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House Republicans released a budget proposal today that would consolidate the six current individual income tax brackets into only two — a 10% and a 25% bracket — while also reducing the top corporate rate to 25% and eliminating taxes on U.S. companies’ overseas profits.

The proposal is part of  a larger election-year message signifying that Republicans — unlike their Democrat counterparts — have a plan to balance the federal budget in a way that does not necessitate tax increases.

As part of Congressman Paul Ryan’s plan, spending would be cut on Medicare, food stamps, college tuition grants, and other “safety net” programs. The plan would produce a 10-year deficit of only $3.13 trillion, less than half the deficit created by President Obama’s recently released budget.   

Equally as predictable, Democrats’ panned the proposal as screwing the poor to finance tax cuts for the rich.

Either way, from a tax perspective the proposal is as meaningful as rearranging the deck chairs on the Titanic, as neither side realistically expects the suggested reform to become law. Rather, the Republican plan is aimed towards establishing the party’s position on spending and taxes prior to the November election.

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It’s going to be a busy day in the tax world, as President Obama will be unveiling  his long-awaited  proposal for corporate tax reform in a few hours. Expected to be included among the proposals are the following:

  • A reduction in the corporate tax rate from 35% to 28%;
  • A modification to Section 199 to ensure that U.S. manufacturers pay no more than a 25% effective tax rate;
  • Elimination of up to a dozen tax deductions currently available;
  • Renewal of the R&D credit under Section 41; and
  • The addition of a “worldwide minimum tax” to ensure that U.S. corporations that move operations offshore pay tax on its overseas profits.

It’s important to note, while the 7% reduction in the corporate tax rate may look universally appetizing, for those corporations that currently take advantage of many of the tax preferences on the chopping block, they may actually see their effective tax rate increase as a result of the lost deductions. Those corporations — typically in the technology and pharmaceutical fields — likely will not be on board with the proposed changes.

In general, however, corporate tax reform is one of the few areas where Republicans and Democrats may be able to find some common ground, as it is widely recognized that the current corporate tax regime is putting the U.S. at a competitive disadvantage with other nations.

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Last night, Republican Rick Santorum, who shocked political pundits by toppling Mitt Romney and Newt Gingrich during his recent run of victories in Minnesota, Colorado and Missouri, finally relented to what has become a rite of passage for any serious presidential candidate: the public release of  his tax returns.

After Santorum published his 2007, 2008, 2009 and 2010 federal returns online (though some attachments were missing), we were asked to review the returns for Bloomberg. The verdict? They were remarkable in just how unremarkable they were.

Santorum’s returns stood in stark contrast to the much-publicized returns of leading Republican candidate Mitt Romney, both in terms of magnitude and composition:

-Whereas Romney’s AGI exceeded $20,000,000 in 2010, Santorum’s hovered around $900,00 for the four-year period.

-As opposed to Romney — whose income was largely taxed at the 15% rate on long-term capital gains and qualified dividends — Santorum generated almost no income subject to preferential rates (zero long-term capital gains and negligible (less than $700) qualified dividend income over the four-year period.)

-Instead, the bulk of Santorum’s income was realized in the form of wages (approximately $300,000 per year) and self-employment income (approximately $600,000 per year), which are subject to tax at ordinary rates. As a result, Santorum’s effective tax rate averaged close to 27% over the four-year period, which is nearly double Romney’s 2010 rate of 13.9%.[i]

-Also in contrast to Mitt Romney, Santorum’s returns contained no reference to family trusts or foreign investments. That’s neither good nor bad, just a fact, and one that is likely to make Santorum more identifiable to many taxpayers.

Also worthy of note:

-Santorum has seven kids, which may explain why he’s pushing to triple the personal exemption amount.

-Santorum paid AMT in 2006, but narrowly avoided it from 2007 through 2010. This was a bit of a surprise, as his large deductions for state taxes and personal exemptions (both AMT adjustments) made Santorum a prime candidate to be subject to the minimum tax. Because Santorum’s income steadily climbed into the higher tax brackets, however, his effective rate exceeded the 28% maximum AMT rate. Perhaps these close calls were the impetus for Santorum’s promise to do away with the AMT should he be elected?

