A New April 15: Make It a Day of Giving (Efficiently)
President Barack Obama on January 22 signed into law a provision allowing charitable gifts made for Haiti relief during February and most of January 2010 to be deducted on 2009 federal tax returns. This noble sentiment would work a lot better if deductions were allowed for all giving made to qualified charities by April 15.
Rep. Ryan’s Tax Roadmap Falls Short of His Revenue Goals
In his provocative Roadmap for America’s Future, Representative Paul Ryan (R-WI) figures that his broad tax code overhaul would eventually generate about 19 percent of Gross Domestic Product in revenues. But the Ryan plan would produce hundreds of billions of dollars-a-year less than that—about 16.8 percent of GDP—a decade from now, according to new Tax Policy Center estimates. Moreover, the plan would give a huge tax cut to the wealthy, while cutting taxes by little or nothing (and in some cases even raising taxes) for low- and middle-income people.
As a result, Ryan would likely fall far short of meeting his goal of balancing the budget and paying off the national debt by 2080, even if government spending were slashed to 1951 levels as he proposes.
Ryan’s plan is exceedingly ambitious. He’d remake Medicare, Medicaid, and Social Security and constrain future growth of nearly all other government programs. On the revenue side, he’d create an alternative tax system. Families and individuals could choose to continue to pay under the existing rules or select a two-rate structure that eliminates most current deductions and credits, repeals the Alternative Minimum Tax, and exempts all interest, dividends, and capital gains from the individual tax.
At the same time, Ryan would replace the corporate tax with a Business Consumption Tax, which is effectively a Value-Added Tax. Firms could expense all investment costs but could no longer deduct wages.
However, TPC found Ryan’s plan generates much less revenue than he projects. If all taxpayers chose the simplified system, it would produce about 16.8 percent of GDP by 2020, far below the 18.6 percent he figures for that year. If taxpayers chose the system most favorable to their situation, the Ryan plan would produce even less revenue—about 16.6 percent of GDP.
What does that mean in dollars? CBO’s most realistic projection of revenues (assuming most Bush tax cuts are extended and many middle-class families continue to be exempted from the Alternative Minimum Tax) figures the existing tax system would raise about $4.2 trillion in 2020. By contrast, Ryan’s plan would generate about $3.7 trillion, or $500 billion less in that year alone.
While TPC didn’t model the Ryan plan beyond 2020, the pattern of revenues it generates suggests it would be decades before it reaches his goal of 19 percent of GDP—very likely sometime after 2040.
Top-bracket taxpayers would overwhelmingly benefit from Ryan’s tax cuts. By 2014 people making in excess of $1 million-a-year would enjoy an average tax cut of more than $600,000. To put it another way, their after-tax income would rise by nearly 30 percent.
By contrast, the average taxpayer making $75,000 or less would pay higher taxes if they chose Ryan’s two-rate alternative. If they chose the tax plan more favorable to them, they’d do a bit better. For instance, people making between $50,000 and $75,000 would typically get a tax cut of $157 in 2014, while those making between $40,000 and $50,000 would pay $128 more on average.
These estimates are subject to lots of uncertainty. For instance, we assumed Ryan’s 8.5 percent VAT—the new business tax—would generate about 4.3 percent of GDP in revenues. TPC’s Joe Rosenberg, who modeled the Ryan plan, believes that estimate is generous. But since no such tax currently exists, it is hard to know for sure.
One other caveat: TPC did not assume that taxpayers would change their behavior in response to this new tax structure. We know they would, of course, in some ways that would generate additional revenue and in others that would lose revenue. But because these changes are so uncertain, TPC did not include them in our revenue estimates.
As I’ve written before, Ryan deserves kudos for highlighting the nation’s fiscal challenges and putting out a real deficit reduction plan. But it is hard to see how this one adds up.
Donated Car Increased in Value
March 8, 2010 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Dawn in the TaxQuips Forum with a simple question. “I donated a vehicle to charity. The vehicle increased in FMV from the time I purchased it 14 years ago. I donated it for the use of the charity (not for resale). It’s a charity that uses vehicles in their daily activities. Can I take a deduction of the FMV or do I have to use my purchase price? It looks like I can use FMV, but I want to be sure I get it right!”
http://taxmama.com/forum/taxquips/charitable-vehicle-increased-in-value
Hi Dawn,
No kidding? A car that went up in value? Wow! What was it?
