Tax Break

IRS budget: IT a priority, enforcement funding down

Remember the budget? Not the one President Barack Obama introduced last month. But the budget for fiscal 2012 – the year we’re in right now?

Don’t feel bad if you forgot. Obama signed the bill two days before Christmas, the same day that he signed the highly-politicized, media-frenzied payroll tax cut extension.

On March 6, the Congressional Research Service published a nice coda report detailing where the money will be spent through Sept. 30 2012.

Overall agency spending is down just $277 million to $44.41 billion from fiscal 2011 levels.

But the IRS’s budget was cut 2.5 percent. Enforcement, which makes up the bulk of IRS spending, was slashed 3.5 percent.

The only area of the IRS budget to see an increase was business systems modernization. This is an effort to bring IRS software into the 21st century with improved tax return processing as well as enforcement.

“When fully operational, the program will have several tangible benefits for taxpayers, including more timely account balance information and faster refunds to tens of millions of taxpayers who are due a refund each tax year,” the CRS report said.

Why is this man smiling when his budget got cut 2.5 percent? IRS Commissioner Doug Shulman. REUTERS/Hyungwon Kang Join Discussion

Marriages end, but taxes are forever

A couple may have split, but that’s no reason to send more than necessary to Uncle Sam, explains Reuters personal finance editor Lauren Young. In this video she walks through the question: who should take the kids as a tax deduction?

Smart tax planning after a divorce. Join Discussion

What is a roof? The IRS needs to know

“Maggie ‘the Cat’: You know what I feel like? I feel all the time like a cat on a hot tin roof.  (from Tennessee Williams, “Cat on a Hot Tin Roof”)

The Internal Revenue Service has its own problem with roofs these days. An IRS employee in Atlanta sent a letter last week to his own agency asking what exactly qualifies as a roof. Shingles? A waterproof cover?

Why, you ask, does the IRS need to specify what is a roof? It matters for accounting purposes.

In December, the IRS issued new rules to clarify the difference between a business expense that is a repair and tax-deductible and one that is an improvement but not deductible right away.

So when it matters for tax purposes whether you’re fixing or improving your roof, you have to know what a “roof” is.

The roof, not-a-roof dilemma illustrates the challenge IRS faces in applying repair regulations. They must be broad enough to be meaningful, yet specific enough to keep the accountants honest.

The letter, written by Roy Nixon, notes that the IRS is giving the public conflicting messages on roof repairs.

“Maggie ‘the Cat’: You know what I feel like? I feel all the time like a cat on a hot tin roof.  (from Tennessee Williams, “Cat on a Hot Tin Roof”) The Internal Revenue Service has its own problem with roofs these days. An IRS employee in Atlanta sent a letter last week to his own [...]

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Essential tax and accounting reading: Contrasting tax plans from Obama and Romney, unequal tax payments, dividend tax hike, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Obama, Romney offer contrasting tax plans. Zachary Goldfarb and Philip Rucker – The Washington Post. President Barack Obama and Republican presidential contender Mitt Romney offered competing proposals for how the government should tax citizens and companies, previewing the ideological clash over taxes that is likely to be at the forefront of the general-election campaign. Obama released a long-awaited plan to overhaul the country’s corporate tax code that plays directly to his base, following his call this month for significant tax hikes on the wealthiest Americans. A short time later Romney unveiled a series of deep cuts in personal and corporate income tax rates, the kind of reductions that have become a tenet of Republican economic thinking. The former Massachusetts governor proposed reducing the rates for individual taxpayers by a fifth, meaning that the highest earners would pay a top rate of 28 percent, compared with 35 percent today. He also suggested taxing corporate profits at a rate of 25 percent. Link

* Obama urges corporate tax cut, closing loopholes. Kim Dixon and Rachelle Younglai – Reuters. President Obama made an opening offer in what could be a long negotiation with corporate America on Wednesday, putting forward his first detailed plan to cut the corporate tax rate. Though it has little chance of becoming law in an election year with Congress paralyzed over fiscal issues, the plan shows Obama’s intent to favor domestic over offshore manufacturing and to broaden the tax base by closing corporate tax loopholes. Of the 30 companies that make up the Dow Jones industrial average, 19 told shareholders that their effective tax rate for their 2011 fiscal years (mostly ending Dec. 31) was lower than Obama’s proposed new tax rate. Link

* Romney proposes 28 percent top U.S. income tax rate. Steve Holland and Patrick Temple-West – Reuters. Republican Mitt Romney revised his proposal for overhauling the U.S. tax code, calling for all individual tax rates to be cut by 20 percent while declining to offer specifics on how to make up the lost revenue from lower rates. Romney’s new tax plan would put the top individual tax rate at 28 percent, down from the top statutory 35 percent rate and matching rival Republican presidential candidate Rick Santorum’s proposed top rate. Romney is seeking to regain momentum in his campaign for the 2012 Republican presidential nomination to face Obama, a Democrat, in the Nov. 6 election. The Romney campaign said on Wednesday that the candidate’s overall budget plan would be revenue neutral. But it provided no details on which politically contentious tax breaks would be cut to avoid ballooning the budget deficit if his tax cuts were implemented. Link

