Archive for the ‘Your Tax Issues’ Category

The only thing as bad as Congress impulsively passing a tax reform bill, is conjuring a half-baked, equally impulsive countermeasure.

But that is precisely what State Senator Kevin de Leon and Assembly Member Autumn Burke are proposing with SB227 and AB2217.  The latter is a recent development.

Both bills allow taxpayers to donate to charitable entities sanctioned or controlled by the state in return for tax credits on their California returns.  SB227 would have contributions funneled through a state entity named The California Excellence Fund. AB2217 would have qualified charitable entities pass 90% of the donations to the state’s general fund. The entities would issue “Golden State Credits” to the donors, who in turn would use then to reduce their tax liability to the state….and also deduct them as charitable contributions on their federal returns.

The bottom line is that a very high percentage of the donations end up in the state treasury.

The sponsors are counting on the precedent of similar programs in a number of states being condoned by the IRS.  However, many of these are essentially one-off credits and not part of a wide-ranging policy, as would be the case in California.

In the grand scheme of things, existing tax credit donations are relatively small, and were virtually irrelevant under the old tax law.  It did not really matter if one took a charitable deduction in lieu of one for state tax  – the total deductions, all other things being equal, were the same. Note that SALT deductions were not allowed if the taxpayer was subject to the AMT.

But if California, New York and other high income states implement workarounds allowing higher income taxpayers to re-characterize state tax payments as charitable deductions across the board, rest assured the IRS will take a hard look.

If the states do not back down, the issue will end up in the courts and taxpayers who avail themselves of the credits would be at risk of owing penalties and fines if the IRS prevailed.

New York passed a version of the workaround which is similar to California’s (it also passed another that involves a payroll tax…not an approach California is pursuing).

If de Leon and Burke were smart, they would wait to see how New York’s plan is received by the IRS, then modify California’s accordingly, rather than subjecting the state’s higher income taxpayers to audits.  That could be the last straw that will send more of them to Nevada.




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I normally keep to state and local topics.  When I stray to national issues, they usually involve tax policy.

I can’t avoid sharing my thoughts on what could be the constitutional issue of a lifetime – whether the federal government can compel a citizen to purchase a product or service.  I’m referring to health care, of course.

However, it is also a tax issue.

The Sixteenth Amendment of the Constitution empowered Congress to levy taxes on income.  There are fringe groups who claim otherwise, but court decisions have tossed their arguments time after time. 

The power to tax is overwhelming accepted as the law of the land.  To the protestors I say:  if you cannot deal with it, start your own constitutional amendment process.  Regardless of how responsible or irresponsible the government is in spending our tax dollars, in the words of former Chief Justice Oliver Wendell Holmes, “Taxes are what we pay for civilized society.” Another way of putting it is, “You don’t get something for nothing.” Try defending the country without taxes.

We are obligated to pay taxes.

So, are the financial penalties imposed by the individual and employer mandate provision of the Patient Protection and Affordable Care Act a tax or a forced purchase of a service?

Given the  financial assistance (direct or indirect), the federal government provides hospitals to help cover unreimbursed costs, I would classify the penalties as a tax – they help in the recovery of costs from those who use medical services free of charge.

The penalties are one of the few facets of legislation I actually liked.  

No tax could recoup the free ride some segments of illegal immigrants receive for emergency services (there are some who do pay in full, and others to a limited extent), or from the scofflaws who willfully do not file tax returns; therefore, would avoid the mandate. There are other remedies for dealing with these groups, none very effective, but that is a whole other topic. 

It is not as if other areas of health care did not deserve attention, it is just that Congress and the President bit off more than they could chew. They created a divisive firestorm which will serve as the proverbial bloody shirt for years, maybe decades, to come. It’s not the first time that has happened. And the consequences have always been brutal.

Many pundits and politicians love to ask the question, “What was the intent of our Founding Fathers,” when it comes to any interpretation of a law’s constitutionality.

