“There’s a new Web site where citizens can suggest ideas to make the federal government more transparent, more responsive, and more efficient. The White House is asking for citizens to submit their ideas for government reform on the Open Government Initiative site. This site for brainstorming, where citizens can suggest ideas and other people can vote for or against those ideas, and offer comments and feedback.”

The National Academy of Public Administration, a Congressionally chartered, non-profit, non-partisan institution, is hosting this brainstorming session, open through May 28th, on behalf of the White House.

According to the website some questions to consider in formulating ideas include:

· How might the operations of government be made more transparent and accountable?
· How might federal advisory committees, rulemaking or electronic rulemaking be better used to drive greater expertise into decisionmaking?
· What alternative models exist to improve the quality of decisionmaking and increase opportunities for citizen participation?
· What strategies might be employed to adopt greater use of Web 2.0 in agencies?
· What policy impediments to innovation in government currently exist?
· What is the best way to change the culture of government to embrace collaboration?
· What changes in training or hiring of personnel would enhance innovation?
· What performance measures are necessary to determine the effectiveness of open government policies?

Bill has “submitted a suggestion repeating the recommendations made by Taxpayer Advocate Nina Olson in her previous reports for the IRS to develop a ‘my IRS account’ portal for taxpayers to log-in and view their tax information”. I myself plan to submit some of the suggestions I have talked about here at TWTP later this week. I may post my submission after they have been submitted.

Bill’s suggestion is a good one. Here is the basic idea –

“Data about income and certain deductions are already reported to the I.R.S. The agency could make this data available to taxpayers through a sort of “My I.R.S. account”. The data is required to be submitted to the I.R.S. in XML format, so the data is already well-formed. This data could made available to be downloaded into a tax software program, or used to pre-populate the required tax forms. Even better, the entire process could be handled on the I.R.S. Web site, whereby missing information is flagged so the taxpayer will know what additional information needs to be found and added so that their tax returns will be complete.”

Click here to read Bill’s complete submission. Obviously there are security concerns involved with this idea, and there must be adequate safeguards so that an “uninvited” third party cannot access the information. Although there should be a way for tax professionals, with approval from the taxpayer, can view the information.

I echo Bill’s request - “If you have a suggestion for reforming the IRS, or other parts of the federal government, I encourage you to speak up”.

TTFN

The commentary reports that - “With states facing nearly $100 billion in combined budget deficits this year, we’re seeing more governors than ever proposing the Barack Obama solution to balancing the budget: Soak the rich. Lawmakers in California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon want to raise income tax rates on the top 1% or 2% or 5% of their citizens. New Illinois Gov. Patrick Quinn wants a 50% increase in the income tax rate on the wealthy because this is the “fair” way to close his state’s gaping deficit.”

But soaking the rich is not the answer. As Laffer and Moore put it, “It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.”

Not surprisingly, the guys found that “from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.”

They are right on in their discussion of my home state of New Jersey (The highlights below are mine) -

“Or consider the fiasco of New Jersey. In the early 1960s, the state had no state income tax and no state sales tax. It was a rapidly growing state attracting people from everywhere and running budget surpluses. Today its income and sales taxes are among the highest in the nation yet it suffers from perpetual deficits and its schools rank among the worst in the nation {FYI the biggest and most influential political contributor in the state is probably the NJEA – rdf} – much worse than those in New Hampshire {No state income or sales tax and less spending per child - rdf}. Most of the massive infusion of tax dollars over the past 40 years has simply enriched the public-employee unions in the Garden State. People are fleeing the state in droves.”

I will be one of those fleeing the Garden State when my father goes to his final audit – not only because it is one of the highest taxed states (I do not consider myself among the rich that is being primed for soaking) but also because it is probably the most politically corrupt. Despite protestations at election time that they have the best interests of the people at heart, NJ state and local politicians in reality are only looking for more ways to fatten themselves and their “peeps”.

While a popular proposal among the “great unwashed masses”, soaking the rich is not the answer to all our financial problems – whether on the state or federal level.

TTFN

Here are Bill Bishoff’s five tax proposals -

· Stop Double-Taxing Social Security Benefits
· Eliminate ‘Refundable’ Tax Credits
· Get Rid of Deceptive Phaseouts
· Dump the Alternative Minimum Tax (AMT)
· Let Employees Deduct Health-Insurance Premiums

These are some pretty good proposals, Bill. I have been touting most of them for years now. Here is my 2 cents worth -

1) Bill says that Social Security is currently “double-taxed”. I suppose to some extent this is partially true. Here is a suggestion - Mandatory employee contributions to Social Security (and Medicare) are not considered “pre-tax” for federal income tax purposes, as are most employer pension plans (and health insurance premiums). So why not make the FICA tax paid by employees “pre-tax” – and the self-employment tax fully deductible – and treat Social Security benefit payments the same as any other pension distribution. I don’t think I have ever heard this proposed anywhere.

