmanageable directions.
For a contrary view, see Linda Beale (Wayne State), More on Tax Information Reporting by Third Parties:
I’m more and more convinced that it is not the deficit that the Republicans hollering for “entitlement reform” care about–it is that they just simply want to destroy all of the things that the New Deal did to provide a safety net for ordinary people, while making sure that they reinstate brute-force capitalism like existed in the 1920s, back when Teddy Roosevelt made his famous statement about the corporate titans and malefactors of great wealth.
For rejoinders, see:
- Tax Lawyer's Blog, Senate Repeals Oppressive 1099 Law, Linda Beale Calls it a Conspiracy
- Tax Update Blog, Senate Votes to Repeal Health Care Bill's 1099 Expansion
Tuesday, February 1, 2011
Even as the United States suffers from a staggering unemployment crisis and vast income inequality, the nation's wealthiest families are sitting on huge piles of unproductive cash.
So with nothing remotely like a second stimulus bill in the cards, the best hope for goosing the economy, creating jobs and providing relief for the needy could lie in a Washington economist's ingenious scheme to get a chunk of that money put into circulation right now, in helpful ways.
Isabel Sawhill, a budget expert at the Brookings Institution, is pushing to temporarily double the tax deduction for charitable giving, a move that would serve as a powerful incentive for the rich to significantly increase -- or at least accelerate -- their contributions to nonprofit organizations.
(Hat Tip: Francine Lipman.)
A year ago, Congress had instructed the Internal Revenue Service to improve small businesses’ compliance with tax laws and created rules to make it more difficult for entrepreneurs to hide their income.
Now, rules requiring businesses to report to the IRS transactions with vendors may become collateral damage in a political fight over the health-care law. President Barack Obama in his State of the Union address on Jan. 25, backed an effort to “correct” the “unnecessary bookkeeping burden” before the rules take effect in 2012, forgoing an estimated $1.9 billion annually to pay for the overhaul of the health-care system.
The about-face is designed to appease congressional Republicans and business groups such as the U.S. Chamber of Commerce that have criticized the rules along with the broader health-care law. It also shows how difficult it is to take steps to close the tax gap among small businesses, which data show have lower tax payment rates than corporations and salaried workers. ...
The IRS estimates that about $345 billion in taxes owed are unpaid every year. Auditors recover about $55 billion of that, leaving $290 billion that goes uncollected, a figure known as the tax gap. The agency attributes $109 billion of the gap to underreported business income earned by individuals. The IRS estimates that this group also fails to pay about $39 billion in self-employment taxes. The figures are drawn from a study of 2001 tax returns and are likely higher today, according to the Congressional Research Service.
The IRS says small businesses are able to underreport their taxes because many business-to-business transactions aren’t reported independently to the government as wages and investment income are. By contrast, about 98% of salaried workers pay what they owe because their employers report their wages to the IRS. The Bush administration, in response to demands from Senate Finance Committee Chairman Max Baucus, a Montana Democrat, in 2008 proposed requiring businesses to report to the IRS when they pay vendors more than $600 for goods. Similar requirements exist for purchases of services.
The new estate law allows couples to do without trusts--if they trust each other.
Under the new law, just as under the old one, you can leave a citizen spouse or a charity an unlimited amount, without worrying about tax. But the new law makes two key changes. First, it raises each individual's lifetime exemption from federal estate and gift tax for transfers to nonspouse heirs to a hefty $5 million, from $3.5 million in 2009 and only $2 million in 2008. Second, it makes the exemption "portable" between spouses--meaning a surviving spouse can add any unused exemption of her just-deceased spouse to her own $5 million exemption. So a widow or widower can pass on as much as $10 million, untaxed, through either lifetime gifts or bequests.
Portability isn't automatic. To get it, the executor of the estate of the first spouse to die must file an estate tax return, even if no tax is due. Surviving spouses should get this return filed even if they have nowhere near $5 million of their own, because someday, who knows? Portability also isn't retroactive, so it's no help to those who lost spouses before 2011. Finally, it doesn't apply to the $5 million per person exemption from "generation-skipping" tax--the extra tax imposed on gifts to grandkids whose parents are still alive. That means the truly rich will want to use up their own $5 million exemptions, likely through gifts in the next two years.
