What is a Tax?

What is a tax?  You would think a senior economist at the Tax Policy Center would have no trouble answering that question. But it is not so simple.

 

This question has come up in the debate over the proposal to require all Americans to have medical insurance—a provision in all of the major congressional health reform bills. If you must buy insurance, is the payment you make a tax or just a premium for insurance coverage?  Is the penalty imposed on those who don’t buy insurance a tax or a fine for failing to comply with the law?

 

Of course, we know taxes are what we pay to fund the general activities of the government. And for most taxes, including the individual income tax, what we pay bears little relationship to how much we benefit from government services.  But not all payments to governments are for broad public services and some levies, such as airline ticket taxes, are associated with direct consumption of a service by the payer.   

 

Payments to governments that are analogous to commercial transactions are counted as user fees, not taxes, and reduce measured spending on the public activity. Examples include the fees I pay when I visit a National Park or for getting my car emissions tested. Getting the emission test gives me a lot less pleasure than hiking in Shenandoah Park, but it is a requirement I must meet for the privilege of driving. And since I am the potential polluter, the state requires me to bear the cost.

 

So when is a payment to government by users of a service a tax and when is it a fee?  A 1993 CBO report cited Malcolm Baldrige, a Commerce Secretary during the Reagan Administration. “I think it is simple,” Baldrige commented.  “If it is a Democratic proposal, it is a tax; if it is Republican, it is a user fee.”  Of course, Baldrige was joking, but nonetheless user-related taxes are often hard to distinguish from user fees.  If my local community funds trash collection out of property tax revenues, total tax collections look higher than if they charge me a separate fee for trash collection (even if the fee is collected when I pay my property tax).  Using federal gasoline taxes to finance interstate highways makes the tax burden look higher than if those roads, like some older state highways, were paid for by tolls.

 

The 1993 CBO report cites four categories of user-related charges:  user fees, regulatory fees, beneficiary-based taxes, and liability-based taxes.  In general, fees are distinguished from taxes by the degree of connection between the payment and the service received or social cost imposed by the payer. Thus, payments to the black lung fund are considered a liability-based tax because, although payments to miners result from past activities of the coal industry, they are not closely linked to the current actions of any firm on which the impost is based. In contrast, charges for food safety inspections are a regulatory fee, because (assuming the cost is passed forward) food consumers who are the beneficiaries of the inspection activities are paying for it. Often, however, a particular levy can be classified on either side of the tax/fee line.

 

So what are payments for mandatory health insurance?  They are involuntary and not based on something the person chooses to do, which makes them look like a tax.  However, the individual gets a benefit –insurance coverage – in exchange for the payment, which sounds like a fee. Because of subsidies, some individuals will pay more than others for the same coverage (tax).  And if the individual fails to buy insurance, she must make a payment to the IRS, for which she will get nothing directly in exchange (tax). But the payment can be viewed as a regulatory fine for failing to meet a public responsibility (fee).  Finally, because the IRS is administering these payments, it looks very much like (and will likely be scored as) a tax.

 

As a tax economist, parsing these questions is fascinating. But I’m not sure it is very important to the health debate. Instead, we’d be better off asking a different set of questions: Who would bear the net costs of this mandate by paying more than the value of insurance they receive?  Who would benefit by receiving insurance in excess of the amount they pay?  Is this income redistribution desirable?  Is it the best way to pay for (near) universal coverage?  And is that goal worth the cost?  If we like the answers, we should support reform and if we don’t we should oppose it, regardless of whether we label the payments “tax” or “fee”.

 

 

Link to the original site

California Wildfire Tax Relief

Today TaxMama hears from Teri in California with this question. “Do you know if there is authority for relief from the 10% penalty on early distribution of IRAs due to the California wildfires?”

[Note: For working links, please see the Resource Box below.]

Hi Teri,

That’s a good question.

I could have sworn I saw a press release about that earlier this month. It’s not up on the IRS site now.

This is all they are showing for Los Angeles to Santa Barbara and Inland Counties – 2003-2007 fires. http://www.irs.gov/newsroom/article/0,,id=99114,00.html

Doing several searches, I cannot find a thing. Not even on the White House site
http://www.whitehouse.gov/search/?keywords=wildfire&F_All=Y

California FTB is showing the 2008 relief
http://www.ftb.ca.gov/professionals/taxnews/2008/1208/1208_2.shtml

There is apt to be relief. But I don’t see it yet. I have asked IRS to look into this to find out when they expect to see a Presidential declaration to grant relief.

And remember, you can find answers to all kinds of questions about disaster relief and other tax issues, free. Where? Where else? At 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 subscribe link and join us.]

