Tax Update Blog: April 2010 Archives
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Will tax on S corporation professional practices be part of 'extender' bill?
April 30, 2010
Of all of the disgusting and dishonest Congressional habits, passing tax laws for a year or two at a time is among the worst. They pass provisions -- many of them corporate welfare giveaways -- temporarily to hide their true costs, and then offset the cost of a temporary extension with a permanent tax increase on less-favored taxpayers.
Both houses have passed versions of HR 4213 to extend a raft of breaks through 2010, including the biodiesel giveaway and the research credit. Now the new Chairman of the House Ways and Means Committee is threatening to permanently increase taxes on S corporation service businesses to pay for the temporary giveaways. Tax Analysts reports ($link)
Levin also said members are considering a plan to impose payroll taxes on some S corporation income as one possible offset for the package but said the details have not been worked out.In 2007 then-Ways and Means Chair Charles B. Rangel, D-N.Y., proposed applying payroll taxes to service-sector S corporation income as part of his trial-balloon "mother of all tax reforms" bill, the Tax Reduction and Reform Act of 2007 (H.R. 3970). At the time, the Joint Committee on Taxation estimated that the provision would raise $9.4 billion over 10 years.
This would likely apply self-employment taxes to K-1 income from businesses that would be "personal service corporations" if they were C corporations -- closing the so-called John Edwards Tax Shelter. That tax increase, if enacted, will stay forever, while next year the Congresscritters will look for somebody else to mug to pay for the next "temporary" extension of the giveaways.
Kay Bell has more.
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Iowa Taxes are due today!
April 30, 2010
If you filed electronically but had a balance due, don't forget to mail that IA 1040-V payment voucher today. Unlike IRS, Iowa doesn't direct-debit electronically-filed returns. If you haven't signed up for Iowa's electronic payment system, you have to mail a check the old-fashioned way.
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Taking your money and giving it to me = tax cut!
April 30, 2010
President Obama likes to say that he has actually cut taxes. State 29 takes a look at his "cuts." Almost all of them are either soon-to-exprire or expired "stimulus" measures or tax subsidies for preferred constituencies. That's the government grabbing your wallet, taking $20 out of it, giving five bucks to a bum, and then bragging about its generousity.
Meanwhile the government is spending at a rate that will lead to either killer tax rates, fiscal collapse, or both. So be grateful for those 'tax cuts' until they come back for them.
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If by 'success' you mean 'embarrassing boondoggle,' yes, it was a success
April 30, 2010
The First Time Homebuyer Credit expires today. At the moment it doesn't appear that yet another extension is in the cards. The New York Times calls it "Successful, but Costly."
Yes, it is a success, if the objective was to demonstrate that people will take free money if you give it to them. It was also a success in showing that people will try to scam refundable tax credit programs. But did it succeed in its goal of making housing more costly shoring up the housing market? TaxVox weighs in:
As my Tax Policy Center colleague Ted Gayer has noted, 85 percent of those who took last year’s credit would have purchased anyway, and the credit merely encouraged them to buy a few months sooner. As a result, Ted estimated it cost the government about $43,000 for each additional sale...
At the same time, more than a few sellers will get burned when their contracts crumble. And, after this subsidy-induced burst of activity, we will still be faced with the real problem: an oversupply of housing, especially after a likely new round of unemployment-driven foreclosures. Don’t be a bit surprised to see third quarter home sales fall after this quarter’s gusher.
In other words, of course not. The Tax Policy Blog points out another way:
The way out of the housing mess is not billions more in subsidies. It's dismantling the existing ones so that individuals can decide for themselves how to best attain shelter.
But as long as the government-owned subprime lenders Fannie Mae and Freddie Mac remain cash cows for out-of-work politicians, don't bet on that.
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Can you learn from your 1040?
April 30, 2010
Yes you can! Robert D. Flach explains.
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Keeping you safer by making you cross more streets
April 29, 2010
Having destroyed what remained of street-level retail in Downtown Des Moines by turning Walnut Street into a deserted transit mall, our central planners have a cunning new scheme: a $20 million transit hub three blocks further south.
Why? Safety! At least according to Elizabeth Presutti, DART's chief development officer, as quoted in the Des Moines Business Record:
DART's desire to move away from Walnut Street stems from the organization's ongoing efforts for better safety. Presutti said that a majority of the pedestrian accidents DART has had have taken place within the vicinity of the transit mall."The pedestrian paths are everywhere," she said of Walnut Street Transit Mall. "It's the closest from A to B. It is the customer's path. So the sheer magnitude of pedestrians everywhere and the turning onto the transit mall in order for the transfer function to take place, that I think has not helped the situation."
Right now the buses stop right next to buildings with skywalk access. You can get out of the bus, get on the skywalks without crossing a street, and be quickly out of reach of snow, rain, cars and predatory DART buses. Under the new plan, you would have to cross at least two busy downtown streets to reach the skywalks. Genius!
Approximate location of proposed downtown Des Moines bus-rail hub.
No, the real reason they want to make the bus hub inconvenient to downtown is even more lame. It's because Tom Kane, the director of the Des Moines Area Metro Planning Organization, wants it to be convenient to the railroad tracks in hopes that there will someday be passenger rail service to Des Moines. He admitted that much at an appearance where I was present. All of the stuff about safety is just a smokescreen, and one that doesn't even make much sense.
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Cedar Rapids real estate magnate loses appeal
April 29, 2010
Richard Mellor, who once owned hundreds of rental units in Eastern Iowa, this week lost his appeal of his tax evasion conviction. The 8th Circuit appeals panel rejected Mr. Mellor's arguments over the instructions provided to the jury that convicted him of four counts of tax evasion and one false claim count.
Mr Mellor didn't pursue an earlier argument on appeal: his claim to be a citizen of Heaven, rather than Iowa. While his citizenship may well be divine, his residency is in Yankton, South Dakota until sometime in 2018.
Cite: USA v. Mellor, CA-8, No 09-3256
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Tax Simplification - or just forms fiddling?
April 29, 2010
Trish McIntire is unimpressed by sample forms used to demonstrate the Bipartisan Tax Fairness and Simplification Act of 2010:
If you want to simplify the tax code, simplify the confusing theory and not the forms. All you are doing is using smoke and mirrors to cover the increase in confusion you will be causing.
The tax reform act she refers to does have some useful ideas, particularly the repeal of the Sec. 199 deduction and the insane alternative minimum tax. It has some provisions that also appear unwise on the surface, like the repeal of exclusions for income earned abroad (we have enough people giving up their U.S. passports already). It's a start, but for a start, you'd like to see something bolder. The lobbyists will be looking to whack away reforms, so you might as well give them as much work to do as possible from the start so that more reforms will survive the whacking.
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Code Cracker can't crack District Court
April 28, 2010
Peter Hendrickson, author of a book purporting to teach its readers to avoid the income tax by "Cracking the Code," has failed to get a judge to undo his recent conviction on tax charges.
One of Mr. Hendrickson's arguments was that he is not a "person" for purposes of the tax law. The judge is convinced otherwise:
Moreover, to the extent that Defendant suggests that the Government failed to meet its evidentiary burden of establishing beyond a reasonable doubt that Defendant is a "person" within the meaning of § 7206(1), this challenge to the jury's guilty verdict rests upon the premise that the term "person" as used in the statute has a specialized meaning. The Court, however, expressly held in its October 7 ruling that the term "person" in § 7206(1) encompasses ordinary individuals. See Hendrickson, 664 F. Supp.2d at 816. As the Government points out, the jury could reasonably have inferred from the testimony at trial that this statutory element was satisfied, where Defendant himself took the stand and appeared to be an ordinary individual.
Ordinary, if somewhat deluded.
He also argued that he didn't receive "wages," under his own squirrely definition. The judge replied:
First, the Government introduced into evidence the W-2 forms issued to Defendant by his employer, Personnel Management, Inc., for the years 2000 to 2006, which reported the remuneration he received from the company for each of these years. In addition, the jury heard from two individuals at Personnel Management, Larry Bodoh and Warren Rose, who discussed Defendant's tenure and responsibilities at the company and characterized Defendant as an "employee." (See Trial Tr. at 370-71, 392-93, 399.) What is more, Defendant himself described his job duties at the company in his testimony at trial. (See id. at 507-10.) From this evidence, the jury could permissibly have concluded that Defendant was an "employee" whose remuneration during the relevant years qualified as "wages," as these terms were defined in the jury instructions given by the Court,1 so that his claims of zero "wages" on his tax forms were false.
Curses. Foiled again.
While books like "Cracking the Code" may seem convincing under their own internal logic, the IRS and the Federal courts don't follow that logic. They are pretty darned sure that there is an income tax, and it applies to you if you have a job or otherwise have earnings, unless there is a specific exemption for you. The Federal Marshals and the Bureau of Prisons are also on board with that. As Mr. Hendrickson will experience for the next 2+ years, it's their opinion that counts.
Cite: USA v. Hendrickson, Case No. 08-20585, DC_MI, SD 4/26/2010.
Related: Cracking the Code, or Smoking the Crack?
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Is the Iowa City Chamber of Commerce more useless than an empty train?
April 28, 2010
You can drive to Iowa City to Chicago on a $30 tank of gas in maybe 4 hours, with plenty of gas left over. Starting May 4, you can take that one-way trip on the Megabus for as little as $1 at a scheduled time of under four hours.
So what does the President of the Iowa City Chamber of Commerce really want? A passenger train to Chicago requiring at least $256 million of subsidies just to start running (you know it will cost more), plus subsidies forever just to get the ticket cost to $42.
Flickr image courtesy Hunterrrr under Creative Commons license
State 29 explains:
Involved with this guaranteed money-burning scam is former Rainforest apologist Nancy Quellhorst, who will believe any massively-inflated attendance figures shoved under her eyelids as long as the taxpayer is getting fleeced.Some consultant was paid to lie and suggest that 120,000 people a year will take the route between Iowa City and Chicago for $42. That's 329 people a day. That projection seems ridiculously high for a route that can be driven in less time for about $30 with a normal car. If you have passengers then the driving costs go even further down.
And they want the Feds to spend $256 million in order to maybe/possibly get $5 million in revenue per year? (120,000 x $42). That sounds like a complete disaster.
Sounds like disaster because it is disaster.
Prior coverage:
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Will a $1,000 credit get you to hire a $40,000 employee you don't need?
April 28, 2010
TaxGrrrl ponders: Tax Break for New Hires: Is it enough?
The IRS believes these incentives will help boost the economy. IRS Commissioner Doug Shulman said, about the Act, "These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead."
Let's just add this to the list of things Mr. Shulman is wrong about. If you don't need to hire somebody, you aren't going to hire them. Anybody dumb enough to hire people to stand around just to get a tax break isn't going to stay in business long enough to keep anybody employed.
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Catch a post-filing season buzz
April 28, 2010
Robert D. Flach emerges from his filing season cave, blinks at the light, and rounds up some worthwhile tax blog posts.
