Mañana Budgeting
President Obama said last night he was going to request $1.5 billion to help address the swine flu outbreak. I wish he had also promised to find the dough to pay for this initiative. But, he didn’t.
This follows a troubling, and ongoing, pattern. Obama and the congressional Democrats say they recognize the consequences of burgeoning deficits and promise to address the problem—next time.
They did this with the pork-laden stimulus bill (what’s up with all this pig business, anyway). After signing the bill, with its $8 billion in earmarks, Obama vowed it would be the last time he’d approve such largess. Now, Obama has two pre-teen daughters. He must know how well this technique works.
The $3.5 trillion budget resolution Congress passed yesterday is yet another example of this mañana fiscal policy. Just one example: It makes room for $764 billion in tax cuts over the next five years, but instructs the House Ways & Means and Senate Finance committees to find a mere $97 billion in offsetting revenue raisers.
The resolution allows Congress to patch the Alternative Minimum Tax for another three years without finding the more than $200 billion it would need to make up the foregone revenue. Democrats seem to have adopted the same theory of budgeting that Republicans loved so well when they were running Washington: We never intended the AMT to hit middle-income taxpayers, so we don’t have to pay for fixing the mess.
Trouble is, we eventually will have to repay the $200 billion no matter what fiscal blinders we put on. Denial, as they say, ain’t just a river in Egypt.
The current argument for this irresponsibility, of course, that that we are in the midst of a recession and any spending cuts or tax hikes will slow the recovery. But Congress can rework the tax code to pay for a permanent AMT fix. Remember, this is a five-year budget that carries well beyond the likely end of the current downturn.
And at a time when it is pumping out trillions of dollars in stimulus, government can surely find $1.5 billion to pay for a swine flu initiative. It may well be that Washington needs the money to combat a potentially deadly pandemic. But it is time politicians think differently about even emergency spending. Obama should be asking what other projects can be deferred or cancelled to pay for this effort, rather than borrowing another billion-and-a-half at the drop of a Kleenex.
Fiscal prudence is never easy, and politicians rarely get credit for it from voters. But it would be nice if Obama and congressional Democrats started acting as if budget discipline mattered, instead of just talking about it. The swine flu money would be a nice place to start.
Girlfriends Business
April 30, 2009 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Jeff in Florida who is concerned. “Don’t you have to show an income with a small business at least one year out of five? My girlfriend has a small business that has shown a NOL for the past three years.”
Dear Jeff,
Are you policing her, or helping her? To avoid having a business treated as a hobby, the Tax Code says it must show a profit for at least 3 years out of 5.
Here’s what IRS says about all this. http://www.irs.gov/irs/article/0,,id=186056,00.html
There are ways around this. I have won on this issue many times for a variety of taxpayers. This is one of my favorite issues. In fact, I’ll be teaching a workshop on how to avoid falling into the hobby loss trap. Join me in a CSEA DigiTAX course on Aug 5, 09 – 11:00 am
http://www.csea.org/EducationandEvents/digiTAXEducation/tabid/89/Default.aspx
CSEA – Audio Tax – Hobby Loss Rules and how to Overcome Them
The basic trick is to prove you have a profit motive and you are actively doing everything you can to make the business profitable. Some businesses, or industries, generally take a longer time to start showing a profit than others. Some will not show a profit on paper for years – like rental properties. (But that’s a whole other issue.)
If your girlfriend is unsure about how to handle her business for 2008, set up a meeting to consult with a tax professional who understands how to present a business – and to reduce the chance of audits.
And remember, you can find answers to all kinds of questions about hobby losses and other tax issues, free. Where? Where else? At TaxMama.com
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- IRS Fact Sheets :: Is Your Hobby a For-Profit Endeavor?
- CSEA DigiTax Courses :: Join us for Hobby Loss Rules and how to Overcome Them – in August
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Illinois EITC Expansion: "Welfare?"
