Tax Update Blog: April 2007 Archives

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GO HOME AND STAY

April 30, 2007

The Iowa legislature has gone home for the year. They leave behind a tax law in even worse shape than the one they found when they started the session in January. Having made some big spending commitments, we shouldn't expect anything better when they return next year.

The principal tax legislation of this session was SF 128, the $1 per pack cigarette tax. This will be an economic development boon to cross-border convenience stores from East Dubuque, Illinois to Princeton, Missouri.

The tax bill that spur the most economic development for those of us who give tax advice by the hour is the tax amnesty bill, SF 580. The bill provides for a tax amnesty to run from September 4 through October 31. It will cover the following taxes:

individual and corporate income taxes; franchise tax; sales and use taxes; hotel and motel tax; local city, county, and school district sales and services taxes; automobile rental tax; equipment tax; petroleum diminution charge; inheritance and estate taxes; motor fuel and special fuel taxes; cigarette and tobacco taxes; and controlled substance tax.

If you think you may have issues with any of these taxes for prior years, it's a good time to discreetly discuss getting your amnesty application in September 4. Taxes paid under the amnesty will be penalty-free, with 1/2 the interest. What? You paid your taxes on time all these years? The legislature appreciates all of us dedicated chumps law-abiding taxpayers.

The legislature also passed sweet tax credits for historic rehabilitation (SF 566) and for film makers (HF 892). Oh, and they rushed through a bunch of tax breaks for Google (HF 912).

Surprisingly, the legislature failed to pass a gas tax increase or a combined reporting requirement for corporations doing business in Iowa.

What's missing? Any effort to make serious improvements to Iowa's dysfunctional, complex, high-rate loophole-ridden tax law. A pathetic effort at property tax relief fizzled at the end of the session. No effort at all was made to lower our high income tax rates or eliminate loopholes. Instead, the legislature is even more committed to taxing its existing businesses and individuals to lure their competitors and subsidize the well-connected. This should solidify our ranking as the worst state for new business startups.

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DR. ATKINS TRUSTEES HAVE A BEEF WITH HIS WIDOW

April 30, 2007

While bunless burgers have disappeared from most menus, and most of the pounds lost on the Atkins diet have been replaced, litigation over diet guru Dr. Robert Atkins' estate is still going strong. Death and Taxes has the scoop.

After Dr. Atkins' death, his widow (Veronica) became very depressed. She also had a huge amount of money to deal with, and no bank or trust company acting as adviser. Instead, Ms. Atkins turned to three individuals she referred to as "The Three Musketeers" -- a "self-described entrepreneur" (yikes!), an accountant, and a lawyer. Mrs. Atkins had the three appointed as trustees of the marital trust created for her benefit, and officers of her husband's foundation. She also...

-agreed to pay each of the men $1.2 million per year, including some money out of her own pocket (since their salaries "exceeded statutory limits on trustee commissions");

-signed them to 10-year contracts with built-in extensions which the three now claim "made them employees for the rest of her life"; and

-allowed each of them to purchase a $5 million life insurance policy on her life, with themselves as beneficiaries.

Nice work if you can get it.

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TAXABLE TALK DOESN'T WASTE WORDS

April 30, 2007

Tax blogger Russ Fox made me smile with answers to questions he received this tax season:

From New York City: I looked at how much my husband and I paid in taxes this year and was appalled. What can we do?

Move.

Russ does go on to explain where to move, but he wastes no time getting to the point.

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HAPPY TAX FREEDOM DAY!

April 30, 2007

The Tax Foundation has declared tomorrow "Tax Freedom Day" to mark the point in the year when the average American has earned enough to cover all federal, state and local tax obligations.

They also have separate Tax Freedom Days by state. Iowa's date this year was April 21, but you can bet it will be later next year. The last Tax Freedom Day is May 20 in Connecticut.

Click map to enlarge.

The TaxProf has more.

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IOWA HOUSE PASSES TAX AMNESTY BILL

April 27, 2007

The Iowa House of Representatives cleared the tax amnesty bill, SF 580, this morning. While the Senate passed the bill almost unanimously, the bill had to overcome significant opposition in the House, passing 55-38.

This bill is expected to raise some millions to help finance the Governor's spending surge as tax delinquents come in from the cold. Unfortunately, the bill fails even the basic "carrot and stick" test of most tax amnesties by failing to increase penalties and enforcement efforts for non-filers. It instead offers only carrots - 1/2 interest and no penalties for those who come in from the cold between September 4 and October 31 of this year.

And if you're behind on your taxes now, the smart bet is probably to do nothing until September 4. If you have been living frugally to pay your taxes on time, or to catch up on your tax debts, the legislature has these words of comfort: sorry, chump!

Prior coverage:

IOWA SENATE PASSES AMNESTY BILL

WAYS AND MEANS VOTES TO SCHMUCK IOWA TAXPAYERS

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ANOTHER REASON TO NOT GET BEHIND ON TAX FILING

April 27, 2007

Not everybody who fails to file a tax return is a "Tax Honesty" adherent. Some folks have every intention of filing their return, but life gets in the way. Some are chronic procrastinators; others are workaholics who just never make the time. Some are just disorganized and irresponsible. And some figure - "I'm sure I'm overpaid. I'll just get on it when I'm not so busy and gut my refunds."

This can be costly, as Daniel Ostrom learned yesterday in Tax Court. Mr. Ostrom didn't get around to filing his 1997 and 1998 returns until the summer of 2001. He was due a refund of $2,772 on his 1997 return, but he owed $2,383. He paid $101 and attempted to apply his 1997 overpayment to 1998.

Unfortunately for Mr. Ostrom, the statute of limitations for claiming his 1997 refund expired on April 15, 2001, about two months before he filed his 1997 return. His ability to use that refund against any other taxes died that day. Procrastination cost Mr. Ostrom $2,772.

The moral? Even if you have a refund coming, file your returns on time, or you may end up making an unexpected contribution to the government.

Cite: Ostrom, T.C. Summ. Op. 2007-66

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NO RINGTONE OR GAS TAX BOOST THIS YEAR?

April 27, 2007

The legislature passed the tax technical provisions bill (HF 923) without the provision that would have required folks downloading ringtones and iTunes to file personal sales tax returns on the downloads. Radio Iowa reports:

The Iowa House has voted against a Senate-backed plan that seeks to tax music, movies and ring tones that're downloaded from the Internet. Critics of the idea said it was ridiculous to expect people to keep track of their Internet downloads, and send the state a check for sales tax on each transaction.

Representative Thomas Schueller, a Democrat from Maquoketa, said the debate had been an eye-opening experience. "I now understand what a ring tone is. Before this bill, I had no clue," he said. "...I think I might actually be able to download one now, too." The tax on Internet downloads have been stuck in a bill that dealt with all sorts of tax issues. The Senate now must decide whether to insist on what some have called the "iPod" tax.

The legislature did take action against a menace facing Iowa youths: candy machines stocked with smokes.

Another provision tucked into the bill, and which got House backing, would forbid businesses from stocking vending machines with both snacks and smokes. Representative Schueller nicknamed it the "Twinkie Clause." "This is an obvious good change. It prohibits cigarettes and cigars from being displayed and/or dispensed from the same vending machines as snacks or candies," he says. "No one wants junior going to the (vending) machine to buy a Twinkie, and come back with a Marlboro instead."

Except junior, maybe. Actually, I have never seen a vending machine that carried Twinkies and cigarettes. Seeing either one of these products would ruin my appetite for the other, but maybe Twinkies and smokes are just meant to go together.

Meanwhile, the the legislature may see some last ditch action on new tax bills today. The Des Moines Register reports that Senate Majority Leader Gronstal is likely to push through his chamber a bill to replace the 1% local option sales tax with a statewide 1% levy, but that it may not make it further:

But beyond Senate support for the tax plan, its fate is uncertain, Gronstal said, citing reservations by Gov. Chet Culver and House Democratic leaders.

Brad Anderson, the governor's spokesman, said Culver "has made it clear that the sales and use tax is not on his agenda for the session."

House Majority Leader Kevin McCarthy, a Des Moines Democrat, said House action on the tax issue was unlikely at the tail end of the session. "I don't see it having enough momentum at this stage," he said.

The bill would also increase the "use tax" on vehicle sales - in effect, the sales tax on cars - by 1%.

The Sioux City Journal reports that plans to increase the gas tax and vehicle registration fees are dead for this year.

Follow tax legislation through the close of the session at our2007 Iowa Tax Legislation page.

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MICHAEL JORDAN'S DREAM TEAM DID BETTER THAN THIS

April 26, 2007

Pleading guilty to federal taxes can't be fun, but it has to be an especially bitter pill in this case:

WASHINGTON – A former Internal Revenue Service (IRS) district director, pleaded guilty today to conspiring to defraud the United States through his involvement in a tax fraud scheme promoted by the Topeka, Kansas-based “Renaissance, The Tax People, Inc.,” the Justice Department and the Internal Revenue Service announced. During a hearing before U.S. District Judge Carlos Murguia in Kansas City, Kan., Jesse Ayala Cota admitted defrauding the U.S. Treasury of more than $1.3 million and to earning more than $300,000 from his participation in the scheme.

We've mentioned "The Tax People" before. It was a multi-level marketing operation that encouraged people to evade taxes by recruiting other people to recruit other people, etc., to tell people they could do the recruiting while deducting personal expenses as business expenses in the process.

"Mr. Cota was the director of Renaissance’s so-called ‘Tax Dream Team,’" said Eric Melgren, U.S. Attorney for the District of Kansas. "Renaissance used Cota’s credentials as a former district director for the Internal Revenue Service to lend the tax fraud scheme legitimacy and to induce people to join and to remain members."

Renaissance used Cota’s IRS credentials, including his prior service as District Director, to induce people to join Renaissance, to assuage their concerns, and to keep them as members.

Dream team? If the original Dream Team performed like this, they'd have lost to Angola.

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LEGISLATURE ASKS GOOGLE "HOW HIGH?"