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They do what they do so well, let's give them more to do
April 27, 2010
TaxProf headline:
TIGTA: IRS Fails to Flag 1.2 Million Tax Returns Evidencing Identity Theft
From the TIGTA press release:
WASHINGTON - An estimated 1.2 million tax returns filed in 2007 reported wages earned by taxpayers who used another taxpayer's Social Security Number, a sign of possible identity theft, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).The Internal Revenue Service cannot currently identify identity theft cases when taxpayers file tax returns using an Individual Taxpayer Identification Number (ITIN) and use another person's name and Social Security Number to work, the report found.
This can lead to all sorts of problems. Some are minor, like having an electronic filing rejected because somebody has already filed a return using your Social Security number, or that of one of your dependents. Some are much more serious, including having your tax payments credited to somebody else, and having somebody else's tax problems end up in your account. But no doubt they will do an excellent job with their additional chores of regulating preparers and running the national health commissariat.
The whole TIGTA report is here. Peter Pappas has more.
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Dividend rates will rise next year. How high? What to do?
April 27, 2010
Will the dividend rate rise from 15% this year to 39.6% next year? Or only 20%? Does that mean you should pay a dividend from your C corporation this year? And what about the 3.8% Obamacare tax?
Paul Neiffer explains the stakes:
Let’s take an example of a farmer with a C corporation who is nearing retirement and wants to liquidate his corporation. Lets assume there is $400,000 of retained earnings. If they distribute the income in 2010, there total tax bill would be $60,000 (assuming no state income taxes). If they wait until 2011, and pay the maximum rate, then the tax bill might be about $158,000 and if they wait until 2013, then the tax bill might be as high as $174,000. As you can see, it makes sense to consider distributing the income this year.
Fortunately, you have the rest of the year to make your plans, but the next eight months will go by quickly.
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Why wait for the train when you can join the Cavalcade?
April 27, 2010
There's a new Cavalcade of Risk up at My Wealth Builder!
Take the express to the blog world's premier roundup of insurance and risk-management posts, including Hank Stern's intriguing post about well-insured woman who drowned fully-clothed in her tub after a night out drinking martinis with her "companion" who also happened to be beneficiary on a life insurance policy.
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Leaving it to charity?
April 27, 2010
If you want to leave a gift to charity, write your will to make sure that the gift goes to a charity is still there, and still a charity, at your death, explains Joel Shoenmeyer:
Provide that payment should only be made if the charity is in existence at the client's death. If the client is concerned about charitable deductions, provide that the charity must also be a recognized 501(c)(3) organization under the Internal Revenue Code.
Plus some other sound advice.
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And in last place...
April 27, 2010
...Connecticut! Today is the Tax Foundation's Tax Freedom Day for Connecticut -- the day in which the Constitution State's taxpayers have covered their tax nut and now are working for themselves. Connecticut has the last Tax Freedom Day in the country. The nationwide tax freedom day is April 9. Alaska has the first Tax Freedom Day, March 26, while Iowa's big day is April 11.
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You gotta have some bondage to break some bondage
April 26, 2010
A fifteen-year prison term seems like a funny way to break free from bondage, but that's the path ahead for Lindsey Kent Springer, the self-styled founder of Bondage Breakers Ministry. A federal judge in Oklahoma sentenced Mr. Springer and an attorney, Oscar Amos Stilley, to 180-month terms on tax charges. From a Department of Justice press release:
Springer used the name Bondage Breakers Ministry to solicit and receive money. His stated purpose for Bondage Breakers Ministry was "to get rid of the Internal Revenue Service." Stilley, an attorney and tax advisor, assisted Springer's tax evasion scheme through a variety of means. Stilley maintained an interest bearing account, called an Arkansas IOLTA Foundation Trust account, which lawyers use to deposit and hold client funds. The pair used the IOLTA account and various other devices such as cashier's checks, check cashing services, money orders, cash and other means to conceal Springer's actual income and avoid creating the usual records of financial institutions. Springer told IRS employees that all funds he receives are gifts and donations to his ministry, and that he does not have any income. He also stated he does not provide any services for payment. There were numerous transactions involving hundreds of thousands of dollars between Springer and Stilley that flowed through the IOLTA account, such as $166,000 paid out in August 2005 to purchase a motor home titled in the name of Springer and his wife, and a September 2005 payment of $25,813 to purchase a Lexus automobile titled in Springer's name.
There have been other cases of attorneys using trust accounts to facilitate tax fraud, but this one is the most ambitious (stupid) to surface in some time. A web site that tracks tax protest figures has this background:
Until he was convicted on multiple federal tax violations, Springer used the web site "Penalty Protester!" to promote his theory and post information about ongoing court cases. He also described himself as the founder of "Bondage Breakers Ministries," which he formed to "expose the violations of the written law committed by the Internal Revenue Service."...Currently in federal custody after having been sentenced on federal criminal tax convictions, Springer is a full-fledged goofball, having once sued every one of the 50 states for failing to put him on the ballot for President of the United States. Springer v. Alabama et al., 2000 WL 305492, No. 99-5227 (10th Cir. 3/24/2000) (sanctions of $1,000 imposed for frivolous appeal).
Silly man, thinking he should be President. Tax violations only qualify you for cabinet positions.
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This disaster won't be subsidized
April 26, 2010
Bill Ray Melot received $59,257 in farm disaster subsidies from 1998 through 2003. He suffered another disaster last week, but this one won't earn him a check. From a Department of Justice press release:
Bill Melot, a resident of Hobbs, N.M., was convicted today of tax evasion, failure to file tax returns, making false statements to the U.S. Department of Agriculture (USDA), and impeding the Internal Revenue Service (IRS) following a four day jury trial before Judge M. Christina Armijo in Albuquerque, N.M., the Justice Department, IRS and the USDA's Office of Inspector General announced.According to the indictment and evidenced presented at trial, Melot owes the IRS more than $18 million in federal taxes and has not filed a personal tax return since 1986. In addition, Melot has improperly collected over $225,000 in federal farm subsidies from USDA by furnishing false information to the agency. Specifically, Melot provided the USDA a false Social Security Number and fictitious Employer Identification Number to collect federal farm aid.
If the judge determines an $18 million tax loss for sentencing purposes, federal sentencing guidelines indicate a 63-78 month sentence, though the judge can adjust the sentence up or down based on mitigating or aggravating factors. As Mr. Melot allegedly used Swiss banks to hide his cash from the IRS, the sentence may be going up.
The IRS will also want the $18 million, of course, with interest and penalties.
The moral? It's unwise to farm the Government on Swiss soil.
Russ Fox has more.
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It's a point of view they know well
April 26, 2010
If Congress insists on using the tax system to social engineer, they need to approach new credits and deductions from a cheater's point of view. Then ask what needs to be built into the law to deflect some of the fraud.
Her topic: the homebuyer credit, scheduled to expire Friday if not again extended by Congress.
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Is your organization about to lose its tax-exempt status?
April 26, 2010
If you are on the board of a local booster club, civic club, or other non-profit, you should make sure they've been filing their tax returns. The New York Times explains why:
At midnight on May 15, an estimated one-fifth to one-quarter of some 1.6 million charities, trade associations and membership groups will lose their tax exemptions, thanks to a provision buried in a 2006 federal bill aimed at pension reform. ...The federal legislation passed in 2006 required all nonprofits to file tax forms the following year. Previously, only organizations with revenues of $25,000 or more — or the vast majority of nonprofit groups — had to file.
The new law, embedded in the 393 pages of the Pension Protection Act of 2006, also directed the IRS to revoke the tax exemptions of groups that failed to file for three consecutive years. Three years have passed, and thus the deadline looms.
For small charities -- those with income under $25,000 -- the necessary compliance requires only eight pieces of information, with no detailed financial information, to be entered on online Form 990-N. For larger exempt organizations, the IRS will require a Form 990, 990-EZ, or 990-PF. For calendar year returns, these are due May 15. If you need more time for your 2009 filing, you can get a three-month extension on Form 8868.
Hat tip: The TaxProf.
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Will IRS help Big Ben?
April 23, 2010
TaxGrrrl addresses the tax consequences of Ben Roethliberger's six game suspension.
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Why a second career doesn't beckon
April 23, 2010
Thoughts on returning to school at Going Concern.
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How many ways can't you deduct your vacation cabin?
April 22, 2010
Once you decide to buy that vacation cabin, you're committed. If you vacation anywhere else, you feel like you're squandering your investment. Yet you can't spend all of your time there, and it would sure be nice if you could get some tenants while you're not there. It's even nicer if the IRS can help you pay for it.
Flickr image courtesy Let Ideas Compete under Creative Commons license
And yes, there are tax breaks for second homes. The biggest one is the home mortgage interest deduction, available for up to two homes. You can also deduct property taxes, at least if you aren't subject to alternative minimum taxes. But what about the home itself, and your out-of-pocket costs? Can you claim the cabin as a rental property, deduct depreciation, insurance, and maintenance, and move your property taxes to an "above-the-line" schedule E deduction?
Probably not. It didn't work for a California man with a 3-bedroom cabin. The man deducted $20,258 as Schedule E losses in 2004. The Tax Court sets the stage:
Petitioner contracted with Alpine Resort Rentals (Alpine), a property management company, to rent the cabin for the 2004 tax year. Per the rental agreement, Alpine had an exclusive right to rent the cabin during 2004. For its services, petitioner paid Alpine a 35 percent commission of all rental income received. Among other things, Alpine was responsible for arranging housekeeping and linens for rental customers; petitioner was responsible for maintaining the property in a safe and aesthetic condition, paying all utilities, having the property "deep cleaned" twice a year, and providing linens.The cabin was rented 3 times during the 2004 tax year, for a total rental period of 12 days and 9 nights. The parties have agreed that the average rental period of customer use for the cabin for 2004 tax year was 3 days.
Petitioner visited the cabin eight times during 2004, for a total of approximately 27 days and 19 nights. Each time petitioner visited the cabin during 2004, he was accompanied by family members.
The IRS attacked the loss on two fronts. First it went after the loss under the "passive loss" rules. Normal rental real estate losses are subject to a "per-se" passive loss limit, unless you are a real estate professional. Our Californian tried to take advantage of a special rule that allows taxpayers with adjusted gross income under $150,000 to deduct rental real estate losses when they "actively participate" in the rental activity. The IRS countered:
An activity involving the use of tangible property, however, is not considered a rental activity for a taxable year if for such taxable year the average period of customer use for such property is 7 days or less. Sec. 1.469-1T(e)(3)(i) and (ii)(A), Temporary Income Tax Regs., supra. Therefore, owners of rental real estate are not considered to be engaged in a rental activity if the average period of customer use is 7 days or less.