• Ask TaxMama :: Where taxes are fun and answers are free
• www.TaxQuips.com :: The number ONE free tax podcast online
• IRS disaster area information :: Southern California reports
• The White House website :: searching for Presidential declarationson California wildfires
• California Franchise Tax Board :: Searching for 2009 wildfire relief - only found 2008 data
• FEMA :: Master List of Declared Disasters

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Why Are Republicans Opposing Medicare Cost Controls?

Democrats are proposing to control future Medicare costs, and Republicans are trying to stop them. Who knew?

This could have been the perfect “Nixon in China” moment. Democrats—who created Medicare and for decades resisted GOP moves to curb the program—control Congress and the White House. A Democratic President has embraced modest efforts to slow the program’s unsustainable rate of growth. Drug makers, doctors, and hospitals all swallow hard and buy into the idea. It could be the perfect moment for a bit of desperately needed fiscal responsibility.

And what happens? Republicans, who only months ago tried to turn Medicare from an entitlement into a voucher, are lined up against slowing the program’s growth. They offer amendments in the Senate Finance Committee to “protect our seniors.” GOP Party Chairman Michael Steele writes a manifesto acknowledging that the long-term growth rate of Medicare is a problem, but insisting that Republicans will go to the barricades to save the elderly from the ravages of Obama-care.

As this depressingly familiar graph shows, the current pace of Medicare spending is not only unsustainable in the long-run, it is politically impossible.

    

By mid-century, Washington will be spending nearly 10 percent of Gross Domestic Product on Medicare but, without major policy changes, collecting only about 20 percent of GDP in revenues. That leaves only 10 percent of GDP for Social Security, Medicaid, interest on the debt, national defense, and everything else government does. And lawmakers will face two equally unpalatable choices: Slash all that other spending by more than half, or raise taxes to dangerously high levels.    

What looks increasingly like a missed opportunity to address this looming disaster is no surprise, given the toxic political climate here in Washington. And not too many years ago, Democrats did the same thing to George Bush, who tried to get a handle on Social Security. Dems were happily wringing their hands over massive Bush-era deficits but, given an opportunity to do something about it, chose the partisan low road. 

Now, the Republicans are taking their turn at irresponsibility. Having lost control of the purse strings, they are howling about the debt we will leave our grandchildren. Yet, given the chance to make the smallest dent in Medicare’s growth rate, they suddenly have become the protectors of seniors. I half expect them to propose naming the Capitol after Claude Pepper. 

Imagine for just a moment an alternate universe: Democrats and Republicans set aside their squabbling and agree to eliminate wasteful or even dangerous Medicare spending. This, however, would require lawmakers to act like adults and explain that more health care is not the same as better care, and that Medicare growth could be slowed without jeopardizing the health of seniors. 

But that isn’t likely to happen. Democrats and Republicans can agree to hand out  Medicare dollars they don’t have, as they did with the Part D drug benefit. But when it comes to controlling costs, partisan name calling is so much more fun

Link to the original site

Incorporated Out of State

Today TaxMama hears from Barry in New York, who wants to know. “I have an LLC incorporated in a different state than the one I reside in. I will run an Web-based business under this LLC. Does having the company incorporated in a different state create any tax complications or costs?”

Dear Barry,

You bet it does! Especially in the State of New York. They are among the most aggressive states when it comes to collecting money that is due to them.

I just can’t understand why someone would set up an LLC or corporation without consulting with their business attorney and tax professional first.

Let’s face it, you may be running a web-based business. But you are running it from your home in New York. Heck, in your case, BOTH New York State AND New York City want a piece of your pie.

You have to register your out-of-state corporation in New York with the Secretary of State’s office. http://www.dos.state.ny.us/corp/corpwww.html

You will have to file all sorts of tax returns – sales taxes, income taxes and perhaps even payroll taxes, depending on how you have set up your LLC. http://www.tax.state.ny.us/

Please meet with a good, local tax professional who can help you catch up with prior year filings in New York, set up the current year properly. Then stay in touch with your tax pro on a regular basis to help you minimize your taxes and stay out of trouble.

And remember, you can find answers to all kinds of questions about where to incorporate and other tax issues, free. Where? Where else? At 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 subscribe link and join us.]

• Ask TaxMama :: Where taxes are fun and answers are free
• www.TaxQuips.com :: The number ONE free tax podcast online
• New York Secretary of State's Site :: Information for corporations
• New York Department of Revenue and Taxation :: For information about sales taxes, income taxes and payroll taxes

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Can’t Find The California Will? Lost? No Will At All?

Dying without a Will in California means that the probate court will address the estate by applying the rules of intestate succession. Sometimes, in the case of lost California Wills, the same rules apply. Here are some of the rules as found in the California Probate Code:

Section

6400: Property subject to intestacy provision.

6401: Surviving spouse or surviving domestic partner; intestate share; community or quasi-community property; separate property.

6402: Intestate estate not passing to surviving spouse of surviving domestic partner.