The debate over how to resolve Illinois’ looming budget deficit has, so far, been an unusually gratifying one. A brand-new governor with little political capital to spend has made a gutsy (and, in our view, basically correct) decision to push for an increase in the state’s personal income tax, which is bar-none the least fair in the nation and among the very lowest as well.
There are, of course, things missing from the governor’s plan. Eliminating income tax exemptions and sales tax exemptions would make the tax base more sustainable (and would reduce the pressure to increase tax rates). But in the short run Quinn’s doing what is needed to make ends meet and has picked a quite fair way of doing it.
If there’s one quite legitimate beef with the governor’s plan as proposed, it’s that there’s not sufficient attention devoted to low-income tax relief. Which is why it’s great to see the editorial board at the Springfield Journal-Register coming out in favor of an expansion of the state’s Earned Income Tax Credit. The SJR’s (correct) rationale:
This kind of credit is especially valuable to low-income working families in Illinois, where the poorest one-fifth of Illinois families spend an average of nearly 13 percent of their earnings in state and local taxes while the wealthiest 1 percent of Illinois households spend less than 6 percent of their incomes likewise.
All true. The underlying point here, unstated by the SJR, is that the EITC is valuable because it’s an income-tax based credit that is refundable, meaning it can be used not only to offset income taxes but to offset sales, excise and property taxes paid by low-income families as well. And the main reason why the poorest Illinoisans pay such a huge chunk of their incomes in tax is because of these non-income taxes.
So you’ve got to charitably assume that it’s because the SJR editorial doesn’t explain this point clearly that half a dozen commenters on the SJR editorial make the boneheaded assertion that the EITC constitutes “welfare” because folks who get it have “zero tax liability” and are therefore getting “free money.” One commenter, who claims to work at the Illinois Department of Revenue, has this to say:
I work at Revenue. Under the current system, many people pay no tax and still get a refund of their EIC on their state return. This is a form of welfare. People are getting money from the state that is not theirs, and they did nothing to earn it.
This tells me only that it’s possible to work for the Department of Revenue and understands precisely zero about how the EITC works. It’s based on earned income. If you have a job and a salary, you get the EITC. The more you earn, the more you get. So to say that EITC recipients “did nothing to earn it” is quite possibly the single most breathtakingly wrong thing one could ever assert about it.
It’s important for people to understand that refundable income tax credits play a critical role in helping to reduce the unfairness of state tax systems overall, and that they shouldn’t be understood as applying only to income taxes. But it’s equally important for people to get that the EITC is a work incentive, and that work incentives respond to… work. A generation of “welfare reformers” who’ve worked diligently to create work incentives for low-income poverty relief would put their heads in their hands and quietly weep (or pull their hair out in despair) at the notion that one can “do nothing to earn” the EITC.
And, I suppose, the fundamental underlying lesson of all this is that we should really just never even bother reading the ‘comments’ section of web-based newspapers articles.
THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 – WHAT’S NEW FOR 2009 – PART III
April 30, 2009 by THE WANDERING TAX PRO
Filed under Articles
Both the amount and the availability of the Hope Education Tax Credit are expanded for tax years 2009 and 2010 and the credit, originally named for the town of Hope in Arkansas (and not the “hope” that you kid will graduate from college), is renamed the “American Opportunity Tax Credit”.
The maximum credit is increased from $1,800 to $2,500. This is calculated as 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. In order to get the maximum credit you must have at least $4,000 in qualified expenses.
Remember that a credit is a dollar-for-dollar reduction of tax. So a $2,500 tax credit will reduce a $3,000 tax liability to $500. Basically a $2,500 credit could mean $2,500 in your pocket.
The credit is available for the first four (4) years of post-secondary education in a degree or certificate program. Previously the HOPE was only available for the first (2) years of qualified education (Freshman and Sophomore at beginning of year) and could only be claimed in 2 tax years. Education after the first two years would then qualify for the Lifetime Learning Credit, which was 20% of qualified expenses up to a maximum of $2,000.