Failing that, the taxpayer argued that if it wasn't a "per-se" passive activity, he wasn't "passive" and could deduct the losses under one of two rules: either he did "substatially all" of the work involved in the property, or he spent at least 100 hours and more than anyone else. The Tax Court said this failed too (my emphasis):
To satisfy one of these tests, petitioner must establish that either (1) no other individual's participation exceeded petitioner's participation during 2004 or (2) that petitioner participated in the activity for more than 100 hours in 2004. With regard to the second requirement, petitioner has set forth little evidence to establish that he was involved in the rental of the cabin for more than 100 hours in the 2004 tax year. He has alleged that he took eight maintenance trips to the cabin during 2004, but in no way has he quantified for the Court the amount of his active participation time. In order to establish that he did spend more than 100 hours engaged in the rental of the cabin, the Court would expect petitioner to provide evidence corroborating his claim that his trips to the cabin were indeed for the purpose of maintenance, e.g., in the form of time logs, oral testimony, and/or receipts.Nor has petitioner established that no other individual's participation exceeded his participation in the activity or that his participation constituted substantially all the participation in the activity. Alpine was responsible for advertising, showing, and renting the property, and after each tenant, a cleaning service cleaned the property. Further, petitioner has conceded that his daughter assisted in the management and maintenance of the cabin and that he contracted with professionals to provide repair services during 2004. While we do not know how much time these services took, they involve a substantial amount of time.
It's up to you to prove your participation, and the Court found the taxpayer failed to do so.
The other IRS line of attack on vacation home deductions is Sec. 280A, which limits operating deductions for vacation homes to rental income if the cabin is used personally for the greater of 14 days or 10 percent of the day is is rented. Maintenance trips don't count as personal use, but again it is up to the taxpayer to prove that a trip is a maintenance trip:
Petitioner has presented no evidence to substantiate his contention. He has not provided to the Court any receipts, work reports, time logs, or testimony to support his claim that the motive of his trips and his activity at the cabin was in fact for upkeep. Although cautioned at trial that his opening statement was not evidence that the Court could rely on to make findings of fact, petitioner chose not to testify at the trial, relying entirely on the stipulation of facts and the stipulated exhibits to provide all of the evidence in his case. Hence, petitioner has failed to meet his burden of proving that personal use of the cabin did not exceed the greater of 14 days. Consequently, the cabin is considered a residence for purposes of section 280A.
The taxpayer didn't lose all of his tax breaks. Because he rented the house for less than 15 days in 2004, he was allowed to exclude the rent received from taxable income. He also was allowed itemized deductions for his mortgage interest and property taxes. But the rest of the deductions -- depreciation, repairs and so on -- were lost.
The Moral? If you want to take deductions for your vacation home above the line, you need to keep records of how much time you spend there, and how you spend it. If you can't prove your participation, the tax law won't help you.
Cite: Akers, T.C. Memo 2010-85
Related: NON-PASSIVE RENTAL LOSSES: NO FUN WITH DICK AND JANE
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We don't worry if car prices are too low...
April 22, 2010
...so why are we fretting over lower housing costs? Yet that's what's happening at TaxVox:
These results come with lots of caveats, but the lessons are clear. One, limiting itemized deductions might not be the best idea while the housing market is still struggling. And two, higher tax rates might just be a much-needed shot in the arm for our anemic housing market.
This would be typically perverse social engineering via the tax code: the IRS takes your money unless you spend it on more house. It's the same lunatic tax code that supports housing demand with the fraud-ridden $8,000 first-time homebuyer subsidy while at the same time spurring housing supply with the low-income housing credit. And they wonder why the housing market is such a mess.
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I hereby declare this blog a public service. Where's my deduction?
April 22, 2010
While politicians can come up with enough bad tax policy ideas on their own, they can also rely on help from academia, reports Prof. Maule:
In Re-envisioning the Charitable Deduction to Legislate Compassion and Civility: Reclaiming Our Collective and Individual Humanity Through Sustained Volunteerism, 19 Kan. J.L. & Pub. Pol'y 269 (2010) (hat tip: Paul Caron’s TaxProf blog), Professor Alice M. Thomas argues that a tax deduction should be added to the Internal Revenue Code for “volunteerism.” In other words, taxpayers would be permitted to deduct some amount representing the value, or some presumed value, of the services they provide when they volunteer.
If this is ever enacted, all posts here at the Tax Update will be part of my volunteer service of tax education, deductible at the highest prevailing rate quoted by major accounting firms in the U.S. I assume that once my volunteer work wipes out my taxable income, the IRS can send me a check for the deductions I can't use.
Related: APPRAISE YOUR GIFTS, AND BE THANKFUL
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Do you think the CPAs and lawyers will dodge the new preparer regulations?
April 22, 2010
The hearing also addressed regulation of paid preparers. Steve Miller, IRS Deputy Comm’r for Services and Enforcement, highlighted the new policy. Sen. Bingaman questioned why the certification and continuing education requirements will not apply to attorneys. He recommends that it should.
And sooner or later, it will. No regulator limits its own reach.
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IRS Agent: you mean my eBay earnings are taxable?
April 21, 2010
One of the hazards of the online economy is the way it can enable employees to surreptitiously compete with their employers. When your employer is the IRS, that can be a bad thing.
An IRS revenue officer from California rode the eBay wave in 2004 and 2005, conducting what she called an "on-line garage sale." She decided that she didn't need to keep track of her eBay income and expenses because she wasn't in a "business." Her employer was less than understanding, and things ended up in Tax Court yesterday:
Petitioner testified that she did not understand why respondent so persistently asked for proof of her costs and expenses. She testified that she purchased personal items and never kept a receipt. "That would be ridiculous, unheard of. Unless there was some really bizarre reason why I kept a receipt, there were no receipts", according to petitioner. To address respondent's claim that she was operating a business, petitioner said she put together two charts, based on her bank statements and PayPal records, showing her "business" expenses. "I didn't have receipts. I sold wedding gifts." "I had gift cards. I said well, I didn't pay anything of [sic] these gift cards from my wedding, so I guess I just take all of that as a loss. They said no. The basis is the gift card."
I know that sort of explanation wouldn't work for my clients.
On the other hand, petitioner admitted that she "occasionally" purchased items for sale in the ordinary course of her eBay sales activity that would still "have tags on them". When she was reminded that most of the items she sold were "advertised" as new, petitioner responded: "I always advertise as new only because you can get a better price for that." And she added, "So basically when you're asking these questions about why things are new, I document them as new if it appears new. Is that wrong?" Petitioner explained that she sold clothing and shoes of various sizes because she contracted plantar fasciitis and was unable to keep up her exercise routine. Lack of exercise caused her dress size to increase, according to petitioner, and the use of orthotics caused her shoe size to increase.
Translation: I fib to my customers, judge, but I'm telling you the truth!
Things went badly for the agent with the judge:
Petitioner is a revenue officer with the IRS. With this background, she has a wider range of knowledge of tax matters than do members of the general public. See Kendrix v. Commissioner, T.C. Memo. 2006-9. Petitioner is, or certainly should be, familiar with the recordkeeping requirements of section 6001, and she had access to a wide range of tax resources relating to the reporting of income and deductions. The Court might not expect for a taxpayer to keep records for a few small items sold on eBay. In view, however, of the large number of transactions in 2004 and 2005 in which petitioner engaged, she should have realized that her activity might be subject to question. Accordingly, respondent's determination is sustained.
The result: tax and negligence penalties.
The Moral: If you do eBay on the side, keep good records. The IRS doesn't buy the "garage sale" story.
Cite: Orellana, T.C. Summ. Op. 2010-51
Update: The TaxProf has more.
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20 years: lots of time to assemble a new 'Dream Team'
April 21, 2010
The man who founded "Renaissance, The Tax People" was sentenced to 20 years in prison yesterday:
In 2008, Michael Craig Cooper, founder of Renaissance, The Tax People, was found guilty of more than 70 counts of mail fraud, wire fraud, conspiracy and money laundering for selling frivolous tax advice and defrauding the Internal Revenue Service.Federal prosecutors accused him of convincing customers that personal expenses such as children’s allowances, commuting miles, educational expenses and vacations were tax-deductible business expenses
In a way, RTTP was the ultimate multi-level marketing setup. Most MLM deals are basically attempts to deduct personal expenses as business expenses under a camouflage of selling vitamins, household products, or whatever. Once I even saw a golf version that purported to make all of your green fees deductible because you would have the chance to market to people at the golf course. RTTP skipped the overpriced diet supplements and marketed the tax deductions themselves. They had an in-house "dream team" of tax advisors, including a former IRS District Director, giving their scam a sheen of credibility.
While most people who try to take flaky MLM-based tax deductions face less dire consequences than a 20-year jail sentence, they can have as many tax problems as they have cases of overpriced household cleaner in their closets.
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Spreading the Stupid Virus
April 21, 2010
A great animation by the Tax Policy Blog of the spread of state film production tax breaks across the country. Because Hollywood needs the money more than the schools do.
And who can you trust with your money more than Hollywood, anyway?
Related: Let them eat canapes
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Getting while the getting is good
April 21, 2010
It seems that lots of people are fleeing the country for tax reasons -- an unprecedented trend for the U.S. International tax attorney Phil Hodgen was recently quoted in a Time Magazine* story about the trend. He has these happy thoughts at his blog:
But for the first time in my career, I am seeing a decent number of people who were born in the United States and have no other ties to other countries. These people have a big job ahead of them to acquire a second citizenship before relinquishing their U.S. passport. Yet they are methodically working through the action steps needed.These people almost always cite taxation as one of the reasons for their decision. Both the political changes we are seeing and the enforcement attitude of the IRS cause them to consider the drastic step of leaving the United States permanently.
You can denigrate them all you want. Call them names. Mock them. But if you look with an open and nonjudgmental mind at what you see, there are some questions that pop up:
- Why are really smart, entrepeneurial immigrants — Ph.Ds, executives, etc. — now willing to leave the United States permanently? Is this good for the United States?
- Why are plain old ordinary people willing to consider this radical step?
- Is this statistical noise or should we pay attention to these — and related — issues?
Expect the trend to continue as long as the President and Congress continue to try to build broad-based entitlements paid for only by "the rich"; as long as IRS continues its international enforcement policy of shooting jaywalkers; and as long as Congress continues to encourage it.
*A pre-internet news source now distributed exclusively in dental offices and assisted-living facilities.
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Right after we learn to keep beer calories from being passed on to my gut
April 21, 2010
Senate Finance Committee Chairman Max Baucus:
We also need to understand how to prevent a bank tax from being passed on to consumers, and how the bank tax might affect lending to small businesses.
Yeah, good luck with that.
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Taxes, Guv'nor?
April 20, 2010
Iowa's candidates for governor have taken the modified limited hangout approach to releasing their tax return data. According to news reports, Terry Branstad and Chet Culver allowed reporters to look at, but not keep, copies of tax return information. Bob Vander Plaats released a "sumary" of his returns in a news release, while Rod Roberts promises tax information "soon."
It's hard to say too much about the candidates based on reporter's summaries and a press release, but we did learn a bit:
- Bob Vander Plaats' S corporation pays him a $60,000 salary for his consulting work, and (it appears) about $44,000 in K-1 income. That reduces his FICA taxes (employer and employee) by about $6,700 from what they would be if he took it all out as wages -- as he would have to in a C corporation.
- Terry Branstad is a miniature farmer. He received $127 conservation reserve payments on "a very small piece of tillable land on his 17-acre property in Boone."
Chet Culver is the secondary wage earner in his family, with a $109,000 official salary, after taking his 10% budget-crisis salary haircut. His wife earned $126,000 as a lawyer. Of course, his job also comes with the fancy house, car and driver, but not a lot of job security.