April 26, 2007

The Iowa Senate shamelessly sold its soul for a mess of servers yesterday, passing a package of tax breaks (HF 912) for the company with a motto of "Do no evil, but it's ok to shake down the states for giveaways." ZDNet has more:

Google is playing its you need us more than we need you card with the Iowa state legislature, and seems to have a winning Googley hand. Not only has Google once again achieved its Google only special "top secret" government privileges, it has apparently succeeded in wooing a legislative representative to serve as a prime Google spokesperson, Senator Bill Dotzler, a Democrat from Waterloo.

According to Dotzler, the trend now is away from having a computer with all the bells and whistles — the software programs — and toward "server farms" which give computer users access to a wide variety of options they'd be hard-pressed to store on a single computer.

Senator Dotzler has to be on the top of the list of every business that wants to be subsidized by Iowa taxpayers since he led the charge for the recently-passed filmmaker subsidy. But he is an expert on this sort of technology, clearly:

Dotzler has undoubtedly been well coached by Google:

"Really, the biggest problem with these server farms is the heat that's generated in them. Just one server panel generates the equivalent of a seven-foot-high pile of toaster ovens, so can you imagine the amount of heat?"

Google has buried the legislature in seven feet of something, but it's not toaster ovens.

Follow the progress of all Iowa tax legislation at our 2007 Iowa Tax Legislation page.

UPDATE: More on Google's shakedown history.

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START ME UP

April 26, 2007

One of the snakes lurking in the tax law is the "start-up costs" rule of Section 195. If you incur expenses to start a new business, you have to capitalize them until the business actually starts. It's not always clear when this happens.

Once the business starts, you can make an election under Section 195 to expense up to $5,000 of start up costs; anything over that gets amortized over 15 years.

A would-be author learned about start up costs the hard way in Tax Court yesterday. Robert Deward is a military history buff who has spent years doing research for a book he plans to write about World War I. It's not a cheap process, and Mr. Deward looked to his tax return for help:

Respondent disallowed all of the $15,892 of "other expenses" claimed on Mr. Deward's Schedule C. Those expenses consisted of $1,765 of amortization and $14,127 for research and development. The research and development deduction on Mr. Deward's 2001 Schedule C consisted of expenses petitioners incurred while on a trip to Europe in 2001 and of research expenses, all related to the proposed WWI book.

The IRS apparently didn't dispute whether the expenses were legitimate; they just said it didn't matter. The Tax Court agreed:

Whether or not he had a profit motive, Mr. Deward has failed to establish that he did anything more in 2001 than research for the book that he intends to write about WWI. The expenses related to researching a topic in order to write a book, without more, are "start-up expenditures" within the meaning of section 195. Accordingly, we will sustain respondent's determination to disallow the miscellaneous deductions of $15,892 on Mr. Deward's Schedule C relating to amortization and the expenditures incurred for research for his book, including costs for traveling to Europe.

The Moral? When you are starting a new business, sooner you "start," the sooner you get to take deductions.

Cite: Robert J. Deward et ux. v. Commissioner; T.C. Summ. Op. 2007-62

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DRAKE RELAYS CARNIVALS!

April 26, 2007

The flood waters are rising here in Des Moines, just in time for this year's Drake Relays.

The Cavalcade of Risk is up at The Digerati Life, where you can find the Insureblog's musings on the benefits of bad habits.

The Carnival of the Capitalists and the Carnival of Personal Finance are also in session. Enjoy!

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WE GET MAIL!

April 26, 2007

Tom from Iowa City writes:

Concerning your article on January 18, 2007 entitled “THIS MAN NEEDS TO GET OUT MORE”. In it you state the law that requires Americans to pay an income tax on their labor to be U.S. Code Title 26, Section 1. Before the article there is a disclaimer stating, “The items below are informational only and are not meant as tax advice.” That is very good advice in itself if you truly believe what you wrote in your article. You evidently have no education whatsoever in tax law. You sir, are a fool.

Don't tell anybody!

Tom must be a "Tax Honesty" adherent, one of the folks that believes that there is "no law" requiring people to pay tax. No matter how many of their fellow travelers get imprisoned and fined under the law they insist doesn't exist, they persist.

Yes, I do find the unanimous opinion of the U.S. Courts more persuasive than that of jailbirds like Irwin Schiff. I believe that when Title 26, Section 1 says "There is hereby imposed...a tax," a tax is imposed.

Foolish? Not so foolish as following advice that lets you live the Irwin Schiff lifestyle.

UPDATE: More airtight reasoning from correspondent Rosie:

I feel sorry that you that you wrote that article demonstrating how clueless you are. In the Articles of Confederation which was a treaty that was never rescinded, it gives all individuals sovereignty. This is what the Browns are talking about when they speak of government agents as "fictions". Had you any education or motivation to read up on things rather than go by popular and false belief, you might learn a thing or two. The Browns are in the right and you have a fraud of a profession. Also, you failed to mention "income" tax laws. You just said tax laws in your article. The Browns do pay lawful taxes. Be more specific next time if you're going to write articles, or better, get another job because you are no one to be writing such ridiculous statements. Get a life.

Yes, that darn Constitutional Convention screwed up everything. Next time I get my hands on a quarter, I'll need to remember that George Washington was the first "fictional" president.

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SELF-IMPRISONMENT WON'T COUNT AGAINST THE SENTENCE

April 25, 2007

Ed and Elaine Brown, the tax-protester couple holed up in their fortified New Hampshire home, were sentenced yesterday to prison terms of over five years for evading taxes, the New Hampshire Union Leader reports:

Amid heavy courthouse security in the wake of threats posted on Internet Web sites and blogs by supporters of the couple's cause, Judge Steven J. McAuliffe also ordered the couple to forfeit to the federal government a total $215,890 in postal money-order purchases they made in order to avoid federal income-reporting requirements

The Browns, who attended neither hearing and were sentenced to 63 months in prison in absentia, were remanded to the custody of the U.S. Marshal Service, which said it continues to speak with the couple regularly in an effort to resolve the matter peacefully.

The Associated Press has more:

Ed and Elaine Brown insist tax laws do not exist and have holed up in their hilltop home in Plainfield, which has a watchtower, concrete walls and the ability to run on wind and solar power. Ed Brown, 64, said he has stockpiled food and supplies.

You'd think it would be easier to deal with something that doesn't exist. Their relationship with reality may be a bit rocky:

In telephone interviews, Ed Brown said the couple will stay in their home despite convictions and warrants.

"I could care less what he does," Brown said of McAuliffe. "I can't talk to a fiction. You're a fiction, too."

The Browns based their defense on a theory that no law exists requiring tax payments.

Elaine Brown, 66, said Monday that she doesn't recognize the government, and that its officials are "a fiction in my life."

When a figment of your imagination calls you on the phone while another figment forces you to hole up in an armed fortress, you have a vivid imagination indeed.

Prior Tax Update coverage of the Browns:

JUST MAIL ME THE TITLE DOCUMENTS

MEANWHILE, BACK AT THE STANDOFF

THIS MAN NEEDS TO GET OUT MORE

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OFFICER RAMONA?

April 25, 2007

The Justice Department yesterday announced that a Washington DC Metropolitan Police Department officer has been indicted on tax charges. That's pretty ho-hum. But this passage of the press release caught my eye:

According to the indictment, Irving earned wages from the MPD in the amount of $155,211 in 2002, $152,153 in 2003, $136,962 in 2004 and $181,913 in 2005. The indictment alleges that in 2002, Irving filed two false claims with the IRS seeking refunds to which he was not entitled, and failed to file tax returns and pay federal income taxes for 2003, 2004 and 2005.

A police detective can earn $181,913? Wow. That explains why the detectives on the TV shows always have such nice suits. Or maybe Archie Brooks and Ramona Cunningham have relatives in D.C. Government.

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NEW IOWA CREDIT FOR REAL ESTATE TAXES CLEARS HOUSE COMMITTEE

April 25, 2007

The Governor's much-ballyhoed effort to reform Iowa's commercial property tax system has laid its first egg.

The House Ways and Means Committee yesterday voted to send HF 905 on to the full house. The bill provides a refundable income tax credit for commercial property taxes paid of up to $320. Refundable credits generate tax refunds even when no tax is owed to begin with. The bill would apply only to taxpayers with $300,000 or less in improved real property. The Des Moines Register covers this today.

Considering all of the attention paid to commercial property taxes at the start of the session, this is a very lame result. It shows the futility of attempting to deal with property taxes while ignoring the problems with Iowa's income and sales taxes. The problems of state finance are all interrelated. You can't deal with property taxes alone any more than you can deal with a weight problem by reforming milk shakes and ignoring Oreo consumption.

The House also approved the increase in the rehab credit ceiling (SF 566). The bill includes a retroactive giveaway of credits to people who have already committed to projects, but it excludes the provision to allow artists to take fair market value deductions for artwork donations -- once again thwarting my artistic vision. Curses.

Follow all of the 2007 session tax legislaton at our2007 Iowa Tax Legislation page.

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EIGHTH CIRCUIT RULES AGAINST TOUCHPLAY OPERATORS

April 24, 2007

The U.S. Court of Appeals in St. Louis today ruled that Iowa did not violate the constitutional rights of Touchplay video lottery operators when it banned the machines last year. This probably ends federal court action in the case, as the Supreme Court isn't likely to take this one up.

Of course, the Touchplay operators still have recourse to the highest court in the land.

Meanwhile, scenes like this will remain as misty memories of Iowa convenience-store history:

Prior coverage: U.S. COURT DECLINES TO PRESERVE ELECTRONIC PAYMENT FOR TAX ON THE MATH-DEFICIENT

(UPDATE: For new readers, "Touchplay" machines are electronic machines that look and act just like slot machines, except with worse odds and with the state taking the biggest cut because they call it "video lottery" instead of "slot machines.")

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YEPSEN SAYS LEGISLATURE DISAPPOINTS

April 24, 2007

David Yepsen's Des Moines Register column today says the soon-to-end legislative session comes up short. Take taxes:

Tax reform? In 1965, they created tax withholding, repealed outmoded sections of the tax code and raised the gas tax. This one did nothing on a par with that. Iowa's commercial property taxes remain among the highest in the country, our income-tax system remains complicated and uncompetitive.

