Deficit Reduction. Tax Reform, and Budget Baselines
How can it be that one commentator can blast the tax reform plan proposed a few weeks by the co-chairs of President Obama’s fiscal commission as a tax cut for the rich while another, looking at exactly the same proposal, sees it as a tax increase?
It’s all about budget baselines. There is nothing more boring, even to budget wonks, but the reference point against which you measure tax changes is critical to how you see those proposals. It doesn’t help that in today’s fiscal debate there are at least three different baselines floating around. Unfortunately that makes it easy for politicians and their partisans to pick the one that helps advance whatever argument they want to make. And make no mistake: This is all about politics, not merit.
Do you want to compare tax changes to the law that applied in 2009? Or would you prefer to compare those revisions to the Tax Code of a decade ago? Or how about measuring it against your best guess of what the law will be five years from now? This is something like a football game where you don’t win by scoring more points than your opponent, but by piling up more than you were supposed to score in a pre-season game scheduled for next August. For a fan, this can be somewhat, let us say, disorienting
But why should anyone who does not own a green eyeshade actually care? Here’s why: Look at what would happen to the highest-earning one percent of households (those earning more than $2 million on average) under one variation of the plan offered by the Obama fiscal commission co-chairs, Erskine Bowles and Alan Simpson. This proposal would eliminate all deductions, credits and exclusions except for the earned income credit and child credit, sharply reduce income tax rates, and continue to exclude employee benefits from payroll tax. The Tax Policy Center estimates it would result in an average federal tax rate of 33.7 percent by the time the proposal is fully effective in 2015.
No argument so far. But is a 33.7 average tax rate a tax cut or a tax increase? Depends on what you measure it against. Take a trip with me through the budget accounting looking glass to see what’s going on.
If you compare Bowles-Simpson to the law that applied at the end of the Clinton Administration, it turns out to be an average tax cut of $8,000 for those top one percent of earners. That’s because under this baseline (called current law since today’s law calls for all the Bush-era tax cuts to expire) their average tax rate would be 34.1 percent, a bit higher than the 33.7 percent they’d pay under Bowles-Simpson. Thus, critics on the left can shout “tax cut for the rich.”
But compare the plan to the law that was in effect last year: Assume the 2001 and 2003 tax cuts endure for everyone, the AMT remains patched, and the estate tax comes back under 2009 rules. Now, Bowles-Simpson raises taxes by an average of $76,000 for that top one percent. Why? Because under this “current policy” baseline, the average tax rate for these lucky duckies would be just 30 percent, much lower than the 33.7 percent they’d pay if Bowles-Simpson becomes law.
Still with me? Great. Because it turns out that Bowles and Simpson scored their own proposal with yet a third baseline developed by the Congressional Budget Office. That one assumes some tax cuts are extended while others are not. I’m not even going there.
The root of this problem lies with the massive and growing uncertainty over tax law. These days, huge chunks of the Revenue Code are temporary. Individual rates that were set in 2001 are due to rise in a month. The Alternative Minimum Tax would have hit close to 30 million middle class households by now. Thanks to years of “temporary” fixes, 85 percent remain exempt– except the most recent fix expired a year ago. Do you assume that Congress continues to protect these middle-class voters? Or that is will extend the Bush-era tax rates for everyone? Or for no one? Oy.
This is hardly the first time politicians have played the baseline game. For instance, when Obama submitted his first budget, he assumed that nearly all of the Bush-era tax cuts and the AMT fix were permanent and thus built into the budget baseline. That way, he could propose extending them without having to account for the nearly $3 trillion ten-year cost. After all, if you assume they are already the law, continuing them costs nothing.
People often ask which baseline is right. My honest answer: I have no idea. TPC’s modelers measure tax changes relative to both current law and current policy. My own preference is to assume the Bush tax cuts will be extended—both because I suspect that’s what is going to happen and because most normal people are likely to compare tax changes to what they pay now, not what they paid a decade ago. But it would be nice if, as we continue to play the budget game, we could at least agree on a way to keep score.
Getting Married Now or Later
November 29, 2010 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Robyn in the TaxQuips Forum, who needs to make a decision. Essentially, it boils down to should my boyfriend and I get married this year or not, in order to get the best tax advantage. They have a child together – and one that is just hers. Read the details here.