Health insurance did not exist in the Eighteenth Century.  It is highly unlikely the original signers gave the concept any more thought than the ramifications of the internet on freedom of speech. Even Ben Franklin was not thinking about electronic social media when he was flying kites in lightning storms.

In those days, people accepted death.  You might say they lived with it; were surrounded by it.  By today’s standards, life back then was the equivalent of surviving a plague. If you read the biographies of our greatest leaders, almost all of them would be filled with the tragic loss of loved ones, many of whom were young, from horrible deaths due to yellow fever, typhoid, smallpox, etc.

If they had a fraction of today’s medical technology, they may have included a right to health care in the Bill of Rights.

But that is speculation.

We are on our own to make the right decision. The Supreme Court will not be the ultimate judge even if they vote in favor of it.

The Health Care Act will be revisited over and over again as the inevitable financial ramifications, unintended consequences and loopholes become apparent. We will also identify the provisions we like.  The Act will be modified over the years as often as tax laws are, with occasional overhauls, too.

In the end, that might be the best we could hope for.

Because, then, we might have a decent system, not a super sized law.

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Moving Lips

There’s the saying:

How do you know when a politician is lying?

His or her lips are moving.

That’s not quite true. 

It’s a lie when the politician’s lips are moving and forming the words tax reform or tax relief.

Legislators or candidates who promise either are pandering for votes. 

The Internal Revenue Code is beyond reform; it is foolish to make an attempt given the barriers created by the sheer complexity of the code and the influence of interest groups from almost every sector of society and industry.

It is easy to promise fairness and relief through reform when relatively few are familiar with the content of the Code.  

To paraphrase a few lines from one of  Les Miserable’s most popular scenes:

Rules beyond compare,

rules beyond belief!

Put them altogether

and call it tax relief!

We are as bamboozled as Thenardier’s guests when it comes to taxes.

It was pure chutzpah that the Congressional action which created the current version of the Internal Revenue Code was named the Tax Reform Act of 1986.  Maybe it was reform in the Bizarro world.

In my view, about the only good that came out of it was the consolidation of tax brackets from fifteen to five.  That much made it a little easier for the average person to plan what they might owe to the federal government, but many people still couldn’t tell if they were measurably better off or worse than in prior years. Comparing your taxes from one year to next is an apples to oranges affair under stable conditions; attempting it when the rules have been overhauled is more like water to dirt, unless you want to pay a professional to figure it out.

Taxpayers were still left with a Byzantine system after 1986 and unsure if the changes offered any relief….and there was certainly no relief when it came to preparing returns. 

Changes have been made since 1986, some of them substantial (such as the Bush tax cuts) but the structure has been virtually untouched….and that feeds the rage people have expressed over the fairness of the system.

Arguments over who is or is not shouldering a fair share are based more on emotion than facts. It is not anywhere near as simple as the 99% versus 1% as the Occupy Everything movement insists .

It’s not that there isn’t unfairness – indeed there is – but unfairness transcends most income levels.  Two households with the same income can have tax liabilities that are as different as night and day within any bracket.

The alternative minimum tax (AMT) is one of the best examples of the Code’s obfuscation. Originally designed to reel in 155 wealthy Americans who did not pay a dime of tax, it has now grown to where 27% of households earning under $200,000 paid it. The AMT is a parallel tax system that most taxpayers must calculate, even those with average incomes, to assure they are in compliance with the law.

Fortunately, readily available tax software does the calculation for you, but it does not prevent a nasty surprise when you learn you owe more than anticipated.  Taxpayers who made all the right decisions throughout the year to minimize taxes may discover that many deductions they were counting on are wiped out in the other universe of the AMT. 

Yet, we put up with this chicanery. People just roll over and allow their federal legislators to perpetuate it, allowing themselves to be strung along with false promises of tax reform.

Do you know what kind of “tax reform” is on the table?

The elimination of the mortgage interest deduction, for one thing! 

Now, I could support that if it were part of a wholesale conversion to a flat tax system along the lines of what Steve Forbes suggested years ago.