Mr. Yepsen understates the case. The legislature didn't just neglect Iowa's tax system; they're making it significantly worse.

Iowa's tax system is a rat's nest of high rates made tolerable to the well-connected by complex loopholes. The main tax policy achievement of this session is more loopholes and higher rates, including:

- A new tax credit/subsidy for filmmakers.
- Bigger and better rehab credits, including a giveaway for projects that were already underway anyway.
- A credit for giving away land for conservation.
- A huge increase in the cigarette tax, creating boom times for northern Missouri convenience stores.

The legislature also looks like it will approve a tax amnesty without any corresponding tightening of enforcement or penalties - a short-term fix that helps undermine tax compliance long-term by creating an expectation of future amnesties.

And the legislature is also working to pass combined corporate reporting to increase corporation tax collections. The worst thing that Iowa could do for economic growth is to make our current corporation income tax actually apply to people. Our 12% top rate is the highest in the nation, and the only reason it doesn't stop economic activity altogether is that it's usually easy to avoid.

Any progress - that is, moves to lower rates, broaden the base, and eliminate loopholes - seems unlikely. Resistance to the bad policy of the current session has been feeble, even from those who should know better. It looks like nothing but dark days ahead for Iowa tax policy. Unless, of course, they pass my loophole.

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MAY 2007 APPLICABLE FEDERAL RATES (AFR) ISSUED

April 24, 2007

The IRS has issued (Rev. Rul. 2007-29) the minimum interest rates for loans made in May 2007:

-Short Term (demand loans and loans with terms of up to 3 years): 4.85%
-Mid-Term (loans from 3-9 years): 4.62%
-Long-Term (over 9 years): 4.90%

Historical AFRs are available at the "links" page at www.rothcpa.com.

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CULVER NIXES RAINFOREST BREAK; CONSERVATION DONATION CREDIT BILL ADVANCES

April 24, 2007

Governer Culver has snuffed the attempt to pass an end-of-session tax break for EarthPork, the indoor rainforest proposed for Des Moines Coralville Dubuque Grinnell Riverside Pella. From today's Des Moines Register:

Proposals to give millions of dollars in government assistance to a rain forest complex near Pella and an adjacent water park, marina and condominium project are unlikely to be approved by the Legislature, a key lawmaker said Monday.

"I don't think it's a good use of legislative time to push something that doesn't appear to have a lot of momentum at this stage," said House Majority Leader Kevin McCarthy, a Democrat from Des Moines.

Earlier in the day, McCarthy said the incentive package was likely to be debated. His revised assessment came after he talked with aides to Gov. Chet Culver, Senate leaders and other House members.

Given the Governor's opposition to the plan in his election campaign, recounted here, it is almost surprising that anybody even tried to move aid for EarthPork. Still, considering some of the other silly things that have gone right through this session, you can't blame the rainforest people for thinking they might have a shot.

The Senate did pass the poorly-thought-out but lucrative land conservation donation credit, SF 587. The House now has to take it up, but it doesn't look like any opposition has formed.

Track the end-of-session tax legislation at our 2007 Iowa Tax Legislation page.

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GEE, WE'RE DRINKING A LOT. SHOULD WE SLOW DOWN? LET'S DRINK ON IT.

April 23, 2007

Iowa is inn the middle of a frenzy of new tax credits for everything from moviemaking to soy-based transformer fluid. In spite of all the fun, the destruction of the state's income tax base is starting to bother some legislators. A little, anyway.

"There is an awful lot of concern about the volume of tax credits and their impact on the budget," said [Iowa Department of Economic Development] director Mike Tramontina. Legislators, especially Sen. Joe Bolkcom, D-Iowa City, have said tax credits need to be studied and possibly reined in. He points to an Iowa Department of Revenue report released this month that shows rapid growth in the awarding of tax credits, from $110 million in the 2000-2001 fiscal year up to $312 million in the first two-thirds of the fiscal year.

But the legislature won't stop drinking the tax credit hooch just because they're starting to see double. The current session will see a massive increase in "economic development" tax credits, which just means taxing existing businesses to lure and subsidize their competitors.

$312 million is about the net amount raised in the last fiscal year by the entire Iowa corporation income tax. I'm willing to bet that repeal of the corporation income tax would do far more for Iowa's economy than more tax credits to feed the Iowa ethanol and biofuel bubble. But that would mean no more press conferences to announce the opening of the newest ethanol ethanol plant that will be unused and empty in 10 years. What good is economic development if a state senator can't cut a ribbon, anyway?

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CRAZY GOING OUT OF SESSION GIVEAWAYS!

April 23, 2007

It's the wild, crazy, going out of session giveaway at the Iowa General Assembly. Those guys are giving away everything that's not nailed down! Everything must go!

Starting with tax breaks for EarthPork, the indoor rainforest jungledome proposed for Des Moines Coralville Dubuque Grinnell Riverside Pella. HSB 315 would let the owners of EarthPark charge and keep sales taxes - the same deal given to the Newton Speedway.

Bill Dotzler, flush from giving away a bunch of our money to finance filmmakers, now is looking to give away even more!

Dotzler said Earthpark "has the potential to be a huge tourism draw." He said, "I think this is going to be a huge economic engine for central Iowa."

Those crazy legislators are also giving away the store to lure an undisclosed web search company (Yahoo? Google?) to locate here. Some company is playing states against one another to get the sweetest possible subsidy package, which the rest of us get to pay for. This has produced HF 912, a package of sales and property tax breaks.

When it comes to giving away our money, our legislature won't be outdone! But lobby now, while there is still money left to give away. It can't last forever! And follow all of the crazy hijinks at our 2007 Iowa tax legislation page.

More coverage of EarthPork tax breaks here.

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THE 21ST-CENTURY VERSION OF 'SKIP DAY'

April 20, 2007

From the Des Moines Register:

Many Valley High School parents opted to keep their children at home today after rumors circulated the school Thursday that a student made threatening remarks referencing the recent shootings at Virginia Tech.

The number of students absent was not immediately known this morning.

"Looking in the classrooms, some are full and some are half full," Valley Principal Vicky Poole said today. "Parents obviously have that choice, but for those of us who are here, it’s business as usual."

Of course West Des Moines schools are safe. Why, grade-school kids can't play baseball at recess because bats are "weapons." You can't get safer than that!

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WE NOW RESUME OUR REGULARLY-SCHEDULED PROGRAMMING

April 20, 2007

Tax season is over. Or not.

If you tried to file online using Turbotax when their e-file server crashed, tax season ended yesterday.

If you live in the Northeast and were affected by the big storm, tax season doesn't end until next Thursday, April 26.

And tax deadlines for those affected by the Virginia Tech shootings are automatically extended to October 15.

Meanwhile, the Tax Update returns to the air after a two-day break. A lot can happen in two days:

- The IRS Commissioner announced his departure from the agency to become president of the American Red Cross. Will he have to testify before Congress any less in this new job?

- Treasury Secretary Paulson doused any hopes that the administration might make any effort at tax reform in its last two years. That's too bad, as a cleanup of the code is overdue. Given the partisan environment in Congress, it may be a hopeless cause for now anyway, but it's surely hopeless if the White House doesn't lead.

- The Iowa Senate approved the plan to bribe filmmakers in to make movies in Iowa through transferable tax credits. The rest of us now get to pay extra credits to subsidize Tom Arnold's next visit home. Harold Hill would approve. 48 senators voted to subsidize one industy with money from every other industry in the state. Two senators - Quirmbach of Ames and Hartsuch of Bettendorf - stood up for the rest of us.

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LEARN SOMETHING!

April 17, 2007

Today is the deadline for filing your 2006 1040. Unless you are extending, of course. For the most part, the game is over for 2006, and there's little to do but add up the score.

Any more, 2006 is dwelling on the past. It's time to move on. What lessons can we draw from this filing season while the pain is still vivid?

DON'T FALL BEHIND.

The hardest tax problems are those when people don't keep up on their taxes. It can happen when you reduce your withholding too much. It can also happen when you don't keep up with your estimated tax payment obligations. If you own an interest in a partnership or an S corporation, it can become a problem in a hurry, especially if you spend the nice distributions they give you without putting them away for your taxes.

The first quarter federal estimated tax payment is due today. If your tax preparer gave you a voucher, file it with your check as instructed. It won't get any easier next April if you don't.

DO THE EASY STUFF NOW

Most people who come to their tax preparares in April looking for a miracle have already squandered most of their tax-saving opportunities. These are likely to be found at work. Take advantage of the easy stuff:

- Maximize your 401(k) contribution. If you aren't at least putting in enough to get the entire employer match, you are making an unforgivable financial blunder. More is better.

- Review your health plan opportunities. If your employer offers an Health Savings Account option, think not twice, but several times before rejecting it. Many employers offer generous breaks to switch to high deductible health insurance, and most of the time you'll be financially better off with an HSA. If there is no HSA at your job, make sure you take full advantage of the cafeteria plan.

- Start funding your 2007 IRA. The main benefit of these is tax-free buildup of earnings; if you fund it now instead of next April, your money is tax-sheltered an extra year.

- If you are saving for college, but a little money away in a Section 529 plan like College Savings Iowa every month.

EXPECT THE UNEXPECTED

One of the perplexing things about being a tax preparer is seeing somebody with a $500,000 W-2 unable to raise $30,000 to pay taxes in April. You should always have some amount of cash easily available. Some people advocate enough to pay six months of living expenses, but I think you can do with less - especially if you have some other investments, or if you have a house. If you are a homeowner, open a home-equity line of credit, and then don't use it except for emergencies - like a $30,000 tax bill.

AND DON'T FORGET TO FILE TODAY!

This is the last installment of our series of 2007 filing season tax tips. Happy filing!

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IF YOU AREN'T E-FILING, SPRING FOR CERTIFIED MAIL

April 16, 2007

Maybe you spent hundreds of dollars to have a preparer do your complicated 1040. Or maybe you spent the 30.3 hours the 1040 instructions say is the average estimated time it takes to do your own return. Either way, you've made a substantial investment in time and/or money.