The charity needs to give you paperwork about the use and the value.
Here are the rules for property that has increased in value.
Amount of deduction – general rule. When figuring your deduction for a gift of capital gain property, you generally can use the fair market value of the gift.
Exceptions. However, in certain situations, you must reduce the fair market value by any amount that would have been long-term capital gain if you had sold the property for its fair market value. Generally, this means reducing the fair market value to the property’s cost or other basis. You must do this if:
Then it goes on to list some instances… It sounds like double-speak, because it is. This question is not as simple as it looks, is it?
Essentially, you’re probably not going to get to deduct the fair market value – or if you do, your deduction will be limited to 30% of your income.
I have to admit, that neither the IRS publications nor the Tax Code has ever made any sense to me about this issue. Thank goodness I never had a client donating appreciated property – except in a decedent’s estate, where basis was easy to determine.
Perhaps someone else here can give you a better answer. Here’s one brave soul:
David Toelkes makes a stab at this: Since you held the tangible personal property for more than a year, you can deduct the FMV of the property as a charitable contribution, provided you also claim the capital gain that you would have reported if you had sold the property instead.
Capital gain tax rate on personal property is 28%, so depending upon your tax bracket, you may come out ahead taking a charitable deduction on the FMV then paying capital gains on the appreciated value.
My understanding may be flawed because the language is so obtuse
Who knows, perhaps someone can actually translate these rules into English – with confidence?
And remember, you can find answers to all kinds of questions about charitable contributions and other tax issues, free. Where? Where else? At www.TaxMama.com .
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- IRS Publication 526 :: Charitable Contributions
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Tax Data Theft Abroad Helps US Tax Evasion Effort
Tax data thefts at HSBC in Switzerland and other offshore banks are leading more whistleblowers to come forward to U.S. tax authorities, a top Department of Justice prosecutor said on March 5, 2010. The whistleblowers — many former bank employees who worked in information technology — could help the U.S. government look for the next bank after UBS AG that may be helping clients evade taxes and further deter wealthy individuals from stashing money offshore. “A lot of folks, and they seem to be IT (information technology) people, see what’s happening” in Germany and France and are coming to the U.S. with information, Kevin Downing, a top DOJ lawyer said to a group of private and government lawyers at a conference in Washington. “It’s a cottage industry right now,” Downing said, declining to name specific banks that could be implicated.
UBS agreed last year to pay $780 million and hand over 4,450 client names to settle criminal and civil charges against the bank after it admitted it actively helped U.S. clients evade U.S. tax law. Germany has said it is prepared to pay for data offered by whistleblowers on clients of Swiss banks who may have been evading taxes, even if the information has been obtained illegally. Germany’s move came after France, another key market for Swiss private banks, announced it had obtained sensitive data belonging to potential tax evaders, some of which belonged to the Swiss private banking operations of HSBC
Tax enforcement authorities around the world are coordinating activities on a greater basis than ever, lawyers said. “That data got into the hands of the IRS (Internal Revenue Service),” noted George Clarke, an attorney for wealthy clients at Miller Chevalier.
Stimulus Expectations Meet Reality
As Congress debates the latest fiscal stimulus bill, commentators have been debating the effectiveness of the previous one. Much of this debate has focused on funds flowing through state capitals, cities, and towns. Depending on whom you ask, these funds have been a critical lifeline or a colossal waste of money. Both views are probably overblown. Last year’s stimulus worked pretty much like previous efforts to boost the economy through state and local governments.
Last week, Harvard’s Ed Glaeser argued that the American Recovery and Reinvestment Act was poorly targeted, going to states that did not exhibit high pre-recession unemployment. White House economic advisor Jared Bernstein countered that Glaeser had ignored large chunks of federal money, namely unemployment benefits for individuals and Medicaid aid for states (precisely the funds that were targeted to economic conditions). Meanwhile, Joshua Aizenman and Gurnain Kaur Pasricha showed in a National Bureau of Economic Research paper that, using either measure, ARRA’s “net fiscal impact” was zero.