The new estate law expires at the end of 2012. If Congress doesn't act before then, not only will portability lapse but the exemption amount will revert to $1 million and the estate tax rate will increase to 55% from the current 35%. Rapidan, Va. estate expert Howard M. Zaritsky insists this makes it risky to rely on portability when redoing estate plans. Others strongly disagree. "Portability is here to stay,'' Columbia Law professor Michael J. Graetz told estate-planning pros in January. Graetz, who wrote a book on the history of the estate tax, also predicts the $5 million tax-free amount won't be reduced. ...
Lawyers are now touting an idea they used to belittle: disclaimer trusts. You leave everything to your spouse outright, but give her the right to disclaim (turn down) all or part of the inheritance and have it go into a bypass trust, allowing her to make an informed decision based on her finances and the latest federal and state estate tax laws. ...
So what have attorneys had against disclaimer trusts? Disclaimers can be tricky; you can't, for example, disclaim assets you've already touched. But mostly, some lawyers haven't trusted surviving spouses to disclaim assets when they should. Now the new game in estate planning is an old-fashioned form of trust--between spouses.
Sunday, January 30, 2011
Try giving them perks and privileges (an extra vote?) in return, says 'Dilbert' creator Scott Adams.
The president was too polite to mention it during his State of the Union speech on Tuesday, but here's a quick summary of the problem: The U.S. is broke. The hole is too big to plug with cost cutting or economic growth alone. Rich people have money. No one else does. Rich people have enough clout to block higher taxes on themselves, and they will.
Likely outcome: Your next home will be the box that your laser printer came in. I hope that you kept it. ...
If we accept that the rich can be taxed at a different rate than everyone else, we can also imagine that there could be other differences in how the rich are taxed. ... I can think of five benefits that the country could offer to the rich in return for higher taxes: time, gratitude, incentives, shared pain and power.
Americans like to tax the rich. As a nation, we rely more on progressive taxes—and less on regressive ones—than any other developed country. We impose no broad-based consumption tax, standing firm against the global popularity of value-added levies. But we make ample use of corporate and individual income taxes—touchstones of progressive politics for more than a century. Our national penchant for progressive taxation has deep roots in American history. ...
It's one thing to say that American politicians have been taxing the rich for more than 200 years, but what were they trying to achieve? Were they seeking to redistribute wealth, to recast society along more egalitarian lines? Or were they simply trying to ensure that rich people paid their "fair share"? The answer, predictably, is both.
American political leaders have defended progressive taxation on narrower grounds, using it to remake the tax system, not society. No one made the case more succinctly than Rep. Cordell Hull, legislative father of the 1913 income tax. "I have no disposition to tax wealth unnecessarily or unjustly," he explained in his memoirs. "But I do believe that the wealth of the country should bear its just share of the burden of taxation and that it should not be permitted to shirk that duty."
Saturday, January 29, 2011
In his State of the Union address, President Obama called on Congress to enact tax reform. Republicans all applauded because to them tax reform is just another excuse to cut taxes. However, their response was muted when he said that any tax reform legislation must be paid for by getting rid of loopholes and cutting spending through the tax code.
No one denies that there are many aspects of the tax code desperately in need of reform. The problem is that Republicans refuse to talk about anything except further cutting tax rates. But the idea of tax reform has always meant much more than that. It also means getting rid of tax preferences that bias individual and business behavior in ways that may not be optimal for them or the economy. In other cases, tax preferences simply waste money subsidizing people and businesses for no reason except that they belong to some politically favored group.
A key goal of tax reform must be to rid the tax code of unjustified tax preferences. The goal, which Republicans used to believe in, should be to achieve tax neutrality. This basically means that people and businesses should make economic decisions based solely on the economics and not because the tax system in effect subsidizes them to do one thing rather than another. ...
Republicans claim they are for it, but they steadfastly refuse to name a single existing tax provision that is worth getting rid of; they are only for tax rate cuts and that is the sum total of their contribution to the tax reform debate. Their rationale, apparently, is that eliminating any tax loophole, no matter how egregious or unjustified, would constitute a tax increase; and they are against all tax increases, period.