2) Bill hits the nail on the head when he says of “refundable” credits – “This is disguised welfare being laundered though the tax system. Plus, it encourages tax fraud.” I certainly agree with Bill when he says, “If Congress wants to create welfare programs without any monitoring, that’s a political decision. But they should dole out the payments in transparent ways, not by sneaking them through the tax system.”

3) If a tax deduction or credit is appropriate it is appropriate for all taxpayers and should be allowed for all. The phase-out of deductions and credits is just a back door way of raising tax rates. As Bill says, “If higher tax rates are deemed necessary, then politicians should raise them in a straightforward and transparent way.” He is again right on the money when he says, “Deception and lack of transparency make for horrible tax policy and, unfortunately, your elected representatives won’t change their behavior until you make them.”

4) Everyone hates the dreaded AMT. I can’t think of any politician in either party who publicly supports it as good tax policy. But yet it lives on. As I have said before, the existence of the dreaded Alternative Minimum Tax is a perfect example of the laziness of Congress. Instead of fixing the problems in the Tax Code Congress just created a “quick fix” by establishing an alternative tax system. And the dreaded AMT does not hit truly high-income taxpayers – none of my millionaire clients pay the tax – but middle and upper-middle class taxpayers. One reason that has been put forward as to why the Republicans are not in a great hurry to repeal this tax is that most of its victims are in high-income and high-tax “blue” states. The dreaded AMT must be destroyed!

5) Many taxpayers who pay for all or part of their health insurance premiums get to treat their payments as “pre-tax” if the employer has a “Section 125 cafeteria plan”. And self-employed individuals can deduct 100% of their health insurance premiums. So what not let employees whose payments are not treated as “pre-tax” on their W-2 also claim a deduction – so that all taxpayers are treated equally?

So what do you think about Bill’s “Big Five” tax change proposals?

FYI – any highlights in the above quotes are mine.

TTFN

For example, they would claim the total tax withheld on 2008 W-2s and/or 1099s on Schedule A of the 2008 Form 1040, and claim the refund from the 2008 state tax return as income on Line 10 of the 2009 federal income tax return.

This is done under the general rule of “when in doubt- defer”. It is better to pay tax on income next year than this year. You will increase the current tax year refund, or reduce the current year amount due. But this is merely a “loan” – as you must pay the tax savings back on the next year’s return.

However this action should not be automatic each year.

The reason is that a state tax refund claimed as income increases the taxpayer’s Adjusted Gross Income (AGI), and in doing so could negatively affect a multitude of deductions and credits.

For example –

* An additional $1.00 of gross income could mean the difference between a $4000 deduction for tuition and fees and a $2,000 deduction for tuition and fees, or a $2,000 deduction for tuition and fees and no deduction at all.

* The allowable Child Tax Credit will be reduced $50 for every $1,000 AGI exceeds the appropriate threshold amount.

* Because of the way Social Security and Railroad Retirement benefits are taxed every additional $1.00 of gross income could be taxed as $1.85.

In the first example above a $10 taxable state income tax refund could cost $500 in taxes to someone in the 25% tax bracket! In the second example the same $10 could cost the taxpayer $50. And in the third a $400 taxable refund would cost $111 in additional tax to someone in the 15% bracket and not $60.

If at all possible you should prepare the state income tax return first (easier to do in some states than others) and claim an itemized deduction for the actual amount of the current tax year’s state income tax liability instead of the total amount of state income tax withheld and/or paid via estimated tax. This way any state tax refund will not have provided a tax benefit.

Or more better - compare the actual current tax year’s state tax liability to the allowable state and local sales tax deduction, and if the allowable sales tax deduction is greater than the calculated liability, though not greater than the actual amount withheld or paid, claim a deduction for state and local sales tax.

You should keep in mind that if you are a victim of the dreaded Alternative Minimum Tax (AMT) for the current tax year you receive no tax benefit from deducting any kind of tax (or at the very least a reduced tax benefit – depending on the amount of AMT you pay), and therefore there is no, or a reduced, tax benefit from any state tax refund.

And only that portion of a state tax refund that provides a tax benefit is included in income. Let us say that a married couple filing a joint return claimed an itemized deduction of $4000 in state income tax withheld on their 2008 Schedule A. This brings the total deductions on the 2008 Schedule A to $12,300. The applicable standard deduction for 2008, including the additional $1,000 for real estate taxes paid, is $11,900 – so the tax benefit from the $4,000 state income tax deduction is only $400 ($12,300 - $11,900 = $400). If the 2008 state income tax refund is $650, only $400 is includable as income on the 2009 Form 1040.

TTFN

So be on the look-out for these checks – so you can run out and save the economy!

I had several clients this past tax filing season who claimed the original credit – a married couple, a single taxpayer and two unrelated individuals who jointly purchased a residence. I did not have any clients who purchased in 2009 and claimed the credit on a 2008 return.

Below is a copy of the memo I included in the folder that I sent to these clients with their finished returns:

Dear Tax Client-

RDF

TTFN

· The maximum amount of the credit has been increased from $7,500 to $8,000.