6402.5: Predeceased spouse; portion of decedent’s estate attributable to decedent’s predeceased spouse.

6403: Failure to survive decedent by 120 hours; deemed predeceased; application of section.

6404: Application of escheat provisions.

6406: Relatives of halfblood.

6407: Unborn relatives of decedent.

6409: Property given to heirs during decedent’s lifetime; advancement against share.

6410: Debt owed to decedent; predeceased debtor.

6411: Aliens

6412: Dower and curtesy, nonrecognition.

6413: Relation through two lines of relationships; single share.

6414: Application of part.

Ask a California probate attorney about questions you have concerning death and taxes. Call Mitchell A. Port at (310) 559-5259.

Link to the original site

Are Families Prepared for Financial Emergencies?

Data from the 2007 Survey of Consumer Finances show a disturbing reality. Even prior to the current recession, many families did not have enough assets to see them through a modest spell of unemployment or another financial emergency. In 2007, nearly one in three U.S. families were liquid asset poor. Low-income, young, and nonemployed families are more vulnerable to economic emergencies. For example, two-thirds (68 percent) of bottom income quintile families and 47 percent of second income quintile families are liquid asset poor, while such shortfalls affect only 1 percent of top income quintile families.

Link to the original site

Ask TaxMama Issue 522 - The Book of Life

Dear Family,

This week has flown by. We’ve all been so busy. Lots to catch up, finishing up tax returns for the end of tax season, designing new tools for you to use next year, designing a new TaxMama site to replace the old, stagnant version that’s been up for a decade or more…and processing tons of amended returns to claim the first time homebuyers credit. Speaking of which, we’ve run into a stumbling block. IRS is getting soooo many of these requests, there seems to be a huge logjam in the processing center. I’ve spent much of this week trying to find out just what’s going on. So far, two IRS insiders have not been able to provide any answers. Still digging.

Another topic I am researching, and would love your input, is online gambling. It’s a billion dollar industry. People are spending, and winning – and losing online. Drawing your winnings, we all know, is a taxable event. But the question is – may you deduct your losses for IRS and/or state purposes? I’ve been getting some help from terrific people at California’s Franchise Tax Board. But, in California the bottom line, I am learning, must come from the attorney general’s office. The big question is – is online gambling legal? Or does it depend on the nature of the game/bet? Which games/tables/sports books etc. are legal and which are not? That’s what I’ll be asking the AG’s office as soon as I get a free moment. If you happen to have experience with this issue (as in, surviving and audit) in California or your state, I’d love to hear from you.

As we race for the final tax return filing deadline this year, naturally the Jewish High Holy Days are keeping pace with us. Last week was Rosh Hashanah, the Jewish New Year. This weekend Yom Kippur commences. (That’s why lots of offices and schools will be closed on Monday. Suddenly everyone is Jewish.) Last week, we engaged in comtemplation, apologies, appreciation. This holy day we repent. And we pray to be worthy enough to be inscribed in the Book of Life for another year. That’s a pretty audacious request to make of your diety don’t you think? Hey God, I’ve been so good that I should be entitled to live for another year!

Whew, how many of us have been that good? When I think of how I snapped at people this week, I really must wonder just how worthy I am!

And then there are some of my elderly relations. In pain, infirm, incapable of even getting out of bed without help. Are they holding life so dear that their prayers for yet another year of suffering are sincere? You’ve got to wonder.

Did you read about the 90-year-old man whose wife had dementia and terminal pancreatic cancer – so he shot her and tried to terminate himself? He succeeded for his wife; but only managed to hurt himself. It breaks your heart seeing someone who had the courage to act, having to live with such failure.

Many cultures have the maturity to address these issues sensibly, helping people make a final transition out of this life and pain, with dignity. It’s a pity the civilized world doesn’t treat humans that way. Oh, we can do it for a dog that’s suffering. But a person, who can actually tell you how unhappy they are? Not a chance. That’s a crime against civil and biblical law. Merciful. Yes?

Oh well, as for me? I am bold enough to request life for yet another year. I have too much more to accomplish to waste time dying. How about you?

Tell me about your traditions. I’ve told you about mine.
http://www.taxquips.com/index.php?cat=Tradition!

TaxMama’s AccountingWeb.com blog questions the processing of the 2008 amended returns for the First Time Homebuyers Credit. Do you know what’s going on?
http://www.accountingweb.com/blogs/accountingweb/talk-taxmama

In IRS News this week we learn what to do if you took a minimum distribution from your retirement plan -but didn’t need to because of the 2009. What are your options? You also learn six useful facts about the new improved version of the Education Credits, which are called “the American Opportunity Tax Credit” to ensure you understand that it relates to education.
http://taxquips.com/index.php?cat=IRSNews

In today’s Money Funny a students explains Roe v. Wade to his professor.
http://taxquips.com/index.php?cat=MoneyFunnies

In TaxQuips this week we learn about sweepstakes phone calls; deducting the cost of storing Dad’s property; how to report a business run by two friends; and how PTAs should report the income from their fundraising events.
http://taxquips.com/index.php?cat=TaxQuips

As always, we love your feedback, opinions and ideas.
You are what makes all this fun – and interesting!

