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The Tax Tsunami on the Horizon

by | TAXES

The folks over at Investors.com did a great round up of the new taxes slated to start in 2011. The end of the article cuts right to the core:
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Not all Americans may fully realize what’s in store come Jan. 1. But they should have a pretty good idea by the mid-term elections, and members of Congress might take note of our latest IBD/TIPP Poll (summarized above).

Fifty-one percent of respondents favored making the Bush cuts permanent vs. 28% who didn’t. Republicans were more than 4 to 1 and Independents more than 2 to 1 in favor. Only Democrats were opposed, but only by 40%-38%.

The cuts also proved popular among all income groups — despite the Democrats’ oft-heard assertion that Bush merely provided “tax breaks for the wealthy.” Fact is, Bush cut taxes for everyone who paid them, and the cuts helped the nation recover from a recession and the worst stock-market crash since 1929.

Maybe, just maybe, Americans remember that — and will not forget come Nov. 2.

http://www.investors.com/NewsAndAnalysis/Article.aspx?id=541131

Alternative Minimum Tax Report

by | ARTICLES, TAXES

Alternative Minimum Tax Report

Introduction

The Alternative Minimum Tax (“AMT”) presents hardships to the practitioner as well as the taxpayer who prepares his own return by, as its name implies, imposing a second tax calculation mechanism on taxpayers. This mechanism brings with it major record keeping and calculation complexities, yet serves virtually no useful purpose-other than the raising of an ever-increasing amount of tax revenue. But as has become very clear in recent years, this increase in tax revenue is not coming from taxpayers who were the intended targets of this tax.

Summary of Conclusion

The AMT does not serve the purpose for which it was intended and functions in a most inequitable manner while adding enormous compliance burdens. It should therefore be changed to eliminate the adjustments for state and local taxes and miscellaneous deductions, update its rates, and modify its exemption.

Discussion & Analysis

The AMT was instituted in its present form when the prior “add on” Minimum Tax” was transformed into the AMT in the early 1980’s. Its “stated” purpose was to require that all taxpayers paid at least a fair share of tax. It was to do this by identifying “loophole” type deductions. {These are referred to as either “preferences” or “adjustments” in the law, and will be referred to hereinafter as “preferences”}. There would then be an alternative calculation using lower tax rates applied against this taxable income as increased by the preferences. However the AMT was seriously flawed from the outset. Instead of focusing on these loophole type preferences (which would have limited the tax to a very small number of tax law “abusers”), the law that was passed included items that were not loopholes at all. And it was then imbedded in an exemption structure which guaranteed that over time all taxpayers would be moved towards paying this tax.

From the beginning, a very substantial majority of all AMT paid by taxpayers results from the following four factors:

  1. Treating state and local taxes as a preference
  2. Treating miscellaneous deductions as a preference
  3. Not modifying the rate to correspond to changes in the regular income tax rates.
  4. Allowing lower exemptions than the regular tax.

Each of these, however, can be quickly shown as innappropriate factors with which to base a tax system intended to just make sure everyone pays a “fair share” of tax.

  1. State and local taxes are hardly a loophole. The taxes exacted by state and local governments are hardly “voluntarily” paid by taxpayers in an attempt to avoid paying federal taxes. Furthermore, reducing a taxpayer’s federal tax liability because he has already paid state and local taxes on that same income already is hardly a loophole.
  2. Miscellaneous deductions is the category of deductions that consists primarily of expenses incurred to earn income that is subject to tax. It includes unreimbursed employee expenses, investment expenses, etc. This is the most basic and important deduction needed to have a truly fair income tax system. For example, if an individual pays a lawyer a fee for collecting back wages, the legal fee is a miscellaneous deduction. If an individual pays the lawyer $300 for collecting $1000 of back pay, netting $700, the AMT would tax the individual on the full $1000.
  3. The AMT rate is generally 28%. This was its rate when regular tax rates were 39.6%. Regular tax rates have dropped, but the AMT rate remains at 28%.
  4. The exemption available under the AMT tax system is a fixed dollar amount which, unlike exemptions and standard deductions under the regular tax system, is not indexed for inflation. Furthermore, it is phased out entirely over certain income levels. That an AMT liability could be caused (or increased) by simply having a lower exemption than the regular tax makes a mockery of the original intent of the AMT. By not keeping this exemption at least as high as the exemption and lower brackets of the regular tax, Congress has simply foisted an illogical and inequitable tax increase on its unsuspecting constituency.

Conclusion

The AMT in its present form has no place in the tax law. If it is kept at all, the addbacks for taxes and for miscellaneous deductions must be eliminated, the rate modified to be appropriately related to regular tax rates, and the exemption made comparable (or greater) than the exemption for purposes of the regular income tax. The AMT is absurdly difficult to administer because of its complex provisions, illogical and inequitable effects, and uncertain interaction with other provisions of the Internal Revenue Code. It is inequitable in the highest order, placing maximum burden on those to whom the most rational elements of the Internal Revenue Code would otherwise apply.

Coming Obamacare Deficits

by | OBAMACARE

David Gratzer over at Townhall.com wrote the following on the coming Obamacare deficits:

On a quiet Friday afternoon this summer, the central justification for President Obama’s health-care overhaul died a quiet death. On that day, a bipartisan coalition in Congress reversed the scheduled Medicare cuts to physician payments, ensuring that, over the next decade, the White House’s reforms will cost many billions more than advertised. After over a year of debate and lofty rhetoric, the reality is this: the president’s goal of “bending” the health-care cost curve has unraveled in just a few months.