· The enhanced credit is available on home purchases which close between January 1 and November 30, 2009. Home purchases which closed in 2008 must follow the original rules for the credit.

· The allowable credit for personal residences purchased in 2009 does not have to be paid back, unless within 36 months of the date of purchase the property is sold or longer used as the taxpayer’s principal residence (i.e. converted to vacation home or rental property). The “credit” for 2009 purchases is no longer an interest free loan from the government but an outright gift from Sam!

Many of the provisions of the “original” credit, enacted in the Housing and Economic Recovery Act of 2008 (see my post “THE HOUSING BILL AND THE 1040“), remain the same.

· The home must be physically located in the United States. A home located in a U.S. Territory does not qualify.

· A “first-time homebuyer” is a taxpayer who has not owned another principal residence at any time during the three years prior to the date of purchase. According to the IRS website “a taxpayer who owned a principal residence outside of the United States within the last three years is not disqualified from taking the credit for a purchase within the United States.”

· The credit is phased out for Modified Adjusted Gross Income (MAGI) of between $75,000 and $95,000 for single filers and $150,000 and $170,000 for joint filers. To determine MAGI you must add excluded foreign income and deductions related to foreign income back to AGI.

· The credit is fully “refundable”. It is treated the same as federal withholding or estimated tax payments on the Form 1040 (or 1040A).

· You can elect to claim the credit for a 2009 home purchase on your 2008 federal income tax return.

· The amount of the credit that must be repaid if the home is sold is limited to the gain on the sale of the property. When determining the gain you must reduced the “adjusted basis” of the home by the amount of the credit claimed. The repayment must be made in the year of the sale.

If you purchased a home in early 2009 and had already filed your 2008 tax return to claim the old $7,500 credit you can amend the 2008 return to claim the additional $500 credit.

According to the IRS, “You can not claim the credit in anticipation of a purchase that has yet to happen. Until you have finalized the purchase of your home, which for most purchasers occurs at the time of the closing, you do not qualify for the credit.”

A principal residence that you build also qualifies. The IRS tell us that “By statute, a residence which is constructed by the taxpayer is treated as purchased on the date the taxpayer first occupies the residence” – so the credit cannot be claimed until you actually move in.

In the above two instances once you close on or move into the home you can file an amended 2008 return to claim the credit.

For more information on the enhanced, and the original, credit you can go to the IRS website First-Time Homebuyer Credit page and check out my post on “HOW TO ALLOCATE THE 1ST TIME HOME BUYER CREDIT AMONG NON-RELATED OWNERS”.

TTFN

My post HERE’S SOMETHING TO THINK ABOUT is way down near the bottom, listed under “Misc”.

There are a lot of interesting and helpful entries on the way to finding mine. Check it out.

My HSTTA post was also in yesterday’s “Carnival of Everything Money #14” at THE PENNY DAILY – although I did not receive an email so announcing. Here I am the very last entry – the sole entry under TAXES. Well they used to say if you can’t get top billing it is better to be last then buried in the middle.

And as a tax preparer, very few things give me more pleasure, at least during the tax filing season, then writing in the explanatory email or memo that precedes or accompanies a finished return, “Your Uncle Sam owes you tons of money this year!”

It is certainly better than beginning with “Oi vey!” or “Now don’t shoot the messenger”.

If everyone loves a refund it only follows that everyone hates paying their “uncles”.

For some the hatred is more deep seated than others. Some of my clients really hate to pay additional taxes with a passion. In their mind they paid more than enough during the year. They would rather get a refund of $1.00 than pay anything to Sam or Jon or Dave (over the years I have on occasion had a return with a refund of only $1.00 – in the old days of the NYC payroll tax if your refund was $1.00 you had to write a letter to the City and request they send you the $1.00).

However, from a strictly financial point of view, when it comes to taxes it is truly “better to give than to receive”. A tax refund means that you have made an interest-free loan to the federal, or state, government.

If you owe Sam, or your state, a balance due on your return that, by way of the various “safe harbor” rules, avoids a penalty assessment for “underpayment of estimated tax” it is you who have received an interest-free loan from the government. You have had full use of your money during the year!

Quite a few of my clients receive rather substantial refunds on purpose, and have been doing so for years. It is a form or “forced savings” - somewhat like a vacation club. They plan to use the refund to pay for their annual family vacation, or to make needed home improvements, or pay for college, or pay off credit card debt.

I, and they, know full well that if they had an extra $100-$200 in their pockets each week they would spend it – and not necessarily wisely.

And, considering today’s interest rates on temporary investments, just what would they earn on the money if they invested it each paycheck instead of giving it to Sam or Jon or Dave for “safekeeping”?

Back in “the day” when ordinary passbook savings accounts paid 5.25%, and short-term CDs paid more, the earnings was worthwhile – and I would recommend to clients that they have the excess withholding automatically deposited in a credit union account so it would not pass through their hands.

And during the Carter years, when interest rates even on money market accounts were double-digit, a refund was truly a sin.

But today this lost interest is a small price to pay for removing the temptation of having the money available for drawing upon during the year.