Dear Robyn,
Yes, it’s probably time to get married – at least for your child’s sake.
As of right now, since you are not married, you can each file as head of household, if your child’s father claims the child you have together – and you only claim your daughter. Since he will have only worked full time for a few months, the Earned Income Credit might just be substantial – along with one of the Education Credits or expenses. Pray that Congress extends the American Opportunity Credit so he can get a refundable credit for his tuition in 2010.
If you get married this year, your combined income might eliminate some of this benefit. But it’s hard to give you good advice without numbers.
So…see if you can invest in a two hour consultation with a tax professional to run some of the alternatives to see which works out best for you. If you can’t afford it, do it yourself. Run the various scenarios yourself using TurboTax’s TaxCaster or H&R Block’s 2010 Tax Estimator.
Test for:
Him Single – You Head of Household.
Him Head of Household – You Head of Household.
Married Filing Jointly
That will help you decide about this year. If it turns out that you are better off being single for 2010, then go ahead and get married in 2011. Good luck!
And remember, you can find answers to all kinds of questions about getting married and other tax issues, free. Where? Where else? At www.TaxMama.com.
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IRS Audit Guide
The IRS made 10 videos entitled “Your Guide to an IRS Audit” to provide basic information about the small business audit process.
Those tax audit videos cover the following 10 topics:
1. What is an IRS audit?
2. You’ve been contacted – what should you do next?
3. Should you get a representative?
4. How do you prepare your records for the audit?
5. What happens when you have an audit at the IRS office?
6. What happens when the IRS audit occurs at your location?
7. What happens after your first appointment?
8. What happens when you agree with the audit findings?
9. What happens when you disagree with the audit findings?
10. If you owe, what are your payment options?
If you have any questions about your audit, you may wish to consult an income tax professional. Call tax attorney Mitchell A. Port at (310) 559-5259.
Taxes and the Deficit Reduction Plans
Plans to rein in the U.S. budget deficit remain in the spotlight as the Bipartisan Policy Center’s Debt Reduction Task Force released its plan to solve the debt crisis. TPC expert William Gale offers analysis of the recommendations and includes recommendations of his own.
Happy Thanksgiving
November 25, 2010 by Tax Blog
Filed under Questions & Answers
Dear Family,
Today, I just want to say THANK YOU.
This morning, on the verge of waking up, all bundled up under the covers, with the heater making the room all cozy…I was thinking warm and loving thoughts.
Of family and friends.
Of TaxMama® family and friends.
Of all the different people I interact with every day and every week.
I was going to identify each of you by name and special position in my life.
But, when I thought of each one of you with love, I found that there are just so many people who make my life good, and solid and mentor me and help me behind the scenes, and even up front, where you can see them – that it would take pages and pages to list them all here.
You know who you are. Each one of you, who takes the time to call me, or send me a note, or a joke, or a project, or refers me to someone who calls me, or who asks me a question – or answers one for me, or who smiles at me, suddenly in the middle of a stressful day, or just looks up and meets my eye – in person or virtually.
It sometimes feels so lonely, and isolated, sitting here, at my desk, in my living room – seeing the world outside, flashing by, each day, while I struggle to meet deadlines. But…
Wow. I had no idea just how blessed I really am.
THANK YOU for your love, participation and patience.
Do you want to feel the same way?
Make a list of each person who enhances your life, each day, in some way.
If you’ve been feeling alone, you will also be astonished at how un-alone you really are.
In fact, if you’ve been feeling alone, which often happens this time of year, reach out and invite someone you know, or work with, to join you for a meal, or a play, or ice skating, or a even something as simple as a walk in the park. Don’t wait for an invitation from others. Perhaps they are too shy to ask you – or think you are too popular or important to accept their humble invitation.
As you race off for the holiday weekend, let me leave you with some peaceful thoughts.
Please, please, slow down.
Stop. Look around you. Really look.
You will leave fewer things behind at home or the office.
Look up directions (if you’re driving) and timetables (if using planes, trains, buses, etc.)
You will experience less stress.
You will not exhibit road rage – or less of it.
Listen.
Listen to the people around you. Especially the children.
Listen to the road reports.
Listen to delays.
Listen to instructions calmly.
And you will see and experience the things and people you love and appreciate.
With love and gratitude.
