Flaky Debt Reduction

On the day when the Congressional Budget Office projected that the federal debt could reach 185 percent of Gross Domestic Product by 2035, consider a bill introduced by two Arizona lawmakers, Senator John McCain and Representative Jeff Flake.

Carrying on a nearly two-decades-old tradition, the two GOP legislators have introduced the “Debt Buy-Down Act,” which would let taxpayers designate up to 10 percent of their federal income tax liability for debt reduction. Congress would have to cut specific programs by the aggregate amount of designated taxes or accept an across-the-board spending reduction.

McCain and Flake say their goal is to rein in federal spending and reduce the national debt. But it is little more than “feel good” legislation that abdicates Congress’s fiscal responsibility. The bill effectively says, “We in Congress can’t control spending so we’ll let taxpayers force us to reduce the debt.” 

In today’s tea party environment, that approach may prove to be good politics but it’s a poor way to govern. A similar bill was first introduced in 1992; it went nowhere and more recent successors have met with similar fates. This incarnation should do the same.

Perhaps the bill’s biggest flaw, however, is that it would do nothing to stop Congress from increasing spending and running the debt up further. The bill would merely require Congress to reduce spending from whatever level it enacted. Thus, taxpayers could designate $1 billion to reduce the debt while Congress boosts spending by $10 billion.

Besides, why stop at 10 percent, and why limit taxpayer input to revenues? If Congress really wants to give taxpayers more say in the budget process, it should let people direct which specific spending cuts will offset the taxes they designate under the proposal. And why stop there? We could follow California’s lead and make spending and tax decisions by referendum. Let the people decide. It has worked so well in the Golden State.

The proper approach, of course, is for Congress to make its own budget decisions and stop trying to duck its responsibilities.

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Can I Get A Copy Of A Living Trust?

I just received an email from Walt in Los Angeles, CA after reading this blog and this is what he wrote:

“Both parents are deceased. I know they had a living trust. I am not on good terms with my siblings. How can I find out about the trust and what is in it?”

Here is my reply:

“Walt, You can ask for a copy because if you are a beneficiary you are entitled to it by law. If they refuse, you can file a petition to remove them as successor trustee for breach of their fiduciary duty to give you a copy.

“California Probate Code Section 16061.5(a) provides that:

“‘When a revocable trust or any portion of a revocable trust becomes irrevocable because of the death of one or more of the settlors of the trust, or because, by the express terms of the trust, the trust becomes irrevocable within one year of the death of a settlor because of a contingency related to the death of one or more of the settlors of the trust, the trustee shall provide a true and complete copy of the terms of the irrevocable trust, or irrevocable portion of the trust, to any beneficiary of the trust who requests it and to any heir of a deceased settlor who requests it.’

“If you would like me to help you file a petition to get the copy, please let me know.”

If you have a similar issue, please call California probate attorney Mitchell A. Port at (310) 559-5259.

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Unemployed and Moved

Today TaxMama hears from Ron who is about to be laid off. He tells us, “I was notified on February 26, 2010 that I was being laid off as of August 2010. I sold my home on May 25th, knowing I wouldn’t be able to afford the mortgage after my layoff. I only lived in the home for 12 months. Will I have to pay capital gains tax or will the layoff exclude me? I only made about $20,000 on the sale of the home, after deducting the basis from the sale price.”

Dear Ron,

In ordinary cases, David Toelkes’ answer would be right. And he is certainly right about the additional costs that will reduce your realized gain.

However, when it comes to the personal residence exclusion, there is a special deal for “unforseen circumstances.” No longer being able to afford your home due to a layoff is specifically one of those situations – see item (b).

Since you lived in the home for 12 months, you are entitled to half of your $250,000 personal residence exclusion – or half of $500,000 if you are married.

Your $20,000 will not be taxed. You will need that to live on. However, be sure to report the sale of your home on Schedule D. Show the same cost as your sales price – profit being -0-.