* Winners and losers from a tax proposal. Binyamin Applebaum – The New York Times. The Obama administration, seeking to promote domestic manufacturing without increasing the federal deficit, proposed Wednesday to offset new tax breaks for manufacturers by raising taxes on a wide range of other companies. Some of the prospective losers are familiar targets, including oil and gas companies, private equity firms and companies that move jobs overseas. The proposal would also roll back provisions that benefit a range of other companies, including Menards, the Midwestern home improvement chain; Brown-Forman, which distills Jack Daniel’s; and Duke Energy, of North Carolina. Some manufacturing firms could face higher taxes, too, because they are major beneficiaries of those same provisions. Over all, the plan seeks to reduce the share of profits manufacturers pay in federal taxes from an average of 26 percent in 2007 and 2008 to a maximum of 25 percent. Link

* Our unequal tax system, in one HTML table. Brad Plumer – The Washington Post. Bruce Bartlett and Kevin Drum point to a striking table in the 2012 Economic Report of the President showing that there’s a huge variation in what people of similar income levels actually pay in federal taxes. Those in the middle income quintile, for instance, can pay anywhere between 1.7 percent and 23.5 percent of their income in federal taxes. About a quarter of the wealthiest Americans, meanwhile, have a lower average tax rate (17.4 percent) than many of those making far less money. What explains the wild variation? Part of it is that some Americans – Mitt Romney is the most famous example – get a sizeable chunk of their income from capital gains, taxed at a lower rate than salaries. Link

* Obama’s dividend assault. The Wall Street Journal editorial. President Barack Obama’s 2013 budget is the gift that keeps on giving – to government. One buried surprise is his proposal to triple the tax rate on corporate dividends, which believe it or not is higher than in his previous budgets. Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6 percent that will kick in next year. Add in the planned phase-out of deductions and exemptions, and the rate hits 41 percent. Then add the 3.8 percent investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be 44.8 percent – nearly three times today’s 15 percent rate. Keep in mind that dividends are paid to shareholders only after the corporation pays taxes on its profits. Link

Essential tax and accounting reading: Contrasting tax plans from Obama and Romney, unequal tax payments, dividend tax hike, and more Join Discussion

Romney’s 2010 IRS return flags complex tax strategies

Republican presidential candidate Mitt Romney’s release of his 2010 tax return offers a rare glimpse at two sophisticated tax transactions which the U.S. Internal Revenue Service requires that taxpayers disclose for investments driven by tax considerations.

Like thousands of other Americans’ returns, Romney’s included special attachments flagging “reportable transactions” to the IRS. Known as Form 8886s, the attachments showed that these foreign currency and contingent swap transactions were undertaken by one Bain Capital fund and three Goldman Sachs funds in which blind trusts for the assets of Romney and his wife Ann have invested several million dollars.

Under disclosure rules strengthened in 2002 to grapple with rising tax evasion by Americans, the IRS requires taxpayers to disclose transactions that it has banned or warned it may challenge as improper.

The IRS has historically had a tough time detecting tax shelters, both innocuous and questionable, buried in taxpayer returns.

While the disclosure rules sometimes help the agency spot abusive tax shelters, they also can cause taxpayers to flag transactions that might appear on the surface to be problematic, but in fact are not.

Romney’s disclosures come in a campaign environment dominated by talk about income inequality and tax loopholes. (Yesterday Romney put forward his ideas for fixing the tax code.)

While the disclosures may raise more questions than they answer, they highlight the sophisticated tax planning – in this case, by some of the funds Romney is invested in – available to wealthy investors.

Republican presidential candidate Mitt Romney’s release of his 2010 tax return offers a rare glimpse at two sophisticated tax transactions which the U.S. Internal Revenue Service requires that taxpayers disclose for investments driven by tax considerations. Join Discussion

Who’s the poorest of the presidential candidates?

One thing Rick Santorum’s tax returns, released late on Wednesday, made clear: None of the leading presidential candidates fits into the 99 percent of the populist Occupy Wall Street movement.

Santorum told Politico he isn’t rich. “I don’t have wealth,” he said.

Well, perhaps compared to frontrunner Mitt Romney’s estimated $22 million income in 2010. Still, with an income of nearly $1 million in 2010, Santorum is comfortably in the top 1 percent of Americans.

Santorum’s adjusted gross income of about $924,000 in 2010 was the lowest of the major Republicans vying to take on President Barack Obama so far, and significantly less than Obama himself, who pulled in a cool $1.7 million – most of which came from his bestselling books.