Eva
Eva Rosenberg, EA
Your TaxMama®
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Donating Real Estate
November 24, 2010 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Peggi in the TaxQuips Forum, with this problem. “I have a rental house that is in a distressed area. I cannot get it rented, it keeps getting broken into. I can donate the house to the LRA for a tax credit. Would this be more beneficial than trying to sell it cheap, say like $10,000. The house is worth about $40,000.”
Dear Peggi,
That sounds like a tough position to be in. But it does sound like a great place for a community association to be able to use, or make available for people who need lodging. It probably won’t get broken into if someone is using the home.
So, yes, it is a good idea to donate it. You will need a formal appraisal from a qualified appraiser.
Perhaps you can negotiate that with your charity – to have them pick up the cost of the appraisal; or perhaps a member of their organization is an appraiser and can donate the service.
The amount of your contribution will be the fair market value of the house – perhaps $40,000.
However, the amount you can actually deduct will be limited, based on a few factors:
- The nature of the charity to whom you donate it
- Whether or not the property has appreciated in value since you bought it or inherited it.
- Your own adjusted gross income for the year of the donation
- Whether the year you donate it has an itemized deduction phase out
- There is none THIS year.
- There WILL be one next year.
However, any amount you cannot use this year will be carried forward to next year. You can read more about the limits in Chapter 2 of IRS Publication 526. And more about how contributions work, in general in the same pub.
I do urge you to sit down with a good tax professional who can work out the actual cash benefit of the donation for you.
And remember, you can find answers to all kinds of questions about donating property and other tax issues, free. Where? Where else? At www.TaxMama.com.
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Ask TaxMama Issue 577 – Pre-Thanksgiving
November 24, 2010 by Tax Blog
Filed under Questions & Answers
Dear Family,
What a nice way to start the day. I just heard from Rasmussen College this morning. They just published their list of the 20 best blogs for accounting students. Delightfully, TaxMama and many of my friends are on the list. But there are others I’ve never heard of – and will look forward to getting to know.
This is Rasmussen College’s first annual list. The students’ responses to previous blogs about individual resources has been very positive. The list is a reflection, both on the tax professionals who take the time to provide useful and entertaining information – and on Rasmussen’s Accounting Faculty, who have extensive business and Internet knowledge. I think I’ll be enjoying their blogs. Won’t you?
Someone sent me a note this week, telling me about the scary news – Amazon.com lost their most recent battle against the State of New York. They are appealing, of course. In the meantime, every business that has affiliates in New York must be collecting NY sales taxes and filing tax returns in NY. That means companies have continued to lock out NY affiliates(people who are paid for having a link on their websites) because it’s too expensive for them to operate with a NY nexus. This is one of the issues I have been alerting you to for years in Chapter 12 of Small Business Taxes Made Easy (and beforehand). There’s updated information about this affects your Internet business in the 2nd edition.
That’s why I have such a long checklist in the first chapter of Small Business Taxes Made Easy. I’ve come to realize how easy it is to overlook a license we should have gotten. Incidentally, if you are concerned about your business being in compliance, do you want a short-cut? Here it is http://snurl.com/license-tax ! These folks will give you a summary of all the licenses and registrations you need.
Upcoming Live Classes
Wednesday December 1, 11:00 am PT – Eva Rosenberg, EA
Homebuyers Credits for Tax Professionals
Upcoming on CPE LINK – with CPE for CPAs, EAs, and more
http://taxmama.com/earn-cpe-without-leaving-the-office/
Preview the series on YouTube
http://www.youtube.com/watch?v=UCMdSFFTwI8
The IRS Practice Series (all times in Pacific Time)
Team taught with Eva Rosenberg, EA, Tom Buck, CPA and Sonya Wilt, EA
Dec 7, 10:00am – 6 Simple Steps to an Offer-in-Compromise (form 656)
Dec 10, 9:00am – The Un-agreed Collection Alternatives and Appeals
http://www.cpelink.com/teamtaxmama
SELF-STUDY at CPE LINK:
Homebuyers Credits for Tax Professionals
The specific laws related to your clients. How to get it rigth the first time. What to watch out for.
And how to overcome IRS Rejections.
