Will It Take a Crisis to Fix Fiscal Policy?
Unless current policies are reformed, the national debt will continue to grow relative to GDP until a sovereign debt crisis, like those in Ireland and Greece, is inevitable. Although the nation is becoming more concerned about spiraling debt and a presidential fiscal commission and other groups have suggested reforms, the president and congressional leaders have been unwilling to recommend specific policy reforms. Consequently, it is becoming more and more likely that policymakers will not undertake necessary reforms until a financial crisis forces their hand. (This paper will appear in the April 2011 issue of Business Economics.)
Closing Loopholes Won’t Be Simple
New York Times’ Room for Debate: The United States has one of the world’s highest corporate tax rates, but many large U.S. corporations pay little U.S. tax.Eliminating special interest loopholes could pay for some, but not much reduction in the corporate rate.The main problem is that it is hard for one country to tax entities that transcend national boundaries.A better approach would tax more corporate income at the individual shareholder level.The Presidents Fiscal Commission and the Bipartisan Policy Center both recommend reducing individual and corporate tax rates and taxing capital gains and dividends as ordinary income.
Cutting Tax Preferences is Key to Tax Reform and Deficit Reduction : Before the Senate Committee on the Budget
Donald Marron’s testimony before the Senate Committee on the Budget on reforming the tax code.
Reforming Federal Taxes: Lessons From History : Before the Senate Committee on the Budget
Eugene Steuerle’s testimony before the Senate Committee on the Budget on reforming the tax code.
Health Care Brawl: All or Nothing Doesn’t Work
The ongoing debate over health reform at times almost appears like a sporting event, with Democrats and Republicans trying to name winners and losers in passing or repealing legislation. But in my Fiscal Times op-ed this week, I explain why, when it comes to health reform, this winner-take-all mentality misses a major point: government programs, whether well designed or poorly designed, need to work within budget constraints. While such constraints inevitably identify losers relative to an open-ended budget (which, like deficits, can hide the losers), they do lead to far better budget and health policy.
The Budget Process: A Maze Perverted by Trickery
The congressional budget process has been so perverted that it no longer imposes much discipline on fiscal decision-making, comments Rudolph Penner, a former director of the Congressional Budget Office. Penner explains how the situation arose and what to do about it.
Debt Ceiling: Geithner Won’t Let Us Default
Treasury Secretary Geithner recently warned that the U.S. may default if Congress doesn’t increase the federal debt limit. In this guest commentary at CNN Money, Donald Marron explains how Geithner will make sure that the U.S. does not default on the public debt, even if Congress is slow to increase borrowing authority.
Important Tax Law Changes for 2010
Courtesy of IRS
Taxpayers should make sure they are aware of many important changes to the tax law before they complete their 2010 federal income tax return.
Here are several important changes that the IRS wants you to keep in mind when you file your 2010 federal income tax return in 2011.
Health Insurance Deduction Reduces Self Employment Tax In 2010, eligible self-employed individuals can use the self-employed health insurance deduction to reduce their social security self-employment tax liability in addition to their income tax liability. As in the past, eligible taxpayers claim this deduction on Form 1040 Line 29. But in 2010, eligible taxpayers can also enter this amount on Schedule SE Line 3, thus reducing net earnings from self-employment subject to the 15.3 percent social security self-employment tax.
Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. Premiums paid for coverage of an adult child under age 27 at the end of the year, for the time period beginning on or after March 30, 2010, also qualify for this deduction, even if the child is not the taxpayer’s dependent.
As before, the insurance plan must be set up under the taxpayer’s business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan. Details, including a worksheet, are in the instructions to Form 1040.
First-time homebuyer credit You must meet the required deadlines to be eligible to claim the credit. You must have bought — or entered into a binding contract to buy — a principal residence on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed or gone to settlement on the home on or before Sept. 30, 2010. Because of the documentation requirements for claiming the credit, taxpayers who claim the credit on their 2010 tax return must file a paper — not electronic — return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, and a properly executed copy of a settlement statement used to complete the purchase.
Taxpayers who claimed the first-time homebuyer credit for a home bought in 2008 must generally begin repaying it on the 2010 return. In most cases, the credit must be repaid over a 15-year period. Many of those affected by this requirement received reminder letters from the IRS.
A repayment requirement also applies to a taxpayer who claimed the credit on either their 2008 or 2009 return and then sold it or stopped using the home as their main home in 2010. Use Form 5405 to report the repayment.
In addition, certain members of the armed forces and some other taxpayers still have time to buy a home and take the credit. See Form 5405 and its instructions for details.