The other factor in Republicans’ thinking is just cynical politics – they are for the sugar of rate cuts, but it is the sole responsibility of Democrats to come up with the medicine of actually reforming the tax code by proposing revenue offsets to pay for the rate cuts. Grover Norquist, president of Americans for Tax Reform and the man who, more than anyone else, lays down the Republican line on all tax issues, told me this when I asked him about coming up with offsets to pay for tax reform: “I recommend taking the corporate rate to 25%. The Dems can suggest tax hikes if they believe they need to ‘make up’ revenue. That is a bipartisan division of labor.”
The political trap is obvious. Any actual reform that would increase revenue will be relentlessly attacked by Republicans as a tax increase and they will quickly send out fundraising letters to whatever group or industry is affected, requesting campaign donations to prevent the Democrats from raising their taxes. No mention will be made by Republicans of the idea that the reforms would be coupled with tax rate reductions in a revenue-neutral manner that neither raises nor lowers net tax revenue in the aggregate. Unfortunately, this strategy will doom any hope of tax reform. No Democrat is going to put forward any revenue-raisers under these circumstances. ...
I am not holding my breath waiting for the first responsible Republican to do what Reagan, Kemp, Kasten and others did in the 1980s and put together a tax package that includes specific revenue raisers to pay for further rate cuts. And pie-in-the-sky reforms that would abolish every tax preference in exchange for a flat rate don’t count because there is not the slightest chance such a radical change will ever be enacted. The best we can hope for is incremental improvement along the lines of the Tax Reform Act of 1986, which was a truly bipartisan effort. But that’s not going to happen if Republicans insist on playing by Norquist’s rules.
- Bruce Bartlett, The Roots of Tax Reform, Part I (1960-1979), 129 Tax Notes (Dec. 20, 2010)
- Bruce Bartlett, The Roots of Tax Reform, Part I (1980-2011), 130 Tax Notes (Jan. 24, 2011)
Tuesday, January 25, 2011
Of course, the education race doesn't end with a high school diploma. To compete, higher education must be within reach of every American. That's why we've ended the unwarranted taxpayer subsidies that went to banks, and used the savings to make college affordable for millions of students. And this year, I ask Congress to go further, and make permanent our tuition tax credit — worth $10,000 for four years of college.
Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.
So tonight, I'm asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. ...
Now, I’ve heard rumors that a few of you have some concerns about the new health care law. So let me be the first to say that anything can be improved. If you have ideas about how to improve this law by making care better or more affordable, I am eager to work with you. We can start right now by correcting a flaw in the legislation that has placed an unnecessary bookkeeping burden on small businesses.
And if we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2% of Americans. Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break. ...
In fact, the best thing we could do on taxes for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them.
- Accounting Today, Obama Calls for Tax Reform
- Associated Press, Obama Calls for Overhaul of Corporate Taxes
- Bloomberg, Obama Backs Corporate Rate Cut Only If It Won't Affect Deficit
- Citizens for Tax Justice, Close Corporate Tax Loopholes — But Don’t Give the Revenue Back to Corporations as a Rate Cut
- Fornes, Obama’s Tax Reform: Corporate, Individual, Or Both?
- Huffington Post, Will Business Kill Tax Reform?
- PolitiFact, Obama Says U.S. Corporate Tax Rate Is Among World's Highest
- Start Making Sense (Dan Shaviro (NYU)), Corporate Tax Reform
- Start Making Sense (Dan Shaviro (NYU)), Tax Discussion in the State of the Union Address
- U.S. News & World Report, Both Parties Want to Take on Tax Reform
- Wall Street Journal, A Call to Overhaul Corporate Taxes
Monday, January 24, 2011
[A] recent U.S. district court case [was] won by the IRS against David Watson, a CPA in West Des Moines, Iowa. At issue: a common tax-cutting maneuver available to the owners of millions of closely held businesses.
The case, David E. Watson P.C. v. United States [No. 4:08-cv-442 (S.D. Iowa Dec. 23, 2010)], revolved around Mr. Watson's low pay as the sole owner and shareholder of a so-called S Corporation. ... According to the decision, the firm made profit distributions of $203,651 and $175,470 to Mr. Watson through his Sub-S for 2002 and 2003, respectively, the years in question.