Unfortunately, Forbes also got excited over Texas Governor Rick Perry’s flat tax plan. If something like it were implemented, it would mean suffering through three methods of tax calculations: regular, AMT and a flat tax. I would hardly call that tax reform.

Herman Cain made some noise with his 999 concept, but one component – a 9% national sales tax – would have been grossly regressive. If you turn 999 upside down, you get 666. If you ever watched The Omen, you know what that means.

Fortunately, both Cain and Perry are out of the picture as far as the Presidency is concerned.

But they succeeded in giving the concept of a flat tax a black eye.  Many people are not going to think beyond the flawed ideas they proposed.

Let’s clarify one thing before going further – all flat tax proposals, including Forbes’, is at least moderately progressive. What makes it so is setting an income level below which nothing is taxed – a zero tax bracket.

Say every penny of income up through $35,000 were not taxed; everything above it taxed at 15%. A filer earning 35,000 would owe nothing; an income of $50,000 would pay an effective rate of 4.5%; $500,000 would bear a 13.95% effective rate. 

There would also be no deductions, credits, personal exemptions nor preferences in the purest flat tax plan – and no AMT.

Notice I said “in the purest flat tax plan.”

We are not going to see that until pigs fly, the cows come home and hell freezes over.  There are compromises that will have to be made , but we could still have a Code that would take less space than a chapter in a Dan Brown novel….and a tax return on a 5×7 postcard for almost everyone.

Only individuals who never made it past third grade math would require preparation assistance.  Even those people would be able to avail themselves of free help from the IRS.

The simplicity would offer a number of benefits: almost no preparation time; no anxiety; no preparation fees; easy tax planning.

The government would benefit as well: more reliable revenue projections; less costly administration; more time for Congress to address meaningful issues.

Potentially, a flat tax could translate to more revenue for the government.  IRS agents would be far more productive chasing down the individuals responsible for the annual tax gap instead of enforcing arcane rules that they themselves may not understand (the confusion over whether airline miles are taxable is a recent example of the limbo facing many citizens).

The latest estimate for the tax gap – the difference between the aggregate tax liability and the actual revenue collected – grew to $385 billion in 2006, up from $290 billion in 2001 (the data used for these estimates lag, which is why 2006 is the latest year evaluated). By the way, those amounts are per year.  Just do the math to estimate the cumulative impact, if you dare, and imagine what it means to the federal deficit.

Instead, IRS agents are spending too much time determining if a taxpayer was using the right depreciation method or was eligible for the earned income tax credit, or enforcing other useless rules with questionable economic value.

It won’t be an easy task to close the tax gap in any event, but the odds would be much better if the IRS could focus on the population segments with the greatest risk of non compliance. There are data riches to be mined that would give clues to whether some people were playing  fast and loose with revenue reporting, but the resources needed to do perform the analysis are inadequate and preoccupied with enforcing the current Code.

Congress would have to change its mindset on the objectives of a tax system before we could move forward with a flat tax system. 

Rather than using the code as a means of social engineering, economic stimulation and revenue generation, drop the first two (they have failed us) and focus on a system that raises adequate revenue in a fair and understandable manner.

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In National Lampoon’s Christmas Vacation, Clark Griswold’s boss Frank Shirley, when confronted over his decision to cut employee bonuses says, “”Look, uh, sometimes things look good on paper, but lose their luster when you see how it affects real folks. I guess a healthy bottom line doesn’t mean much, if to get it you have to hurt the ones you depend on.”

I can say the same about the chained CPI Index, which consistently calculates a lower inflation rate than the traditional CPI. 

While the theory behind it makes sense – people will trade down on their purchases when prices rise – the methodology used to measure those product substitutions will be very subjective.   If it is applied to determine annual increases in social security benefits will it adequately weigh the impact of medical expenses?  Substitution of goods and services would not be very practical when it comes to health expenditures. Using duct tape in lieu of a cast would not be an option.

There are other ways we can rein in social security costs:  for example, gradually raising the retirement age – at least up to seventy and even higher over time if life spans continue to increase. Why that isn’t on the table for immediate consideration is shocking. Do you think that might reflect a lack of courage on the part of Congress?