IRS Practice Series: Overview of Collection Issues – Price = ZERO:
This on-demand webcast provides a broad overview of the collections process. From preparing the Power of Attorney – IRS Form 4868, to freezing the collection activity, to Offers-in-Compromise and Appeals, the course will explore the numerous collection issues a practitioner may encounter and lay the ground work for the IRS Practice Series. Topics will be covered in more detail in the dozen courses of The IRS Practice Series – leading to a Tax Mediary (CTM) Certificate upon completion of the series.
http://www.cpelink.com/teamtaxmama
EA Class News
Someone followed my advice about how to get more work, even before year end. She just established a solid relationship with a law firm, who instantly sent her a client paying her a small fortune to prepare several years of tax returns.
Follow TaxMama’s career advice – and your earnings WILL increase!
We had such fun Thursday evening during our informal class. People ask really good questions. Believe me, even after all these years, even I learn new things.
http://irsexams.com/registration/
Remember, you can get a 10% discount on the EA Class if you register for TaxMama’s Family first.
http://taxmama.com/membership/family-membership/
The discount code can be found in the Family Look-Ups resource.
http://taxmama.com/family-member-resources/
Other TaxMama News:
Suze Orman’s new MoneyMindedMoms.com is going strong.
You can ask her questions in the forum – Suze is actually dropping by an answering your questions, just as I do here. Join us and speak to Suze. Here are some of the questions Suze answered this week:
- Is this a good time to file for bankruptcy?
- Not Everything is Taxable; Some of the Good Things in Life are Free. Jen Goode points out that DIY isn’t always the best idea. But…she gives you 5 instances when it does work. Phyllis Shelton covers a touchy subject – the impact of long-term care on the family. This gets scarier as we and our parents get older. Liz Strauss tells you about Kids Wish Lists for the Holidays. (She doesn’t know that I pioneered the idea about 15 years ago, creating My WishList and the idea of the universal WishList…but that’s another story.) Sabrina identifies the Leaks that Drain You – bad habits worth kicking. What a great idea. Tricia Meyers has a great idea for a party – and a frugal way to get the best books – Book Swapping Parties. Am I invited? Doreen Kukral, the queen of green helps us Eat Smart, by become Locavores (not people who eat locomotives, silly!) Find out what that means. It’s a great idea.
http://www.moneymindedmoms.com/articles/
At Equifax this week, TaxMama has fun, explaining the tax considerations of winning prizes on game shows – and winning lotteries. Ilyce Glink explains how to think about debt when you’re buying a home. Dan Solin gives advice in a desperately need area – how to improve your investment returns without increasing your risks. Can this really be done? Linda Rey explains an interesting-sounding concept – “Laddering” insurance policies. The Equifax Credit team explains how to protect yourself from credit repair scams.
http://www.equifax.com/blog/tax/en_ff
This week’s AccountingWeb.com blog offers you a special accounting poem, Twas the Week Before Thanksgiving. It also gives you the opportunity to add your own stanzas and win a copy of Small Business Taxes Made Easy, 2nd Edition – which will be out next month.
http://www.accountingweb.com/blogs/accountingweb/talk-taxmama
Incidentally, AccountingWeb has a new publication you might enjoy – Going Concern – focusing on keeping the profits flowing. http://goingconcern.com/subscribe/
In IRS News, The IRS wants to return $164.6 million in undelivered refund checks. Is your refund missing? Also, the IRSAC reports are out with recommendations on things that IRS needs to fix in their operations.
http://taxmama.com/category/asktaxmama/irs-news/
In Money Funnies today, we learn what’s really important.
http://taxmama.com/category/asktaxmama/money-funnies/
In TaxQuips this week, We start the week with Monty who has to deal with two sets of operating losses for one of his clients. Corporate Net Operating Losses . Someone told Liz that she might be able to report a capital loss for selling her inheritance at less than the value on the date of death. Selling Inheritance at a Loss. TaxMama tackles the 2011 Tax Cuts, to help us understand the real impact of not extending the tax cuts to the ‘wealthy’. 2011 Tax Cuts . We end the week with Joe, whose relatives are getting some very expensive, but useless advice about their inheritance from Dad, who died in the Bahamas last year. Bahamas Inheritance . http://taxmama.com/category/tax-quips/
November’s MarketWatch column next week, we will cover year-end tax tips for small businessowners.
http://www.marketwatch.com/Journalists/Eva_Rosenberg
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://taxmama.com/asktaxmama/ask-taxmama-issue-577
TaxNerd gear makes a bold statement year-round.