Mr. Watson, who had a graduate degree in tax and 20 years' experience, received only $24,000 of salary for each of those years, far less than the $40,000 a year earned by recent graduates in accounting with no experience, according to one expert for the IRS.
The agency cried foul, saying his pay was far too low. Why object? Unlike profit distributions, all salary is subject to a 2.9% Medicare tax and some is subject to a 12.4% Social Security, or FICA, tax. ... By reporting low pay Mr. Watson didn't save any income taxes, but he did save nearly $20,000 in payroll taxes for the two years, the IRS said, pegging Mr. Watson's true pay at $91,044 for each year.
Judge Robert W. Pratt agreed, ruling that the CPA owed the extra tax plus interest and penalties.
Mr. Watson plans to appeal the decision. "The IRS can disallow a tax deduction for unreasonably high compensation, but the law doesn't give it the authority to raise pay in order to collect extra payroll taxes," he says. Independent tax expert Robert Willens in New York says this will be a hard argument to win. ...
Recent IRS statistics suggest why the agency might focus on Sub-S pay. Over the past decade and a half, when executive paychecks exploded, the salaries of Sub-S owners declined as a percentage of total income, from 52% in 1995 to 39% in 2007, according to the latest data available. (The remaining income is taxable to the owners as well, but doesn't incur payroll taxes.) During the same 12-year period, Sub-S income doubled, while salaries increased only 26%. The average pay for a Sub-S owner was recently was $38,400, according to Martin Sullivan, an expert with Tax Analysts, a nonprofit publisher near Washington.
What is a fair ratio of profits to pay? There isn't one answer, experts say. A company with substantial capital or assets, such as a manufacturer, often is able to justify lower pay than one selling personal services like a law or accounting firm. Says Mr. Willens: "I would tell a client that for personal services, 70% would be the absolute floor and might not get the job done," he says.
In Mr. Watson's case, his revised compensation came to only about 40% of his total return from the company. The upshot: Pay can vary—but it can't be too low.
- Tax Update Blog, WSJ Spotlights Area CPA S Corp Court Loss (Jan. 22, 2011)
- Tax Update Blog, Court Sets 'Reasonable' Comp for CPA S Corp Shareholder (Dec. 30, 2010)
- Tax Lawyer's Blog, S Corp Wages and Distributions: Basic Tax Planning (May 5, 2009)
- Tax Update Blog, John Edwards Shelter Targeted by IRS (Mar. 12, 2005)
- TaxProf Blog, WSJ Charges Kerry-Edwards with Tax Hypocrisy (July 14, 2004)
- Thinking Like, S Corps Help Owners Save on Taxes: John Edwards Saved $600k With His S Corp
Sunday, January 23, 2011
- Caplin & Drysdale Press Release
- Caplin & Drysdale's IRS Complaint
- Forbes, Lawyer Asks: Why Is National Hot Rod Association Tax-Exempt?
- Washington Examiner, If It Walks Like a Duck and Talks Like a Duck ....
Friday, January 21, 2011
- Champaign News-Gazette, Jimmy John's Founder Contemplates Moving Headquarters Out of Illinois
- Chicago Examiner, Jimmy John's Anounces May Move Headquarters From Illinois to Florida
- Chicagoist, How Fast Can Jimmy John's Leave Illinois?
- Conglomerate, State Budgets: Raise Taxes or Slash Spending (or Both)?
- Crain's Chicago Business, Jimmy John's Might Flee Illinois Over Higher Taxes
- NBC Chicago, Gourmet Sandwiches on the Go: Founder May Take His Free Smells Elsewhere
- Reason, Smells Like Goodbye: Jimmy John's Bails Out of Illinois?
- South Florida Business Journal, Jimmy John’s Founder May be Florida Bound
(Hat Tip: Andrew Morriss.)
Wednesday, January 19, 2011
(Hat Tip: Myreon Hodur.)
Swedish taxpayers looking to shield earnings from the country's tax authorities may have an unlikely tax haven at their disposal across the Atlantic: the United States.
While Sweden and the United States have a tax treaty obligating the tax agencies in both countries to exchange information with each other, the Swedish Tax Authority (Skatteverket) hasn't received any information from its US counterpart since 2005.