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Watch out for the quiet ones
April 20, 2010
My experience is that lawyers who yell and make loud threats are almost always covering for a lack of legal knowledge and/or a lack of self-confidence. The lawyers to watch out for are the ones who quietly and politely tell you they will see you in court. These guys have a case.
Sounds right to me.
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Cracker in a cage
April 20, 2010
Peter Hendrickson wrote a book "Cracking the Code: The Fascinating Truth About Taxation in America." To hear Mr. Hendrickson tell it, you don't really have to pay income taxes. Unfortunately for him, his sentencing judge appears not to have read his book, reports the Detroit News:
A man whose claims that most earnings are not subject to income tax have drawn national attention was sentenced to two years and nine months in prison Monday by a federal judge.Peter Hendrickson, 54, of Commerce Township, whose views on federal income tax are detailed in his book "Cracking the Code," was found guilty of 10 counts of filing false documents by a federal jury in October.
Mr. Hendrickson's book apparently had some influence outside the courtroom:
Mark Daly, an attorney with the U.S. Justice Department in Washington, D.C., said Hendrickson's books and website postings have convinced many others that they are not subject to income tax.About 10,000 income tax returns have been filed in a manner similar to what Hendrickson uses, Daly said. "The court needs to send a message to this large community."
A "large community"? Does this make him a "community organizer"?
Mr. Hendrickson is learning an important lesson about the tax law: It doesn't matter if you don't think it exists when the sentencing judge, the appeals judges, the Supreme Court, the Federal Marshals and the Bureau of Prisons think it does.
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It's not reasonable to rely on an unreliable accountant
April 20, 2010
"Blame the accountant" is always a popular strategy for folks trying to avoid penalties for bad tax positions. Sometimes it works. But if you already have a history of non-filing, that excuse might not wash. It failed for eye doctor James McNair:
At trial Dr. McNair acknowledged that he "never paid any attention" to whether the C.P.A. actually paid petitioner's employment taxes and that he never discussed it with the C.P.A. because "The subject never came up." Dr. McNair also acknowledged that petitioner had a history of failing to file and pay employment taxes in 2 prior years. Particularly in the light of this history, petitioner's failure to adequately oversee the C.P.A.'s performance of his duties indicates a lack of ordinary business care and prudence, especially considering that the C.P.A. had been recently hired.
Hint: If you hire a CPA to keep you out of tax trouble and he never actually prepares returns for you, that's a bad sign.
Cite: McNair Eye Center Inc., T.C. Memo 2010-81.
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IRS Issues Applicable Federal Rates (AFR) for May 2010
April 20, 2010
The IRS has issued (Rev. Rul. 2010-12) the minimum required interest rates for loans made in May 2010:
-Short Term (demand loans and loans with terms of up to 3 years): 0.79%
-Mid-Term (loans from 3-9 years): 2.87%
-Long-Term (over 9 years): 4.47%
The Long-term tax exempt rate for Section 382 ownership changes in May 2010 is 4.03%.
Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.
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Garbage in, garbage out
April 20, 2010
The money quote from the case:
Before the trial petitioners stipulated that they did not consult a tax professional or visit the IRS' Web site for instructions on filing the Schedule C.We do not accept petitioners' misuse of TurboTax, even if unintentional or accidental, as a defense to the penalties on the basis of the facts presented. ... At trial Ms. Lam did not attempt to show a reasonable cause for petitioners' underpayment of taxes. Instead, she analogized her situation to that of the Secretary of the Treasury, Timothy Geithner. Citing a Wikipedia article, Ms. Lam essentially argues that, like Secretary Geithner, she used TurboTax, resulting in mistakes on her taxes. In short, it was not a flaw in the TurboTax software which caused petitioners' tax deficiencies. "Tax preparation software is only as good as the information one inputs into it." [Bunney v. Commissioner, 114 T.C. 259, 267 (2000).]
The Moral: just because TurboTax lets you put capital losses on Schedule C doesn't make it right.
Cite: Lam, T.C. Memo 2010-82
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Iowa Capital Gain Exclusion: You have to own the business for 10 years, not the asset.
April 19, 2010
Iowa has a special capital gain exclusion for businesses that hang in there for a long time. If you sell the assets of a business that you have owned at least 10 years, and in which you have materially participated for ten years, you can exclude the capital gain from your Iowa taxable income. This normally requires a sale of "substantially all" of the business assets, but you can also exclude from income gain on business real estate owned in a qualifying business without selling the other assets.
A newly-released letter from the Department of Revenue clarifies that you don't have to own each asset for ten years for the gain on the sale to qualify. From the letter:
On February 19, 2010, the Department issued a Notice of Assessment for individual income tax. The reason for the assessment was a denial of the capital gains deduction claimed on the 2006 Iowa return. More specifically, the capital gain was from the sale of an asset that had been held less than ten years.Our review finds the Department erred. The statutory requirements for the deduction are that the business must have been held ten years and the taxpayer must have met the material participation requirements. Rule 701 IAC 40.38(1) addresses the sale of the assets:
b. Assets of a business. Those assets of a business which may qualify for capital gain treatment under rule 40.38(422) if the assets are sold or exchanged under the conditions described in this rule are real property, tangible personal property, or other assets of a business which were held by the business more than one year at the time the assets were sold or exchanged. However, for purposes of this subrule, tangible personal property of a business does not include cattle or horses described in subrule 40.38(2), other livestock described in subrule 40.38(3), or timber which is described in subrule 40.38(4).(emphasis added)
The rule does not require each individual asset be held more than ten years. Since the asset was held more than one year, the deduction should have been allowed. Therefore, the Department will cancel the assessment.
So: if you liquidate a ten-year business, you can exclude all gain from property held by the business owned at least one year -- not just assets held for ten years. And if you sell real property out of your ten-year business, you don't have to have a ten-year holding period for that property.
Related: IOWA'S SUPER-LONG TERM CAPITAL GAINS DEDUCTION: IF YOU QUIT, DON'T WAIT TOO LONG TO RETIRE
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You're welcome, Mr. President!
April 19, 2010
President Obama released his 2009 tax returns. His biggest income item was a $5 million-plus Schedule C for his book income. For the second year in a row, Mr. Obama took the maximum SEP deduction for his retirement based on his book earnings -- a move suggested by the Tax Update and belatedly heeded by the First Taxpayer, reducing his federal tax bill by about $17,000. Just another valuable benefit of being a regular Tax Update reader, at no extra charge. And now you can follow us on Twitter or Facebook, too!
More coverage of the Obama returns from Kay Bell and the TaxProf.
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Why it's dangerous to run your Iowa LLC without your own operating agreement
April 19, 2010
So what rules apply to an LLC that does not have a written operating agreement? It stands to reason that the terms of the new Iowa LLC Act will apply to all oral or implied operating agreements. This has serious and potentially harsh consequences to the members because the default rules under the Iowa law require that (1) all income be distributed equally among the members of the LLC regardless of their relative investments, (2) the LLC will be member-managed, and (3) all members will participate equally in the management of the LLC regardless of their relative investments.Put your deals in writing!
If the 1%-investor gets as much cash as the 50% guy, that can be a real problem.
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Last day tax tips
April 15, 2010
There's nothing left to do but the deed. It's April 15. If you don't have your tax act together by now to do your return, you won't by the end of the day either. And if you expect your friendly local tax preparer to drop everything to solve your problems today, you may be sorely disappointed.
So what to do?
If you aren't ready to file, extend that return. Even if you don't have the cash to pay what you think you owe, extend. If you extend, the penalty for late payment is 1/2% per month. If you don't extend, it's 5% per month, plus interest, on the balance due.
E-file if you can. When you file electronically, you get verification of timely filing and IRS receipt of your filing, and if you have a refund, it arrives quicker. It also saves you the running around trying to find an open post office without a line.
If you are filing or extending by mail, document that you are timely. Certified Mail, return receipt requested, costs an extra $5.10 postage. Compared to fighting the IRS over a 5%-per-month penalty -- or worse, an invalid net operating loss carryback -- it's a bargain. Save your manual postmark, as the post office purges its computer records after two years.
Don't expect the post office to stay open past their usual closing time. As part of their campaign to avoid doing anything unnecessarily useful, post offices have mostly ended their tradition of late April 15 hours. If you can't e-file and you must file after work, your best bet is a private delivery service that stays open late, like FedEx-Kinkos. It costs a little more than the post office, but a lot less than a late balance-due return. An authorized private delivery service receipt is as good as a certified mail receipt for documenting timely filing. Remember, though -- if you use a private delivery service, you can't use the usual post-office box IRS address; you have to use the Service Center street address.
Don't bounce a check to the IRS. The penalty is 2% of the bounced check amount, minimum $25, plus the late payment penalty. You can pay with a credit card if you need to. If you can't pay, file or extend anyway, take the 1/2% penalty, and try to pay before May 15 to avoid another 1/2% charge. If your liability is 90% paid in, there is no penalty on an extended return, just interest.
Now go file, and have fun today!
This is the last of our 2010 filing season tax tips. We're taking tomorrow off, see you back at the Tax Update on Monday. Thanks for reading!
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The answer is 'yes'
April 15, 2010
The question: Is Tax Complexity So Bad?
It doesn't have to be this way. And even without a flat tax, Iowa's system could be much simpler and better.
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Tax day deals...
April 15, 2010
... are happening at TaxGrrrl's place.
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15 More Tips
April 15, 2010
15 April 15 filing tips from Kay Bell.
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Honey, does this deduction make my butt look like a billboard?
April 15, 2010
The Tax Court issued a decision yesterday destined for the annals of creative tax dentistry (my emphasis):
Respondent denied petitioners' claimed deductions for car and truck expenses of $23,705 and $22,899 for tax years 2002 and 2003, respectively. In 2002 petitioners drove an Audi and a Land Rover, both of which were claimed by petitioners to have been driven solely for business purposes. Petitioner wife had veneers (cosmetic dental applications) applied to her teeth by petitioner husband. Petitioners claim that any time petitioner wife drove anywhere in one of the vehicles she was "a walking, talking billboard for [the] dental office" because of the veneer work petitioner husband had performed. Additionally, each vehicle had a license plate holder that displayed the name of the dental practice.
The court wasn't dazzled by her veneered smile:
The crux of petitioners' argument is that all use of their vehicles, whether otherwise personal or not, may be claimed as business use because of the license plate holders on each vehicle that advertise the dental practice. Petitioners have offered no authority to support this position, nor could the Court find any supportive law. The idea that a license plate holder somehow transforms all personal use into business use is clearly "too good to be true".
The court had problems with a bunch of other dodgy dental deductions. The result? Additional taxes of $295,000, plus about $50,000 in penalties.
The molar moral? The IRS wasn't born yesterday. Just because you can keep a straight face when you explain your deduction doesn't keep them from laughing.
Cite: Willock, T.C. Memo 2010-75.
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Tax Tip: there's still time for a 2009 IRA contribution!
April 14, 2010
Yes, it's pretty much the last minute, but there may be one 2009 tax planning move left for you. You can make Individual Retirement Arrangement (IRA) contributions for 2009 as late as April 15, 2010.