-Despite being one of only four men left in the conversation to be the next leader of the free world, Santorum prepared his own tax returns. The thought of a man with AGI approaching $1,000,000 and such lofty political aspirations cranking out his own Schedule C on Turbo Tax is both adorable and dangerous, like a kitten playing with a handgun.

-Perhaps because the returns were self-prepared, Santorum deducted $85,000 in mortgage interest in 2009, an amount that borders on impossible given the $1,100,000 maximum amount of primary residence debt permitted to be taken into account under I.R.C. § 163. Either Santorum got a raw deal in the form of a 7.5% jumbo interest rate on his home, or he really needs to read this post.

-With AGI of nearly $1,000,000 per year but no investment income, Santorum’s tax returns beg the question: Where does he keep his money? Based on a quick perusal of his financial disclosure, it appears Santorum has $50,000-$100,000 in a checking account, $100,000-$250,000 of Universal Health Systems stock, $500,000-$650,000 in various IRA investments, and $250,000 in Section 529 plans so his seven kids can go to college and form a kick-ass volleyball squad.

How Santorum’s returns are received by the media and taxpaying public will begin to be revealed tomorrow, but this much is certain, no one will be able to attack his effective tax rate or use of loopholes favoring the wealthy.


[i] As I’ve stressed before, any discussion of Romney’s effective tax rate really should take into consideration the corporate level tax paid by his many investments.

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There are certain things you can count on recurring every four years: February gets one day longer, people actually care about hockey, the U.S. women fall short in the World Cup, and concerns over tax law move to the forefront of public consciousness.  Such concerns are poised to reach a fever pitch on Monday, as President Obama plans to release his 2013 budget. Coming in an election year — and with the country’s debt currently standing at astronomical levels — this budget stands to be as heavily scrutinized as any in recent memory, with much of the focus squarely on the president’s tax proposals.

Over the past six months, President Obama has floated varying forms of a general framework for tax reform, but with the 2013 budget release, Republicans and Democrats alike will finally get their first look at specific elements of the president’s plan.  

What will we see? Assuming President Obama sticks to the principles he laid out during his Deficit Reduction Plan and State of the Union Address — we can expect the following:

Individual Proposals

  • Repeal of the Bush tax cuts for taxpayers earning more than $250,000 effective 1.1.2013. For these “wealthy” individuals, the maximum individual tax rate will return to 39.6%, qualified dividends will again be taxed at ordinary rates, and the tax on long-term capital gains will rise from 15% to 20%.
  • Removal of the tax advantage currently afforded to private equity fund managers who receive a grant of a pure “profits interests” in a fund in exchange for management services. These “carried interests” allow the fund managers to receive allocations of future income that is primarily taxed at the favorable long-term capital gains rate. The president will likely propose to tax subsequent allocations of income resulting from the grant of a profits interest as compensation for services, taxed at ordinary income rates.
  • In what is easily the most highly anticipated — and sure to be the most heavily criticized — aspect of the president’s 2013 plan, the “Buffet Plan” will finally come to fruition. The proposal will likely recommend an alternative calculation (in addition to the existing alternative minimum tax) that will ensure that taxpayers earning over $1,000,000 pay tax at an effective rate of at least 30%.
  • A limitation on itemized deductions for individuals earning more than $250,000 (or perhaps only on those earning more than $1,000,000 as part of achieving the goals of the “Buffet Rule”). Based on the president’s August proposal, the mortgage interest deduction could be the first to go.
  • Extension of the current 2% reduction on an employee’s share of payroll taxes. Set to expire in three weeks, the president has been adamant that the cut stay in play for the remainder of 2012. Whether he carries it into 2013 remains to be seen.

International Proposals

  • In his State of the Union Address, President Obama professed a desire to implement a minimum tax to be paid by U.S. corporations on its operations overseas. This is likely to be built into the 2013 budget in some shape or form.
  • Enactment of a tax credit for corporations willing to move international operations back to the U.S.
  • Doubling the Section 199 deduction to 18% for U.S. manufacturers.

Corporate Proposals

If these proposals are in fact a part of the president’s 2013 budget, we’d be well advised to grab some popcorn, sit back, and await the swift response from the Republican party. The “Buffet Rule” in particular is sure to incite further cries of socialism and class warfare from the Romney and Gingrich camps — particularly in light of the sweeping tax cuts they are floating —  and may well cause Rush Limbaugh and Bill O’Reilly to spontaneously combust.