Now isn't the time to cheap out. Unless you are filing electronically, you ought to spring for the extra $4.25 to file your return "certified mail, return receipt requested." It's well worth the time and trouble of going to the post office to get that postmarked receipt. The tax law is full of sad stories of taxpayers who lost thousands of dollars because they didn't have a postmark to document that they filed on time. Don't let it happen to you!

Another documented timely filing.

If there's no post office open or handy, you can also use a mailing receipt from one of the designated private delivery services authorized by IRS for timely return shipment. As they don't use P.O. boxes, you'll want to refer to Russ Fox's handy list of service center street addresses.

And don't procrastinate, because Jiffy Express isn't a designated private delivery service.

This is the penultimate entry in the taxupdateblog.com series of 2007 filing season tax tips. Collect them all!

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HAPPY EMANCIPATION DAY!

April 16, 2007

On April 16, 1862, President Lincoln signed the act of Congress freeing the slaves in Washington, D.C. Now seven score and five years later, that act gives you an extra day to file your tax return.

April 15 is the normal due date for individual tax returns. When it falls on a Saturday or Sunday, the due date is pushed back to the following Monday, which would be today. But because Emancipation Day is a holiday in Washington, D.C., the IRS this year decided that everybody gets an extra day to file and pay their taxes.

The signature page of the D.C. Emancipation Act. Click to enlarge.

That means most people can celebrate this blow against slavery by holding onto their cash one more day. Tax preparers celebrate with another day of work.

Cross posted at Chequer-board.net.

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THREE YEARS BEFORE THE BLOG

April 16, 2007

Yesterday was the third anniversary of the estimable TaxProf Blog. Paul Caron is the bomb!

Happy Anniversary, Professor!

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TAXES ARE DUE TUESDAY. NO CASH?

April 15, 2007

It happens every year. Sometimes there are even good reasons. The return is ready, the taxpayer owes a bunch, and the cash isn't there. You don't have any investments you can turn into cash immediately. What to do?

DON'T BLOW IT OFF. The worst thing you can do is to just put your head in the sand. If you don't file anything, you start to accrue a monthly penalty of 5% of any amount you owe the IRS. 60% APR almost makes LoanMax look reasonable (though the total penalty maxes out at 25%). Interest also accrues on the unpaid taxes and penalties. Once you start digging this kind of hole, it can take years to climb out.

FILING BUT NOT PAYING. Getting an automatic extension with Form 4868 gives you until October to file a timely return. Even if you can't pay your tax, an extension can turn the 5% monthly failure-to-file penalty into a 1/2% montly failure-to-pay penalty. That is, it can if you ultimately file your completed 1040 and pay your taxes by the extended due date.

Also, the tax regulations don't impose the failure to pay penalty if you have 90% of your tax paid in by the original due date. In that case, you just have to pay the interest on the remaining balance due at the IRS rate for underpayments - currently 8%. If you are coming up just short, you should pay in what you can with an extension and pay the rest as soon as possible.

BORROW (but not from a car-title or payday-loan shop. The IRS is a better creditor). If you have a home equity line, tap it. The IRS accepts credit card payments. If you have a good credit rating, your friendly banker might be able to do something. If you have a gullible sympathetic relative, take advantage.

NOWHERE TO BORROW? Then it's time to fill out Form 9465, Installment Agreement Request. You can do this online. If you own more than $25,000, you may need to file additional infomration on Form 433f. Of course, if you owe that much, you need professional tax help anyway.

Once you get the installment agreement in place, live up to it. The IRS gets ugly in a hurry if you fall behind on an installment plan.

And whatever you do, don't bounce a check. It only makes your penalties worse. And work with a professional so you don't get caught short next year.

This is another of our series of filing season tax tips. There's a new one every day through April 17 at www.taxupdateblog.com.

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READY TO FILE? RUN DOWN THE CHECKLIST

April 14, 2007

If you are going to file by the April 17 deadline, you should have your taxes about done by now. Before you drop that form in the mail, take a few minutes to go through the IRS last-minute checklist:

* Did you use the peel–off label and enter any corrections? If you used the label, did you enter your social security number in the space provided?

* If you do not have a label, or there are too many corrections, did you clearly print your name, social security number, and address, including zip code directly on your return?

* Did you enter the names and social security numbers for yourself, your spouse, your dependents, and qualifying children for earned income credit or child tax credit, exactly as they appear on the social security cards? If there have been any name changes be sure to go to www.ssa.gov or call at 1–800–772–1213.

* Did you check only one filing status?

* Did you check the appropriate exemption boxes and enter the names and social security numbers exactly as they appear on the Social Security Card, for all of the dependents claimed? Is the total number of exemptions entered?

* Did you enter income, deductions, and credits on the correct lines and are the totals correct?

* If you show a negative amount on your return, did you put brackets around it?

* If you are taking the standard deduction and checked any box indicating either you or your spouse were age 65 or older or blind, did you find the correct standard deduction using the worksheet in the Form 1040 Instructions or the Form 1040A Instructions?

* Did you figure the tax correctly? If you used the tax tables, did you use the correct column for your filing status?

* Did you sign and date the return? If it is a joint return, did your spouse also sign and date the return?

* Do you have a Form W-2 (PDF) from all of your employers and did you attach Copy B of each to your return? File only one return, even if you have more than one job. Combine the wages and withholding from all Form W–2's, on one return.

* Did you attach any Form 1099-R (PDF) that shows tax withheld?

* Did you attach all other necessary schedules and forms in sequence number order given in the upper right–hand corner?

* If you owe tax, did you enclose a check or money order with the return and write your social security number, tax form, and tax year on the payment? Refer to Topic 158 for more information, and

* Did you make a copy of the signed return and all schedules for your records?

A few minutes now can save you weeks of frustrating correspondence with the IRS. It's time well spent.

This is one of a series of daily tax tips appearing here at www.taxupdateblog.com through April 17, this year's tax deadline. Collect them all!

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TAX UPDATE IN THE NEWS

April 14, 2007

We got a mention in today's Des Moines Register. I sound sort of cranky and anti-social:

Here's Kristan's biggest piece of advice at this moment: "Don't call your accountant. He's working."

Oh, well. I can't say I was misquoted, but that doesn't sound very good. For the record: if you really need to call your accountant, call your accountant. Just don't call and ask him "where's my return" every day. He's pedaling as fast as he can. Or she, as the case may be.

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IRS PUBLISHES 2007 AUTO DEPRECIATION TABLES

April 13, 2007

The tax law long ago cracked down on tax breaks for "luxury" cars. Since then many people have been surprised to find they've been driving in the lap of luxury.

The IRS today issued the new maximimum depreciation deductions for cars placed in service in 2007. The tables limit depreciation for cars with prices starting at $15,300. The tables:

MAXIMUM ANNUAL DEPRECIATION, PASSENGER AUTOMOBILES

Year 1...............$3,060
Year 2................4,900
Year 3................2,850
Year 4 and after......1,775

MAXIMUM ANNUAL DEPRECIATION, TRUCKS AND VANS

Year 1...............$3,260
Year 2................5,200
Year 3................3,050
Year 4 and after......1,875

The IRS also issued the "inclusion amounts" for leased automobiles. The depreciation and lease tables are all in Rev. Proc. 2007-30.

Borderline luxury: 2006 Chevrolet Malibu LT: priced to sell at $15,295.

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EXTREMISM IN PURSUIT OF AN EXTENSION IS NO VICE

April 13, 2007

OK, the tax deadline is upon us. Counting today, we have five days to make our peace with the IRS.

Well, no, We have six months and five days, actually. All you need to do is file Form 4868 to get until October 15 to file your taxes. Just make sure you have at least 90% of your taxes paid in. It's smarter, of course, to be all paid in, but you avoid the 1/2 percent underpayment penalty if you are 90% paid in.

If you are a quarterly estimated tax filer, you should pay in enough to cover your first quarter 2007 estimated tax payment. You can credit it to 2007 when you finally file your 1040, and in the meantime it serves as a cushion in case your 2006 tax bill turns out to be more than you anticipate.

Some people don't like to extend. The typical arguments:

"I'm more likely to be audited." Nonsense. I have seen no evidence that extended returns attract IRS attention. It is clear, though, that returns with errors do attract IRS attention. If taking an extension means you file a more accurate return, you actually reduce your chances of an audit. That's especially true if you would other wise have to file an amended return to fix an error.

"I want the statute of limitations to run." This is actually has some merit, if you have a controversial position on your return. It also rarely applies in real life. While I'm sure it happens, I've never seen a client have to pay extra taxes because they kept the three-year statute open an extra few months by extending a return. Again, if by extending you make your return more accurate, you probably reduce the chances of the IRS looking at you.

Extensions also give you time to consider other options for your 2006 return, like a SEP. So take your time - extend it, don't amend it.

This is one of a series of daily tax tips appearing here at www.taxupdateblog.com through April 17, this year's tax deadline. Collect them all!

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SCARED STRAIGHT?

April 13, 2007

The annual flurry of indictments, sentencings and plea deals for tax cheats continued yesterday. A sample:

Denver Attorney Indicted on Tax Evasion Charges

Memphis Business Woman Arrested On Tax Evasion And Theft Charges

Big Dig contractor strikes deal on tax evasion charge

This one struck me as especially interesting. It involved a bunch of doctors from North Platte, Nebraska, who somehow got hooked up with Lowell Baisden, a Bakersfield, California CPA:

Several of Baisden's customers are physicians and nurse anesthetists from North Platte, Neb., many of whom have not filed past-due tax returns. According to Baisden's plan, the customers created real estate and forestry corporations, but almost all of the income reported by the corporations was derived from the customers' income from their jobs in the medical profession. Baisden reported deductions for the corporations for customers' lawn care expenses, expenses related to their personal residences, car expenses, and for one customer, the purchase cost and storage fees for an airplane.

If their lawns look like mine does, the forestry deductions might not be out of the question. Still, a U.S. District court has issued an injunction to stop Mr. Baisden from promoting this setup.