The only potential problem is that you sold the house too soon. You may have blown your prorated personal residence exclusion since you are not yet unemployed – and are several months from being unemployed. In fact, it’s even possible (though unlikely) your company’s fortunes might turn around before August. Though, in this market, I can see the wisdom of trying to sell as early as you can.

In which, case, turn back to David’s advice and look for every possible increase in basis and profit reduction.

Good luck finding a new job before the old one runs out.

And remember, you can find answers to all kinds of questions about selling your home other tax issues, free. Where? Where else? At www.TaxMama.com.

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Why Auto-enroll 401(k)s May Reduce Retirement Savings

For the past decade, policymakers and pension experts have encouraged employers to increase worker participation in 401(k) plans by automatically enrolling their employees in these retirement programs. And it works. One study concludes that participation  among new hires nearly doubles—from less than half to nearly 90 percent—when workers are auto-enrolled.

But important new research by the IMF’s Mauricio Soto and Urban Institute’s Barbara Butrica finds there may be a downside: While more employees enroll thanks to the opt-out design, their employers are likely to match less of their contributions. And that might actually reduce the level of overall pension contributions for some workers. No good deed, as they say, goes unpunished.

In many ways, auto-enrollment makes a lot of sense. Because inertia is so powerful, new workers often don’t bother to fill out the paperwork to participate in 401(k)s. But if their employers sign them up, few workers take the trouble to disenroll even though they are allowed to do so. The 2006 Pension Protection Act as well as 2009 Internal Revenue Service regs are intended to further encourage employers to auto-enroll their workers.

The idea was catching on even before those policy changes. The percentage of 401(k) plans with auto enrollment boomed from just 4.2 percent in 1999 to almost one-quarter in 2006. More than 40 percent of firms with 5,000 or more employees automatically enroll their workers. Employers typically match 50 cents for every dollar their workers contribute, up to 6 percent of salary. And, according to a 2006 survey, half of firms said their main reason for offering auto enrollment was to encourage retirement savings.

But Mauricio and Barbara found that employer match rates are about 7 percentage points lower for opt-out plans. They can’t say for sure whether auto enrollment causes lower match rates. But it sure is possible. After all, if more employees participate, their employers will have to spend more to match their contributions. Whatever the cause, it seems that while auto-enrollment may increase the number of workers with 401(k)s, it won’t necessarily boost their retirement savings.      

Link to the original site

Mortgage Interest Paid

a title=”Mortgage Note” href=”http://flickr.com/photos/35468159852@N01/107836778” target=”_blank”>Today TaxMama hears from Christie who is facing an IRS audit. She says, “The IRS is saying I owe tons of money due to me not proving that my mortgage expense on my interest-only loan for the house I live in was indeed an interest expense. They say I have not proved that I paid the interest. I showed them the mortgage statements and year-end statement showing mortgage interest expense. Am I missing something?”

Dear Christie,

Without seeing what you’ve sent IRS, I can’t really know what the problem is.

However, here are some clues – and some tips to prove your case:

1) Is the mortgage in your name?

2) Is that the same name as on your tax return? Or did your name change due to marriage, divorce, or you just liked a different name?

If the name is the same – then the Form 1098 from the mortgage company showing how much interest was paid is helpful. If they want more, get a printout from the lender showing each payment made during the year. So far, all that does is prove the mortgage interest was paid. It doesn’t prove WHO made the payments.

To prove YOU made the payments, give IRS a copy of the cancelled check for each payment. There are only twelve checks you need to produce, shouldn’t be hard. If you don’t have copies, ask your bank to generate copies. Good luck!

And remember, you can find answers to all kinds of questions about IRS audits and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Cash Back Shopping

Today TaxMama hears from Janet in the Tax Quips Forum with an excellent question. “There are several websites out there that allow you to earn cash back when you shop on their site. Do you have to report these earnings to the IRS, considering it’s not really earned income? you’re just getting a small rebate from the retailer when buying their product. I want to sign my grand kids up with cash back shopping so they can start saving for college. Will they be tax exempt from any money they earn when people shop for them?”

Dear Janet,

I am So glad that you asked.