The maximum contribution for all types of IRAs is the lesser of wage or self-employment income or $5,000 ($6,000 if you were age 50 at the end of 2009). For married couples, a stay-at-home spouse can use the other spouses income for this purpose.
If you are actually trying to reduce 2009 taxes, the traditional IRA may be the way to go. You can deduct all of your contribution if you are not covered by an employer plan. If you are covered, or if one spouse is covered, the deduction phases out at different levels of income -- the phase-out starts at $55,000 for single filers.
If you don't qualify for a deduction, your best bet is a Roth-style IRA. If you make a Roth contribution, there is no current deduction, but you can take out the principal tax free any time, and the earnings are tax free too if you let your contribution ride for five years. Unfortunately, the ability to make Roth IRA contributions also phases out at higher income levels, starting at $105,000 adjusted gross income for single filers and $167,000 for joint filers.
Even if you don't qualify for either the Roth or the deductible traditional IRA, you can still make a non-deductible traditional IRA. Yes, the withdrawals will be taxable some day, but they build up earnings tax-free in the meantime, and at least the withdrawals won't be subject to the 3.8% Obamacare tax on "unearned" income.
This is the penultimate 2010 Filing Season Tax Tip. Last round tomorrow!
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When an effort to fight taxes reaches the end of the road
April 14, 2010
It took a long time, but the IRS efforts to collect 1999 taxes from a Spirit Lake, Iowa man are finally scheduled to bear fruit a week from Friday. That's when the IRS is to auction two motorcycles and two cars once owned by unwilling taxpayer Michael Alan Reed. Some background from the court case allowing the IRS to seize the vehicles:
In 1999, defendant Reed sent a letter and affidavit to the IRS contesting the applicability of federal income tax to him. Also in 1999, defendant Reed sent to the IRS a "Non-Negotiable Bill of Exchange" in the purported amount of $51,635,000. Along with the "Non-Negotiable Bill of Exchange", defendant Reed sent a copy of his birth certificate, indicating that he was born in the United States, driver's license, and social security card.
This somehow failed to make the IRS go away, and in the end the IRS ended up seizing the four vehicles. If it were me, I'd miss this one the most:
1947 Indian Chief, VIN CDG5320
No, I don't ride motorcycles, but that's still a sweet bike. If you are more of a Harley kind of taxpayer, there's also this:
1991 Harley "softtail"
All of which teaches a sad but important lesson: there is an income tax. No matter how convincing Irwin Schiff, William Benson, or the other tax protest scholars might sound when they say there is no income tax, the federal judges, federal Marshals, IRS collection guys, and the federal prison wardens are all sure that there is one. Mr. Reed has learned the hard way whose views count.
Prior coverage: Losing your ride, the IRS way.
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A smaller nightmare is still a nightmare
April 14, 2010
One of Iowa's Republican candidates for Governor, Rod Roberts, has finally brought Iowa's individual income tax into the campaign, promising a 10% cut in Iowa's rates. That would reduce Iowa's 8.98% top rate to 8.082%. From his press release:
Roberts further noted that his plans to cut corporate and personal income taxes will allow him to be the first Governor in years to reduce the size of state government. This is because Roberts has vowed to abide by a limitation that prohibits state government from spending more than 99% of projected revenue. Since Roberts’s tax reform plans will result in less revenue for the state, the 99% spending limitation will require state government to spend fewer taxpayer dollars, too.
(Via The Beanwalker)
That's nice, but it would be more credible if he says what expenses he would cut. I know, he's a politician, and being specific will only draw fire from the other politicians, but still. Of course, he might offer the stock answer "I'll cut the waste, fraud and abuse." Maybe if I keep looking, I'll find that line item in the budget.
Tax cuts are nice - I like paying less taxes. But even at lower rates, Iowa would still have a nightmare tax system. Iowa has one of the most complex personal income taxes in the nation, outstripped only the very worst systems, like California. We have an alternative minimum tax, 30-odd special interest tax credits, a bunch of narrow deductions tied to political pandering, and high rates. By stripping out the corporate welfare and "targeted" breaks for the well-lobbied and politically privileged, Iowa could get rates under 4% while raising the same revenue it does now -- while saving taxpayers hours and dollars in compliance costs. Quick and Dirty Iowa Tax Reform Now!
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Boy jobs?
April 14, 2010
A newlywed finds true love and a tax preparer (via Instapundit). He should offer to do the ironing instead.
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Tax Tip: You still have time for a SEP
April 13, 2010
When facing a tax bill on April 15, the normal and healthy reaction is to ask "isn't there something I can do about this?"
While there isn't much left in the bag at this point, it may not be entirely empty. If you are self-employed, you can still set up and fund a Simplified Employee Pension, or SEP, for 2009. You can then take as much as 25% of your self-employment income -- maximum $49,000 for 2009 -- and put it in a SEP-IRA. By putting money from one of your pockets to another, your get to cut your taxes.
The only documentation required is a Form 5305-SEP for your records and a deposit to your SEP account with your friendly community banker or broker by April 15 - or October 15, if you extend your 1040. Hey, if it's good enough for Barack Obama (line 28), it's good enough for you!
Two more days left of tax season -- and two more 2010 Filing Season Tips!
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So how much would that high-speed rail cost again?
April 13, 2010
Des Moines Register:
Express bus offers cheap fare to ChicagoMegabus.com, a low-cost express bus company, will begin twice-daily roundtrip service to Chicago and Iowa City from downtown Des Moines.
Passengers can begin booking travel today at megabus.com for travel on May 4 and later.
The Iowa stops are the newest of Megabus.com's 18 city-to-city destinations from its Midwest hub in Chicago. Known for offering fares as low as $1, Megabus.com caters to tech-savvy young professionals by offering free wireless Internet, electrical outlets in every row and replies to customer complaints via Twitter.
Amazing. A private provider wants to do this without federal subsidies. Compare that to the proposed $50 million-plus cost for a low-tech train route from Chicago to Iowa City.
Ozzy would approve.
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Governor: no corporate giveaways but my corporate giveaways
April 13, 2010
Better wise late than never, I suppose.
Governor Culver is suddenly against corporate giveaways:
State Rep. Rod Roberts and Bob Vander Plaats, the party’s 2006 nominee for lieutenant governor, have called for eliminating the corporate tax. Former Gov. Terry Branstad has proposed cutting it in half.Asked about the plans Friday, Culver said Iowans likely have other priorities.
"I think most Iowans, instead of more corporate giveaways, are going to be looking at expanding things like the Earned Income Tax credit that rewards work," the governor said in an interview with the Quad-City Times.
That's a bold statement for the man behind the Iowa Office of Energy Independence, which exists to give away money to corporations in the name of Greenness. It's a bold statement from a man who is a big fan of the "Grow Iowa Values Fund," another lobbyist pinata. It's a tremendous course change for the man who signed and administered the most famous of corporate giveaways, the Iowa Film Credits.
Well, the Governor didn't actually come out against these in the interview, but we'll assume that he's really against corporate giveaways now. Maybe he'll even outdo his Republican would-be opponents and embrace the Quick and Dirty Iowa Tax Reform.
(Via The Bean Walker)
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It's almost over Carnival!
April 13, 2010
Yes, tax season is nearly done. If your return is done, congratulations!
Go celebrate at Kay Bell's Carnival of Taxes! It's the best roundup of tax-related blog posts this side of the Rio Grande!
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Not all estate planning LLCs work
April 13, 2010
Marc Ward tells how one set up to hold shares of a publicly-held company came to grief.
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Tax tip for day traders: Marking it to Market
April 12, 2010
Every time the stock market shows signs of life, folks bored by their day jobs suddenly take to hanging out with Maria Bartiromo and start day trading. They commonly lose a lot of money. The tax code normally doesn't help these people because capital losses are usually deductible to the extent of capital gains, plus $3,000. That can require people to live hundreds of years to use up their losses at $3,000 per year, and that would put an unacceptable strain on Social Security.
There is an out for some of these poor would-be Methuselahs. The tax law has a provision -- the "Section 475(f) election" -- that allows "traders" in stocks and commodities to deduct their losses as ordinary, without limit. The price: all gains are also ordinary (but if you're day-trading, you aren't holding positions long enough to get the capital gain rate anyway), and you have to mark your open positions to market at the end of the year -- potentially recognizing gain before you sell the gain positions.
But if you want to elect this treatment for 2010 (sorry, it's already too late for 2009), you have to do so no later than this Thursday, April 15. You cannot defer this election by extending your return. You make the election by filing a statement with your timely return or your extension; the statement should have your name, Social Security number, and it should include:
1. That you are making an election under section 475(f) of the Internal Revenue Code;
2. The first tax year for which the election is effective; and
3. The trade or business for which you are making the election.
Of course, the election is optional -- you can assume you will never have enough losses to cause you a problem -- but if you are serious about your day trading, it could come in very handy.
Three days of filing season -- three more 2010 Filing Season Tips. You don't want to miss a one!
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Ride the Cavalcade to April 15!
April 12, 2010
Tax season careens to its end, but you can ride in style to April 15 at the new Cavalcade of Risk, hosted at Political Calculations.
Lots of good stuff at the finest roundup of insurance and risk-management posts anywhere, including useful instructions for gaming Obamacare by buying insurance only when you are sick.
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Obamacare, brought to you by your annuity
April 12, 2010
Taxable income from annuities is just one of the many types of "unearned" income (a despicable term, by the way) set to be taxed in 2013 to pour down the Obamacare rathole. The annuity companies, naturally, are miffed, reports the Des Moines Register (with bonus quotes from me). Yes, it's a screw job for annuities. And people with bank CDs, and stocks, and mutual funds, and non-active owners of pass through entities, all of whom will face the new 3.8% "unearned income" tax. And, sooner or later, you.
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I have lots to say about taxes right now...
April 12, 2010
...but it's probably already been said in Tax Analysts new book, As Certain as Death, Quotations About Taxes. You can find a pdf of the book here, or order it free here. Hat tip: Chris Bergin at Tax.com.
The quote that best sums up my views:
“Giving money and power to government is like giving whiskey and car keys to teenage boys.” – P.J. O’Rourke
Of course, you have a better chance of getting something back from the boys.
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Tax Tip: make sure you deduct all of your tax payments
April 11, 2010
All itemizers are allowed to deduct payments of state and local income taxes made during the year, including estimated tax payments and withholdings. If you file an Iowa 2009 return, you get to deduct your federal payments made during 2009.
One of the most common errors we see in self-prepared returns is failing to deduct all of your tax payments. For example, taxpayers making estimated tax payments often make their fourth quarter payments in January of the subsequent year -- say, the 4th quarter 2008 payments in January 2009. These payments aren't deductible in 2008 because they weren't made during the year; they can be deducted on the 2009 returns, but taxpayers often forget to do so.
To keep the payments straight, CPAs often use a little worksheet like the one below. By listing out tax payments received and payments made during or for 2009, you can make sure you don't miss any deductions, or fail to properly report tax refunds.
Boxes with bold borders are totals. Click worksheet to enlarge.