It's always surprising to me that somebody who is smart enough to make it through medical school isn't smart enough to avoid something like this. Everybody on Mr. Baisden's client list now will get to develop a close working relationship with the IRS.

Crossposted at chequer-board.net, where I'm helping to fill in while the regular blogger vacations. He obviously doesn't do tax.

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OH SURE, I'LL USE LOTS OF BLENDED BIODIESEL

April 13, 2007

Another piece of data indicates that we should require the legislature to go home about March 1 emerged yesterday. The chief taxwriter in the Iowa House of Representatives proposed a refundable personal income credit of 7 cents per gallon for purchases of "blended biodiesel fuel."

Never mind that it would require consumers to keep track of how many gallons of blended biodiesel they used. Or make up a number ("lots!"). Never mind that it would be an enforcement nightmare. We're going to be "energy independent."

A scene from the heydey of Iowa energy independence.

Follow the progress of every wacky piece of Iowa 2007 tax legislation at our 2007 Iowa Tax Legislation page.

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TAXPAYERS GONE WILD

April 12, 2007

Every year at this time the government makes a flurry of tax evasion indictments. Judges also seem to like to sentence tax criminals around this time of year. Just, you know, as a friendly reminder.

Yesterday they made an example of Joseph R. Francis, the founder of the "Girls Gone Wild" empire, indicting him on tax evasion charges. He is accused of taking $20 million in phony deductions and of stashing millions in offshore accounts. Among other things, the indictment alleges that Mr. Francis deducted the cost of building a $3.7 million home as a business expense.

So don't do that.

Joseph Francis in happier times.

UPDATE: The TaxProf has more.

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TAX TIP: IS YOUR IRA WITHDRAWAL TAXABLE?

April 12, 2007

It's standard tax advice to leave your money in your IRA as long as possible. The longer your money stays in your IRA, the longer it builds up without being taxed. If you take it out too early (generally before age 58 1/2), you often also face a 10% excise tax on top of the regular income tax.

Yet circumstances don't always cooperate. If you took money out of your IRA in 2006, you may be able to avoid or reduce taxes and penalties on the withdrawal.

Sometimes part or all of your IRA withdrawals can be nontaxable. Other early withdrawals are taxable, but aren't subject to the 10% penalty. Keep these exceptions in mind so you don't pay extra tax or penalties on your return:

- Roth IRA contributions can be withdrawn tax-free to the extent of your non-deductible Roth IRA contribuitons before age 59 1/2. Of course, all Roth distributions after that age are tax-free.

- Traditional IRA distributions are tax-free to the extent they are attributable to your non-deductible contributions. Determine this amount using Form 8606.

- Qualifying distributions rolled over into another IRA within 60 days are nontaxable.

- Traditional IRA distributions are taxable, but may be penalty-free, in these situations:

*You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

*The distributions are not more than the cost of your medical insurance.

*You are disabled.

*You are the beneficiary of a deceased IRA owner.

*You are receiving distributions in the form of an annuity.

*The distributions are not more than your qualified higher education expenses.

*You use the distributions to buy, build, or rebuild a first home.

*The distribution is due to an IRS levy of the qualified plan.

*The distribution is a qualified reservist distribution.

You can find more information on whether you qualify to avoid these penalties here.

Return here to www.taxupdateblog.com for a tax tip each day through April 17. Go here for the whole collection.

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GOT STATES? DON'T FORGET YOUR CREDIT

April 11, 2007

Many taxpayers pay income taxes in more than one state. With the increased popularity of "pass-through" ownership of businesses through S corporations and limited liability companies, many taxpayers find themselves filing returns in two or more states. Others have taxes paid in other states by the businesses that they own through a "composite" return filed by their S corporation or partnership.

All states with an income tax have a system to keep their residents from paying full state taxes on the same income in more than one state. The credit for taxes paid in other states is computed on your resident state return; Iowans use Form 130. The credit is the lesser of the tax paid to the other state or the tax computed on the income in the home state.

If you are an Iowan who owns an S corporation, there is another alternative. You can compute an S corporation apportionment credit on Form 134. This credit can provide significant savings, especially for taxpayers whose S corporations retain a large part of their annual income.

And remember, in Iowa you can claim a credit for taxes paid in other states if you have foreign tax withheld. Many taxpayers have this through international mutual funds.

Stop here at www.taxupdateblog.com for a tax tip a day through April 17. Collect them all!

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HAROLD HILL GULLS THE HOUSE

April 11, 2007

Like rubes rushing the patent medicine wagon, the Iowa House almost unanimously voted for a rich special interest giveaway for the film industry yesterday. By a 95-1 margin the House approved HF 892 to provide a 50% subsidy to film projects, and then some:

- A 25% tranferable tax credit for expenditures on a film project;
- A 25% credit for investors in film projects; and
- a tax exemption for sales of goods and services to film projects.

Because the credits are transferable, the filmmakers can sell them to finance their projects. This feature makes this tax credit a subsidy, rather than just a tax break.

If it weren't tax season, I would spend more time pointing out just how absurd this thing is. Why is this one industry - an itinerant one that leaves nothing behind but empty fast food wrappers - somehow worthy of being subsidized by every other business? The standard line about how much the filmmakers bring to the economy can be said about any business - more so, in fact, about the ones that stay here and provide permanent jobs, and who end up paying for this subsidy.

A puff piece for the bill in the local business paper says:

Supporters point out that the tax incentives do not take funds from the state, but rather lower the amount of taxes producers and investors pay.

Nonsense. From a business and accounting standpoint, this is delusional. It's like telling a businessman that if he doesn't collect his outstanding business receivables, he doesn't really lose anything. The state is out the money as surely as if it wrote a check, and the rest of us have to pay that much more to make up the difference.

The bill now looks like it will surely pass. Follow the progress of this and every other piece of foolish tax legislation at our 2007 Iowa Tax Legislation page.

Link: Prior Tax Update coverage.

UPDATE: The House roll call on HF 892 shows that Bruce Hunter of Des Moines is the representative who stood alone for the taxpayers on this one.

Tags: harold hill.

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SECOND ONE IS PRISON, BABE...

April 11, 2007

The sheriff caught up with Ron Rakow, former manager of the Grateful Dead. Mr. Rakow yesterday was sentenced to five years in federal prison for eveading $2.2 million in federal taxes.

Mr. Rakow is 69.

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IS THERE SUCH A THING AS A 'TAX SEASON' DEFENSE?

April 10, 2007

I've seen tempers flare during tax time, but nothing like this:

TROY — An accounting firm employee fired from his job last week apparently picked his targets when he returned with a shotgun to the suburban office building where he previously worked, police said.

Anthony LaCalamita III fatally shot a 63-year-old woman Monday morning and wounded two men, authorities said. LaCalamita still was listed as part of the professional staff on the Web site of Gordon Advisors, a public accounting and business consulting firm located in the building where the shooting took place.

On Monday morning, workers were calling 9-1-1 as the gunman ran past.

“He literally made eye contact with witnesses, they could see the shotgun in his hand, they could smell the gunpowder and he ran by them,” Lt. Gerry Scherlinck said.

LaCalamita then left the Troy office complex and headed north, where he was spotted by a motorist and later taken into custody by police, who had orders to shoot and kill him if he resisted, authorities said. He was arrested following a 30-mile car chase in which speeds reached 120 mph.

Yikes.

I wonder how the guy got fired at this point in tax season? Maybe anger management issues...

Thanks to reader Kathy for the tip.

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TAX TIP: FUND YOUR 2006 HEALTH SAVINGS ACCOUNT

April 10, 2007

Some taxpayers can still knock $5,000 or more off their 2006 taxable income without giving up the use of their money until retirement. These are taxpayers who had a qualifying "High Deductible" health insurance plan during 2006, but who have not yet made a contribution to a Health Savings Account.

Health Savings Accounts work a bit like old-fashioned individual retirement accounts, or IRAs. You can deduct contributions to the accounts, but the earnings accumulate tax-free until withdrawal. But unlike IRAs, you can always withdraw earnings from an HSA tax-free to pay medical expenses not otherwise reimbursed by insurance. That means your earnings aren't locked away until retirement like IRA earnings are. If you don't use them for health expenses, you can withdraw the funds for retirement like IRA funds.

To contribute to an HSA for 2006, you need to have had a qualifying high-deductible health insurance plan in place during the year. This means an deductible of at least $1,050 for individual coverage or $2,100 for family coverage. The maximum deduction for single-coverage taxpayers is the lesser of $2,700 or the annual deductible; for family coverage taxpayers, the deduction caps out at the lesser of the deductible or $5,450.

The deadline for 2006 HSA contributions is April 17. A number of Iowa financial institutions sponsor HSAs, including Iowa Savings Bank of Carroll. To claim the HSA deduction, complete Form 8889.

Link: IRS discussion of HSAs

Related: LAST GOP TAX BILL ADDS HSA IMPROVEMENTS

Come back to www.taxupdateblog.com for a tax tip a day through April 17. Collect them all!

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IOWA SENATE PASSES AMNESTY BILL

April 10, 2007

Speaking of snake oil, the Iowa Senate yesterday approved the Governor's tax amnesty plan, SF 580, 48-2. Before approving the plan, the Senate rejected efforts to add provisions increasing penalties for nonfilers and frivolous returns. Most amnesty plans are paired with such penalties as part of a "carrot and stick" approach. Leaving out the stick makes it clear that this is just a revenue-raising gimmick with no follow-up to discourage future non-filers.

Two legislators bucked the crowd and took a stand for the taxpayers who don't need an amnesty to pay their taxes: Jerry Behn of Boone County and David Harsuch of Scott County.

Prior coverage: WAYS AND MEANS VOTES TO SCHMUCK IOWA TAXPAYERS

Follow the progress of all 2007 Iowa tax legislation at our 2007 Iowa tax legislation page.

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TAX QUACK TASTES OWN MEDICINE

April 10, 2007

Many a snake-oil dealer in pioneer days took a swig from one of his own "medicine" flasks in front of a crowd to demonstrate the safety of his product, if not its effectiveness.