It helps attract the opposite sex!
Shop at www.taxnerd.net or http://www.zazzle.com/taxmama*
Hugs from your favorite TaxNerd,
http://www.zazzle.com/taxmama*
Eva Rosenberg, EA
Your TaxMama® is watching…out for you.
==========================
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2010 IRSAC Report Made Available
November 24, 2010 by Tax Blog
Filed under Questions & AnswersWashington — The Internal Revenue Service Advisory Council (IRSAC) issued its annual report today during a public meeting held in Washington, DC, delivering a report with a series of recommendations on a wide range of tax administration issues.
IRSAC made several recommendations based on its findings and discussions, in some of the following areas:
- Procedures related to filing for the Work Opportunity Tax Credit (WOTC).
- Electronic business returns with Employer Identification Number (EIN)/Name Control mismatches.
- Effectiveness of the Issue Management Program in Examinations.
- IRS implementation of uncertain tax position (UTP) reporting.
- Current filing requirements for Foreign Bank and Financial Accounts (FBAR).
- Proposed continued education program and sponsor requirements for tax return preparers.
The primary purpose of IRSAC, which draws its members from the tax professional and academic communities, is to provide an organized public forum for senior IRS executives and representatives of the public to discuss relevant tax administration issues.
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Keeping Medical Bills Down
November 24, 2010 by Tax Blog
Filed under Questions & Answers
Recently a friend told me that she is paying more for her share of the company’s health insurance. Several others have had the same complaint. We all through Obama’s Health Care plan would reduce our costs, based on the concept of ‘economies of scale.“
Well then, the best way to keep our medical costs low is to stay healthy. Right?
Here’s an excellent way to get your exercise.
Just in case you want to get a little extra exercise, make one for your friends.
Here’s how at the SomeWhatSimple.com website.
Courtesy of Floyd Greenman, EA, in memorium.
Please remember to send us your humor.
Clean jokes preferred.Read more Money Funnies here:
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Bahamas Inheritance
November 24, 2010 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Joe in the TaxQuips Forum, with this odd tale. “My cousin’s wife whose [missing word] was born in Canada and is also a U.S. citizen will be receiving about $150,000 inheritance from her father’s estate. My cousin and his wife live in the US. Her parents are Canadian citizens. Her father, who was living in the Bahamas the past few years, passed away in 200. He was living in the Bahamas at the time of his death. My cousin has no idea if there are Canadian or Bahamian taxes paid from the estate. My cousin has been trying to find answers to his questions which are: What, if any, US Federal and/or state taxes are there on this inheritance? Her mom, who is still living, will receive the the entire estate except for the $150,000 that he provided as a bequest to his daughter. They sought help through a high-priced accountant recommended by a local accounting organization, but he provided little to no help – and the accountant’s fee was nearly $1000. Can you provide some tax guidance on this issue?”Hi Joe,
I guess I don’t understand the problem, or why it cost $1,000 NOT to get an answer? The US inheritance issues are pretty straightforward.
1) There are no US (federal) taxes on an inheritance.
2) To bring in that much money in one year, your cousin’s wife will have to fill out a Form 3520 to report the source of the funds – and to prove it was not taxable.
3) As Doris pointed out, some states may have inheritance taxes. The easiest way to find out, if she does not have her own tax professional in her state? Call up the state’s tax authority and ask them. Again – free.
4) Was the word you are missing in the first phrase above “father”? “her Father was a born in Canada and is a US citizen”?
If that’s the case, his ESTATE may face US taxes. In 2009 there was still a US estate tax in place. If her mother is not a US citizen, the total tax-free estate might be limited to $60,000. If Mother is a US citizen, the exclusion is $3,500,000 – and there are special provisions for spouses. But if the estate is at that level, you do need a US estate tax attorney involved.
5) As to the Bahamas and Canada…I doubt there are taxes for the heir. Rather, her father’s estate may face taxes, or in Canada, capital gains taxes due upon death. Her mother will have to sort that out with her attorney.
If the accounting firm didn’t give her enough help to get this far – find out just what they did do for the money. Perhaps they did provide some useful assistance? If not, request a refund. No on should have to pay when all someone does is bill for wasted time.
And remember, you can find answers to all kinds of questions about inheritance taxes 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!]
Please post all Comments and Replies in the new TaxQuips Forum
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