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Posts Tagged ‘obama’

On Saturday morning, my neighbor talked me into doing a mountain bike race to the top of the Aspen ski resort. At registration, it looked like there were only 10 other people stupid enough to spend a beautiful morning suffering up 3,400 vertical feet of dirt road, causing me to wonder if I might have a shot at a top-three finish.

As we got set to start however, I looked around at who else was toeing the line: there was Lance Armstrong, the seven-time Tour de France winner turned Aspen local, Neal Beidelman, a local ski-mountaineering legend and Mt. Everest hero, marathon mountain-bike national champion Anne Gonzales, and local freak Max Taam, who was coming off a win the previous weekend at the Steamboat Stinger.

Needless to say, I didn’t sniff the podium. Aspen is not a town that favors the mere mortal.

On to the tax stuff… For those of you who aren’t yet bored with reviewing the tax returns of people who aren’t paying you to do so, on Friday Republican VP candidate released his 2010 and 2011 returns to the public. There was nothing starting about either return. Of course, given the firestorm over his own tax history, Mitt Romney would have been crazy to appoint anyone with any sort of skeletons in their financial closet as his running mate.

Meanwhile, President Obama extended an offer to Romney: publish his five most recent tax returns, and the Obama administration won’t target Romney’s unwillingness to release any additional returns in campaign ads. Note, however, that they didn’t say anything about refraining from implicating Romney of being responsible for some of America’s most sensational unsolved murders.

If you can’t trust large mass producers of cancer sticks to practice sound business ethics, then who can you trust?

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Alright…at this point, I’m spending more time on the Tax Policy Center’s website than I am on JustinBieberMusic.com ESPN.com, and that’s a little unsettling.

Last week, we posted about a Tax Policy Center study that crunched the numbers on Mitt Romney’s tax proposals and determined that meeting his dueling goals of 1) cutting tax rates by 20% across the board, and 2) eliminating deductions in a manner that generates enough additional tax to make the proposal revenue neutral, was not possible without shifting $86 billion of tax burden from those making more than $200,000 to those earning less than that threshold.

The study immediately came under attack, by Romney and others. Romney dismissed the study as “garbage in, garbage out,” blissfully ignoring the fact that the assumptions made by the Center were necessary only because Romney has refused to provide details regarding what deductions would be on the chopping block.

Then, on Monday, this opinion piece was published on the Wall Street Journal’s website taking aim squarely at the study. Foremost among the complaints were two deductions the Center left out of its base broadening computation: the exclusion for interest income on municipal bonds, and the exclusion for the inside build-up on life insurance vehicles. The Center had not considered the impact removing these preferences would have on the potential revenue to be earned from Romney’s proposal because it had concluded that he would not disrupt these tax preferences because they provide incentive for saving and investment.

In response to the criticism, yesterday the Tax Policy Center published a FAQ addressing the various concerns voiced about the initial study. Most importantly, the Center re-ran the numbers with the assumption that Romney could and would eliminate the two preferences discussed above: the tax-free treatment of municipal bonds and the exclusion for the inside build-up on life insurance vehicles.

Eliminating the two exclusions from income — which predominately benefit high-income taxpayers — would raise an additional $45 billion from those earning more than $200,000, and $4 billion from those earning under that threshold. This $45 billion additional tax on the “high-income” group would reduce the shifting of the tax burden to those making less than $200,000 from $86 billion — as proposed in the original study — to $41 billion.

In summary, even with more aggressive base broadening, the study indicates that Romney’s plan would benefit taxpayers earning more than $200,000 by $41 billion, with those earning less than $200,000 picking up the tab.

Now we just sit back and await the inevitable response from both the Republican and Democratic side. President Obama is sure to point to the study as further evidence that Romney’s tax proposals aim to benefit the wealthy. The question is: what will Romney say?

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A few things you may have missed this weekend while asking the perfectly reasonable question: There’s a such thing as men’s field hockey?

In his Bloomberg opinion piece, the author hits the nail on the head: Neither President Obama’s nor Mitt Romney’s tax plans, as currently constructed, are what this country needs right now to reduce the deficit.

