Archive for July 23rd, 2012

It is with a heavy heart that I announce the passing of one of the most important and influential websites to ever emerge from the interwebs: the Ron Mexico Name Generator. As I touched on here, the Ron Mexico Name Generator gave ordinary people the opportunity to walk in the footsteps of NFL great Michael Vick and create their own ingenious, geography-based aliases for use in anonymously seeking treatment for STDs.

I can personally attest to the good times that were had at the old RMNG, and I’ll fondly remember the days I spent as my fun-loving alter-ego, Chad Virgin Islands. The world wide web is a sadder place with it gone.

The beauty of the internet, however, is that when one site falls, there’s always a new,  equally enjoyable site ready to take its place in providing a much-needed temporary reprieve from the drudgery of the work day.  And in this case, it’s tax related!

The Tax Foundation has produced this ingenious Tax Calculator, which allows users to enter in anticipated 2013 tax data, press a button, and instantly see what their tax liability will be under three alternative scenarios:

1. Full expiration of all Bush tax cuts (if no legislation is passed by year-end);

2. A full extension of all Bush tax cuts (what the Republicans are hoping for); or

3. The Bush tax cuts are extended, but only for those earning less than $250,000 (President Obama’s proposal).

Given the unprecedented levels of uncertainty we face heading into the election, the calculator is an invaluable tool for taxpayers and practitioners alike, as it reduces the endless campaign rhetoric we’ve been inundated with over the past year to meaningful dollars.

Clearly, there’s a lot at stake should the Bush tax cuts be permitted to expire for all taxpayers. For example, a family of four with a household income of $150,000, mortgage interest of $10,000 and real estate taxes of $2,000 would see its 2013 federal tax liability rise from $22,155 to $26,401, an increase of $4,300. Couple that with the fact that an employee’s share of the social security payroll tax liability is slated to return to 6.2% next year, and the total tax burden for our family of four increases by $6,504. That’s quite painful.

Now, let’s consider a family of four raking in $500,000 in salary next year. You might think that those earning more than over $250,000 would only benefit if the Bush tax cuts are extended for all taxpayers, but as usual, you’d be wrong.

Keep in mind, if the Bush tax cuts are extended for all taxpayers earning less than $250,000, the tax brackets for those earning less than the threshold will remain as they are today: 10, 15, 25, 28, and 33%. For those earning in excess of the threshold, however, they too will be able to take advantage of these lower tax rates for the income they’ve earned below the threshold. In other words, it’s only the income the $500,000 family earns in excess of $250,000 that would be subject to a rate increase if the Bush tax cuts are extended for all but the nation’s richest.

So what does this mean for our imaginary $500,000 family?

If the tax cuts expire for all taxpayers, the rates revert back to the old, higher 15, 28, 31, 36 and 39.6% brackets, meaning all of the $500,000 is subject to higher rates, not just the portion in excess of $250,000. Assuming a real estate tax deduction of $5,000 and mortgage interest of $30,000, this results in a federal tax liability, including payroll taxes, of $166,788.

Should the Bush tax cuts get extended for earnings under $250,000, however, the reduction in the lower marginal rates reduces our taxpayer’s liability to $158,960, a reduction of $7,700, which is nothing to sniff at.

And lastly, should the Republicans win out and the Bush tax cuts be extended for all, the same hypothetical $500,000 earner would see their federal tax bill drop to $142,342, a reduction of $16,600 from the Obama proposal and $24,500 from a scenario in which all the Bush tax cuts expire.

Play around with the calculation; it really helps to illustrate what’s at stake for tax advisors and their clients in the coming months.

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Weekend Roundup

A few things you may have missed this weekend while watching Adam Scott channel his inner Greg Norman and cough up the British.

Forbes has an update on something we blogged about in February — the odd decision by the IRS to include a piece of art in a collector’s estate at a fair market value of $65,000,000. The piece contains a bald eagle and thus cannot legally be sold, which would certainly seem to limit, if not eliminate, it’s “fair market value,” but the IRS still doesn’t see it that way.

Tax Court upholds validity of Treas. Reg. §1.152-2(a)(1), determines that parents cannot claim dependency exemption or child tax credits for children that were not U.S citizens during the tax year.

Democrats and Republicans. Not so different after all?

From Forbes: For all the fuss Democrats and Republicans have made about how allowing the Bush tax cuts to expire for those earning in excess of $250,000 will either 1) repair the broken economy, or 2) doom small businesses, respectively, take a guess what the annual increase in tax will be for a married couple earning $300,000? A whopping $199, or less than the price of four Yankees tickets..

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