Standard Mileage Rates for 2010 The standard mileage rate for business use of a car, van, pick-up or panel truck is 50 cents for each mile driven. The rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 16.5 cents per mile. The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.
Tax Breaks Extended Several tax breaks that expired at the end of 2009 were renewed and can be claimed on 2010 returns. They include:
- State and local general sales tax deduction, primarily benefiting people living in areas without state and local income taxes. Claim on Schedule A, Line 5.
- Higher education tuition and fees deduction benefiting parents and students. Claim on Form 8917.
- Educator expense deduction for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250, Claim on Form 1040, Line 23 or Form 1040A Line 16.
- District of Columbia first-time homebuyer credit. Claim on Form 8859
For further information about these changes visit the IRS website at http://www.irs.gov.
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Just in time for Valentine’s Day – Taxes for Partners!
Partners’ Filing Status Varies Federal to State, and State to State
Courtesy of CCH – This article is SO important for all domestic partners to read!
(RIVERWOODS, ILL., February 11, 2011) – Whether opposite-sex or same-sex marriage, civil union or domestic partnership, your relationship can have tax consequences, according to CCH, a Wolters Kluwer business (CCHGroup.com).
These tax consequences can be both beneficial and detrimental. And, for many people – particularly those in same-sex partnerships – they can just be confounding, as federal law does not recognize same-sex marriages or civil unions while a growing number of states do. As a result, these couples often find they need to complete taxes one way for their federal income tax returns and another for their states tax returns.
“When a couple has joint property or has children or where spouses are earning significantly different income and paying different bills, it can get very complicated trying to allocate and report this separately for tax purposes,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA.
Below CCH outlines some of the tax perks and pitfalls for same-sex couples.
Federal Tax Considerations
The Defense of Marriage Act (DOMA) of 1996 defines marriage as a union between a man and a woman. This precludes same-sex partners from being recognized as spouses under the Internal Revenue Code.
As a result, same-sex couples cannot file their federal tax returns jointly – even if recognized as married by their state. Rather, each partner must file as single or as head of household.
The tax consequences of this can be good or bad, depending on a number of factors.
For example, the income levels for joint filers in the 10- and 15-percent tax brackets are at least twice as high as they are for single filers, providing married couples some relief, which same-sex couples can’t take advantage of as single filers. But, above that level, some married couples may find themselves paying more in taxes, depending on who earns the income and the credits and deductions available to them.
Couples who must file separately can use this to their advantage. For example, shifting interest income from a joint brokerage account to the lower income earner and moving joint deductions, such as eligible charitable contributions, to the higher income earner.
Income shifting for same-sex partners, however, may be limited in states with community property laws that recognize domestic partnerships (California, Washington and Nevada). Community property rules generally require that earned income be split equally between marriage partners for both federal and state taxes. The IRS has issued internal guidance indicating that the community property rules of the state will be applied to domestic partners where the state applies the rules to domestic partners. The fact that the IRS does not recognize same-sex partners makes this even more confusing: they must file separately, but it appears that they will be required to claim the income 50-50.
“Many people will want to have a tax professional help them with these returns as it is complicated, and it’s a good idea to provide an explanation with both partners’ tax returns when they’re filed,” said Luscombe.
Lower income couples not recognized as married under federal law may also be able to lower their taxes by filing separately. For example, the separate incomes of two parents each with children could make them eligible for credits like the earned income tax credit (EITC). However, their combined income as a married couple could mean they would no longer qualify for the EITC, which for 2010 provides a refundable credit of up to $5,666.
Not being recognized as a couple for federal tax purposes could be an advantage when selling appreciated property. For example, because a same-sex couple is not seen as related under federal tax law, one partner can sell an asset to a second partner under a deferred gain sale. That partner can then sell it to a third party with the initial partner not realizing the gain for many years into the future, based on the terms of the sale from the first to second partner.
There also are some clear disadvantages for couples who are not able to file jointly. For example, a spouse is automatically a “dependent” for tax purposes, providing a $3,650 (for 2010) and $3,700 (for 2011) exemption to joint filers. Being recognized as a spouse also means that benefits, such as employer-paid healthcare coverage, which covers the worker, their children and/or their spouse, is tax-free.
For same-sex couples – particularly those with children – not being able to recognize this benefit as tax-free is quickly confusing.
“The taxpayer would need to determine what portion of the coverage should be allocated to themselves and their children and how much to their partner, and then pay taxes on that portion,” said Luscombe. “There’s no easy or clear-cut formula for doing this.”
Tax laws for pensions and inheritances also favor traditional marriages as a surviving spouse in a two-sex marriage can inherit a husband’s or wife’s estate without any federal estate tax. However, in any other relationship, federal estate taxes would apply.