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The presidential election is a mere nine months away, and while the man to represent the Republican party in its quest to unseat President Obama is still anyone’s guess, most pundits agree it will come down to either former House Speaker Newt Gingirch or Mitt Romney, the former Governor of Massachusetts. 

While the months to come will surely flush out each candidate’s stance on hot-button issues like foreign policy, homeland security, and public breastfeeding, we here at Double Taxation concern ourselves with tax law, and only tax law. And though both Gingrich and Romney have found their personal tax returns at the center of controversy in the past few weeks, we’re of the view that not enough attention has been paid to the tax proposals each candidate would seek to implement should they be elected president. 

As a result, we’ve culled through each candidate’s published proposals and campaign rhetoric in an attempt to create a comprehensive comparison of their respective plans for tax reform, culminating in this “Tale of the Tax Tape,” if you will. We’ll spare you the commentary, however, as the determination of the “best” plan requires an independent analysis based on each individual voters” political, social, and religious values.  

Newt Gingrich

Comparison of Key Tax Considerations

Mitt Romney

Remain at 35%; 15% if optional “flat tax” is elected (see fn iv)

Top Ordinary Rate[i]

Remain at 35%
Remain at 15%; 0% if optional “flat tax” is elected (see fn ii)

Long Term Capital Gains Rate [i]

0% for taxpayers with AGI < $200,000; 15% for everyone else
Remain at 15%; 0% if optional “flat tax” is elected (see fv ii)

Qualified Dividends Rate [i]

0% for taxpayers with AGI < $200,000; 15% for everyone else.
Taxed at ordinary rates; 0% if optional “flat tax” is elected (see fn ii)

Rate on Interest

0% for taxpayers with AGI < $200,000; ordinary rates for everyone else.
Offer individual taxpayers an optional 15% flat tax[ii] Please see footnote ii, as this is a critical part of the Gingrich tax platform.

Tax Code Reform

Start with the Bowles-Simpson Commission[iii] approach; lower rates and broaden the tax base
Eliminated

Estate Tax[iv]

Eliminated
Maximum 12.5% rate

Corporate Income Tax[v]

Maximum 25% rate
Switch to a “territorial system[vi]

International Tax Reform

Switch to a “territorial system”
Full expensing of capital expenditures permitted

Capital Expenditures

100% bonus deprecation extended  1 year
No tax on corporate capital gains; eventually replace payroll tax with personal accounts

Miscellaneous

Would end the American Opportunity tax credit for college education; lower payroll taxes

[i] Neither Gingrich nor Romney propose to allow the Bush tax cuts to expire. Were they to expire, the top ordinary income rate is slated to return to 39.6% on January 1, 2013. In addition, qualified dividends will again be taxed at ordinary rates — as opposed to the current 15% — and long-term capital gains will be taxed at a 20% rate as opposed to the current 15% rate.

[ii] In what may be the most important aspect of Gingrich’s plan, taxpayers could elect to forego the complexities of the Code in favor of a flat 15 percent tax rate regardless of income. Under this alternative calculation, all capital gains, interest income, and dividends would be tax-free, while nearly all deductions and credits would be abolished, except for the deductions for mortgage interest and charitable contributions and the earned income, child and foreign tax credits. The AMT would be eliminated, and all taxpayers would have the option of a $12,000 standard deduction. The idea is to create simplicity; taxpayers would be able to pay their taxes by mailing a postcard to the IRS with the necessary calculation, thereby saving considerable time and professional fees.

[iii] Bowles-Simpson was a presidential commission created by President Obama in 2010 to propose ways to cut the federal deficit. From a tax perspective, the commission attempted to simplify the Code while simultaneously raising tax revenue by eliminating many tax deductions.

[iv] The estate tax is currently at 35% for 2011 and 2012, but is slated to return to a 55% rate in 2013.

[v] The maximum corporate income tax rate is currently 35%.

[vi] A territorial systems is one in which income is taxed only in the country in which it is earned. Under its current “worldwide” system, foreign affiliates of American companies are generally taxed on income in their host country. When the earnings are repatriated from the foreign affiliate to a U.S. corporation, tax is paid a second time to the U.S., with a credit given for the tax paid abroad.

