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To keep tabs on your federal tax refund as it winds its way through the system, you’ll need your social security, filing status, and the exact amount of the refund you have coming to you. Then head over to the IRS web site’s online refund tracking tool and plug in the numbers.

While you wait for it, read about ways our readers have told us how they spend their tax return. What about you? Are going to spend the money you get back, save it, or a little of both? Tell us in the comments.

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President Obama’s proposal to boost the Medicare tax is a key element of the compromise health bill that looks increasingly as if it is going to become law. The Joint Committee on Taxation estimates it would generate over $180 billion over the next decade. And exactly as intended, the tax increase would fall almost entirely on the top 1 percent of taxpayers, according to a new analysis by my Tax Policy Center colleagues.  

Obama would boost the Medicare tax by 0.9 percentage points for households with incomes over $200,000 for singles and $250,000 for joint filers. In addition, he’d impose a 2.9 percent tax on these same people on interest, dividends, annuities, and most other investment income. While the official Obama summary does not say so, the new tax would apply to capital gains as well. Add it up, and the 1.2 million taxpayers making $624,000 or more (their average income is about $2 million) would pay nearly 86 percent of this tax once it is fully effective in 2013.

On average, the Obama proposal would raise their taxes by more than $20,000. The top 0.1 percent of earners–those making more than $2.8 million– would get hit with a tax increase of more than $120,000. By contrast, nearly everyone else would get no tax hike at all under this proposal.

Oddly, senators who were adamantly opposed to an income tax surtax that the House included in its health reform bill seem perfectly fine with this plan. Since the two levies raise roughly the same money from the same people, I’m not sure why. But sometimes in Washington it is all about framing rather than reality.

Obama probably doesn’t hurt his cause when he says he’d use some of the money to help make Medicare solvent. That’s sounds really good. Unfortunately it is mostly meaningless. The general fund already pays a large share of Medicare. Revenues allocated to making the Medicare trust fund “solvent” would be dollars unavailable to, for instance,  close the “donut hole” in the Medicare drug benefit (three-quarters of which is funded through income tax dollars). It is all the same money.

Converting this chunk of Medicare funding to a progressive income tax, rather than a regressive payroll levy, is an interesting idea. But doing it in this ad hoc way, and only for the very wealthiest taxpayers, seems pretty clumsy. But the worst part is that it will force me to stop calling the Medicare levy a payroll tax. If this bill passes, it will henceforth have to be known simply as the Medicare tax. Something else to try to remember.   

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Hi Madhu,

Actually, this is much easier than you think.

File an MFJ IRS tax return. You will both benefit.

Then, in MN, file a non-resident/part-year resident return. Show yourself as a resident. Show your wife as a non-resident.

Do the same thing in Wi, expect your wife is the resident – and you are the non-resident.

You won’t end up paying any taxes to states where you or your wife don’t income.

Any competent tax pro can help you with that. It’s a bit complicated to do yourself.

Good luck! And I hope this all works out for you both.

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

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If you’re rich, the best estate planning advice would be to die quickly. If you’re not, the best advice is to either review or rewrite your estate planning documents to make sure your heirs aren’t left high and dry if you die.

That’s because estate taxes that could allow Uncle Sam to nab up to 45% of your bequeathed assets are currently — and very temporarily — kaput.

A decadelong phase-out of the estate tax eliminated the tax completely as of January. The catch: If nothing’s done, estate taxes will boomerang back to historic levels in 2011. That means any bequest of more than $1 million would be hit with a heavy levy on any amount above that limit after December.

But estate planning isn’t just about taxes, and it’s not just for the rich.

The legal vacuum that was created by the temporary elimination of the estate tax has created potential pitfalls even for people with modest estates.

For example, if you were to die this year and had an old “by-pass” trust, the elimination of the estate tax could cause you to accidentally disinherit your spouse, said Clay Stevens, director of strategic planning for Aspiriant, a wealth management firm in Los Angeles.