As a result, Swedish tax authorities have been unable to cross-check information about income earned in the United States for the last five years, leaving the door wide for companies and individuals based in Sweden to cheat on their Swedish taxes.
Sunday, January 16, 2011
- ABC News
- Associated Press
- Financial Times
- Globe and Mail
- New York Times
Saturday, January 15, 2011
A decision in May by the IRS that was hailed as a step toward equality for same-sex couples has instead become a headache for tens of thousands of gay and lesbian families in California. [IRS: California Registered Domestic Partners Can Split Income and Tax Withholding 50/50 Without Adverse Gift Tax Consequences]
Same-sex couples who are registered domestic partners — or who married during the brief legal window — are facing a new, more complicated tax status, one that has raised a litany of expensive concerns. Many of these families will now have to pay for professional help to file by April 15.
The issues involve an IRS decision that affects the three states with both community-property laws and same-sex marriage or registered domestic partnerships: California, Nevada and Washington.
Married heterosexual couples in those states have long had the option of filing their federal taxes separately and splitting their earned incomes (community property) on their tax returns. If one person makes more than the other, splitting can result in paying lower taxes by taking the higher earnings down a tax bracket or more.
After gay rights advocates fought for five years, the IRS decision let the same rules apply to legally partnered same-sex couples — an estimated 60,000 in California. ... But carrying out the change has proved challenging. ... Same-sex couples do not have the option of waiting for these issues to be resolved. The decision on income-splitting appears to be mandatory and immediate. “I do not believe taxpayers can choose whether to follow the income-splitting rule,” Patricia Cain, a law school professor at Santa Clara University and leading expert on same-sex tax law, recently wrote. ...
Confusing and costly tax returns are not the only fallout from the IRS change; the policy has set off a chain reaction of other concerns. In a report to Congress last week, the federal Taxpayer Advocate Service put the situation in its “most serious problems” category, saying the change could have many unintended consequences, like on student loan eligibility and tax credits for same-sex couples.
- Pat Cain (Santa Clara), Tax Victory or Not?:
The more we look at these complications in the details of how to apply the rules, the more obvious it is that it would be much easier for everyone, especially the IRS, if same-sex spouses and RDPs were entitled to the same rules as similarly-situated opposite-sex spouses. Some have argued that these tax complications are likely to play a pivotal role in leading us closer to true equality for same-sex couples.
I made that point myself a couple of nights ago at a community seminar on the new tax law. I was joined by three expert tax-return preparers, Karen Stogdill, Deb Kinney, and Chris Kollaja, who discussed a number of the complications. If you're interested, you might take a look at the webcast:
- Francine J. Lipman (Chapman) & Rebecca J. Kipper (J.D. 2012, Chapman), Just a Matter of Fairness: Tax Consequences of the Revised Community Property Treatment of California Registered Domestic Partners, 30 ABA Tax Section News Q. 16 (Winter 2011):
This paper describes the federal tax treatment of California registered domestic partners (RDPs) historically and prospectively. In May 2010 the federal government issued guidance that materially revised the government's prior position of ignoring state law property characterizations and determined that 'the federal tax treatment of community property should apply to California registered domestic partners.' The paper discusses the tax implications of this guidance on registered domestic partners in California and other community property states as well as for the 18,000 same-sex married couples in California. The guidance moves RDPs closer to tax equality with opposite sex married couples in California. Nevertheless, the guidance leaves many questions unanswered.
Friday, January 14, 2011
- Accounting Today, Geithner Mulls Corporate Tax Reform
- Bloomberg, Tax Reform Is in the Eye of the Beholder
- CNN, Corporate Tax Reform: Talk Grows Louder
- Financial Times, Geithner Starts Talks on Tax Overhaul
- The Fiscal Times, Corporate Tax Options — A Tangled Mess
- The Hill, Geithner to Meet With Corporate Finance Chiefs on Tax Reform
- Reuters, Big Companies Take Tax Gripes to Geithner
- Wall Street Journal, Talks on Corporate-Tax Revisions Set to Start
- Wall Street Pit, Tax Reform Questions for Geithner to Ask of Business Leaders
- Washington Post, Tax Pledge Hinders Obama's Plans to Overhaul Tax Code
Thursday, January 13, 2011
Many wealthy people got pitches from their estate planning lawyers last year encouraging them to make taxable gifts. It seemed like a good idea at the time. Lifetime gifts are an important estate-planning tool. Not only do they leave less for the government to tax later, but if the assets increase in value after you have passed them along, the appreciation is tax-free.