Speaking of the Romney plan, more on this later today, but the Tax Policy Center has crunched the numbers again, and it ain’t pretty. If his plan were to be enacted in the revenue neutral model that’s been promised, taxpayers earning over $1,000,000 will see their after-tax income increase by 8.3%, while those earning less than $200,000 will actually walk away with 1.2% LESS cash every year after paying their taxes.

A quick primer on the increasingly-necessary exclusions from cancellation of indebtedness (COD) income.

The war of words regarding Mitt Romney’s refusal to release more than his 2010 and 2011 tax returns has escalated, with Democrats citing an “anonymous source” and claiming that Romney paid no federal income tax for a 10-year period.

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The following email came into Double Taxation HQ today from one of my firm’s high-ranking auditor types, and it seemed befitting of its own post:

Dear Tony,

You look very handsome today; I just thought you should know. Is the below email I had forwarded to me true, or is this just someone that doesn’t understand what they are reading?

HOME SALES TAX

> Have you seen this?

> When does your home become part of your health care?…….. After 2012!

> Your vote counts big time in 2012, make sure you and all  your friends and family know about this!

> HOME SALES TAX

> I thought you might find this interesting, — maybe even SICKENING! The National Association of Realtors is all over this and working to get it repealed, — before it takes effect. But, I am very pleased we aren’t the only ones who know about this ploy to steal billions from unsuspecting homeowners.

How many realtors do you think will vote Democratic in 2012?  Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? That’s $3,800  on a $100,000 home, etc. When did this happen? It’s in the health care bill, — and it goes into effect in 2013. Why 2013? Could it be so that it doesn’t come to light until after the 2012 elections? So, this is a change you can believe in?

> Under the new health care bill all real estate transactions will be subject to a 3.8% sales tax. If you sell a $400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation, — who often downsize their homes. Does this make your November,  2012 vote more important?

> Oh, you weren’t aware that this was in the Obama Care bill?  Guess what; you aren’t alone! There are more than a few  members of Congress that weren’t aware of it either.

I hope you forward this to every single person in your address book.

> VOTERS NEED TO KNOW.

Thanks for your help, Tony. Did I mention you look handsome today?

Hugs and Kisses,

 Jeff.

[Ed note: we may have taken some creative liberties with the auditor’s email for presentation’s sake, but the thrust of the question and the forwarded chain email remains unchanged.]

To answer your question, Jeff: whoever forwarded the email is perfectly right to be confused by the implications of Obamacare. Whoever crafted this email, on the other hand, is an idiot. Not because they misinterpreted the Patient Protection Act — that’s a simple mistake — but because they got so righteously indignant while all the while being grossly misinformed. Unless of course, the chain email was authored by Mitt Romney, in which case, he’s stupid like a fox.

As we’ve previously discussed, starting in 2013 Obama will indeed tack an additional tax of 3.8% on a taxpayers’ net investment income — which would include gain from the sale of a home — but this is an additional income tax, not a sales tax.

The designation is important, because income tax is only paid on realized and recognized gains that are not otherwise excluded from income, while sales tax — as is indicated in the chain email — is paid on the absolute sales price.

Why does this matter? Because assuming the home being sold is a primary residence and otherwise satisfies the requirements of I.R.C. § 121, a married taxpayer can exclude up to $500,000 of gain from the sale of the residence. Thus, even though a taxpayer may recognize a $499,999 gain from the sale of a home, if it is excluded from taxable income under Section 121, there is no taxable gain upon which to assess the 3.8% additional tax.

The originator of the email above would have you believe that the 3.8% tax would be assessed on the purchase price, and that is simply not the case. Since no gain is recognized courtesy of Section 121, no capital gains tax — including the 3.8% addition provided for in Obamacare –is assessed on the sale.

Section 121 takes out much of the sting of the 3.8% tax increase, but there are other limitations to the Obamacare surcharge as well. For example, the tax is only assessed on those with adjusted gross income in excess of $250,000. If your AGI is below the threshold, the 3.8% increase won’t kick in.

Of course, as with all chain emails, there is some truth to be found: if a taxpayer sells a home in 2013 and either 1) the gain exceeds $500,000 or 2) Section 121 doesn’t apply for some other reason, AND the taxpayer has AGI in excess of $250,000, the taxpayer will pay an additional 3.8% tax next year.  However, as noted above, that 3.8% tax will be assessed on the net gain, not the sales price.