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H&R Bach

Michele Bachman has expert credentials when it comes to taxes – a federal tax litigation attorney, a tax attorney and an L.L.M in Tax Law from some college down the road on I-64 from the University of Richmond (I don’t hold that against her).

Say what you want about her, but she is no Sarah Palin.  I don’t know if Palin knows the difference between a short and long form.

I would expect Bachman would lead an intelligent discussion about tax policy, something that has been lacking so far in the buildup to 2012.  What I heard, instead, was a statement that sounded as if it came from the lips of Sarah Palin.

The Congresswoman wants the nation to enjoy a tax holiday for a full year.  Well, if that came to fruition, it would at least put the argument about the debt ceiling on the back burner, and move the United States just below Greece in the world economic pecking order. What’s so bad about that?  We could then get a bailout from China and India.

I am not in favor of raising taxes in this economy, but I am against politicians resorting to pandering.  Quite frankly, it’s insulting.

And before Tea Party advocates jump all over me, I feel the same way about the White House promising more jobs than can possibly be delivered from any program, or the mayor touting all of those well-paying jobs the proposed new stadium will generate – and will likely add to the use of the Earned Income Credit.


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Not enough people know that deleted files on a computer are recoverable.  That’s fine if you need to recover them. 

It’s not fine if someone else does – someone with nefarious objectives.

That can happen if you donate your computer, it is stolen or seized as evidence.

I use Webroot’s Window Washer, but there are similar products as well.

With Window Washer, you can select the standard of wiping – I use Defense Department or higher.  Such standards make it virtually impossible for even the most sophisticated experts to piece together your deleted documents, pictures and spreadsheets.

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George Steinbrenner was a winner in my book. 

He resurrected the New York Yankees franchise when he purchased the team from CBS in 1973 for $10 million.

CBS ran the team as if it were just another television program.  The network’s corporate management just did not appreciate the potential from marketing the Bronx Bombers’ winning tradition.

George did and the rest is history – the most successful sports franchise since the gladiators of ancient Rome.

But “the boss” was not only a winner in life; he might be the biggest winner ever in death.

By passing on to the big ballpark in the sky in 2010, he beat the death tax.

Back in 2001, Congress decided it was time to phase out the controversial estate tax (also referred to as the death tax).  The exclusion that shields decedents’ assets was gradually increased from $675,000 to $3.5 million in 2009, then the tax was completely phased out starting in 2010.

However, Congress was reluctant to go the whole nine yards in 2001 and left the door open to revisit the tax in 2010.  It was assumed a future Congress would reconsider the long-term future of the tax before the sunset date. The economy and wars in Afghanistan and Iraq probably contributed to shelving any new legislation, or perhaps Charles Rangel was too busy relaxing at his beach house in the Dominican Republic.

 Whatever the reason, the law remained unchanged, although there are several alternatives on the table right now (I’ll cover them in another article later this year).

 As it stands, the tax is scheduled to kick back in next year when the 2001 law sunsets.  The exclusion will be a mere $1 million.  Steinbrenner’s estate probably well exceeds a billion dollars, in no small part due to the Yankees.

Had he died in 2011, Steinbrenner’s heirs would have been subject to paying at least $500 million in estate taxes!  There’s no telling what would have transpired for the Yankees – possibly sold to pay the tax? 

Thanks to George’s good timing, Red Sox fans’ fantasy of breaking up the Yankees will be filed under fiction, alongside “The Year the Yankees Lost the Pennant.”    The Devil undid the Pinstripers in the novel (made into the successful musical “Damn Yankees“), but if Steinbrenner could beat the taxman, old Satan would amount to as much competition as the Baltimore Orioles.

For some, 2010 could pose a moral dilemma.  What if a parent with a large estate is suffering from a terminal illness with death being the prognosis within several months?  The most perverse heirs may pray for death before 2011 rings in.

It’s an ugly thought, but it will probably occur in some minds.

Death and taxes will always play a part in our lives – and no one is getting out of this life alive.  That is a 100% certainty.

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