In addition to tuition and fees the credit is expanded to include required “course materials”, such as books, as qualified expenses.
The credit is phased-out for single taxpayers with “modified” AGI between $80,000 and $90,000 and joint filers with MAGI of $160,000 to $180,000. Here “modified” AGI begins with your regular AGI (i.e. Line 37 on the 2008 Form 1040) and adds back any exclusion or deduction for foreign income, foreign housing costs, income for residents of American Samoa and income from Puerto Rico.
Previously single taxpayers with MAGI above $58,000 and joint filers with MAGI above $116,000 were not eligible for any education tax credit and those with incomes above $80,000 or $160,000 were not eligible for any “above-the-line” deduction for tuition and fees.
So many of my clients who were denied any tax benefits for their kids’ college costs will be able to realize some tax savings in 2009 and 2010. This is good.
As with the HOPE credit, the $2,500 maximum is per student and not per return. So if you have two kids in college at the same time you can get up to $5,000 from “Sam”. The Lifetime Learning Credit maximum of $2,000, which would apply to graduate school, is per return, regardless of the number of students. If you had one dependent child eligible for the maximum AOTC and one dependent child in graduate school eligible for the maximum LLC you could claim a total of $4,500 in education credits on your tax return.
Generally a tax credit is only allowed up to the amount of tax liability. If your tax liability is $500 the credit is limited to $500. However up to 40% of the allowable American Opportunity Tax Credit is “refundable”. So if you have a “0” tax liability you could get up to $1,000 in your pocket as a “gift” from Uncle Sam. As with the Earned Income Credit you could “make a profit” by filing a tax return. If the student is subject to the “kiddie tax” this will affect the refundable portion of the excess credit.
You know how I feel about “refundable” credits.
When originally proposed there was talk of requiring students to engage in some kind of “community service” to be eligible for the AOTC. However the final bill merely instructs the Treasury Department to “study” the “feasibility” of requiring students to perform community service. It also directs Treasury Department studies on –
· Coordination with non-tax student financial assistance;
· Coordinating the credit allowed under the Federal Pell Grant program to maximize their effectiveness at promoting college affordability; and
· Examining ways to expedite the delivery of the tax credit.
The credit is for tuition, fees and course materials actually paid in calendar years 2009 and 2010. Qualified expenses related to a college semester beginning in calendar year 2009 that were paid in calendar year 2008 will be eligible for the HOPE or Lifetime Learning Credit on the 2008 Form 1040 (or 1040A) under the old tax rules.
As an added benefit for college students, for tax years 2009 and 2010 computer equipment and computer “technology”, including internet access costs, will be considered “qualified education expenses” under Section 529 college savings plans. Students will be able to use tax-free 529 monies to purchase computers and pay for internet access if they are enrolled in an eligible educational institution in 2009 and 2010.
TTFN
Original Article by The Wandering Tax Pro
Is It Finally Here? A Tax Credit For Energy Savors?
The Internal Revenue Service today reminded individual and business taxpayers that many energy-saving steps taken this year may result in bigger tax savings next year
Homeowners can get bigger tax credits for making energy efficiency improvements or installing alternative energy equipment.
The IRS also announced homeowners seeking these tax credits can temporarily rely on existing manufacturer certifications or appropriate Energy Star labels for purchasing qualifying products until updated certification guidelines are announced later this spring.
“These new, expanded credits encourage homeowners to make improvements that will make their homes more energy efficient,” said IRS Commissioner Doug Shulman. “People can improve their homes and save money over the long run.”
ARRA provides for a uniform credit of 30 percent of the cost of qualifying improvements up to $1,500, such as adding insulation, energy-efficient exterior windows, and energy-efficient heating and air conditioning systems. The new law replaces the old law combination available in 2007 of a 10-percent credit for certain property and a credit equal to cost up to a specified amount for other property.