What gives? Did Paul Krugman’s prognostications about Fifty Little Hoovers come true? Not so fast. The NBER study asked not whether ARRA boosted the economy but merely whether it stimulated government spending. (Tax cuts are completely out of the story.)
There is no doubt federal outlays grew – to the tune of about $160 billion through last December according to the CBO. But, the NBER authors say, belt tightening by state and local governments almost completely offset this increase.
As the NBER authors note, “the counterfactual of the performance of the US economy in the absence of the fiscal stimulus is hard to ascertain.” In other words, no one knows what would have happened to government spending without the stimulus. They assume it would have chugged along at typical post-World War II levels, while others think we were headed for The Great Depression 2.0. In any event, it’s certainly not hard to find a governor who says that, but for those extra federal funds, their budget situation would be a lot worse.
So was ARRA a flop? No more so than usual. States and localities generally save federal dollars for a rainy day if they can get away with it, much like individuals save tax cuts. This tendency also frustrated Washington architects of General Revenue Sharing during the 1970s and 1980s.
In any case, expecting states and localities to bail out the national economy, aid the needy, and (literally) pave the way for a new economic future may be a bit much. Next time the federal government fights a recession by sending money to state and local governments (as it probably should), we should avoid weighing this effort down with excessive expectations.
Short Term Installment Agreement
March 8, 2010 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Joe in the TaxQuips Forum with lots of questions. Edited down he’s asking: “Is it true that you cannot efile prior year returns? I need to file for this year and last year. I expect to owe money for each year, but don’t need a long-term installment agreement. What form shall I use? And what shall I do?”
http://taxmama.com/forum/taxquips/e-filing-prior-year-taxes/
Dear Joe,
At this time, IRS is not set up to accept prior year e-filed returns. They will be in the near future.
If you are filing the current year tax return and expect to have money by October, don’t ask for an installment agreement. Put your tax return on extension. You will have until 10/15/10 to file.
You will have the same level of underpayment penalties and interest as if you filed your tax return in April – you just won’t start the IRS collections process until later.
Go out and earn or borrow the money you need to pay the taxes – and file and pay in full in October.
See how much less complicated this is?
As to installment agreements in general? They are not designed for 36-60 years – they are designed for 36-60 MONTHS! Use Form 9465 http://www.irs.gov/pub/irs-pdf/f9465.pdf
Yes, you need to file tax returns separately for each year.
So figure out your 2009 balance due – file it and pay in October. Next, if you owe money for 2008, file it, along with a Form 9465 and propose a payment plan that pays it off in 12-24 months. Your installment agreement will be automatically accepted as long as your balance due is under $25,000.
And remember, you can find answers to all kinds of questions about balances due and other tax issues, free. Where? Where else? At www.TaxMama.com.
[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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- IRS Form 9465 :: Installment Agreement Form
Executor’s And Administrator’s Probate Duties
LIABILITIES AND DUTIES OF PERSONAL REPRESENTATIVE
When the California probate court appoints you as personal representative of an estate, you become an officer of the court and assume certain duties and obligations. An attorney is best qualified to advise you about these matters. You should understand the following:
1. INVENTORY OF ESTATE PROPERTY
Locate the estate’s property
Determine the value of the property
You must arrange to have a court-appointed referee determine the value of the property unless the appointment is waived by the court. You, rather than the referee, must determine the value of certain “cash items.” An attorney can advise you about how to do this.
File an inventory and appraisal
Within four months after Letters are first issued to you as personal representative, you must file with the court an inventory and appraisal of all the assets in the estate.
File a change of ownership
At the time you file the inventory and appraisal, you must also file a change of ownership statement with the county recorder or assessor in each county where the decedent owned real property at the time of death, as provided in section 480 of the California Revenue and Taxation Code.
2. MANAGING THE ESTATE’S ASSETS
Prudent investments
You must manage the estate assets with the care of a prudent person dealing with someone else’s property. This means that you must be cautious and may not make any speculative investments.
Keep estate assets separate
You must keep the money and property in this estate separate from anyone else’s, including your own. When you open a bank account for the estate, the account name must indicate that it is an estate account and not your personal account. Never deposit estate funds in your personal account or otherwise mix them with your or anyone else’s property. Securities in the estate must also be held in a name that shows they are estate property and not your personal property.