The smart ones made sure the bottle they drank from didn't have the actual "product" in it.

Attorney George E. Harp forgot that basic marketing lesson, and it cost him $5,000 in Tax Court yesterday. Mr. Harp represented two taxpayers using "Tax Honesty" arguments - legal snake oil that says there really is no income tax. Unfortunately for him, one of his clients was himself. The court wasn't pleased:

Additionally, petitioner is an attorney who is admitted to practice before this Court and has represented at least two taxpayers before the Court. See Olmos v. Commissioner, T.C. Memo. 2007-82; Heers v. Commissioner, T.C. Memo. 2007-10. Under the circumstances, it is reasonable to assume that petitioner understood the potential consequences of maintaining an action primarily for delay and of raising frivolous and groundless arguments. On the basis of the above, we shall impose a penalty on petitioner pursuant to section 6673(a)(1) in the amount of $5,000.

His other client did slightly better. While the client, a dentist, lost his case, the court didn't assess the frivolous return penalties that his attorney got slapped with.

The TaxProf has more.

Cites:

Harp, T.C. Memo 2007-83
Olmos, T.C. Memo 2007-82

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'NOT GUILTY' PLEA IN VIRGIN ISLANDS TAX FRAUD CASE

April 10, 2007

Illinois auto dealer James Auffenberger entered a "not guilty" plea yesterday to charges that he used a Virgin Islands tax scheme to evade federal income taxes. He was released without having to post bond pending a June 4 trial.

Link: prior Tax Update coverage

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TAX TIP: STEP INTO A SEP?

April 09, 2007

If you started a new business on your own, or if you had a profitable moonlighting business on the side, you may be facing an unpleasant tax bill. You might be able to ease the tax pain by - figuratively speaking - taking money out of one of your pockets and putting it into another.

At this point, the easiest way to do that is to set up a Simplified Employee Pension plan, or "SEP." A SEP is a plan where an employer puts money into an employee's IRA. You can put up to 25% of your funds into an employee SEP and get a deduction, while the employee picks up no income. Of course this is most attractive when you are the only employee.

A SEP is easy to set up. All you need to do is complete a Form 5305-SEP and put it in your records, and fund your SEP-IRA by the due date of your return. If you extend your return, you have until the extended due date to set up and fund the plan.

The downside of a SEP is that if you have any employees, they have to get the same percentage of salary contribution that you have. As long as there are no employees, though, it can work very well.

If you want to set up the plan for the 2006 tax year, though, you need to get on the stick. You don't want to wait until the last minute to find a bank or mutual fund company to handle it. If you are down to the wire and you aren't sure what to do, it may be wise to extend your return so you can consider a SEP at your leisure, in consultation with your tax advisor.

The bottom line? It's still your money; it's just put away for retirement. You move it from one pocket to another, and you reduce your taxes by doing so.

Visit www.taxupdateblog.com for a tax tip a day through April 17.

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WE'RE NUMBER 4!

April 09, 2007

Forbes Magazine just came out with a list ranking which U.S. Cities are "Best Places For Business And Careers." Des Moines placed at #4, just ahead of Knoxville, Tenesseee (heh). The rankings focused on business costs, living costs, workforce education, crime rates, and job and income growth.

Looking at the detail, Des Moines doesn't do exceptionally well in any of the areas rated; it's best score is #50 in "Educational Attainment" out of the top 200 metro areas. Yet it isn't awful in any single area, with its worst ranking 117 for its crime rate.

Source: Forbes.com

There are a lot of good things about Des Moines. The 10-minute commute is pretty sweet, and compared to places like Chicago, or even Minneapolis, housing is cheap.

In its ranking of states, in contrast, Forbes ranks Iowa #25, and number 41 in "growth prospects." It might have something to do with our being the worst state for small business by one ranking. Short commutes are nice, but they don't make up for high and complex taxes and a rapidly worsening political environment for business.

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CROOKS AND BOZOS ON PARADE

April 09, 2007

As tax season heats up, so does the action at Taxable Talk, where Russ Fox has the lowdown on tax crooks in the news and the latest installments of his series of "Bozo tax tips." Just go there and start down the page.

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DON'T FORGET THE EXCISE TAX REFUND!

April 08, 2007

It's a chilly Easter in most of the country, but sunny here in Des Moines. As it's a holiday, we'll stick with an easy tip today.

The IRS says that millions of eligible taxpayers are failing to claim the telephone excise tax refund. Anybody who has paid a long-distance phone bill in the past three years can claim this as a "gimme" tax credit, whether you itemize or not.

If you have lots of time and you have spent a lot of time on the phone, you can figure your actual refund for the last three years, but most of us will just claim the standard amount, based on the number of personal exemptions on your 1040:

* One exemption, the standard refund amount is $30;
* Two exemptions, the standard refund amount is $40;
* Three exemptions, the standard refund amount is $50;
* Four exemptions or more, the standard refund amount is $60.

There are a few people who don't qualify for the credit: those who only use prepaid calling cards or prepaid cell phones. Everybody else with a long distance bill qualifies. You can check the details here if you aren't sure.

To claim the refund, just put your number -- $30, $40, $50 or $60 -- on your 1040. It goes on Line 71, if you file the long form.

Click to enlarge.

Have a great Easter. And go Zach Johnson, Drake boy and Iowa native! (UPDATE: and 2007 Masters Champion!)

Come to the Tax Update Blog for a tax tip a day through April 17. Collect them all!

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THE QUICK AND DIRTY GUIDE TO FINANCIAL HAPPINESS

April 07, 2007

A longtime reader posted this comment yesterday:

When it comes to retirement I'm an idiot. I get the feeling my wife and I are going to be so in debt. Especially because I won't have health insurance when I retire. Do I need to employ you? My attorney makes no mention of retirement for my wife and I, but he does my taxes, and is well aware of our financial situation. I get the feeling he doesn't make suggestions because he wants to be paid.

I'm not technically a financial planner, but most people can get by quite well without one. The basics are simple. The hard part is actually exercising the discipline to do it. Scott Adams, creator of Dilbert, distills the basics in a wonderful little list:

Everything you need to know about financial planning*

* Make a will.
* Pay off your credit cards.
* Get term life insurance if you have a family to support.
* Fund your 401(k) to the maximum.
* Fund your IRA to the maximum.
* Buy a house if you want to live in a house and you can afford it.
* Put six months’ expenses in a money market fund.
* Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.

*From Dilbert and the Way of the Weasel, 2002

I would add three items to the Dilbert list:

* Make sure you have health insurance. If you don't have it through work, get a high-deductible plan and fund a health savings account. If you can afford to, let the funds accumulate in the HSA and pay health costs out of after-tax funds.

* Get good disability insurance.

* If you are saving for a child's education, do it in a Section 529 plan or Educational Savings Account. If you live in Iowa, use the College Savings Iowa plan and get a deduction on your state income tax return to boot.

If you want an actual book on this, buy The Random Walk Guide to Investing: Ten Rules for Financial Success.

If you are already in a big hole and need to dig out first, contact a reputable credit counseling outfit.

The ideas are simple. Changing habits to use the ideas is the hard part, but it gets much easier once you've done it for a little while.

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IS THE SALES TAX DEDUCTION A BETTER DEAL?

April 07, 2007

Congress restored the long-lost deduction for sales taxes a couple of years ago with a new twist: you can deduct either state and local income taxes or sales taxes, but not both. People in high-tax states like Iowa take for granted that the income tax deduction is a better deal. That's usually right - but not always. And if you live in a low tax state like South Dakota or Florida, the sales tax deduction might be a no-brainer.

Iowa's loophole-ridden tax law can cause you to have a low income tax in some seemingly odd circumstances. Special breaks for the elderly often cause seniors to have little or no Iowa tax. Young adults and those who take advantage of Iowa's many "economic development" tax credits can also find themselves with little or no tax liability.

Those of us old enough to have worked with the pre-1986 sales tax deduction remember the demented clients who would bring a grocery bag full of all of their receipts for the year so you could compute their sales tax deduction. There's a better way.

The IRS has issued tables you can use to compute a "gimme" sales tax deduction, based on your income. You can add to the table number actual taxes paid for large purchases like cars or boats. These tables are incorprated in the online sales tax calculator at the IRS web site.

Visit the Tax Update blog at www.taxupdateblog.com for a new tax tip every day through April 17. Collect them all!

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ESTIMATED TAXES - TRIM THE PENALTIES

April 06, 2007

So you ended up owing the IRS this year. You had a big capital gain, maybe. Or you went out on your own, were self-employed, and you didn't count on not having taxes withheld. You're going to get a penalty, right?

Not necessarily. Just because you have a big balance due doesn't mean you have a penalty; even if you have one, a little calculation might help you trim it down.

The tax law has a default rule that requires you pay in 90% of your taxes each year through withholding or timely estimated tax payments. If you don't meet the requirement, you pay a non-deductible penalty computed using an interest rate set each quarter by the IRS. In effect, you pay the IRS interest for not giving them your money earlier.

There are important exceptions to the 90% rule that come in handy all of the time.

The biggest exception is the "protective" rule. If in 2006 you paid in at least as much tax through withholding and timely estimates as you had in 2005, you owe no penalty. If your 2005 adjusted gross income was $150,000 or more, you had to pay in 110% of your 2005 tax in 2006 to meet this exception. Most people who have a big one-time income boost can reduce or greatly eliminate their estimated taxes this way.

The other big exception is "annualizing" your 2006 income. If you had a big chunk of income late in the year, you can reduce or even eliminate your estimated tax penalties by filling out the "annualization worksheet" for Form 2210. This worksheet lets you compute the required tax payments quarter-by-quarter based on your income for each quarter.

When you do your estimated tax worksheet, you can spread your withholding evenly through the year. If you had a big year-end bonus, that withholding applies equally to each quarter.

And remember, the first estimated tax payment of 2007 is due April 17. Be sure to budget for it.

Look for a daily tax tip here through April 17; collect them all. Also, don't miss the Taxable Talk Bozo Tax Tips series, in case you need a smile.