That IS tax-free money to your and/or your grandchildren. Two excellent sites that help you save for college are http://www.upromise.com and https://www.babymint.com . Another site that gives you money back is ebates.com . Also look for credit cards that provide rebates that are deposited into a college savings plan.

No need to go out of your way to spend. But if you’re buying things anyway, see if you can get a good deal using these sites. AND if you use college savings credit card to make the purchase, you could double your rewards.

People who use the cards in their businesses can really rack up reward points for mileage, etc. My sister-in-law ran a retirement hotel for about 20 years. Putting everything on credit cards, she built up enough mileage points that she is regularly able to travel to New York, Israel, anywhere, for free, or practically for free. (Of course, she paid off all the balances due the minute the bills were presented – not a favorite behavior of credit card companies.)

For more tips about maximizing credit card rewards, visit Tim Winship at http://frequentflier.com/ .

Hey, who knows. Perhaps if you run your entire spending through those cards for the next dozen years or so, you might pay for a year or two of college. Couldn’t hurt.

And remember, you can find answers to all kinds of questions about credit card and shopping rewards 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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TDF 90-22.1 FOREIGN FINANCIAL ACCOUNT REPORT DUE 6/30/10 – STREET ADDRESS TO USE FOR DHL, FED EXP OR UPS DELIVERY

TDF 90-22.1 FOREIGN FINANCIAL ACCOUNT REPORT DUE 6/30/10 – STREET ADDRESS TO USE FOR DHL, FED EXP OR UPS DELIVERY 

The following street address should be used to file TDF 90-22.1 (FBAR) form when the US mail is not available for delivery. These private delivery services will not deliver to the PO Box shown delivery address shown on the form’s instructions.:

IRS Detroit Computing Center
Attn: FBAR Mailroom
4th Floor
985 Michigan Ave.
Detroit, MI 48226
(313) 234-1062
This form must be filed immediately. If it does not arrive by 6/30/10, you may incur a $10,000 late filing penalty. The fine can be greater if you do not file at all and also might include criminal prosecution.  When in doubt whether you owe the form to the US Treasury, best to file just to be certain there are no problems since it does not cause any additional income tax cost, and is only a reporting form.

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IRS Issues Regulations on 10-Percent Tax on Tanning Services Effective July 1

Video: Tanning Services Excise Tax: English | ASL

IR-2010-73, June 11, 2010

WASHINGTON — The Internal Revenue Service today issued regulations outlining the administration of a 10-percent excise tax on indoor tanning services that goes into effect on July 1.

The regulations were published today in the Federal Register.

<!-more->

[TaxMama Note: This means you will pay a 10% sales-tax-like fee everytime you use a tanning booth or salon.]

In general, providers of indoor tanning services will collect the tax at the time the purchaser pays for the tanning services. The provider then pays over these amounts to the government, quarterly, along with IRS Form 720, Quarterly Federal Excise Tax Return.

The tax does not apply to phototherapy services performed by a licensed medical professional on his or her premises. The regulations also provide an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.

The IRS and Treasury Department invite comments.

Send submissions to: CC:PA:LPD:PR (REG-112841-10), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.

Submissions may be hand-delivered to: CC:PA:LPD:PR Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-112841-10), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC.

Submissions may be sent electronically via the Federal eRulemaking Portal at www.regulations.gov (REG-112841-10).

Related Items:

• Questions and answers on the indoor tanning service excise tax
• Affordable Care Act Tax Provisions

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IRS Issues Regulations on 10-Percent Tax on Tanning Services Effective July 1

Video: Tanning Services Excise Tax: English | ASL

IR-2010-73, June 11, 2010

WASHINGTON — The Internal Revenue Service today issued regulations outlining the administration of a 10-percent excise tax on indoor tanning services that goes into effect on July 1.

The regulations were published today in the Federal Register.

<!-more->

[TaxMama Note: This means you will pay a 10% sales-tax-like fee everytime you use a tanning booth or salon.]