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Last night, I parked myself on the couch just in time for President Obama’s State of the Union Address. As a tax geek, I was excited to hear his proposals for comprehensive change to the Internal Revenue Code. I was excited to hear if he had solidified plans for the much-discussed “Buffet Rule.” I was, perhaps, most excited to hear if he would fan the flames of the perceived inequities in this country by highlighting the 13.9% effective tax rate paid by his chief opposition, leading Republican candidate Mitt Romney. This would be an address, I believed, that could change both the future of our country, and from a selfish perspective, my career.

But then I noticed Teen Wolf was on AMC, so I bagged the address and watched that instead. Hey, I’m only human.

I kid, I kid. I managed to watch the entire address — no small feat when you have a two-year old boy — and while the President left Romney’s hot-button tax rate out of his address, he did cap the night by urging Congress to require taxpayers with income exceeding $1,000,000 to pay a minimum effective rate of 30% as part of his State of the Union Address.

This is nothing new from the President, who originally floated the idea of a “Buffet Rule” that would require the nation’s wealthiest taxpayers to pay a minimum effective rate back in September, though at that time it was purely a concept with no framework for application.

This “Buffet Rule’ began to take shape on Tuesday night. While some details remain unclear, it appears this 30% rate on high-earners would be achieved not by substantially increasing the preferential rates currently in place on qualified dividends and long-term capital gains, but rather by eliminating certain deductions such as mortgage interest, tax-free health care, retirement savings and child-care benefits for those with adjusted gross income in excess of $1,000,000. The President made it clear that charitable contributions will not be impacted or further limited by the potential changes.

As we saw back in September, President Obama reiterated his commitment to taxpayers on the other end of the income spectrum, requiring that taxes not increase on those with incomes under $250,000.

Noticeably absent from the President’s address was a proposal discussed in September that taxpayers with income in excess of $250,000 but less than $1,000,000 would see a return to the top tax rates of 39.6% as of January 1, 2013, as well as a 28% cap on certain itemized deductions. I don’t know if this means the President has abandoned this proposed reform on these mid-range earners, or if it was purely omitted from the address. Time will tell.

From a corporate perspective, President Obama was adamant that comprehensive corporate tax reform is necessary to entice U.S. corporations to bring jobs back home. The President recommended a three-prong approach designed to eliminate current incentives that make it more attractive to ship jobs overseas:

  1. Eliminate tax deductions for outsourcing jobs; replace it with new tax credit to cover moving expenses for companies that close production overseas and bring jobs back to the U.S.
  2. Remove incentive to locate corporations overseas through an international minimum tax on overseas profits. If all corporations are required to pay a minimum tax on international income, other countries will not be able to entice American business through unusually low tax rates.
  3. Increase tax breaks for U.S. manufacturers by reducing rates and doubling the tax deduction for high-tech manufacturers.

All in all, there were no great surprises in the address. And let’s be honest, given the current congressional gridlock, the odds of any of these changes being enacted in the  near future are extremely slim, reducing last night’s address to one hour of spirited rhetoric.

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I’m like Randall from Clerks, only the exact opposite: I like people, but I hate gatherings. Particularly dinner parties. Oh, how I hate dinner parties.

This is largely due to the fact that I’m awful at small talk, which in turn is largely due to the fact that I’m only well-versed on two things in life: sports and The Simpsons. And while this may make me a hit with the 14-21 year old demographic, most adults seem largely unimpressed with my ability to list 20 people who’ve worked alongside Homer at the Springfield Nuclear Power Plant.

No, the majority of my contemporaries prefer to talk about grown-up topics like mortgage rates and lawn care and the various pros and cons of the local school systems. Now, call me immature, but when I get stuck talking about any of this stuff, it makes my brain want to flee my body, sort of like this:

As my wife constantly reminds me, however, I am now a husband and a father, and by extension, a grown-up. I can no longer avoid uncomfortable conversations by stuffing my pockets with cocktail shrimp and waiting out a party in an upstairs guest bathroom. I’ve got to grin and bear it, which means I’ve got to be prepared.

And you should be too. Whether you’re socially challenged like me or not, as CPAs, new acquaintances expect us to be experts on all things finance. It matters little if you’ve spent your entire career preparing consolidated corporate tax returns, your neighbor Bill will inevitably look to you for advice on funding little William’s 529 plan.