State Tax Considerations
While same-sex couples can’t file their federal tax returns jointly, they can file jointly in a few states.
Currently, five states and the District of Columbia, allow same-sex marriages: Connecticut, Iowa, Massachusetts, New Hampshire and Vermont. With the exception of New Hampshire, which has no broad-based income tax, all of these states allow same-sex couples to file joint state income tax returns.
An additional 10 states with civil union or domestic partnership laws have varying rules: California, Colorado, Hawaii, Illinois, Maine, Nevada, New Jersey, Oregon, Washington and Wisconsin. Three of these states allow same-sex couples to file state income tax returns jointly: California, Oregon and New Jersey. However, four other states do not allow joint filing for these couples: Colorado, Hawaii, Maine and Wisconsin. Nevada and Washington do not have state income taxes and Illinois’ civil union law goes into effect for 2011, so it does not affect 2010 Illinois tax returns.
Another provision under DOMA provides that individual states are not required to recognize same-sex marriages performed under another state’s law. Currently, only Maryland, New York and Rhode Island recognize same-sex marriages performed in other states. None of these states allows same-sex couples to file joint state tax returns.
| State | Same-sex Partnerships | Allows Joint State Filing |
| California | Civil union / domestic partnership | Yes |
| Colorado | Civil union / domestic partnership | No |
| Connecticut | Marriage | Yes |
| District of Columbia | Marriage | Yes |
| Hawaii | Civil union / domestic partnership | No |
| Illinois | Civil union / domestic partnership | N/A for 2010 |
| Iowa | Marriage | Yes |
| Maine | Civil union / domestic partnership | No |
| Maryland | None; recognizes other states’ unions | No |
| Massachusetts | Marriage | Yes |
| Nevada | Civil union / domestic partnership | No state income tax |
| New Hampshire | Marriage | No state income tax |
| New Jersey | Civil union / domestic partnership | Yes |
| New York | None; recognizes other states’ unions | No |
| Oregon | Civil union / domestic partnership | Yes |
| Rhode Island | None; recognizes other states’ unions | No |
| Vermont | Marriage | Yes |
| Washington | Civil union / domestic partnership | No state income tax |
| Wisconsin | Civil union / domestic partnership | No |
“Generally, only in states where same-sex partnerships are recognized and they are allowed to file jointly, do partners realize some of the tax advantages of being a couple,” said Luscombe.
For example in New Jersey, the surviving domestic partner is exempt from the state’s inheritance tax. But that’s not the case in every other state. Often times, such as with estate and gift taxes, state rules are based on federal rules. As a result, same-sex couples often not only have to prepare separate federal income tax returns but also prepare a pro forma federal tax return as a married couple so that they can calculate their state tax and complete that return.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is the leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).
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News Flash – IRS Amnesty on Offshore Accounts
Second Special Voluntary Disclosure Initiative Opens;
Those Hiding Assets Offshore Face Aug. 31 deadline
Courtesy of IRS
[TaxMama note: We have been anxiously awaiting this announcement. IRS had mentioned that this was coming. This will be a huge help to people who never meant to conceal their ‘offshore’ accounts. They just didn’t realize they needed to file this special report with the US Treasury Department.]
WASHINGTON — The Internal Revenue Service announced today a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.
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“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing,” said IRS Commissioner Doug Shulman. “This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”
The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.
“As I’ve said all along, the goal is to get people back into the U.S. tax system,” Shulman said. “Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”
The new initiative announced today – called the 2011 Offshore Voluntary Disclosure Initiative (OVDI)—includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.
For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.
The IRS is also making other modifications to the 2011 disclosure initiative.
Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty.
The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.
The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.
“This is a fair offer for people with offshore accounts who want to get right with the nation’s taxpayers,” Shulman said. “This initiative offers them the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well.”
The IRS is handling processing of the voluntary disclosures in centralized units to more efficiently process the applications.
The IRS will also launch a new section on www.IRS.gov that includes the full terms and conditions on the 2011 Offshore Voluntary Disclosure Initiative, including an extensive set of questions and answers to help taxpayers and tax professionals. The web site also includes details on how people can make a voluntary disclosure.
In the first voluntary disclosure program in 2009, taxpayers faced up to a 20 percent penalty covering up to a six-year period. Taxpayers came forward with about 15,000 voluntary disclosures in that effort covering banks in more than 60 countries.
Shulman said IRS efforts in the international arena will only increase as time goes on.
“Tax secrecy continues to erode,” Shulman said. “We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.”
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