The first important line is line 4, "Overpayments Taxable in 2009". The amount in the "Federal" column should appear on line 27 of your Iowa 1040. The amount in the "Iowa" column is often taxable on the Federal 1040, line 10 -- though maybe not, especially if you didn't itemize in 2008, or if you paid alternative minimum tax in 2008. The Line 10 worksheet on page 23 of the 2009 1040 instructions will help you determine whether your state tax refund received in 2009 is taxable.
The next key line is "Deductible taxes paid in 2009" The amount on that line in the "Federal" column is should match the total on your Iowa 1040, line 34. The amount in the "Iowa" column should match the federal 1040 Schedule A, line 5, assuming you don't file in any other states.
Finally, double check the amounts on the "Total Taxes Paid for 2009" against your return; the "Federal" column should match the total on lines 61 and 62 of your 1040, and the "Iowa" column should tie to the total on lines 60 and 61 of your IA 1040. Nothing is more annoying than being told after you file that the state wants some more money from you.
There are only a few days left this filing season - don't miss the rest of our daily 2010 Filing Season Tips!
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Sunday morning sidewalk in Downtown Des Moines
April 11, 2010
A quiet start to the last Sunday of this tax season.
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Tax Tip: Fund your health savings account for 2009
April 10, 2010
Sometimes you can buy a deduction for yourself. If you have a qualifying high-deductible health insurance plan, you may be able to buy a deduction by contributing to your Health Savings Account by April 15. Since an HSA is a financial account you own -- though with some restrictions -- an HSA contribution is a way for you to buy a deduction from yourself.
To qualify for an HSA, you need to have health insurance under a qualifying "High Deductible Health Plan," which is one meeting these conditions:
You deduct HSA contributons "above the line" -- without having to itemize -- on line 25 of your 2009 1040.
You can always take out HSA funds tax free to pay qualifying medical expenses. You can also withdraw funds that you don't use for medical nsesexpenses on a taxable basis, but without penalty, after you reach age 65, become disabled, or die. Other withdrawals are subject to tax and a 10% penalty (20% starting in 2011).
Check back daily through April 15 for more 2010 Filing Season Tips!
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It's better to extend than amend
April 09, 2010
You've done your part. You've gotten all of your tax information to your preparer in order and on time. But you still are waiting on a K-1 from a partnership or S corporation. It probably won't be big -- why not just file now and be done with it?
It can be tempting, especially if you think you have a big refund coming, to just go ahead and file anyway. Even so, it's usually a bad idea.
Most businesses are set up nowadays as S corporations or partnerships (limited liability companies with multiple owners are usually taxed as partnerships). Their income is taxed on the owner's returns directly. They can distribute their income without incurring an additional tax; any funds not distributed increase the owners' basis in their investment, reducing future capital gains.
The K-1 is the way S corporations and partnerships break out their income so the owners can report it properly on their own returns. Unfortunately for owners, these can take a long time to prepare for a complex business, or one without great bookkeeping. They don't have to be distributed at the same time as 1099 forms (normally January 31); in fact, they can be issued as late as September 15 on extended returns.
If you are up against the April 15 deadline and still waiting for your K-1, it's usually much better to extend your return. If you file an extension, you only have to prepare the actual return once -- saving you time and preparer costs. If you amend, you give the IRS two returns to look at instead of only one. And if you file without the K-1 and don't correct the return when you finally get the K-1, chances are good that the IRS will notice.
There are times taxpayers will want to file without a K-1. If you have a huge refund coming, maybe it's worth the hassle of amending a return later to get the refund now. Sometimes a failing or failed business just doesn't get a K-1 out in time even for extended returns; then you have to file as best you can. But normally, extend, don't amend. You can e-file an extension or file Federal Form 4868. Remember, extending the return deadline doesn't extend your deadline for paying taxes. Iowa doesn't require a separate extension form if you are 90% paid in; if you need to pay some cash, send Iowa a payment with Form IA 1040-V by the April 30 Iowa deadline.
This 2010 Filing Season Tip first appeared at IowaBiz.com. Come back for a new tip every day through April 15!
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Happy Tax Freedom Day!
April 09, 2010
While we preparers think of April 16 as our day of freedom, the Tax Foundation says today is Tax Freedom Day:
Tax Freedom Day will arrive on April 9 this year, the 99th day of 2010, according to our annual calculation using the latest government data on income and taxes. Americans will work well over three months of the year—from January 1 to April 9—before they have earned enough money to pay this year's tax obligations at the federal, state and local levels.This year's Tax Freedom Day is one day later than in 2009, but more than two weeks earlier than in 2007. The shift toward a lower tax burden since 2007 has been driven by three factors: (1) The recession has reduced tax collections even faster than it has reduced income; (2) President Obama and the Congress have enacted large but temporary income tax cuts for 2009 and 2010, just as President Bush did in 2008; and (3) Two significant taxes were repealed for 2010 as part of previous legislation, the estate tax and the so-called PEP and Pease provisions of the income tax.
Despite all these tax reductions, Americans will pay more taxes in 2010 than they will spend on food, clothing and shelter combined.
Tax Freedom Day is a useful reminder of how much of our working lives are spent toiling to support critical government services like Tax Credits for rich girls, Benzes for Filmmakers, and vacations to Bora Bora for educators. Have a good one.
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If I'm paid in cash, is it taxable?
April 09, 2010
Of course it is. Russ Fox has more.
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Can you skip a partnership return for the farm you own with your siblings?
April 09, 2010
That might be an expensive bad idea. Paul Neiffer explains at Farm CPA Today.
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How rich can you be and still get a subsidy on your 1040?
April 09, 2010
Quite. See my new post at Going Concern.
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Filing Season Tip: you probably don't qualify for the Iowa capital gain deduction
April 08, 2010
If you don't do many Iowa returns, you might get excited when you see line 23 on the Iowa 1040, "Iowa capital gain deduction."
Curb your enthusiasm.
The Iowa Capital Gain Deduction requires an unusual degree of persistence. It normally only applies to capital gains on the sale of business assets that meet two ten-year requirements:
- A ten-year holding period, and
- You have "materially participated" in the business for the last ten years. "Material participation" is determined under the Section 469 "passive loss" rules. A special Iowa rule allows "retired" farmers -- those who quit farming after reaching Social Security age -- to claim the deduction even after material participation stops.
What's more, the only asset sales that qualify are those resulting from the sale of substantially all of a business, or the sale of real estate used in the business. Sales of corporate stock to third parties or sales of partnership interests don't qualify, but proceeds on a corporate liquidation may.
There are also narrow capital gain exclusions for certain livestock and timber transactions. If you still think you might qualify, Iowa has a bunch of flow charts to help you find out for sure.
Iowa examines just about every claim for a capital gain deduction, at least by mail, so if you claim it without being entitled, you can be pretty sure they'll notice.
Seven more 2010 Filing Season Tips remain. Check back every day through April 15!
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Look - a talking goat!
April 08, 2010
Tom Wheeler, the designated fall guy for the Iowa film fiasco, gave a long interview this week to the Des Moines Register. Mr. Wheeler has been indicted for "non-felonious misconduct in office," which seems to be the same as a charge of criminal ineptitude.
Mr. Wheeler spent the interview deflecting blame:
• Wheeler said he frequently sought guidance on expenditures from the state Department of Revenue, including in-kind, deferred or sponsorship transactions in which no cash changed hands. In particular, he said, he conferred with Jim McNulty, a senior manager in the taxpayer services and policy division.McNulty declined to comment for this article, referring questions to the attorney general.
That would be out of character for Mr. McNulty; he isn't exactly known as a taxpayer-friendly sort of guy. A representative of the Attorney Generals office said it didn't go down the way Mr. Wheeler says.
Mr. Wheeler comes off as an amazingly trusting soul:
• Wheeler said he never thought filmmakers were out to take advantage of him or the program. Of Kip Konwiser, a Los Angeles filmmaker, and Dennis Brouse, star of a public television series, who face questions about their tax-credit claims, he said: "I never felt like they were holding back. I felt they were good business people who were on the up and up."When asked whether perhaps some people in the film industry thought of Iowa's liberally run program as a gold mine, he said: "I don't know what they were really thinking."
Hey, Tom, here's a clue:
Nicole Schafer was the personal assistant to Bruce Isacson. He directed the movie "South Dakota."Shafer said Isacson, repeatedly abused the system, using money from state credits to buy an SUV, laptops and iPods.
"A couple of times, he would make jokes like, 'Thanks, Iowa,' as he's buying things," Shafer said.
Mr. Wheeler has a lot to answer for in letting Hollywood loot the state treasury even more than they were supposed to, but "non-felonious misconduct in office" really means "goat." If being inept is a crime, they may as well just lock the doors to the state Capitol from the outside. Trying to pin a rap on Mr. Wheeler is just a way to distract us from the 147 legislators who passed the film giveaway, and from the Governor who signed the bill and then put a credulous fanboy with a $120,000 budget in charge of passing out millions of taxpayer dollars to Hollywood sharpies.
State 29 has more.
Related: Iowa's wheeler-dealer tax credit
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Howdy, Stranger!
April 08, 2010
The mayors of Des Moines and Cedar Rapids want to kill convention business reduce the property tax burden by being able to jack up hotel taxes. David Brunori reports.
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I got mine, give yours to the government
April 08, 2010
Going Concern reports:
“We’re calling on other wealthy taxpayers to join us to send the message to Congress and President Obama that it’s time to roll back the tax cuts on upper-income taxpayers.”~ Mike Lapham, paper-mill heir, would like to pay more taxes.
Translation: "I got mine. I want the government to grab the ankles of you schmucks trying to climb the ladder behind me."
Hey, Mike Lapham: why don't you just contribute your net worth, right here.
Peter Pappas has more.
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Tax Tip: Own your return!
April 07, 2010
You sign it, you own it. Your tax return, that is.
Even if you pay somebody to do your tax return, when you sign on the line, it's yours. If there is something grossly wrong, the IRS is coming after your money -- not the preparers. While reliance on a preparer can help you avoid penalties, the courts have held that you can't say you relied on your advisor if you signed the return without even looking at it. As the Tax Court earlier this year said, in a decision imposing penalties on a couple,
Taxpayers have a duty to read their returns to ensure that all income items are included. Reliance on a preparer with complete information regarding a taxpayer's business activities does not constitute reasonable cause if the taxpayer's cursory review of the return would have revealed errors
If you don't have time to read the return before April 15, get an extension and take all the time you need. The penalties you save may be your own.
Check back tomorrow for another 2010 Filing Season Tip!
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Iowans for Tax Relief: making the perfect the enemy of the good
April 07, 2010
Yesterday's post on tax issues in the Iowa Governor's race lamented the candidates' timid approaches to income tax reform:
Far better to adopt the key planks of the Quick and Dirty Iowa Tax Reform:- Eliminate the corporation income tax
- Lower the to individual rate to 4 percent or less.