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IOWA PUSHES FOR RETURN TO THE TOP 10

April 06, 2007

The University of Iowa basketball team is making a bid to return to the "sweet 16" by hiring a new coach.

Iowa itself is making a bid for the "sour 16" -- to be one of the 16 states with the heaviest state and local tax burden, measured as a percentage of income. Disappointed with the 18th place ranking in the latest Tax Foundation ranking of tax burdens, the state is making its push to move up. As recently as 1990, Iowa had one of the 10 heaviest tax burdens, but complacency set in. No more:

- A new cigarette tax is slated to raise $129 million per year.
- A push for "combined" corporation reporting is attempting to increase Iowa business taxes.
- Central Iowa may do it's part if it votes to approve "Project Destiny," a project to increase the sales tax rate in central Iowa to 7%.

Sure, loopholes are being carved out to help the well-connected; after all, what are friends for? But with only 6/10 of a percent of income separating Iowa from number 10 New Jersey, and only 1/10 percent separating us from the sour 16, Iowa is definitely going for it.

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DON'T FORGET THE TRADITIONAL IRA!

April 05, 2007

The Individual Retirement account is one of the easiest tax breaks to use, yet it is one of the most under-used tax tools. When Congress restricted the IRA deduction in 1986, many people just stopped paying attention. That's a bad idea. There's been a lot of new tax law since then, and an IRA contribution might be just the thing to make this year's tax filing more pleasant.

For yourself, you can always deduct an IRA contribution if your adjusted gross income is below $75,000 filing a joint return, $50,000 for a single return, or $10,000 if you are married filing separately. If you and your spouse aren't covered by any employer retirement plan, you can make a deductible IRA contribution regardless of your income. If you are covered but your spouse isn't, you can make a deductible contribution to the spouse's plan if your combined AGI is under $150,000. Full details of these limits can be found here.

The maximum 2006 IRA contribution per individual is $4,000, or $5,000 if you were 50 years old by the end of 2006. Remember, you have until April 17 to fund an IRA for 2006, so you still might be able to buy a deduction.

Get a tax tip a day for the rest of the filing season here at taxupdateblog.com. Collect them all!

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THOSE WACKY LEGISLATORS!

April 05, 2007

As it enters the final weeks of its 2007 session, the General Assembly is turning into a frenzy of bad tax policy. Take yesterday:

The Senate Ways and Means committee voted unanimously to make chumps out of people who pay their taxes by approving an amnesty (SSB 1168) plan for those who don't. The companion bill for this shortsighted budget gimmick was introduced in the Iowa House (HF 893), and it no doubt will slide right through.

THE LEGISLATURE GIVETH

Meanwhile, two new tax credit bills were thrown into the hopper, providing special tax breaks for a few and shifting their tax burdens to the rest of us. SSB 1349 would give a whopping 50% tax credit for donations of up to $100,000 of land for conservation purposes; meanwhile a new amendmnet to HF 883 would give teachers a $250 credit for school supplies purchased.

These are classic examples of good intentions run amok. There are already generous federal tax benefits for donations of conservation property. This 50% credit is huge - far more so than the federal benefits. These two credits would result in tax breaks equal to over 80% of the value of donated property. Meanwhile, the various ethanol breaks provide incentives to reduce conservation and plant fencerow to fencerow. It's like sleeping pills to get you to sleep and meth to wake up.

The teacher credit has the double disadvantage of favoring a specified profession and providing a tax benefit that's too small to audit. Cynical teachers will take the credit, whether they spend $250 on their kids or not, knowing that there is almost no risk that they'll be required to substantiate the spending. Other teachers will save their receipts, take only the credit their entitled to, and feel like schmucks after talking to the cynics in the Staff Room.

THE LEGISLATURE TAKETH

Meanwhile, SSB 1350 was introduced to deny pollution control property tax credits to large farms; we don't want to encourage the farms that can make the biggest messes to buy the latest pollution control equipment, after all. Don't even think of repealing this special tax favor entirely. And HSB 305, the "Satellite Video Equalization Tax," was introduced to stick it to satelitte providers who enable users to bypass the government-mandated local cable monopoly.

THE LEGISLATURE FLIPPETH OUT ENTIRELY

Finally, in a stunning non-tax display of delusion, we saw the introduction of HSB 304, "An Act establishing the office of energy independence and the Iowa power fund ..." The idea that Iowa could be, or should be, "energy independent" is so incredibly ridiculous, only a legislator could talk about it while looking earnest. So we're going to re-open the strip mines of Davis County? There's certainly still coal underneath the new subdivisions in Waukee; if we're really serious about this energy independence thing, we can just drop some mine shafts in people's backyards, I'm sure nobody will mind if its in the name of "energy independence." Unless, of course, it's just a cynical and inane excuse to pass out taxpayer money to buy votes or something.

The heydey of Iowa energy independence.

Follow all Iowa 2007 tax legislation at our 2007 Iowa Tax Legislation page.

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IOWANS: DON'T MISS YOUR 'COLLEGE SAVINGS IOWA' DEDUCTION

April 04, 2007

Many Iowans overlook the tax benefits available when you save for a child's education through College Savings Iowa. CSI is a "Section 529" plan sponsored by the state. It qualifies for the usual federal Section 529 benefits: earnings on plan funds grow tax-free, and they can be withdrawn tax-free to cover college costs.

CSI has an additional benefit for Iowa taxpayers: contributions can be deducted on Iowa returns - up to $2,500 per donor, per donee for 2006. That means a two parents with two kids can put away $10,000 in CSI for college and deduct it on their Iowa returns. The deduction is not available for contributions to other Sec. 529 plans.

You claim the deduction on Line 24 of the Iowa 1040 - the "other adjustments" line.

We are running a daily tax tip through April 17. Read them all here.

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FEDS GO AFTER 'WE THE PEOPLE'

April 04, 2007

The Tax Division at the Department of Justice kicked off the final two weeks of tax season with a frenzy of filings. In addition to the effort to close 254 Jackson Hewitt tax prep franchises accused of rampant cheating, the feds filed for an injunction to close down the "We The People" organizations efforts to help people "de-tax" themselves.

"We The People" is an organization run by longtime tax protester Robert Schulz. In addition to their political efforts against the income tax, the Department of Justice alleges that they sell tax fraud schemes:

The government’s complaint, filed in Syracuse with the U.S. District Court for the Northern District of New York, alleges that Schulz has used the two We the People entities to market a nationwide tax fraud scheme, called the Tax Termination Package, to employers and employees. According to the complaint, the Tax Termination Package includes We the People forms, which the defendants falsely tell customers can be used to replace forms the IRS requires employers and employees must use in connection with federal tax withholding from wages.

The suit says that Schulz and the We the People entities falsely state that use of the replacement forms will allow customers to legally stop tax withholding. According to the complaint, the defendants base the scheme on frivolous arguments about federal tax laws that federal courts have repeatedly rejected.

Of course this stuff doesn't work, but there are always new suckers willing to give it a try.

The government likes to file suits like these during tax season to remind people not to be suckers. Some people are beyond education, though:

Even after watching [tax protester Arthur] Farnsworth lose a federal tax evasion case, his job and much of his savings -- his West Rockhill Township house could be next -- members of the Pennsylvania Lawmen Committee for Public Interest, a support group for those who don't pay income taxes, remain undeterred.

Farnsworth is scheduled to be sentenced today in federal court in Philadelphia. His attorneys are seeking a prison term of less than one year. Federal prosecutors are asking for 21 to 27 months.

''I don't think there's anyone who is going to go back to the system because of his prosecution,'' Don McGeady, 48, of Dublin said last month. Like Farnsworth, he hasn't paid income taxes since 1996. He testified on behalf of Farnsworth at his trial.

Links:

Tax Protester FAQ

New York Post coverage

UPDATE: 27 months for Mr. Farnsworth (via Drudge)

UPDATE 2: The TaxProf has more.

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HAROLD HILL HAS A NEW FILM BILL

April 04, 2007

For procedural reasons that escape me, a new version of the filmmaker giveaway bill was introduced and referred to the Iowa House Ways and Means Committee yesterday.

The bill, HF 892, has three separate giveaways for people who want to make movies in Iowa:

-A 25% tax credit for production expenses;
-A 25% tax credit for investors in film projects, and
-A tax exemption for income "sale, rental, or furnishing of tangible personal property or services directly related to the production" of a film project.

The credits can be sold, which means the filmmakers get cash from the state for their projects. Since the credits will likely be sold at a discount, it's just like a subsidy, only with built-in waste. With a total of 50% in credits, taxpayers get to foot the bill for half of a project's costs.

But there's more! It's not enough to subsidize the filmmakers. We also give a tax exemption to the direct beneficiaries of these subsidies - the hotels, the extras, the local Wal-mart that sells stuff to the film company. Everybody wins! Everybody, that is, except the 99.9% of the taxpayers that have nothing to do with a film project.

Follow all of the Iowa tax legislative boondoggles at our 2007 Iowa Tax Legislation page.

Link: Prior tax update coverage.

Tags: harold hill.

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APRIL CHILL CARNIVALS

April 04, 2007

There were snow flurries in the air this morning; time to come inside for this week's blog carnivals.

The Carnival of the Capitalists is at Businesspundit.com this week. The Carnival of Personal Finance is at No Credit Needed, where you can check out Insureblog's discussion of Stoopid Client Tricks, health-insurance division. Last but not least, Don't Mess With Taxes hosts this weeks Carnival of Taxes. Enjoy!

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JACKSON HEWITT BLEW IT?

April 03, 2007

This may or may not help Jackson Hewitt tax services.

I'm guessing "not."

From a Department of Justice press release:

WASHINGTON - The United States has filed civil injunction suits against five corporations that operate Jackson Hewitt tax preparation franchises, as well as 24 individuals who manage or work at the franchises, the Justice Department and the Internal Revenue Service (IRS) announced today. According to the four lawsuits—filed in federal courts in Chicago, Atlanta, Detroit and Raleigh, N.C.—the corporations operate under franchise agreements with Jackson Hewitt Tax Services Inc. of Parsippany, N.J., the nation’s second largest tax preparation firm.