Even people in a position to shift substantial wealth to family tend to be reluctant to make gifts so large that they will incur gift tax. Still, for much of 2010, it seemed like a wise financial strategy to do just that. With both the gift tax and the estate tax automatically scheduled to increase to 55% in 2011, the 35% gift-tax rate on gifts of more than $1 million in 2010 looked like a bargain.
If, due to procrastination or lack of interest, you ignored what lawyers then dubbed a unique "opportunity," you avoided a quandary that’s consuming a lot of airtime this week at the Heckerling Institute on Estate Planning, the annual Super Bowl on the subject sponsored by University of Miami School of Law. The lawyers meeting here in Orlando are in the awkward position of trying to figure out what clients who followed their advice can now do to reverse those 2010 taxable gifts.
Their collective chagrin stems from the sweeping tax overhaul President Obama signed Dec. 17. Under this law the amount that anyone can transfer tax-free during life went up this year from $1 million to $5 million ($10 million for married couples). So by simply waiting until 2011 to make gifts, it might have been possible to avoid gift tax altogether.
Jubilation has broken out in the Midwest—or at least in Wisconsin and Indiana, now that Democrats in neighboring Illinois have rushed their tax increase into law.
Late Tuesday night, Democrats in the Illinois house and senate rammed through Governor Pat Quinn's 67% hike in the state income tax and a nearly 50% jump in the state corporate tax. The increase will add $1,400 to the average family's tax bill, and we doubt it will help job creation in a state that has lost 374,000 jobs since 2008.
New Wisconsin Governor Scott Walker immediately rolled out a press release inviting Illinois businesses to decamp to the Badger State, contrasting his agenda to reduce taxes and welcome business with the Illinois increase. Indiana Governor Mitch Daniels added: "We already had an edge on Illinois in terms of the cost of doing business, and this is going to make it significantly wider."
That's for sure. Small businesses will pay the new 5% income tax rate, up from 3%, and the effective corporate tax rate will rise to 9.5%, which, when combined with the federal rate of 35%, will make the Land of Lincoln one of the most expensive places in the world to conduct business.
- Bloomberg, Illinois's Record Income-Tax Increase Divides Businesses and Investors
- Christian Science Monitor, Why Illinois Lawmakers Passed 66% Income-Tax Hike
- CNN, Illinois Tax Hikes Will Hurt Companies
- L.A. Times, Illinois Gov. Pat Quinn Delighted With Whopping 66% Income Tax Hike
- New York Times, Questions Persisting as Illinois Raises Taxes
- Reuters, Illinois, a Kleptocracy in Action
- Tax Foundation, Illinois Approves Sharp Income Tax Increase, Third-Highest Corporate Tax Rate
- Tax Foundation, Illinois Tax Increases Will Undermine Job Growth and Economic Recovery
- Tax Update Blog, Illinois Jacks Up Income Tax; Still Broke
- Wall Street Journal, Illinois Braces for Tax Increases
- Wall Street Journal, Wisconsin 1, Illinois 0: With Springfield Raising Taxes Amidst its Fiscal Disaster, the New Republican Governor of the Badger State Is Telling Illinoisans, "Escape to Wisconsin"
If President Barack Obama and Congress ever decide to get serious about federal deficit reduction, there is a potential $1 trillion deficit reduction funding source that they have ignored. With annual federal budget deficits projected to average $1 trillion for the next decade, they should seriously consider this funding source, instead of assuming - contrary to fact - that radical cuts in federal discretionary spending programs can painlessly and equitably achieve meaningful deficit reduction. ...
Although we can cut some discretionary spending, we also can search for wasteful, duplicative or inefficient federal spending in another place most voters would never think of - the federal tax code. Subsidies totaling over $1 trillion, known as "tax expenditures" are woven throughout the federal tax code. These tax expenditures provide federal subsidies that are targeted to specific industries and activities. Some of these tax expenditures (e.g., the home mortgage interest deduction) are well known and considered by most Americans as entitlements. Many tax expenditures are hidden from public view, however, buried in the complex morass of the federal tax code.