- Eliminate all corporate welfare and special interest tax breaks
- Allow Iowa S corporations to elect to be C corporations, taxable only on distributions to Iowa residents, for Iowa filing purposes.This would require ending federal deductibility, the sacred cow of the powerful lobby Iowans for Tax Relief, and it would take away annual taxpayer checks to influential corporations via the refundable Research credit. That probably explains why candidates are reluctant to do the right tax policy thing.
That prompted a phone call from an unhappy Ed Failor, Jr., President of Iowans for Tax Relief, who felt this was unfair to his organization. I explained that I thought IFTR's hardline position in favor of deducting federal taxes on the Iowa return was an obstacle to improving Iowa's tax system. He said that IFTR was willing to give up deductibility if there were adequate protections against subsequent tax rate increases. I invited him to send an e-mail response. This arrived shortly afterwards:
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U.S. District Court holds Colorado Credit Union taxable on some activities
April 07, 2010
A U.S. District Court this week ruled that Colorado's Bellco Credit Union must pay "Unrelated Business Income Tax" (UBIT) on income from Credit Insurance. It was also taxable on its share of income from "Credit Union Indirect Lending Association" because of the credit union failed to convince the court that the income was related to the Credit Union's exempt purpose.
UBIT is a tax imposed on otherwise tax-exempt entities that have business income. It parallels the corporate tax system and is designed to keep taxable entities from having to compete with tax-exempt businesses. Banks think that pretty much everything a credit union does is unfair competition, but the district court didn't go nearly that far; it ruled that a lending program and royalty income from accidental death and dismemberment insurance was not subject to UBIT.
This decision is a follow-up to an earlier decision that ruled Bellco was not subject to UBIT on brokerage fees and commissions earned from members, but not from non-members.
Link: Bellco Credit Union, DC-CO No. 1:08-cv-01071
Related: Credit Unions: not so tax-exempt?
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Will a higher power protect you from Obamacare penalties?
April 07, 2010
The TaxProf reports that, like many things in the Obamacare train wreck, it's not so clear that there are effective religious exemptions from the Obamacare coverage sort-of mandate.
Related: Shulman: refund offsets likely IRS tool to collect mandatory health care penalty
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Tax Season Tip: Iowa tax credit for prom tickets!
April 06, 2010
It's not just tax season in Iowa; it's prom season too. While proms can be painful financially, both to parents and to boyfriends, Iowa eases the pain with a little tax break. Prom tickets are among the expenses that qualify for Iowa's "Tuition and Textbook Credit."
Flickr image courtesy www.chicagofabulousblog.com via Creative Commons license.
Eligible expenditures include:
* Books: books and other instructional materials used in teaching subjects legally and commonly taught in Iowa’s public elementary and secondary schools, including those needed for extracurricular activities
* Clothing: “non-street” costumes for a play or special clothing for a concert not suitable for everyday wear
* Driver’s Education: only if paid to the school
* Dues, Fees and Admissions: includes those paid for extracurricular activities such as activity fees; booster club dues; fees for track and cross-country; activity ticket or admission for high school athletic events; fees for a physical education event such as roller skating
* Materials: includes materials for extracurricular activities, such as sporting events, speech activities, musical or dramatic events, awards banquets, homecoming, prom, and other school-related social events
* Music: rental of musical instruments for school or band; music / instrument lessons at a school; sheet music used in a school; valve oil; cork grease; music books and reeds used in school bands or orchestras
* Shop class and mechanics class: cost of required basic materials
* Shoes: football, soccer, and golf shoes; cleats for football shoes; track spike shoes
* Travel: non-travel fees for field trips if the trip is during school hours
* Tuition: the school must be accredited; amounts paid are not allowed if they relate to teaching of religious tenets or doctrines of worship
* Uniforms: band, hockey, and football uniforms
The credit is 25% of the first $1,000 of qualifying expenses. Sadly, prom dresses and tuxes don't qualify.
Kay Bell has more on the credit today.
Collect a new 2010 Filing Season Tip each day through April 15!
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Branstad: cut Iowa corporate tax rate in half
April 06, 2010
Former Governor Branstad, the front runner in the race for the Republican nomination for governor, has put corporate tax reform on his platform. Charlotte Eby reports:
Under his proposal, corporate income taxes would be cut in half, which would mean the top rate of 12 percent would be reduced to 6 percent. Branstad estimates that would amount to over $80 million per year."We know this won't be easy, and it won't be accomplished overnight, but it must be done if we're to grow our economy and attract more business, especially small business, and entrepreneurs to our state," Branstad said.
Branstad called Iowa's commercial property taxes among the highest in the country and said the state corporate income tax rate of up to 12 percent is the nation's highest marginal rate.
The proposal would be a big improvement on Iowa's dysfunctional tax system, but it is at best a half-measure. It still leaves in place a complex corporation tax law that remains expensive to enforce and that brings in only a sliver of the state's revenue needs. Worse, the plan fails to address Iowa's high individual rates and its rats nest of corporate welfare tax breaks. Far better to adopt the key planks of the Quick and Dirty Iowa Tax Reform:
- Eliminate the corporation income tax
- Lower the to individual rate to 4 percent or less.
- Eliminate all corporate welfare and special interest tax breaks
- Allow Iowa S corporations to elect to be C corporations, taxable only on distributions to Iowa residents, for Iowa filing purposes.
This would require ending federal deductibility, the sacred cow of the powerful lobby Iowans for Tax Relief, and it would take away annual taxpayer checks to influential corporations via the refundable Research credit. That probably explains why candidates are reluctant to do the right tax policy thing.
Link: Branstad policy document.
Update: I should note that both of Mr. Branstad's oppenents, Rod Roberts and Bob Vander Plaats, propose a corporate tax repeal. Neither proposes anything on the personal income tax side.
Tax Policy Blog has more on the tax issues in the race.
UPDATE II: Iowans for Tax Relief calls to clarify that they favor elimination of the corporation income tax. Point noted.
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Shulman: refund offsets likely IRS tool to collect mandatory health care penalty
April 06, 2010
While the Joint Committee on Taxation appears to have overstated the limitations on the ability of the IRS to collect health care taxes, there are real limits, according to IRS Commissioner Doug Shulman:
Speaking at the National Press Club on Monday, Shulman downplayed the IRS’s role in enforcing the recent overhaul of the health insurance industry by claiming the agency would not aggressively target individuals who don’t purchase coverage. He noted that the health-care bill expressly forbids the agency from freezing bank accounts, seizing assets or pursuing criminal charges, but when pressed said the IRS would most likely use tax refund offsets to penalize those that don’t comply with the mandate.
The IRS will likely match information returns from health insurers to a special form or schedule and assess the penalty on those who don't report adequate insurance, or whose report doesn't match the information returns. If the payment doesn't come voluntarily, they'll reduce any refund -- giving people a compelling reason to make sure they don't overwithhold, so the IRS has no refund to offset.
The real question is whether this sentence in the Joint Committee explanation is accurate:
Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.
If the IRS doesn't even charge interest, it's hard to see why it makes any sense to ever self-report the penalty. The smart thing to do financially is to compute the penalty and invest it until the IRS figures out how to collect. Of course, we preparers can't tell you that, or Doug Shulman will use his super preparer-enforcement powers to enforce silence.
Even if the IRS can overcome its enforcement problems, the penalty is likely to fail anyway.
Via Instapundit.
UPDATE: More from Megan McArdle, including this sage advice:
Getting a "refund" on your taxes means that you have just made an interest-free loan to the government. Do you relish the opportunity to make interest-free loans to anyone else, just for the sheer joy of eventually getting your own money back? I hope not.
Avoiding the "personal responsiblity payment" would be an even better reason to watch your withholding than avoiding giving IRS your money interest-free.
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Penniless on the dollar
April 06, 2010
Peter Pappas passes on a timely warning for those tempted to take up the late-night cable TV offers of "pennies on the dollar" tax settlmeents:
Tax troubles keeping you up at night? Then you’ve no doubt seen your fair share of late-night TV pitches to settle your tax debts for less than you owe. Such “pennies on the dollar” come-ons, regardless of the source, demand scrutiny — especially if they promise an Offer in Compromise (OIC) with the IRS. Such deals to settle tax debts for less than the full amount are rare.
The one experience I've had with a client who had tried one of the TV advertisers left me deeply unimpressed with their service.
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Be careful when gifting LLC interests...
April 06, 2010
...because sometimes they don't qualify for the annual gift tax $13,000 per-donor, per donee exclusion. Marc Ward explains.
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Hope, and change countries
April 06, 2010
Is the tax law driving Americans abroad to give up their citizenship? The Wall Street Journal reports today that it is so:
The number of American citizens and green-card holders severing their ties with the U.S. soared in the latter part of 2009, amid looming U.S. tax increases and a more aggressive posture by the Internal Revenue Service towards Americans living overseas.According to public records, just over 500 people worldwide renounced U.S. citizenship or permanent residency in the fourth quarter of 2009, the most recent period for which data are available. That is more people than have cut ties with the U.S. during all of 2007, and more than double the total expatriations in 2008.
This jibes with international tax lawyer Phil Hodgen's impressions. When Americans are increasingly choosing to be tax refugees, that's a warning that our tax rates are getting too high, that our tax rules for citizens abroad are dysfunctional, and that our international tax enforcement crackdown is misdirected.
Via the TaxProf.
Related: Unintended consequences of the offshore crackdown
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Filing Season Tax Tip: is April 15 your Section 1031 swap deadline?
April 05, 2010
One reason the "like-kind exchange" rules are so popular is that you can have up to 180 days to buy replacement property. If you follow the rules -- and you have to be meticulous about doing so -- they can let you cash out of one property and reinvest the proceeds in another property without current tax. But an easily-overlooked rule can shorten that 180-day limit.
If the proceeds of the sold property are properly escrowed, the tax law gives you 45 days to identify replacement property and 180 days to close. But if April 15 -- due date for your tax return -- is is less than 180 days after you sell your property, then April 15 becomes your deadline. This affects property sales after October 15.
Fortunately, there's an easy way around this. If you extend your 1040, you get your whole 180 days to close the deal. But if you fail to get that Form 4868 filed, your attempted Sec. 1031 swap may end up being unexpectedly taxable.
Check back every day for a new 2010 Filing Season Tip through April 15.
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Film fiasco: What did the Department of Revenue know, and when?
April 05, 2010
It looks like Iowa taxpayers may have spent many millions subsidizing pretend filmmaking expenses, according to a long investigative piece in yesterday's Des Moines Register. And, the story hints, this might have been done with the knowledge and approval of "officials" at the Iowa Department of Revenue.
The pretend expenditures were through "sponsorships." Somebody would agree to "sponsor" the film -- say, by promoting it on a website -- in exchange for being named in the film credits. They would assign some tremendous value to the sponsorship and to being named in the credits, and the Iowa Film Credit would award tax credits based on this value -- with no cash (other than taxpayer cash for the credits) ever changing hands. The story reports that one producer claimed credits based on $12.4 million of these sponsorships - which, the way the film program was run, could have resulted in over $6 million of tax credits that the producer could sell for real money. If so, the State of Iowa assigned $6 million of tax receivables in exchange for -- nothing.
Film trucks burning taxpayer money in Downtown Des Moines in early September, 2009, just before the film credit scandal exploded.
