Posts Tagged ‘income’

Unless you’ve been living in a cave, you likely already know that Mitt Romney created a bit of an uproar when, behind closed doors, he suggested that because 47% of all Americans pay no income tax, they will vote Democratic “no matter what;” the theory being that Romney’s proposals to cut income tax cannot resonate with a group that pays no income tax.

Now, obviously, there’s no way to link tax filings to voter records to test the accuracy of Romney’s statement, but we can learn a bit more about who comprises this tax-indifferent 47 percent. And to that end, the Tax Policy Center’s got us covered with Five Myths About the 47 Percent.

Among the more interesting tidbits:

  • The TPC estimates that of the 47% percent, only 0.1% earn income in excess of $200,000. That would indicate that fewer taxpayers are “gaming the system” than some would have you believe.
  • Rather, the vast majority of people who pay no federal income tax have low earnings, are elderly or have children at home. Furthermore, fewer than half of individuals in households with incomes below $30,000 voted in 2008, compared with about 60 percent of people with higher incomes. And because these lower income taxpayers do — when they vote — tend to vote Democratic, it appears Romney may actually benefit, rather than suffer, from this tax-indifferent — and apparently — election-indifferent — portion of the population.
  • Many of the taxpayers who pay no income tax are not the beneficiaries of Democratic “safety net” legislation, but rather bipartisan efforts to help those in need.  For example, Presidents Ronald Reagan and Bill Clinton both favored the earned-income tax credit (EITC), which has helped millions of families stave off poverty.

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Dear U.S. Millionaires,

Quit your bitchin‘.



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While the Supreme Court’s decision to uphold Obamacare has left half of the nation readying plans to renounce their citizenship and flee to Canada, the rest of us who stick around have to deal with the aftermath. And while to date, the individual insurance mandate has been the target of much of the ire, my guess is that sooner rather than later the nation’s attention will turn where it likely belongs: on the 3.8% surtax set to be imposed on investment income beginning in 2013.

The surtax will apply only to those with AGI in excess of $250,000 ($200,000 for single taxpayers), but when coupled with the slated increase in the preferential tax rates currently afforded long-term capital gains and qualified dividend income should the Bush tax cuts expire, those taxpayers affected by the increase are staring at a doubling — or in some cases tripling — of the tax rates they currently pay.  

To illustrate, should the Bush tax cuts expire, the tax rate imposed on long-term capital gains is set to rise from 15% to 20%. Tack on the 3.8% surtax for appropriate taxpayers, and you’re looking at a 8.8% rise from 2012 to 2013, an increase that will — and should — have taxpayers considering accelerating the sales of investments and businesses into 2012.

Similarly, courtesy of the Bush tax cuts, taxpayers have enjoyed a 15% tax rate on qualified dividend income for over a decade. Should those cuts expire, all dividends will again be taxed at a top rate of 39.6% plus the 3.8% surtax, meaning the dividend rate will increase from 15% to 43.4% with the turn of the calendar.

Of course, few experts expect the Bush cuts to expire at year-end; rather, a short-term patch is the more likely answer. In that case, the top tax on both long-term capital gains rates and qualified dividends will increase only by the 3.8% surtax — from 15% to 18.8%, while the top rate applied to interest income will increase from 35% to 38.8%.

While the leading question facing questions in light of the increasing tax rates may well be, “Should I sell my business in 2012?” there are other concerns that need to be addressed as well.

For example, assume a client owns many rental properties that, in total, generate significant income. An election treat the taxpayer as a “real estate professional” under I.R.C. § 469(c)(7) has never been necessary, because the taxpayer is not generating losses. In fact, you’ve preferred to treat the client’s interests in the rental activities as passive, because the client has other non-rental passive investments that generate losses and can partially offset the passive rental income.

But starting in 2013, the 3.8% surtax is slated to be applied not only to long-term capital gain, dividend and interest income, but also to rental income. While the Patient Protection Act is largely bereft of guidance on how the surtax will apply to rental income, certain questions are raised:

If I don’t make the election to treat the client as a real estate professional, does all the rental income become subject to the 3.8% tax, or would material participation suffice?

If material participation will suffice, will I need to make the election to aggregate all the activities in order to meet the tests under Section 469?

If I make the election, the rental activities are no longer treated as passive. Thus, the non-rental passive losses the client generates will no longer have passive income available to offset, and will be suspended under I.R.C. § 469. Is trading the 3.8% surtax for the inability to use the passive losses worth it?

I don’t know the answer yet, and in all likelihood, neither does the IRS, since they have not issued formal guidance, likely waiting like the rest of us to see what the Supreme Court decided to do with Obamacare.

Of course, even with the Supreme Court’s blessing, the fate of the surtax is still shrouded in a bit of uncertainty, as there is the matter of the election to come this November. Should Mitt Romney prevail, the first thing on his to-do list would be to repeal the Patient Protection Act, and send the 3.8% surtax with it. Should that happen, it would make the decisions to accelerate investment income into 2012 — whether on the sale of publicly traded stock or closely held business look rather rash and ill-conceived.

In the meantime, however, I’ve scoured the interwebs, and as she always does, Laura Sanders over at the WSJ did a great job dissecting the the looming surtax. I highly recommend you give it a read.