Santorum’s wealth rose swiftly after he left the Senate in 2006, where he made a Senate salary of about $165,000. His first year out in 2007, racked up nearly $660,000.

Most of the income from his four years of the newly released returns came from his consulting business, Excelsior. Much of that work relates to his ties made after years in Washington, on issues from health to energy policy.

Santorum, who has been surging in some polls to a neck-and-neck race with Romney, paid a relatively high tax rate — about 29 percent in 2010, compared with Mitt Romney’s 14 percent – highlighting a stark divergence between income taxed at the top 35 percent “ordinary” tax rate and investment income taxed at 15 percent, the source of much of Romney’s wealth.

One thing Rick Santorum's tax returns, released late on Wednesday, made clear: None of the leading presidential candidates fits into the 99 percent of the populist Occupy Wall Street movement. Join Discussion

The slippery slope of a sugar tax

A recent study on the effect of taxes on sugary beverages is bound to give the soda industry’s lobbyists a headache.

Professor Annette Nellen, who teaches at San Jose State University and blogs at 21 Century Taxation, wrote last week about a new study on the link between a soda tax and lower diabetes rates. The report said:

Over a ten year period (2010-2020), the penny-per-ounce tax could reduce new cases of diabetes by 2.6%, as many as 95,000 coronary heart events, 8,000 strokes, and 26,000 premature deaths.

Still, Nellen said she is skeptical of soda taxes because it uses the tax code to play favorites. Why should sodas be considered “bad” while juices and other sugar drinks could dodge the tax?

Levying taxes to channel behavior is a slippery slope, she said. Why stop with sugar? Too much salt and saturated fat are unhealthy as well.

Nellen wrote in 2008 about a tax New Mexico proposed in 2008 on video game and television sales.

Still, there is strong evidence about the negative health consequences from sugar (see this Reuters story from January).

A recent study on the effect of taxes on sugary beverages is bound to give the soda industry's lobbyists a headache. Join Discussion

Taxes not just certain, they’re right thing to do-survey

Most Americans believe strongly that it’s a civic duty to pay their “fair share” in taxes, that cheating on taxes is wrong and that cheaters should be held accountable, said a survey from the U.S. Internal Revenue Service’s Oversight Board released on Monday.

Created by Congress in 1998 to keep an eye on the IRS, the oversight board does its survey annually. This year’s is consistent with past results showing strong support for the tax obligations of citizenship and low tolerance for those who shirk it.

Despite chatter on the political fringes about taxes being a form of theft, 96 percent of those surveyed said they completely or mostly agreed that  ”it is every American’s civic duty to pay their fair share of taxes.”

Only 8 percent gave the answer “as much as possible” to the question, “How much, if any, do you think is an acceptable amount to cheat on your income taxes?” That’s a contrast to attitudes in places like Italy and Greece where tax dodging is endemic.

 More than 60 percent said the IRS should get more funding to do a better job at enforcement.

Most Americans believe strongly that it's a civic duty to pay their "fair share" in taxes. Join Discussion

Tax clips from the Web: Mitt’s millions, cost basis and more

Tax season looms! Indeed, for many, it already has begun. Here are some of the best stories on taxes that you might have missed elsewhere on the Web.

Mitt’s millions raise a fundamental tax question

Call it the dawn of the debate over carried interest and why it may be taxed differently in the future. The primary question that has emerged from the ruckus over Mitt Romney’s finances, which Kay Bell asks in her tax blog don’tmesswithtaxes, is whether capital gains should be taxed at a lower rate than normal income. There are arguments on either side. One is that  investments help build the U.S. economy, so tax breaks may be justified. On the other side is an argument that Warren Buffett was famous for making in the Op/Ed pages of the New York Times last August in which he asked why capital gains tax breaks should result in a billionaire paying an effectively lower tax rate than his middle-income staff.

Cost basis exploration

Forbes’ blogger Kelly Philips Erb weighs in with “Got Stock? Cost Basis Rules May Impact Taxes,” a good read if you have income from investing in stocks. This year investors need to know about changes to “cost basis” rules from the IRS. The department made changes partly to ensure that investors pay enough tax on gains from their stocks last year. Now stock brokers are required for the first time to provide the cost basis amounts to their clients in time for filing, and send a new form to the IRS. Investors still have responsibility for reporting all transactions that resulted in stock gains, of course, so whether the process will become more complicated remains to be seen.

Quick Links

Thinking about getting some help with your filing? The IRS has regulations in place to prevent people from going to “unscrupulous” tax preparers. Taxabletalk.com explains them in a handy video here.

Tax season looms! Indeed, for many, it already has begun. Read some of the best stories on taxes that you might have missed elsewhere on the Web. Join Discussion