Oh, say the producers, there was real value there. There's an easy way to prove it, then. If a film producer really receives sponsorships of $12.4 million in services in a business exchange, he is required to report it as taxable income. The rules that allow tax-free exchanges don't cover "sponsorships," so the amount would show up on as taxable income. On the other side, the taxpayer could deduct only the actual cash expenses incurred -- the cost of adding the "sponsor" name to the film credits. If that value was real, then it needs to show up on the producer's federal income tax return. If it's not there, he is lying either to Iowa or to the IRS.
The scandal has led to criminal charges against Tom Wheeler, former director of the Iowa Film Office. His attorney says she's ready to drag the Department of Revenue into the mess:
Angela Campbell, his defense attorney, does not dispute that Wheeler approved a range of activities as eligible for tax credits when no cash was actually spent.However, she said, he did that after receiving direction and approval from officials within the Department of Revenue and others at the Iowa Department of Economic Development.
"If Revenue said it's OK, Tom didn't have the authority to disagree," she said.
So far no published rulings from the Department of Revenue have surfaced blessing cash-free film credits. While you have to take what the defense says with a grain of salt, it will be ugly if it turns out that the Department of Revenue really was blessing this raid on the state treasury. It looks as though there remains more dirt to surface:
Jeffrey S. Thompson, a deputy state attorney general who is among those leading the state investigation, said prosecutors are "working to take whatever actions we can under the law to recover money for the state or hold people accountable."Thompson hinted the full story of what went wrong in Iowa's film office is still unraveling.
"When Iowans find out the extent of this, they are going to be outraged," he said.
Wow. If it's more outrageous than what's already been reported, there should be riots when it comes out.
While it's nice that the Des Moines Register is digging into this story now, it would have been better if they had provided more than fanboy coverage of the credit when it was first enacted. State 29 has a must-read post on the failures of Iowa's media in the film credit fiasco. Bonus: he calls me a "busy capitalist pig/tax blogger guy." I think that will be the new Tax Update motto.
Related: The Iowa 'let's pretend' film tax credit
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Don't let tax season be Bozo Season
April 05, 2010
Tax time can trigger Bozo Behavior Syndrome. Russ Fox has some advice about this dreaded conditions at Taxable Talk. Today's installment: "Bozo Tax Tip #8: Use a Bozo Accountant"
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Iowans, you are free to go
April 05, 2010
Yesterday was "Tax Freedom Day" in Iowa and three other states, according to the Tax Foundation. National Tax Freedom Day - "- the date on which Americans will have worked long enough to have earned enough money to pay this year's tax obligations at the federal, state and local levels" -- is this Friday.
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Foreign trusts are a great tax planning ploy, right?
April 05, 2010
Wrong, says Phil Hodgen, international man of tax mystery:
Real life scenario: Mom, living outside the U.S., wants to help daughter, living in the U.S., to buy a house. Mom sets up a foreign trust, puts money into it, the trust buys a house, and daughter lives there rent-free.Until a couple of weeks ago, no problem. Daughter didn’t pay rent, and she she could use the house without having any income tax exposure derived from the use of the house that she didn’t own.
Now the daughter living there rent-free is going to be treated as receiving income equal to the FMV of the use of the house. If the house would rent on the open market for $5,000/month, the daughter now has taxable income of $5,000/month from the trust. Without receiving cash.
You can thank a little provision buried in the recent "HIRE" "jobs" legislation for this result.
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Today's filing season tip - give it a rest today.
April 04, 2010
No tax tip today. It's a good day for other things.
Happy Easter!
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Spring Break Tax Tip: team up with your student at return filing time
April 03, 2010
When you fledglings leave the nest for college, they naturally want to do their own returns (it's like getting your first car, just a lot more glamorous). That's normal and healthy, but it can complicate your return.
It's also normal and healthy to want to claim the college tax credits we discussed yesterday. Sadly, while you or your student can claim the credit, you can't both do so. But this can be a tax planning opportunity.
Many parents can't use the credit -- either because they have income in excess of the ceilings for the credit, or they have other tax issues -- like other credits -- that make the college credits meaningless. That might be an opportunity to throw the credit to the student. If the student has enough income to pay tax -- maybe through a summer job, or your successful investments on their behalf when they were little -- they might be able to use a credit that would otherwise go to waste.
IRS Publication 970 explains how this works:
IF you claim an exemption on your tax return for a dependent who is an eligible student, THEN only you can claim the American opportunity credit based on that dependent's expenses. The dependent cannot claim the credit.IF you do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption), THEN only the dependent can claim the American opportunity credit. You cannot claim the credit based on this dependent's expenses.
So if the kid is home on break, have one of those touching heart-to-hearts and decide which of you will claim the credit.
Check back daily for a new 2010 Filing Season Tip through April 15! Photo Credit: Flickr image of Cornell College's King Chapel by _dew_incognito under Creative Commons license.
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Tax tip: Got kids in College in Iowa? You might profit from disaster.
April 02, 2010
The "American Opportunity Credit" reduces taxes by up to $2,500 for parents with college kids. But if your student goes to a child in a "Midwestern Disaster Area," the credit could be as high as $3,600. Most schools in Iowa are in disaster zones; you can see the list of covered counties here.
So when you do your return, remember to fill out Form 8863 if your adjusted gross income is less than $180,000 on a joint return, or $90,000 for a single return. You might just find yourself getting some cash back from the government.
Link: IRS Tax Benefits For Education: Information Center
This is part of our daily series of 2010 filing season tips through April 15. Collect them all!
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The myth of the rational taxpayer
April 02, 2010
In between tax returns, the Tax Update is wading through Bryan Caplan's "The Myth of the Rational Voter," whose theme is that voters are systematically wrong on many major issues. Howard Gleckman at TaxVox has a data point in favor of that thesis:
Has relatively cheap software made us indifferent to complexity? Do we no longer care how complicated the Revenue Code is since Turbo Tax is going to do it all for us anyway?To beat a dead horse, the political economy of all this troubles me. Extreme complexity is not just annoying and somewhat costly. It also makes the tax system more opaque. Voters don’t know who is getting special deals and who is not. For the most part, I believe most of us don’t even know how much we pay in taxes.
Don’t believe me? Try this experiment: Next time you go to a party, ask people how much they paid last year. They may remember their refund, but I’ll bet they won’t know what their total income tax bill was.
That sounds right to me. It's rare that somebody asks me what the total tax bill was. They just want to know whether they owe or have a refund coming, and how much. Whether you get a refund or owe is really an accidental result of how much you've paid in via withholding and estimates. The real action is the total tax computed. Yet people whose tax has declined will still be more bothered by owing a bit of a small amount than by getting a refund but having a higher total tax bill.
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How do you report your state tax refund?
April 02, 2010
TaxGrrrl has the scoop.
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Tiger's girlfriends: self-employed, or gift recipients?
April 02, 2010
Going Concern covers today's critical tax policy issues:
Maybe! Our imagination tends to run wild so if you’ve got reason to believe that hush money paid to Tiger’s mistresses is of no interest to the IRS, please advise.TMZ is reporting, based on "sources — and they are good" that Tigger paid Rachel Uchitel $10 million to keep her mouth shut regarding their affair.
It doesn't sound much like "disinterested generosity," so it's not a gift. Is keeping your mouth shut "self-employment?"
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CRP: Subject to self-employment tax?
April 02, 2010
Not necessarily. Paul Neiffer reports on the exemption for Social Security recipients. Roger McEowen addresses the problem for other taxpayers here.
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They don't make them like they used to
April 02, 2010
Wonderful YouTube video of President Kennedy visiting the IRS (via the TaxProf).
It's full of dark Robert Hall suits, thin black ties, and adorable early 1960s technology:
Actually, I think this is still used at the Kansas City Service Center.
And don't you wish we still had a bow-tied IRS Commissioner named "Mortimer"?
I think I saw one working female in the whole video. Considering that the men in the video appear to be trolls, that couldn't have been much fun for her.
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Let the IRS match your 401(k)
April 01, 2010
Your boss might not be the only one willing to match your 401(k) contribution. The IRS might help, too.
The "Retirement Savings Contributions Credit" can provide a credit of up to $2,000 for joint filers for contributions to 401(k) plans or IRAs. The credit runs at 10% to 50% of the contribution, depending on income, and its available for the following adjusted gross income ranges:
• Single, married filing separately, or qualifying widow(er), with income up to $27,750
• Head of Household, with income up to $41,625
• Married Filing Jointly, with income up to $55,500
You claim the credit on Form 8880. Learn more at the IRS web site.
Come back every day though April 15 for a new 2010 Filing Season Tip!
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Send me to Bora Bora or freeze in the dark, you slacker!
April 01, 2010
When people start groaning under high taxes, there's always someone like Chris Bergin at Tax.com to cheer us up with something like this:
As a society, we will never be free of taxes – that is unless we all want to be bathing down by the river, catching our own dinner, and freezing to death in the dark.
Joseph Henchman at the Tax Policy Blog has the right response:
The next time Chris and the Tax Analysts want to grab drinks with the Tax Foundation crowd, and I offer to pay for a round, I fully expect everyone to run up my tab. Americans are running up the tab, in part because groups like the Center on Budget and Policy Priorities (CBPP) have pushed the notion that someone else can pay for all or most of government services, and that that's sustainable. (The CBPP's "rebuttal" of Tax Freedom Day, where they emphasize that most people have a lower tax burden than the average, reinforces this point.)The solution to badly-designed social welfare programs should not be knee-jerk higher taxes, but reforms and a sustainable, broad-base/low-rate tax system that encourages economic growth and minimizes interference with individual freedom.
But what about paying for essential public services like education? Today's Des Moines Register shows how that works:
Top executives of the Iowa Association of School Boards - along with their spouses - traveled to professional conferences at resorts in Alaska, Key West, Fla., Puerto Rico, Hawaii and other locales at the expense of the taxpayer-funded organization, newly disclosed records show.
So stop complaining about paying high taxes so your taxpayer-funded overlords can vacation in Bora Bora, you ingrate. Do you want to wash clothes on a rock by the river or something?
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It takes a thief
April 01, 2010
A tax lawyer involved in setting up flaky tax shelters was sentenced to three years probation - a light sentence under the circumstances. Tax Crime defense attorney Jack Townsend comments:
In justification of the light sentence, the Judge Stein cited Cinquegrani's cooperation with the Government, including explaining the PICO shelter to investigators. Got that concept -- if you are going to cheat, do it in a complex way so that, if you are caught, you can help the Government and mitigate the sentence.
Well, it worked this time anyway.
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Why not? California has lots of cash to spare
April 01, 2010
From Tax Analysts ($link):
California Gov. Arnold Schwarzenegger (R) has again vetoed a comprehensive tax conformity bill (SB X8 32) because of its provision related to penalties for frivolous refund claims; the governor signed bills to provide credits for home buyers (AB 183) and to promote green technology (SB 71).
In the Governator's world: simplifying taxes = bad. Throwing away money into a doomed housing market and hopeless technology = good. Poor California.
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Congress does something that makes sense
April 01, 2010
April Fools! Of course.
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