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In celebration of both 150 years of tax law and graphics crammed with too much information, enjoy this little number put together by Turbo Tax.  Noticeably absent from the listing: March 2, 1928: the date Tom and Mary Hardwick from Lake Oswego, Pennsylvania deducted $80 of charitable contributions they never actually made and got away with it.  A dark day for the U.S. tax regime, indeed.


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While New Jersey residents wait with breathless anticipation for the Snooki-LaValle lovechild to arrive and lead them to a new age of prosperity, the State’s leadership is left to try and salvage the present by enacting sweeping tax cuts.

What remains to be determined, however, is what shape the cuts will take. On Wednesday, Governor Christie announced that he was “pretty close” to a deal on a tax-cut plan with Senate President Stephen Sweeney. To recap, here were the proposals by each side:

Christie: A 10% across-the-board reduction in the individual income tax rates to be phased in over a three-year period beginning in 2013. The plan would cost the state $183 million in 2013 and $1.1 billion by the fourth year.

Sweeny: Senate Democratic leaders, criticizing Christie’s plan as favoring the wealthy, have called for a 10% tax credit on the first $10,000 of property taxes paid. The credit would only be permitted for residents with income below $250,000, shifting the benefit of the tax cuts to the lower and middle class. The plan would cost the state $175 million in 2013 and $1.4 billion by the fourth year.

A third proposal had been pitched by state Assembly Democrats that would have doubled the tax credit to 20% of the first $10,000 of taxes paid while using the same income limits. As opposed to the Senate’s plan, the Assembly tax credits would have been paid for by implementing a “millionaires tax;” raising the top personal rate from 8.97% to 10.75%. Christie, as expected, rejected this idea as “dead.”

The sticking point will likely continue to be where to focus the tax cuts: Democrats don’t want the state’s millionaires to receive any additional benefit, while Governor Christie has been adamant about not raising taxes on the wealthy, having twice vetoed measures that would previously implemented a “millionaire’s tax.”

From Christie:

We’re pretty close, so now let’s see if we can find an area of compromise,” Christie said of Sweeney’s proposal. “I think everyone should get tax relief and he limits it at $250,000 — there’s a boulevard there between them. Lets see if we can get the car onto that boulevard and move it down the road.”

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Here at Double Taxation, we tend to highlight the lighter side of the Tax Court, with topics ranging from the application of the hobby loss rules to drag racing to trophy wife-related theft losses to charitable contributions for crazy cat ladies.

But tax trials are serious business; and if you’d like to stay out of the court room, it’s helpful to know the most frequently litigated issues.  To that end, the IRS Taxpayer Advocate’s annual report has you covered:

Most Frequently Litigated Tax Issues: June 1, 2010 – May 31, 2011
1. Summons Enforcement 132
2. Trade or Business Expenses 107
3. Collection Due Process 89
4. Failure to File and Estimated Tax Penalties 74
5. Gross income 62
6. Accuracy Related Penalties 55
7. Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax 48
8. Joint and Several Liability 44
9. Frivolous Issues Penalty 44
10. Charitable Deductions 27
1,045. Medical Expense Deductions for Visits to Prostitutes 1

So how does one leverage that information to increase their chances of a Tax Court victory? Dean Zerbe over at Forbes offers some advice:

Trade or business expenses.  For individuals the problem continues to be having good books and records to support the deduction of expenses – especially for travel and entertainment expenses.  

A number of cases in this area also get into the question of whether the taxpayer is deducting expenses (and claiming losses) for a legitimate “for profit” activity.  As a general rule, I’ve found the IRS takes a dim view of businesses that involve animals – horse training, cat raising, etc.  If you aren’t making a profit in your animal business, be ready for an IRS letter, particularly if you are claiming a loss from the activity and deducting as a business expense your subscription to “Cat Fancy” or “Horse and Hound” magazines, as well as the cost of kitty litter, oats, etc.  Don’t be surprised if the IRS deems your animal fancy a hobby.

Gross income – What counts as income.  Damage awards top the list here.  While payments due to physical injury or sickness are not subject to tax, other damage payments are (ex. payments for emotional distress).  The effort to avoid this issue should start by having a tax attorney involved with the final settlement agreement.  Always a big help if you ensure that a settlement makes clear what the payments are for.

Charitable Deductions.  This is a new one for the list of litigated issues.   Congress and the IRS have cracked hard on taxpayers taking an expansive view of the value of certain charitable deductions. If you think your Yugo that goes only in reverse is worth 20k as an antique – think again.  Good valuation is the key to success – and keeping your feet on the ground in what you claim especially in areas such as conservation easements.

Zerbe saves his best advice for last; recommending how to make nice with the IRS before things ever escalate to the point of litigation:

Of course the best way to win in court is never to end up there in the first place.  So if you’re audited, first, when the IRS is knocking on your door – this is not the time to be a spendthrift – get your tax professional involved early in the process as positioning is everything.  Second, listen closely and understand fully the IRS’ concerns. Third, provide the IRS documentation and legal support justifying your positions and addressing the IRS issues.  Fourth, exercise your rights for review at IRS appeals and mediation. Finally, I am a big believer that you need to be on offense when dealing with an IRS audit. 

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