Wednesday, January 12, 2011
[T]here's some good budget news to report for a change. Federal tax revenues are rising briskly again, which should allow progress against deficits if the politicians can control their spending appetites.
The CBO reported last week that federal tax receipts climbed in December by $18 billion, following somewhat smaller gains in the previous two months. For the first quarter of fiscal 2011, revenues have climbed by $44 billion, or nearly 9%, to $531 billion. Especially encouraging is that these revenue gains came predominantly from individual income taxes, which rose 23% in the first three months to $256 billion. ... We should add that the deficit declined only modestly in the first fiscal quarter because spending rose by $26 billion to $902 billion.
The taxman has never been a popular figure anywhere. But in the tiny Swiss village of Reconvilier, that functionary has assumed the even more detestable profile as the guy who'll waste your dog if you don't cough up what you owe.
Pierre-Alain Némitz said he's been overwhelmed by insults and threats since the Reconvilier municipal council he heads informed residents in late December they risked seeing their dogs killed if they don't pay the $48.50 annual tax the village levies per pooch.
Monday, January 10, 2011
- Monica Davey (New York Times), In Illinois, a Giant Deficit Leads to Talk of a Giant Tax Increase
- Esther Fung (Wall Street Journal), China Set to Tax Residential Real Estate
- Al Hunt (Bloomberg), Reagan Offers Obama Playbook on Fixing Tax Code
- John Harwood (New York Times), Changing Corporate Tax Is a Tricky Balancing Act
- Tom Herman (Wall Street Journal), Tax Changes for Teachers
- Jonah Lehrer (Wall Street Journal), How Uncertainty Cripples Us
- Laura Saunders (Wall Street Journal), IRS: No Charitable IRA Do-Over
- Laura Saunders (Wall Street Journal), Tax Changes For 2011: A Checklist
- Katie Thomas (New York Times), Political Heavy Hitters Take On College Bowls Over Taxes
Wednesday, January 5, 2011
The new Republicans in Congress have vowed to challenge Washington's role in American public education, and said they will seek to turn more power over to the states on many fronts. But one of their priorities is a new federal rule: to give parents in every state tax credits if their children are home-schooled.
Previous efforts in Congress to adopt a nationwide tax break have failed, and currently only three states -- Illinois, Louisiana and Minnesota -- allow some benefit for home schooling.
Will the idea succeed in the new Congress, given some conservatives' longtime opposition, on the grounds that the credits might open the door to more government regulation of education? How would such a system work? Is it a threat to public education, as its critics claim?
- Chester E. Finn Jr. (Hoover Instittuion), Yes, but Tests Are Necessary
- Susan B. Neuman (University of Michigan), A Scam Against Public Schools
- William A. Estrada (Home School Legal Defense Association), No Extra Rules Required
- Luis Huerta (Columbia Uiversity), Uniting Fiscal and Social Conservatism
- Neal P. McCluskey (Cato Institute), Unconstitutional Intrusion
- Rob Reich (Stanford University), More Oversight Is Needed
- Bruce Cooper (Forddham University), Respect for Religious and Family Rights
Tuesday, January 4, 2011
Billionaires Gates, Buffett and Zuckerberg will still give big. But what about ordinary donors?
For donors, a crucial question has always been how much to give to charity while alive and what to leave as charitable bequests in their wills or trusts. The economic crisis has caused many people to cut back on current charitable giving, perhaps figuring they could always make up for it with bequests. But changes in the federal estate tax system signed into law by President Obama on Dec. 17 may well lead some of those who had postponed charitable giving to cut back on future bequests too.
The new tax law raises the exemption from federal estate tax to $5 million a person ($10 million per couple) for deaths in 2011 and 2012. As a result, fewer families will even come close to paying the tax. That means that, except for the super wealthy, the tax benefits of giving through an estate plan have been wiped out. ...
[M]eanwhile, the possibility of converting a traditional IRA to a Roth IRA -- an option that became available in 2010 to all taxpayers, regardless of their income or filing status -- has given the charities some stiff competition for IRA nest eggs that account owners don’t expect to need.