These trusts, aimed at reducing estate taxes, often have boilerplate provisions for bequeathing children an amount equivalent to the estate tax “exclusion.” This year, that exclusion is unlimited, so everything goes to your kids and unintentionally there would be nothing left for a spouse, he said.

Then, too, as long as the estate tax is phased out, so is something called the “step-up” that reduced capital gains taxes on your appreciated assets after you died.

You can still get that break if you make a few strategic fixes to your estate plan this year, Stevens said. But, if you do nothing, your heirs could face capital gains taxes on all but a pittance of your appreciated property.

“This is the one year when you can’t procrastinate,” said Herbert E. Nass, a New York lawyer and author of “101 Biggest Estate Planning Mistakes.” “Absolutely everyone should review their documents.”

What if you have no documents? Then get cracking.

Studies indicate that the vast majority of Americans don’t have wills, trusts or powers of attorney. That can leave heirs in a rough spot, said Danielle Mayoras, coauthor with her husband, Andy, of “Trial & Errors: Famous Fortune Fights.”

Act now, avoid trouble later

Ignoring your estate plan can land your children with ill-suited guardians or give them a pile of cash that they’re too young to handle, she said.

If you become incapacitated before you die, it can mean that your care could be dictated by a stranger — or even an enemy. And, doing nothing can cause your heirs to bicker and battle in court — sometimes for decades.

“People never think their family is going to end up fighting,” Andy Mayoras said. “But, especially in this economy, families are fighting over money more and more.”

Nass contends that neglect of an estate plan may have cost one wealthy New Yorker his life. Wall Street titan Ted Ammon, in the throes of an acrimonious 2001 divorce, was killed by his estranged wife’s boyfriend, Nass said. The boyfriend went to prison, but the estranged wife got the estate because Ammon hadn’t yet changed his will.

“That was big news out here for a long time,” he said.

What do you need? First and foremost you need a will, which distributes your assets at death. Wills can be simple — a matter of a few paragraphs — or very complex. It depends on your wishes and whether you expect to draw up additional documents, such as a trust.

If you don’t want a trust, your will should name personal guardians for any minor children, economic guardians who can distribute assets to your children and other heirs, and an executor who will make sure the terms of the will are carried out. Finally, it should include a simple statement about what you own and who should get it.

If you’re leaving assets through a will, it’s wise to also execute powers of attorney for both financial and healthcare matters, Stevens adds. That will give somebody you trust the ability to pay your bills and make medical decisions for you if you become incapacitated before you die.

But if you want your heirs to be able to avoid probate — a time-consuming and costly legal process that involves a court reviewing the distribution of assets bequeathed through a will — you’d be better off to also create a trust. If you have a trust, your will essentially can be a one-liner: “I want all my nonretirement assets to go into my trust.”

(Retirement accounts such as IRAs should be left directly to people, not trusts. That gives your heirs the ability to withdraw those assets, and pay taxes on them, over a longer period of time.)

A trust would then distribute the assets based on the formula you’d drawn up. Trusts can accommodate difficult issues, such as whether you want to attach a few strings to your bequests as you might if you’re leaving assets to heirs who are not financially or personally responsible.

Divide and conquer . . . the IRS

Trusts also typically contain clauses that dictate who would handle your financial affairs should you become unable to handle them yourself. And many include a “by-pass” or a “two-step” provision that essentially splits the trust in two.

Splitting the trust is aimed at saving estate taxes. That’s because husbands and wives can leave each other all their assets without tax consequences, but if they want to leave money to anyone else, any amount over a set threshold is subject to tax.

The amount that’s “excluded” from estate taxes has been a moving target for the last 10 years, but is unlimited today and likely to amount to $1 million in 2011.

As a result, savvy couples with estates in excess of $1 million (in any year but 2010) would each execute a by-pass trust, leaving the amount of the estate tax exclusion to their kids or other heirs and the rest to their spouse.

That would preserve the estate tax exemption for the spouse who is the first to die. In the case of someone with $2 million in assets, that could save heirs a tidy $550,000 — or 55% of the second $1 million.