The new law also raised the limit on the amount that can be claimed for improvements placed in service during 2009 and 2010 to $1,500, instead of the $500 lifetime limit under the old law.
In addition, the new law has increased the energy efficiency standards for building insulation, exterior windows, doors, and skylights, certain central air conditioners, and natural gas, propane or oil water heaters placed in service after Feb. 17, 2009.
If you are avid energy savor and need help on the preparation of your return, contact a professional tax rep today.
How Would Small Businesses Fare Under Obama’s Tax Plan?
Earlier this week the Washington Post published an article painting the Administration’s tax plan as one that would burden small business owners with soaring tax payments. In stark contrast, a Post editorial run just two weeks earlier—“The Small Business Myth”—debunked claims that Obama’s plan unfairly targeted business owners. Which Washington Post piece is right?
The editorial.
There are plenty of legitimate reasons to oppose the Administration’s tax agenda — most notably that it fails to raise enough revenue to pay for projected spending, even after the current economic crisis has passed. But the heightened tax burden on small businesses just isn’t one of them. The truth is that the overwhelming majority of small business owners would still face relatively low tax rates under Obama’s plan, just as they do under the current tax code.
The claim that the Obama tax plan would disproportionately hit small businesses centers on the President’s proposal to allow the top two marginal income tax rates to revert to their pre-Bush levels. The Administration wants to continue the lower rates for single earners making under $200,000 and for married couples making less than $250,000. Marginal tax rates for wealthier taxpayers would rise to 36 percent from 33 percent and, for the very richest, to 39.6 percent from 35 percent.
Allowing these rates to rise would hurt very few small business owners. In 2009, about 36 million taxpayers have small business income — defined as taxpayers who report a gain or loss on tax schedules C, E, or F. This group includes not only sole proprietorships, S corporations and partnerships, but also taxpayers who receive royalties, rental income, and income from trusts. Of these 36 million small business owners, just 1.3 percent (about 457,000) fall into the top two tax brackets—indicating that approximately 99 percent of small business owners fare better under the President’s proposed changes to the statutory tax rates. Estimates by the Treasury Department and Joint Committee on Taxation reach a similar conclusion.
And not everyone who receives small business income should be classified as a small business owner; most derive the bulk of their income from other sources. TPC estimates show that only about 174,000 taxpayers, or 0.5 percent of small business owners, both fall into the top two marginal tax rates AND derive more than half their income from a small business. This group makes up 0.1 percent of all taxpayers, meaning that the chances of being in this group—a small business owner getting at least half of total income from small businesses and being subject to a tax increase—is about one in a thousand.
Most taxpayers get a break under the Administration’s tax plan. A small proportion would see their taxes rise. In this sense, small business owners are no different than everyone else.
Home Provided by Employer
April 29, 2009 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Joe in Maryland with an interesting problem. “I have been offered a great job but I am a little concerned about having to move from my home to the home that is owned by the company that wants to hire me. I will be required to reside in the company home for two years. The rental fair market value will be added to my W-2 income. My concern is about how much will be added to this income. The home is valued over $4 million. The company wants me to live there to entertain clients and to occasionally meet with clients at that residence. What should I expect as far as additional income being added to my W2?”
Dear Joe,
If your company is offering you a job that includes a $4,000,000 home, then they are also offering you a pretty hefty salary.
RUN, don’t walk to the nearest experienced tax professional BEFORE accepting the job. Have the tax pro review the information about the housing costs added to your compensation. Be sure your tax pro is extremely diplomatic, so s/he can speak with your company’s compensation folks about this arrangement.
There is a loophole in the law. When an employee is living in a company-provided home for the benefit of the employer, the value is not income to the employee.
http://www.irs.gov/publications/p15b/ar02.html#en_US_publink1000101811
Since you have no choice at all and must live in the home, there may be a way to entirely avoid adding the cost to your payroll – or at least to reduce the amount they add based on the number of days they expect you to be showing off the home (meetings, entertainment, etc.) to clients or prospective clients.