Hopefully this clears things up. For more information, consult your local library.

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Earlier today, President Obama fired what promises to be the opening salvo in a six-month battle to determine the fate of the Bush tax cuts. As a reminder of what’s at stake, the 2001 and 2003 reductions of the individual income tax rates are set to expire at year-end, and in the absence of further legislation, the current tax brackets of 10/15/25/28/33 and 35% percent would be replaced by rates of 15/28/31/36 and 39.6%.

In his address to Congress, President Obama remained true to prior promises, urging an extension of the Bush tax cuts for those taxpayers with adjusted gross income of less than $250,000. For those earning in excess of the threshold, the top rates of 33% and 35% would return to the 36% and 39.6% rates seen prior to 2001.

While Obama’s push to extend reduced rates only for lower and middle class taxpayers should come as no surprise, the President did acquiesce on one portion of his previous stance: he is now arguing for only a one year extension of the Bush tax cuts; previously, the President promised to make the cuts permanent for those earning below the $250,000 threshold.

In his remarks, the President correctly pointed out retaining the current rates for the lower and middle classes is one of the rare pieces of tax policy to find bipartisan agreement. As a result, there is no need to continue to hold up an extension of those rates for qualifying taxpayers while the parties continue to hash out what to do with those earning more than $250,000.  That debate, Obama reasoned, can take place after the lower and middle-class extension is signed into law.

It’s a cheeky bit of strategy by the President.  By backing off his requirement that any lower and middle class extensions be permanent, Obama is attempting to show the voting public that he’s willing to work with his Republican adversaries to come to an agreement. Should the Republican party not be willing to make its own concessions — either real or largely illusory, as the President’s may well be — in order to reach an agreement to extend the cuts, they risk alienating the very lower and middle class voters who may well decide the upcoming election.

Further exacerbating the Republican’s potential public perception problem, if the party’s leaders fail to heed the President’s plea to extend the middle-class cuts now and debate the fate of the nation’s wealthy later, Republicans will appear willing to let the entire nation suffer to ensure they protect the wealthiest two percent.  

Republican lawmakers, of course, have other ideas for any extension. They would like to see the Bush tax cuts continued for all taxpayers, and are unwilling, at least at this point, to give up what leverage they have by agreeing to a scaled-back extension of the cuts. To that end, House Republicans are expected to unveil their own bill proposing a one-year extension of the current rates for all taxpayers later this month.

It should be interesting to see the response to today’s remarks engender from Mitt Romney as well as current members of the House. This much we know, we’re in for a heated half-year on Capitol Hill.

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Sounds strange, but it’s true. After poring over Chief Justice Roberts’ opinion, the primary reason nearly every American will be required to own health insurance starting in 2014 or else be required to pay a penalty…err….tax to the IRS is because the required payment to the IRS under I.R.C. § 5000A is BOTH a penalty and a tax.

Allow me to explain.

Before the Supreme Court could determine whether the individual insurance mandate is constitutional, the justice’s first had to wrestle with the “Anti-Injunction Act.” The Anti-Injunction Act essentially provides that no suit may be brought against the government for imposing a tax until after the tax has been paid, at which point the payor could sue for refund. The purpose of this rule is obvious: to allow the government to impose revenue raising taxes and not have to fight through an endless string of lawsuits before they may begin to collect their revenue.

As a result, if the penalty imposed under I.R.C. § 5000A for failure to own health insurance were deemed to be a “tax” for purposes of the Anti-Injunction Act, the Supreme Court would be effectively barred from ruling on the constitutionality of the Patient Protection Act until 2015: the year taxpayers would have begun making payments on their tax return and could thus sue for refund. The Supreme Court, however, found that for these purposes — and as we’ll discuss later, only for these purposes — the amounts paid under I.R.C. § 5000A are a “penalty,” rather than a tax.

The Anti-Injunction Act applies to suits “for the purpose of restraining the assessment or collection of any tax.” §7421(a) (emphasis added). Congress, however, chose to describe the “[s]hared responsibility payment” imposed on those who forgo health insurance not as a “tax,” but as a “penalty.” §§5000A(b), (g)(2). Congress’s decision to label this exaction a “penalty” rather than a “tax” is significant because the Affordable Care Act describes many other exactions it creates as “taxes.”