Please use the Comments link online.
http://taxquips.com/index.php?id=1345

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Hugs from your favorite TaxNerd,

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Your TaxMama is watching…out for you.

www.TaxMama.com
www.TaxQuips.com
www.IRSExams.com
www.taxnerd.net
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TAX CALENDAR 2009
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10.15.2009 Personal returns – FINAL DEADLINE

10.15.2009 Employers Make monthly Payroll tax deposit

11.02.2009 3rd Quarterly Payroll Returns and Pay Taxes Due

11.02.2009 3rd Quarterly Sales Tax Returns and Pay Taxes Due

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• Ask TaxMama :: Where taxes are fun and answers are free
• www.TaxQuips.com :: The number ONE free tax podcast online
• Money Funnies & Inspiration :: College Student explains Roe v. Wade
• IRS News :: Education tax credits, minimum distribution waiver

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IRS Issues Guidance on 2009 Required Minimum Distribution Waiver

WASHINGTON ? The Internal Revenue Service today provided guidance for retirement plan administrators, plan participants and retirees regarding recent legislation affecting required minimum distributions. The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for 2009 from certain retirement plans.

Generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer’s plan beginning with the year the account owner reaches age 70½. The 2008 law waives required minimum distributions for 2009 for IRSs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.

Notice 2009-82 provides relief for people who have already received a 2009 required minimum distribution this year. Individuals generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.

The notice also provides guidance for retirement plan sponsors. It contains two sample plan amendments that plan sponsors may adopt or use to amend their plans to either stop or continue 2009 required minimum distributions. Both sample amendments provide that participants and beneficiaries can choose to receive or not to receive 2009 required minimum distributions. Also, both sample amendments allow the employer to offer direct rollover options of certain 2009 required minimum distributions.

Plan sponsors may need to tailor the sample amendment to their plan’s particular terms and administration procedures and must adopt the amendment no later than the last day of the first plan year beginning on or after Jan. 1, 2011 (Jan. 1, 2012 for governmental plans).

• Ask TaxMama :: Where taxes are fun and answers are free
• www.TaxQuips.com :: The number ONE free tax podcast online
• IRS Notice 2009-82 :: Guidance on 2009 Required Minimum Distribution Waiver

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Six Facts About the American Opportunity Tax Credit

Courtesy of the IRS

Many parents and college students will be able to offset the cost of college over the next two years under the new American Opportunity Tax Credit. This tax credit is part of the American Recovery and Reinvestment Act of 2009.

Here are six important facts the IRS wants you to know about the new American Opportunity Tax Credit:

• This credit, which expands and renames the existing Hope Credit, can be claimed for qualified tuition and related expenses that you pay for higher education in 2009 and 2010. Qualified tuition and related expenses include tuition, related fees, books and other required course Materials.

• The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000 per student each year. Therefore, the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualifying expenses for an eligible student.

• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. The credit is gradually reduced, however, for taxpayers with incomes above these levels.

• Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.

• The credit can be claimed for qualified expenses paid for any of the first four years of post-secondary education.

• You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction, which ever is more beneficial for you.

Complete details on the American Opportunity Tax Credit and other key tax provisions of the Recovery Act are available at the official IRS Web site at IRS.gov/Recovery .

• Ask TaxMama :: Where taxes are fun and answers are free
• www.TaxQuips.com :: The number ONE free tax podcast online
• IRS site for the Recovery Act :: For complete details on the American Opportunity Tax Credit
• IRS Information center for :: Tax Benefits for Education
• IR-2009-78 Special IRS Web Section :: Highlights Back-to-School Tax Breaks; Popular 529 Plans Expanded, New $2,500 College Credit Available
• IRS Publication 970 :: Tax Benefits for Education
• IRS YouTubeVideo :: Education Credits
• IRS Audio file for podcast :: American Opportunity Tax Credit

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Roe v. Wade

A young man was sitting in class when the professor
asked him if he knew what the Roe vs. Wade decision was.

He sat quietly, pondering this profound question. Finally,
after giving it a lot of thought, he sighed and said,
“I think this was the decision George Washington made
prior to crossing the Delaware.”

Courtesy of the old I-HelpDesk & WebReview #1253

Please remember to send us your humor.
Clean jokes preferred.

Read more Money Funnies here:
http://taxquips.com/index.php?cat=MoneyFunnies

• Ask TaxMama :: Where taxes are fun and answers are free
• www.TaxQuips.com :: The number ONE free tax podcast online

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