Without this, the added income will be hefty. The best way to know how much they will add to your wages for rent is – to ask them! Or have your tax pro get all the numbers for you to compute what the extra tax hit will be. Remember, you will be paying no rent. So take into account what you would have paid if you had the right to chose your own residence.
And remember, you can find answers to all kinds of questions about lodging for the benefit of the employer and other tax issues, free. Where? Where else? At TaxMama.com
- Ask TaxMama :: Where taxes are fun and answers are free
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- IRS Publication 15b :: Fringe benefits for employees
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A LITTLE THIS-A AND A LITTLE THAT-A – WITH THE EMPHASIS ON THE LATTA
April 29, 2009 by THE WANDERING TAX PRO
Filed under Articles
Look what happened to a client -
“{My son’s} return was properly addressed to the IRS. I mailed it myself. The US Postal Service had delivered {the} tax return to a company in Kansas City MO instead of delivering it to the IRS address. That company had opened the letter up, must have looked at the information inside, and it was returned back to {my son} with a small explanation attached. What I can’t figure out is why they just didn’t give it back the Post Office and it would of been on it’s way. So, know we are worried about someone having all of David’s information and are concerned.”
+ I have been catching up on my @rdftaxpro messages at Twitter and found a note from Kay Bell of DON’T MESS WITH TAXES that she, Kelly Phillips Erb (aka TAXGIRL) and I are included in a blog list from fellow tax blogger Jim Maule – “MauledAgain’s 10 Favorite Tax Blogs”. Also on the list is Joe Kristan’s ROTH AND COMPANY TAX UPDATES and Russ Fox’s TAXABLE TALK.
+ As long as I am shamelessly “tooting my own horn” (a la TAX MAMA) I might as well also point out that THE WANDERING TAX PRO made the list of the “100 Best Financial Planning Blogs” compiled by L. Fabry at the ONLINE MBA REVIEW’s blog. Online MBA Guide ranks the best online MBA degrees and reviews top online MBA programs in the USA.
THE WANDERING TAX PRO is #89 on the list under the last category of “Specialty Blogs”. It looks like I am the only tax blog on the list!
+ A very belated thanks to Pete Pappas of THE TAX LAWYER’S BLOG for selecting my post on “The EIC and Tax Fraud” for inclusion in his “Issue # 6: Dr. Taxosphere, Or How I Stopped Worrying and Learned to Love the Tax Code”.
Pete’s comments on the subject were right on –
“My Observations: The EITC is a refundable credit. In other words, qualifying taxpayers get a check from the government regardless of whether they paid any taxes in during the year.
It is, therefore, a welfare program and, as was the case with America’s old welfare system (subsequently reformed in the 90’s through a joint effort of Congressional Republicans and President Clinton), its entitlement nature invites abuse.
Nobody should get money from the government (i.e. other taxpayers) merely by completing a form requesting the money.
Like the guy who leaves his keys in his Cadillac and the driver-side door wide open, a government that makes it this easy for people to steal from it deserves to have its money stolen.”
Pete also posted about “Five Nevers from Flach”. I do agree with him about butchers and surgeons.
TTFN
Original Article by The Wandering Tax Pro
Swine Flu Tax Incentives Move Through Congress
A new package of anti-swine flu tax incentives was introduced in the House today.
The three-pronged package would provide a new tax credit for businesses that purchase liquid hand sanitizers, make it easier for state and local governments to sell tax-exempt bonds to finance swine flu first-response teams, and provide a new deduction for automobile air handlers.
The measure, called the Swine Flu Protection Act (SFPA), has bipartisan support in both the House and Senate. “This package will help keep America safe from this insidious homeland security threat,” said Representative Hedley Lemarr (R-Tex.). “And make no mistake: This is not new spending,” he added.