But the most important thing may be to simply make your wishes known so your heirs know that you’ve thought about them and how you’d like to provide for them when you’re gone. That alone could eliminate a lot of family bickering.

Both Nass and the Mayorases wrote books about what celebrities have done wrong with estate planning. They say they did so to give parents and their children a way of bringing up the topic to explore how they could do it better.

“It’s a way to get the dialogue started,” Andy Mayoras said.

Danielle Mayoras adds that entertainer Ray Charles’ estate plan provides a blueprint of how to do it right. He got his 12 children and their nine respective mothers in a room to talk about what he was planning, which was to give most of his money to charity. But everyone was provided for in some way, she said.

“The beauty of doing that is that everything is out in the open,” she said. “It gives the family some comfort and the ability to talk about it.”

Call Mitchell A. Port, an experienced estate planning attorney, for a consultation now. Call (310) 559-5259.

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Representative Paul Ryan (R-WI) has responded to the Tax Policy Center’s analysis of the revenue portion of his Roadmap for America’s Future. TPC found Ryan’s major tax restructuring would likely raise significantly less revenue than he expected and would substantially lower taxes for high-earners. In his response, Ryan suggests he’d be willing to adjust his plan to hit his revenue target of 19 percent of Gross Domestic Product. Here is his response:      

“I appreciate the Tax Policy Center’s effort to advance the debate on our need to get a grip on the explosion of spending and put the government on a sustainable path.  Our nation’s fiscal crisis is the result of Washington’s unsustainable spending trajectory, not from a lack of sufficient revenue. 

“The tax reforms proposed and the rates specified were designed to maintain approximately our historic levels of revenue as a share of GDP, based on consultation with the Treasury Department and tax experts.  If needed, adjustments can be easily made to the specified rates to hit the revenue targets and maximize economic growth.  While minor tweaks can be made, it is clear that we simply cannot chase our unsustainable growth in spending with ever-higher levels of taxes.  The purpose of the Roadmap is to get spending in line with revenue – not the other way around.

“I look forward to continuing the dialogue with the Tax Policy Center and working with my colleagues in Congress to advance real solutions to our fiscal crisis.”

The following additional points should be considered when interpreting these results:

1) The Tax Policy Center’s revenue analysis of the Roadmap is not an “official” score of this plan.  The Joint Committee on Taxation (JCT) is responsible for providing the official revenue score of legislation before Congress.
 
2) The Roadmap’s revenue baseline was constructed last year, using CBO’s long-term “alternative fiscal scenario.”  This baseline incorporated an economic forecast from early 2009.  Since that time, economic forecasts have generally been lowered, which would tend to cause lower-than-predicted revenues over the near term.  The Tax Policy Center’s revenue analysis of the Roadmap uses an updated economic forecast from the one originally used to construct the Roadmap revenue baseline.  The different economic assumptions in these baselines likely explain a portion of the lower revenue prediction.

3) The Tax Policy Center analysis covers a 10-year period, but the Roadmap is a long-term plan with spending and revenue projections covering 75 years.  As such, the analysis is not consistent with the long-term horizon of the plan.  Staff originally asked CBO to do a long-term analysis of both the tax and spending provisions in the Roadmap.  However, CBO declined to do a revenue analysis of the tax plan, citing that it did not want to infringe on the traditional jurisdiction of the JCT.  JCT, however, does not have the capability at this time to provide longer-term revenue estimates (i.e. beyond 10 years).  Given these functional constraints for an official analysis, staff relied on its original work with the Treasury Department and other tax experts to formulate a reasonable expected path for long-term revenues given the tax policies in the Roadmap combined with the economic growth projections available at the time. 

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Dear PA,

Believe it or not, there is a difference between using the $10,000 to pay for home improvements, and to pay off a credit card.

With the right ADVANCE planning (yes, redundant), you would have been advised to draw the money from the IRA to use to pay your home construction bills.