In general, providers of indoor tanning services will collect the tax at the time the purchaser pays for the tanning services. The provider then pays over these amounts to the government, quarterly, along with IRS Form 720, Quarterly Federal Excise Tax Return.

The tax does not apply to phototherapy services performed by a licensed medical professional on his or her premises. The regulations also provide an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.

The IRS and Treasury Department invite comments.

Send submissions to: CC:PA:LPD:PR (REG-112841-10), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.

Submissions may be hand-delivered to: CC:PA:LPD:PR Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-112841-10), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC.

Submissions may be sent electronically via the Federal eRulemaking Portal at www.regulations.gov (REG-112841-10).

Related Items:

• Questions and answers on the indoor tanning service excise tax
• Affordable Care Act Tax Provisions

• Ask TaxMama :: Where taxes are fun and answers are free
• www.TaxQuips.com :: The number ONE free tax podcast online
• IRS News at TaxMama.com :: Where you can comment on this

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Man Tools Explained

Aaaah…so this explains the $10,000 or so invested in the Garage!

DRILL PRESS:
A tall upright machine useful for suddenly snatching flat metal bar stock out of your hands so that it smacks you in the chest and flings your beer across the room, denting the freshly-painted project which you had carefully set in the corner where nothing could get to it.

WIRE WHEEL:
Cleans paint off bolts and then throws them somewhere under the workbench with the speed of light. Also removes fingerprints and hard-earned calluses from fingers in about the time it takes you to say, “Oh, swear!”

SKILL SAW:
A portable cutting tool used to make studs too short.

PLIERS:
Used to round off bolt heads. Sometimes used in the creation of blood-blisters.

BELT SANDER:
An electric sanding tool commonly used to convert minor touch-up jobs into major refinishing jobs.

HACKSAW: One of a family of cutting tools built on the Ouija board principle… It transforms human energy into a crooked, unpredictable motion, and the more you attempt to influence its course, the more dismal your future becomes.

VISE-GRIPS:
Generally used after pliers to completely round off bolt heads. If nothing else is available, they can also be used to transfer intense welding heat to the palm of your hand.

OXYACETYLENE TORCH:
Used almost entirely for lighting various flammable objects in your shop on fire. Also handy for igniting the grease inside the wheel hub out of which you want to remove a bearing trace…

TABLE SAW:
A large stationary power tool commonly used to launch wood projectiles for testing wall integrity.

HYDRAULIC FLOOR JACK:
Used for lowering an automobile to the ground after you have installed your new brake shoes, trapping the jack handle firmly under the bumper.

BAND SAW:
A large stationary power saw primarily used by most shops to cut good aluminum sheet into smaller pieces that more easily fit into the trash can after you cut on the inside of the line instead of the outside edge.

TWO-TON ENGINE HOIST:
A tool for testing the maximum tensile strength of everything you forgot to disconnect.

PHILLIPS SCREWDRIVER:
Normally used to stab the vacuum seals under lids or for opening old-style paper-and-tin oil cans and splashing oil on your shirt; but can also be used, as the name implies, to strip out Phillips screw heads.

STRAIGHT SCREW DRIVER:
A tool for opening paint cans. Sometimes used to convert common slotted screws into non-removable screws and butchering your palms.

PRY BAR:
A tool used to crumple the metal surrounding that clip or bracket you needed to remove in order to replace a 50 cent part.

HOSE CUTTER:
A tool used to make hoses too short.

HAMMER:
Originally employed as a weapon of war, the hammer nowadays is used as a kind of divining rod to locate the most expensive parts adjacent the object we are trying to hit.

UTILITY KNIFE:
Used to open and slice through the contents of cardboard cartons delivered to your front door; works particularly well on contents such as seats, vinyl records, liquids in plastic bottles, collector magazines, refund checks, and rubber or plastic parts. Especially useful for slicing work clothes, but only while in use.

SOB TOOL:
Any handy tool that you grab and throw across the garage while yelling “SonOfaBlister” at the top of your lungs. It is also, most often, the next tool that you will need.

Courtesy of Floyd T Greenman EA in Northridge, CA

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Clean jokes preferred.

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