Interest-bearing accounts and other investments
Except for checking accounts intended for ordinary administration expenses, estate accounts must earn interest. You may deposit estate funds in insured accounts in financial institutions, but you should consult with an attorney before making other kinds of investments.
Other restrictions
There are many other restrictions on your authority to deal with estate property. You should not spend any of the estate’s money unless you have received permission from the court or have been advised to do so by an attorney. You may reimburse yourself for official court costs paid by you to the county clerk and for the premium on your bond. Without prior order of the court, you may not pay fees to yourself or to your attorney, if you have one. If you do not obtain the court’s permission when it is required, you may be removed as personal representative or you may be required to reimburse the estate from your own personal funds, or both. You should consult with an attorney concerning the legal requirements affecting sales, leases, mortgages, and investments of estate property.
3. Record Keeping
Keep accounts
You must keep complete and accurate records of each financial transaction affecting the estate. You will have to prepare an account of all money and property you have received, what you have spent, and the date of each transaction. You must describe in detail what you have left after the payment of expenses.
Court review
Your account will be reviewed by the court. Save your receipts because the court may ask to review them. If you do not file your accounts as required, the court will order you to do so. You may be removed as personal representative if you fail to comply.
4. INSURANCE
You should determine that there is appropriate and adequate insurance covering the assets and risks of the estate. Maintain the insurance in force during the entire period of the administration.
5. NOTICE TO CREDITORS
You must mail a notice of administration to each known creditor of the decedent within four months after your appointment as personal representative. If the decedent received Medi-Cal assistance, you must notify the State Director of Health Services within 90 days after appointment.
6. CONSULTING AN ATTORNEY
If you have an attorney, you should cooperate with the attorney at all times. You and your attorney are responsible for completing the estate administration as promptly as possible.
When in doubt, contact your attorney. Call lawyer Mitchell A. Port at (310) 559-5259. This statement of duties and liabilities is a summary and is not a complete statement of the law. Your conduct as a personal representative is governed by the law itself and not by this summary.
A New April 15 Make It a Day of Giving (Efficiently)
President Barack Obama on January 22 signed into law a provision allowing charitable gifts made for Haiti relief during February and most of January 2010 to be deducted on 2009 federal tax returns. This noble sentiment would work a lot better if deductions were allowed for all giving made to qualified charities by April 15.
Tax Credits Make Small Businesses Health Reform Winners, Not Losers.
Critics of health reform legislation assert that it would crush small business. The National Federation of Independent Business, for instance, insists reform will have “a costly and punitive impact” on these firms.
I do not understand this argument. Small businesses face huge disadvantages in today’s insurance market. Unlike their larger competitors, they can’t self-insure or bargain for low premiums and their small risk pools make them highly susceptible to huge rate hikes if just a single employee gets sick. The health bill would help level that playing field.
Many—though certainly not all–small businesses would come out ahead. There are lots of health bills out there, but let’s look at President Obama’s version. In it, small businesses would get tax subsidies for offering insurance to their workers, low- and some moderate-wage workers will get their own subsidies to purchase coverage (and some may even be newly covered by Medicaid). Small firms would get access to exchanges that should make it less costly for them to insure their workers. And, perhaps most important, the bill would take some small steps to control future health costs.
There are some trade-offs. Many firms with more than 50 workers would have to pay a modest penalty if they do not offer insurance. Those with more than 200 workers must automatically enroll all employees in their health plans. But the issue that getting the most attention is Obama’s effort to impose an excise tax on high-cost employer-sponsored plans. Because small businesses on average pay higher premiums than larger firms, some critics of reform argue that these smaller firms would disproportionately suffer under this tax.
This concern seems wildly overblown. First, the Obama plan is far from draconian. It would impose a 40 percent tax on the value of plans in excess of $10,200 for individual coverage and $27,500 for families. But the tax would not take effect until 2018. And companies with workers whose coverage is more costly due to age or gender or those that are located in high-cost states could offer even more costly plans without being subject to the tax.
Second, according to the Kaiser Family Foundation, the average cost of a family plan last year was $13,375. Other research estimates that small firms pay, on average, about 20 percent more, so their typical cost is about $16,000—far below the $27,500 threshold for taxable plans.