Then, you would not have had to use your credit cards to buy the material. You would not have had to use another credit card to consolidate your other credit card bills.

Incidentally, three more rules that apply to this $10,000 IRA draw:

1) It’s only an exclusion from early withdrawal penalties – not from taxes.
2) It only applies to the purchase or construction of a first home.
3) It only applies to money drawn from an IRA, not any other kind of retirement plan.

http://www.irs.gov/retirement/participant/article/0,,id=211440,00.html

And remember, you can find answers to all kinds of questions about getting around the IRA penalties 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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In his provocative Roadmap for America’s Future, Representative Paul Ryan (R-WI) figures that his broad tax code overhaul would eventually generate about 19 percent of Gross Domestic Product in revenues. But the Ryan plan would produce hundreds of billions of dollars-a-year less than that—about 16.8 percent of GDP—a decade from now, according to new Tax Policy Center estimates. Moreover, the plan would give a huge tax cut to the wealthy, while cutting taxes by little or nothing (and in some cases even raising taxes) for low- and middle-income people.

As a result, Ryan would likely fall far short of meeting his goal of balancing the budget and paying off the national debt by 2080, even if government spending were slashed to 1951 levels as he proposes.

Ryan’s plan is exceedingly ambitious. He’d remake Medicare, Medicaid, and Social Security and constrain future growth of nearly all other government programs. On the revenue side, he’d create an alternative tax system. Families and individuals could choose to continue to pay under the existing rules or select a two-rate structure that eliminates most current deductions and credits, repeals the Alternative Minimum Tax, and exempts all interest, dividends, and capital gains from the individual tax.

At the same time, Ryan would replace the corporate tax with a Business Consumption Tax, which is effectively a Value-Added Tax. Firms could expense all investment costs but could no longer deduct wages.

However, TPC found Ryan’s plan generates much less revenue than he projects. If all taxpayers chose the simplified system, it would produce about 16.8 percent of GDP by 2020, far below the 18.6 percent he figures for that year. If taxpayers chose the system most favorable to their situation, the Ryan plan would produce even less revenue—about 16.6 percent of GDP.

What does that mean in dollars? CBO’s most realistic projection of revenues (assuming  most Bush tax cuts are extended and many middle-class families continue to be exempted from the Alternative Minimum Tax)  figures the existing tax system would raise about $4.2 trillion in 2020. By contrast, Ryan’s plan would generate about $3.7 trillion, or $500 billion less in that year alone.

While TPC didn’t model the Ryan plan beyond 2020, the pattern of revenues it generates suggests it would be decades before it reaches his goal of 19 percent of GDP—very likely sometime after 2040.  

Top-bracket taxpayers would overwhelmingly benefit from Ryan’s tax cuts. By 2014 people making in excess of $1 million-a-year would enjoy an average tax cut of more than $600,000. To put it another way, their after-tax income would rise by nearly 30 percent.

By contrast, the average taxpayer making $75,000 or less would pay higher taxes if they  chose Ryan’s two-rate alternative. If they chose the tax plan more favorable to them, they’d do a bit better. For instance, people making between $50,000 and $75,000 would typically get a tax cut of $157 in 2014, while those making between $40,000 and $50,000 would pay $128 more on average.

These estimates are subject to lots of uncertainty. For instance, we assumed Ryan’s 8.5 percent VAT—the new business tax—would generate about 4.3 percent of GDP in revenues. TPC’s Joe Rosenberg, who modeled the Ryan plan, believes that estimate is generous. But since no such tax currently exists, it is hard to know for sure.

One other caveat: TPC did not assume that taxpayers would change their behavior in response to this new tax structure. We know they would, of course, in some ways that would generate additional revenue and in others that would lose revenue. But because these changes are so uncertain, TPC did not include them in our revenue estimates. 

As I’ve written before, Ryan deserves kudos for highlighting the nation’s fiscal challenges and putting out a real deficit reduction plan. But it is hard to see how this one adds up. 

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