That’s why I’ve put together the following FAQ. As you may have heard, our nation has been dealing with a bit of a debt problem. On Tuesday, legislation was passed as part of a “deficit reduction deal,” allowing the U.S. to narrowly avoid defaulting on its obligations and preventing us from becoming the largest province in the Chinese empire.

It’s only a matter of time before someone asks you what the deal is about the deal. So read on, and you can thank me after your next dinner party.

Wait…what happened?

The U.S. almost defaulted on its outstanding debt. The U.S. Treasury is no different then MC Hammer or Mike Tyson; it can’t cover its expenses strictly from the revenue it earns. As a result,  it looks to borrow.  However, the Treasury can only borrow money as long as the total debt doesn’t exceed a ceiling stated by law.  As of July 2011, the U.S. had maxed out its $14.3 trillion borrowing limit, meaning unless the President found some serious loose change under his couch cushions, we would have to either increase the debt limit or risk becoming unable to service our obligations, potentially leading to default.

So how did we avoid default?  

To change the debt ceiling, new legistlation must be passed. This was accomplished mere hours before default was likely, when lawmakers agreed to increase the amount the U.S. could borrow from its lenders, while simultaneously requiring the government to cut its spending in an effort to reduct the deficit. This may seem counterintuitive — akin, if you will,  to trying to curb your wife’s shopping habit by handing her a shiny new VISA but advising her to take it easy at Ann Taylor Loft —  but it accomplished the task of keeping us out of default.

How much additional cash can we borrow?

The legislation will raise the debt ceiling by $400 billion today, then another $500 billion in September. It will then be increased by another $1.2 trillion to $1.5 trillion. That’s a total debt ceiling increase of $2.4 trillion, or just enough to cover Albert Pujols next contract.

What kind of budget cuts are we facing? 

Much of the first $900 billion of spending cuts will likely come from our defense budget. So while we may become a more fiscally responsible nation,  in ten years there will be nothing to prevent the King of England from marching right through your front door and pushing you around. So there’s that to consider.

Where are the tax increases?

Despite an abundance of rhetoric over the past few months, the current proposal doesn’t account for any additional revenue raisers — tax or otherwise. Only reduced spending.

Can you really reduce a deficit by merely cutting spending and not raising additional revenue?

Sure you can, but as Chris Rock once said, you can also drive a car with your feet, but that don’t make it a good idea. It’s extremely likely that when the bipartisan committee assigned to reducing the deficit puts their heads together later this year, tax reform will be on the menu.

What kind of tax reform might we see?

In light of these recent developments, I would wager a guess that any reform may well be sweeping, the likes of which we haven’t seen since 1986. I just wouldn’t expect to see any major changes in 2011, since the bipartisan committee has a tight window to work with in meeting its November 2011 deadline for recommending additional deficit reduction strategies.

From a long-term standpoint, however, several proposals are currently on the table, including the following:

Obama’s Plan:

  • Includes an extension of the Bush tax cuts after 2012 for only those earning less than $200,000 ($250,000 for MFJ).
  • Eliminating tax breaks for big oil and corporate jets.
  • A permanent extension of the R&D credit.
  • Keeping the 3.8% Medicare contribution tax on certain unearned income after 2012.

These proposals keep with Obama’s theme of targeting the wealthy and demanding that they pay their “fair share.”

The Gang of Six Plan

White House Deficit Commission

  • Reducing tax rates, but eliminating or reducing many current tax incentives, including the deduction for home mortgage interest, accelerated depreciation, lower rates on capital gains and the earned income credit.
  • Individual rates would drop to a range from 8-23%, though dividends and capital gains would be taxed as ordinary income.
  • Eliminating the AMT.
  • Repealing the state and local tax itemized deduction and reducing the charitable contribution deduction.
  • A single corporate rate of 26% and elimination of the Section 199 deduction.

That should give you everything you need to handle any unsolicited questions with aplomb. You’ll notice I’ve only provided facts; no opinion. It’s been my experience that in a social setting, one should never offer their views on politics, religion, or just how overrated Lady Gaga is. It can never end well.

Instead, just drop some deficit reduction deal knowledge. You’ll be a bigger hit at parties than this dude. 

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