So while small firms, on average, may be more likely than big companies to pay the penalty, few of them will. And, in any event, none will pay a dime of this excise tax for at least eight years. By then, if the exchanges work out as hoped, premiums should be much more manageable.
At the same time, very small firms (include many sole proprietorships) would be in line for an immediate, extremely generous tax credit for buying insurance. From 2010-2013, these businesses would be eligible for a credit of up to 35 percent of premiums. Starting in 2014, they could get a credit of up to 50 percent of the cost of buying insurance through a state exchange, as long as they pay at least half the premium.
It is easy for critics to pull out individual elements of this vast health plan, rip them as tax increases, and claim, as the NFIB does, that the entire package would be a disaster for small business. But considering the huge labor market disadvantages these businesses face today as a result of their high insurance costs, most of these small firms are likely to be big winners once the dust settles.
Federal Tax Liens Are A Serious Problem
The “National Taxpayer Advocate” 2009 Annual Report to Congress in part discusses the notice of federal tax lien (NFTL). The Report said that on average, a lien filing reduces a taxpayer’s credit score by 100 points. Unpaid tax liens may remain on a taxpayer’s credit history, leaving a derogatory mark on the credit history indefinitely. Released liens, including those paid off by the taxpayer, are not generally removed from the credit history until seven years from the date of release. Thus, an NFTL has a significant long-term impact on a taxpayer’s credit record. As a result, some lenders decline to extend credit to a taxpayer if the IRS has filed an NFTL against the taxpayer’s property. Others will charge substantially higher rates, even if the lien is subordinated. Impaired credit history can also affect a taxpayer’s ability to obtain insurance or rent an apartment on reasonable terms. Moreover, some licensing boards require members to maintain a clean credit history and some employers require employees to do so as a condition of employment. Thus, a lien filing can mean that employees lose their jobs and self-employed individuals cannot maintain the licensing necessary to remain in business. It can also hamper the taxpayer’s ability to stay compliant and obtain credit needed to pay preexisting tax debts.
Properly applied, the notice of federal tax lien (NFTL) can be an effective tool in tax collection. It gives the IRS a priority interest in the taxpayer’s property, such as a home or a car, and may enable the IRS to collect all or a portion of the tax debt if the taxpayer sells or refinances the property.
If improperly applied, however, tax liens have the potential to cause needless harm to taxpayers and undermine long-term tax collection.
If improperly applied, however, tax liens have the potential to cause needless harm to taxpayers and undermine long-term tax collection. Assume, for example, that a taxpayer loses his job during a recession and becomes unable to pay his tax bill. The filing of a tax lien can significantly harm the taxpayer’s credit and thus negatively affect his or her ability to obtain financing, find or retain a job, secure affordable housing or insurance, and ultimately pay the outstanding tax debt. Moreover, the government must consider that its role as a creditor is different from that of a private entity creditor. If the filing of a tax lien drives up the taxpayer’s costs and renders him or her unemployed or underemployed, the government may be forced to make outlays in the form of unemployment benefits, food stamps, and the like. Thus, the imprudent filing of a tax lien has the potential to badly damage the taxpayer and the taxpayer’s family and simultaneously reduce federal revenue – a lose-lose proposition.
For this reason, the decision whether to impose a tax lien should be made on a case-by-case
basis. Yet, the IRS files many liens systemically….
The results of research done by the Taxpayer Advocate suggest that the IRS’s use of liens may not be furthering the agency’s revenue collection objective and, equally significant, that the IRS has shown very little interest in evaluating the effectiveness of liens for itself.
A federal tax lien (FTL) arises when the IRS assesses a tax liability, sends the taxpayer notice and demand for payment, and the taxpayer does not fully pay the debt within ten days. An FTL is effective as of the date of assessment and attaches to all of the taxpayer’s property and rights to property, whether real or personal, including those acquired by the taxpayer after that date. This lien continues against the taxpayer’s property until the liability either has been fully paid or is legally unenforceable.
It is IRS policy not to use the NFTL as a negotiating tool. The IRS is required to release a lien not later than 30 days after the underlying liability either is fully satisfied through full payment of tax or is legally unenforceable (typically, by expiration of the statutory period for collecting the tax).
If you have tax problems, call a qualified tax attorney. Call Mitchell A. Port at (310) 559-5259.