An Obama Administration spokesman said this morning that the President may support the plan–or he may not—depending on which direction public opinion blows. He also insisted that the measure raise taxes on everyone making more than $250,000.
To be eligible for the credit, hand sanitizers would have to be American made, a provision that international tax experts argue may violate existing trade agreements. The proposal is also controversial because, like the health care exclusion, only businesses could claim the credit. Individuals could not.
The second provision would exempt swine flu first-responder bonds from state volume caps. Rapid response teams located in specially designated Flu Recovery Zones would be eligible for additional assistance through a taxable bond subsidy.
The auto credits would enhance the Administration’s green car initiative. The special air handlers would remove swine flu virus that is disseminated through coughs and sneezes. Thus, the device would protect a driver from passenger-generated infection. Buyers of Chrysler and GM cars would get the equipment whether they wanted it or not.
A $500 deduction would be available to buyers of new cars that include the equipment. However, purchasers would not be eligible if they have they have taken a new home-buyer tax credit, or if the car gets less than 25 miles per gallon. The deduction would be in addition to the above-the-line sales tax deduction for the purchase of new cars, but only for couples making $250,000 or less. Special provisions would be made for hybrids. The credit would be excluded from the Alternative Minimum Tax for 2010 only, but would be subject to the Administration’s proposed 28 percent cap on the value of deductions.
Sources say Senate Finance Committee ranking Republican Charles Grassley (R-Iowa) might support the package, but only if the word “swine” is removed from the title.
Just sayin.
Amending Very Old Returns
April 28, 2009 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Mark in West Virginia with this problem. “The IRS thinks I owe them money from 1999. I have proof to the contrary, but they say I can’t file a 1040x after 3 years. Even the Tax Advocates told me that. My father acting as my power of attorney filed it through H&R block. They forgot to show $17,000+ that was paid to a sub-contractor. I even have the sub-contractors tax return for 1999 showing I paid her.” Read the rest of the story in TaxQuips 1205 (see link in Resource Box below)
Dear Mark,
I’ve been sitting here for the last hour or two, trying to find a gentle and helpful way to answer you. I’m not sure there is one. You seem to be your own worst enemy. If you knew there was a major mistake on your tax return, why didn’t you amend it right away? Or within the three years? Isn’t three years long enough to send IRS a letter?
It’s not clear why it was necessary for your father to file your tax return with a power of attorney. If you were ill, or away on active duty in the military all that time, you will probably be able to get IRS to give you some special consideration.
But I don’t understand why, if you’re working with a Taxpayers Advocate, you didn’t drop what you were doing and get her all the documents she asked for? Was this not a priority for you? The Advocate’s office has limited staff. They need to devote their energies to people they can help. Those who won’t help themselves do tend to fall by the wayside.
Now, as to not being able to file an amended return for 1999, that is not correct. I’ve done that many times, working with people in trouble. You may file the amended return. Three things will happen if you do. 1. You will reduce your tax liability for 1999. 2. You will not get any refunds, except for money IRS took within two years of the date you file the amended return. 3. You will extend the collections statute for another 10 years, if there is still a balance due.
So, if you have only one year left on the open statute of limitations for collections, your best bet is reduce your withholding on your current paycheck, so you don’t end up with a refund next year. And wait for the 10 years to end.
As to WV, call them up and have a talk with them, too. Find out when their statute ends, or if they are willing to accept the amended return, just to reduce the balance – even if you don’t end up with a refund.
Incidentally, consider joining Procrastinators Anonymous – http://www.procrastinators-anonymous.org . They may be able to help you understand why you keep putting off tasks that are essentially simple, and definitely beneficial to you.
And remember, you can find answers to all kinds of questions about amended returns and other tax issues, free. Where? Where else? At TaxMama.com
- Ask TaxMama :: Where taxes are fun and answers are free
- www.TaxQuips.com :: The number ONE free tax podcast online
- TaxQuip 1205 :: Comment to Amending Tax Returns