The suits allege that one of the individual defendants, Farrukh Sohail of Atlanta, Ga., wholly or partly owns each of the five corporations, which prepared and filed over 105,000 federal income tax returns last year. The five corporations allegedly operate more than 125 Jackson Hewitt retail tax preparation stores in the Chicago, Atlanta, Detroit and Raleigh-Durham, N.C. areas.

So maybe the big refund wasn't quite right?

One complaint cites a Jackson Hewitt franchise customer whose Jackson Hewitt-prepared tax return claimed he was a barber who was entitled to a fuel tax credit for buying 25,000 gallons of gasoline for off-highway business use. The complaint alleges the customer would have had to drive 1,370 miles each day, seven days a week, to consume that much fuel in one year, leaving little if any time to cut hair.

That barber must have been using gasoline-powered shears. The results aren't stylish, but they are efficient:

Haircut, anyone?

Update: The TaxProf has more, including links to the Justice Department News Release and the complaints.

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TAX TIP: REMEMBER THE TUITION DEDUCTION

April 03, 2007

You can look all day at your Form 1040 in search of the line used for taking the deduction for higher education expenses. It's pretty subtle. It's on line 35, labeled "Domestic production activities deduction."

Yes, that seems strange. Blame Congress. The deduction was slated to expire at the end of 2005, but Congress extended it through 2007 after the 2006 forms went to the printer. An IRS news release explains how you claim the deduction:

Higher Education Tuition and Fees Deduction

Claim the deduction for up to $4,000 in higher education tuition and fees on Form 1040, Line 35, “Domestic production activities deduction.”

Enter "T" on the blank space to the left of that line entry if claiming the tuition and fees deduction, or "B" if claiming both a deduction for domestic production activities and the deduction for tuition and fees. For those entering "B," attach a breakdown showing the amounts claimed for each deduction.

The deduction is available "above the line," whether or not you itemize and whether or not you have alternative minimum tax. It phases out when AGI exceeds $65,000 for single filers and $130,000 for joint filers. It doesn't apply in a year when you claim a Hope credit or lifetime learning credit for the same student.

This is another installment in our daily series of 2007 filing season tax tips.

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WAYS AND MEANS VOTES TO SCHMUCK IOWA TAXPAYERS

April 03, 2007

The Iowa House Ways and Means Committee yesterday approved the Governor's tax amnesty bill yesterday. HSB 298 would give Iowans two months to come clean on taxes without penalties and with only half the usual interest.

This, of course, is bad faith. Those of us who have paid our taxes, and those who got behind and had to scrimp and save to pay full penalties and interest, get treated like schmucks in order to give the legislature a temporary cash boost. This only encourages the temptation to cheat in anticipation of an amnesty.

Related: DOUBLE-CHUMPING IN THE LEGISLATURE

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VALUE ADDED? MAYBE NOT 'FAMILY VALUES'

April 03, 2007

The "value-added tax" lurks on the fringes of tax policy debates, but it never seems to get to sit down at the table. Maybe it would have better luck if it was willing to pay for a "sit-down."

The VAT is sort of a sales tax that applies at every level of the delivery chain, rather than just at retail. The United Kingdom has a value-added tax. Determining just where value is added poses all sorts of interesting problems, as U.K. blogger Tax The Fish explains:

Spearmint Rhino Ventures (UK) Ltd operated six gentlemen clubs, offering lapdancing entertainment by partially clad women.

The women paid a licence fee to the club for allowing them to conduct their business on their premises for an eight hour period. The lapdancers' 'portfolio' consisted of private dances for the customers, for which the customers paid upfront. Also, if a customer so requested, a lapdancer could arrange a 'sit-down', which basically meant that she would sit and chat with him for an hour. The customer paid extra for this service.

In addition to the licence fee, the lapdancer also paid £40 to the club for each sit-down she arranged.

The rest of the money was retained by the lapdancer.

The taxman tried to claim VAT on the fees paid by the customers to the lapdancers. However, instead of going after the lapdancers for the money, the taxman decided to get it from the club. There would have been no point chasing the women for the money as, generally speaking, there is no requirement to register for VAT unless your sales exceed £64,000 in a year. As it was unlikely that each lapdancer would be earning that amount of money in a year, there was no point chasing them for VAT. On the other hand, as a result of their high sales turnover, the clubs were already liable for VAT, so it was in the taxman's interest to see if they could be stung for some extra.

It is interesting that the VAT has some of the same compliance problems we see in an income tax. The service providers in question work in a cash economy, making collection difficult, so the tax man tries to go after the establishment owner. A U.S. version of this is the restaurant tip collection program.

In this case, the taxman struck out:

The judge wasn't having any of this. He didn't see how the lapdancers could be described as agents of the club. The way he saw it, when a lapdancer arranged with a customer for either a private dance or a 'sit-down', the customer was contracting, not with the club, but with the lapdancer herself. He therefore concluded that the club did not have to pay the VAT.

Related: prior Spearment Rhino tax coverage.

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FOREGO CAPITAL GAIN RATES?

April 02, 2007

The Andrew Jackson you carry around in your pocket may look a bit like an aging figure skater. Don't let that fool you. Old Hickory was unbelievably tough. In a duel, he chose to wait for the opponent to shoot first. He accepted the bullet without flinching, and took all the time he needed to shoot his opponent dead.

Sometimes the Andrew Jackson strategy works in tax. For example, sometimes it pays to voluntarily pay higher tax rates on your capital gains and dividends, which are taxed at a maximum rate of 15%.

Why would you ever want to pay a 35% rate when you could pay 15%? If it gives you more deductions.

The tax law limits deductions on "investment interest" to your "investment income." Investment interest occurs when you borrow to purchase an investment, like stock, bonds or other investment property. Investment income includes interest income, but it normally doesn't include capital gains or dividends. Many folks incurred a lot of investment interest in the day-trading frenzy of the late '90s and the early part of this decade.

The tax law does allow you to elect to treat capital gains and dividends as investment income if you forego the lower capital gain rate. That can let you deduct investment interest expense that would otherwise carry forward.

Situations to consider the Andrew Jackson strategy of having your capital gains taxed as ordinary income include:

- You have more investment interest carryforwards then you are ever likely to use otherwise.

- You need the deduction right now.

- You are in the AMT "phase-out" range, where your marginal rate on capital gains and dividends is really 22%.

You make this election by including the amount of dividend and capital gain you want to have taxed as ordinary income on line 4g of Form 4952; then follow the instructions.

We will have a daily filing season tip through April 17. Collect them all!

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IT'S STILL APRIL 17 TO ME

April 02, 2007

While us tax drones tend to view April 17, the deadline day, as tax freedom day, the Tax Foundation looks at things differently. To them Tax Freedom Day is April 30. In rough terms, that's the day when we have earned enough to pay our taxes for the year so we can start working for ourselves.

They compute tax freedom day as April 21 for Iowans.

(Hat tip: TaxProf Blog)

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MINNESOTA TRIES TO OUT-STUPID IOWA

April 02, 2007

The Iowa General Assembly has been setting a standard for bad legislation, passing out special tax breaks at a furious pace.

Minnesota's legislature couldn't keep up with Iowa's production of stupid little tax bills, so they decided to retaliate with one great stupid tax bill: their senate voted to give Minnesota the highest state tax rate in the nation.

Saturday’s vote capped the first half of the session, as Democrats tested the limits of their legislative power in the face of Pawlenty’s veto threats. The tax proposal would raise almost $1 billion by creating a new fourth-tier income tax rate of 9.7 percent. The rate would hit taxable income above $250,000 for joint filers and $141,250 for single filers.

Minnesota’s top rate is currently 7.85 percent. Only California, Vermont and Oregon have top rates of 9 percent or more.

Fortunately for Minnesotans, the bill faces a veto. And while 9.7 would be the highest "stated" rate, California has a 1% surtax that would have kept it on "top" in real terms.

The TaxProf Blog and Taxable Talk have more.

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TAX CRIMES IN THE NEWS

April 02, 2007

Russ Fox has his weekend roundup of tax crime news up at Taxable Talk.

As tax season roars to its conclusion, we can expect to see a flurry of tax sentencings and indictments, friendly reminders from the IRS of the unhappy consequences of tax cheating.

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LOCAL KIDS BACK FROM IRELAND

April 01, 2007

It's a cloudy, rainy, cool day here. They've had similar weather in Ireland lately. I know because my high-school son got to go there to March in the St. Patrick's Day parade with his high-school band. Here he is on the Irish coast:

Being a tax geek, I naturally couldn't go, so I'm jealous. It sounds like they had a great time. You can catch a bit of them in the parade clip below (they're in the orange band uniforms); my boy plays the "tenor" drums, the five-head kit you strap over your shoulders. He is on the side closest to the camera, and he appears when the little second counter at the bottom of the YouTube window reads "00:41," six seconds in.

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CASH CONTRIBUTIONS: MAKE SURE YOU HAVE THE PAPERWORK

April 01, 2007

As you put your information together to prepare your 2006 Form 1040, make sure your charitable donees have held up their end of the process. For charitable donations of $250 or more, you get no deduction unless you have a receipt from the charity that tells you:

- the amount of cash and a description (but not the value) of any property other than cash contributed;

- whether the donee provided any goods or services in consideration for the contribution;

- a description and good-faith estimate of the value of those goods or services; and

- if the goods or services consist entirely of intangible religious benefits (e.g., admission to a religious ceremony, but not religious school tuition or fees), a statement to that effect.

You don't turn this statement in with your return, but you are required to have it if you claim the deduction. No documentation, no deduction, and probably you will get a penalty of 20% of any tax resulting from not having the documentation. That means if your charity hasn't gotten you this statement, it's time to ask them for it.

Remember, the requirements get more stringent starting in 2007. If you are, say, in the habit of putting $5 in the collection basket at church anonymously, you will no longer be able to deduct it. You will need either a cancelled check or a receipt from the charity to support your deduction.

Check IRS Publication 1771 for more information.

This is another installment in our series of 2007 filing season tips. Look for a new one each day through April 17.

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