Moving on to the highly-anticipated part of the decision, the Supreme Court was left to determine if requiring taxpayers to obtain health insurance was constitutional under two alternative arguments:

1. Did Congress have the power to enact the mandate under the Commerce Clause?

2. In the alternative, can the mandate be viewed not as an order to acquire insurance, but rather a tax to be borne by those who forego insurance? And if so, is such a tax within the powers of Congress?

Commerce Clause Argument:

The Supreme Court determined — by a 5-4 vote — that the individual insurance mandate was not constitutional under the Commerce Clause. The primary factor in the determination was that the Commerce Clause allows Congress to regulate commerce, not to compel Americans to enter into commerce they might otherwise refrain from:

The individual mandate, however, does not regulate existing commercial activity. It instead compels individ­uals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce. Construing the Commerce Clause to permit Con­gress to regulate individuals precisely because they are doing nothing would open a new and potentially vast do­main to congressional authority. Every day individuals do not do an infinite number of things. In some cases they decide not to do something; in others they simply fail to do it. Allowing Congress to justify federal regulation by pointing to the effect of inaction on commerce would bring countless decisions an individual could potentially make within the scope of federal regulation, and—under the Government’s theory—empower Congress to make those decisions for him.

To illustrate the Pandora’s box that could be opened by allowing Congress to initiate commerce, Justice Roberts used the following example:

Indeed, the Government’s logic would justify a manda­tory purchase to solve almost any problem. To consider a different example in the health care market, many Americans do not eat a balanced diet. That group makes up a larger percentage of the total population than those without health insurance. The failure of that group to have a healthy diet increases health care costs, to a greater extent than the failure of the uninsured to pur­chase insurance. Those in­creased costs are borne in part by other Americans who must pay more, just as the uninsured shift costs to the insured.  Under the Gov­ernment’s theory, Congress could address the diet problem by ordering everyone to buy vegetables. That is not the country the Framers of our Constitution envisioned.

While the government posed the argument that all Americans — whether young, old, healthy, sick, insured or uninsured — will at some point need health insurance, and thus are all “active” in the health insurance marketplace, the Supreme Court was not convinced:

The Government repeats the phrase “active in the mar­ket for health care” throughout its brief, but that concept has no constitutional significance. An individual who bought a car two years ago and may buy another in the future is not “active in the car market” in any pertinent sense. The phrase “active in the market” cannot obscure the fact that most of those regulated by the individual mandate are not currently engaged in any commercial activity involving health care, and that fact is fatal to the Government’s effort to “regulate the uninsured as a class.” Everyone will likely participate in the markets for food, clothing, transportation, shelter, or energy; that does not authorize Congress to direct them to purchase particular products in those or other markets today. The Commerce Clause is not a general license to regulate an individual from cradle to grave, simply because he will predictably engage in particular transactions.

Taxing Powers Argument

Having held that the individual insurance requirement was unconstitutional under the Commerce Clause, the fate of Obamacare rested on whether the mandate could be imposed as part of Congress’ taxing powers.

Before it could address this argument, however, the justice’s had to be willing to look at the mandate another way. Rather than reading the requirement to obtain heath insurance or pay a tax as an “order,” it should be viewed as simply imposing a tax on those who do not buy the product. The court was willing to do so:

Under the mandate, if an individual does not maintain health insurance, the only consequence is that he must make an additional payment to the IRS when he pays his taxes. See §5000A(b). That, according to the Government, means the mandate can be regarded as establishing a condition—not owning health insurance—that triggers a tax—the required payment to the IRS. Under that theory, the mandate is not a legal command to buy insurance. Rather, it makes going without insurance just another thing the Government taxes, like buying gasoline or earn­ing income. And if the mandate is in effect just a tax hike on certain taxpayers who do not have health insurance, it may be within Congress’s constitutional power to tax.

Next, in order to determine whether the mandate was within the taxing powers of Congress, the Supreme Court — just pages after holding the mandate to be a “penalty” for purposes of the Anti-Injunction Act — would have to be convinced that the payment made to the IRS under I.R.C. § 5000A was actually a “tax” for constitutional purposes. Surprising many, the court made just that leap:

The exaction the Affordable Care Act imposes on those without health insurance looks like a tax in many re­spects. The “[s]hared responsibility payment,” as the statute entitles it, is paid into the Treasury by “tax­payer[s]” when they file their tax returns. 26 U. S. C. §5000A(b). It does not apply to individuals who do not pay federal income taxes because their household income is less than the filing threshold in the Internal Revenue Code. §5000A(e)(2). For taxpayers who do owe the pay­ment, its amount is determined by such familiar factors as taxable income, number of dependents, and joint filing status. §§5000A(b)(3), (c)(2), (c)(4). The requirement to pay is found in the Internal Revenue Code and enforced by the IRS, which—as we previously explained—must assess and collect it “in the same manner as taxes.” This process yields the essential feature of any tax: it produces at least some revenue for the Government. Indeed, the payment is expected to raise about $4 billion per year by 2017.

Thus, the Supreme Court was able to reconcile calling the mandate a “penalty” for purposes of the Anti-Injunction Act, but a “tax” for purposes of its constitutionality:

It is of course true that the Act describes the payment as a “penalty,” not a “tax.” But while that label is fatal to the application of the Anti-Injunction Act, supra, at 12–13, it does not determine whether the payment may be viewed as an exercise of Congress’s taxing power. It is up to Con­gress whether to apply the Anti-Injunction Act to any particular statute, so it makes sense to be guided by Con­gress’s choice of label on that question. That choice does not, however, control whether an exaction is within Con­gress’s constitutional power to tax.

In addition, because Congress left it up to us, the taxpayers, to decide whether to obtain insurance or pay the tax, with no potential for punitive sanctions or criminal prosecution, it carried the hallmarks of a constitutional tax.

And that’s how we got to where we are today: with an elated President Obama, a despondent Rush Limbaugh, and much of America shaking their heads and trying to make sense of how the same payment can be both a “penalty” and  a “tax.”

Click for a PDF of the entire opinion —  Supreme Court opinion — including the dissenting opinion of the four liberal justices who believed the mandate was within the powers of the Commerce Clause, as well as the dissenting opinion of the four conservative justices who found the mandate unconstitutional under both arguments.

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With the battle surrounding the Bush tax cuts between President Obama and Mitt Romney taking center stage as the election nears, an area of the tax law where the two candidates may have even more disparate views has slipped into the background.

In the international tax arena, Mitt Romney has thrown his support behind a move to a pure “territorial” tax system. In such a system, U.S. tax would never be imposed on income earned from non-U.S. sources by a foreign subsidiary of a U.S. corporation. The foreign subsidiary would also be permitted to repatriate the earnings with tax-free dividends to its U.S. parent, which — the theory goes — would eliminate the current penalty for bringing foreign earnings back to the U.S., and thus encourage domestic investment and growth.

Detractors of the territorial system — with President Obama foremost among them — argue that this system encourages U.S. corporations to shift operations to jurisdictions with lower tax rates, taking jobs and revenue along with them and eroding the U.S. tax base. As a result, the President has strongly encouraged legislation that would penalize U.S. corporations that move business overseas, while providing incentive in the form of tax breaks for those U.S. companies that currently have operations abroad to bring business back home.

It appears Senate Democrats are ready to push forward with the President’s mandate, as they announced today that the plan to vote next month on a proposal that would accomplish both goals.

The proposed legislation, titled the “Bring Jobs Home Act,” would grant companies a  20% tax credit for the expenses incurred in bringing jobs and investment to the U.S., while also denying companies a deduction for the expense of moving investment out of the U.S.

With regards to the credit, the bill provides that if pursuant to an insourcing plan, a company incurs expenses (aside from normal operating expense and severance expenses) to eliminate a business unit located outside the U.S. and establish a new business unit in the U.S., then upon completion of the relocation the taxpayer is entitled to a credit equal to 20% of the qualified expenses. The bill also provides that the taxpayer may alternatively elect to take the credit in the year after it would typically be allowed.

On the disallowance of the deduction for outsourcing U.S. activities, proposed I.R.C. § 280I would deny any expenses incurred by the taxpayer to relocate the operations outside the U.S. For these purposes, the definition of “expenses” is the same as that used in defining the expenses eligible for the credit.

Voting should take place by July 4th.

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