The president and his supporters argued that we need ObamaCare in order to tame the federal budget deficit. When he signed the bill into law, the president touted the importance of the legislation in reducing long-term deficits. Democrats cited Congressional Budget Office scoring showing that the health legislation would reduce the deficit over ten years to the tune of roughly $130 billion. But that was back in March.

In May, the CBO released its quantitative analysis showing that discretionary spending not accounted for in the previous scores would cost $115 billion. The CBO director himself expressed significant doubts about potential deficit reduction. Speaking to the Institute of Medicine, he said: “Rising health costs will put tremendous pressure on the federal budget during the next few decades and beyond. In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure.”

That brings us to the quiet Friday afternoon of June 25. By cancelling scheduled Medicare cuts, the president and his Congressional allies have made the fiscal problem even worse: Not only do those fiscal problems remain, but White House reforms meant to address them will push net federal-government health expenditures further into the red. Any notion of fiscal balance has been lost.

Yet cancelling these scheduled Medicare cuts is nothing new. Time and again, Republican and Democratic leaderships in Congress have haphazardly voted to undo scheduled cuts.

Congress reversed planned Medicare physician cuts in 1999—and 2004, 2005, 2006, and 2008. In fact, since 1997, when members of both parties agreed to automatic cuts if spending rose faster than population and economic growth, the program has been cut just once, in 2002. Maybe it’s the pressure of the doctors’ lobby. Maybe it’s the seniors’ lobby. Maybe it’s both.

And this Democratic Congress has been no better. In fact, just months after passing Obama’s health-reform legislation, Democrats vigorously and successfully pushed to postpone the Medicare cut until November (they had previously voted to delay it from April to June 2010).

More worrisome is this: in liberal circles, it’s popular to argue that Congressional efforts to control Medicare costs under the Sustainable Growth Rate (SGR) formula have been overly successful. James R. Horney and Paul N. Van de Water make exactly this point in a publication for the liberal Center on Budget and Policy Priorities. They write: “Even though Congress did not allow the full cuts required under the SGR formula to take effect, it has still cut the physician reimbursement rate substantially – at its current level, the reimbursement rate in 2010 will be 17 percent below the rate for 2001, adjusted for inflation.” Picking up on this point, Paul Krugman recently argued that Medicare has been historically very successful at reigning in costs. But praising Medicare cost containment in a time of heavy health-care cost inflation is like praising Lehman Brothers for making good investments in Latin America when the market for subprime mortgages was imploding.

Let’s put this in perspective: health inflation was 3.4 percent last year, just over double the basic inflation rate. Tellingly, the worst cost increases were experienced by Medicare (costs were up 8.6 percent), and Medicaid (9.9 percent).

Unfortunately, the White House and Congress squandered a great opportunity to bend the cost curve downwards, opting instead for the status quo. The quiet congressional vote in June shows how far the administration has strayed from its reform rhetoric. If we are ever to reign in health care spending, we need leaders who will make tough choices and tough cuts. Their rhetoric must become reality.

http://townhall.com/columnists/DavidGratzer/2010/07/15/the_coming_obamacare_deficits

Tax Credit Rhetoric

by | TAXES

The figures bandied about regarding the percentage of tax cuts in the stimulus package was false. Only a very small portion of the bill represented real tax cuts – the rest was spending implemented by having it paid through the tax system. This same type of deceit put Enron executives behind bars. Yet, because it is Uncle Sam and not Kenneth Lay, we let our guard down—and our sensibilities.

Tax cuts and tax credits are terms often used interchangeably. Most Americans don’t know the difference and Congress was counting on that. The stimulus package was sold as “tax credit this” and “tax cut that”. We eventually tuned out: they sound alike, ergo they must be alike. But that is simply not true.

Tax credits peppered the stimulus package. Whether it was a “credit” for energy saving devices, college tuition, alternative energy, gasoline efficiency, or even for being over a certain age; all are simply government expenditures being run through the tax system, But its your money collected and then given back to certain people who meet the criteria—or dare we say, agenda.

For example, if the law provides that by purchasing a $5,000 energy saving device you can reduce your taxes by $1,000, this has nothing whatever to do with a tax cut. If you have to do something to get something, you must look at what is really going on. In this case, the manufacturer and seller of the device is being paid a $1,000 subsidy by Congress to help it sell its product. The payment is being made by having the IRS write the check.

We’re in a recession now. Tax cuts have helped end recessions in the past. The same cannot be said for tax credits. Government is simply laundering its expenses by running it through the tax code. Stimulus spending will do nothing to fix the economy and everything to make the government and its deficit bigger. With politicians and the media using confusing rhetoric, many Americans bought into The Big Lie.

NY State–We Punish You for Withholding the Correct Amount of Tax

by | GOVERNMENT, NEW YORK, TAXES

Everyone knows about withholding—it’s the money taken out of our paycheck. It is an attempt bythe government, on a pay-as-you-go basis, to collect from you over the course of the year, the amount of tax you would owe for that year.

The various taxing authorities provide specific rules to employers as to how to withhold on regularpaychecks. There are special rules or withholding on bonuses, and other forms of pay (stock option exercises, taxable fringe benefits, etc.) that are over and above regular pay. Commonly, withholding on bonuses are at a fixed statutory rate, normally near the maximum tax bracket of the jurisdiction.

But during the Cuomo years, NY State decided that they could ease their annual budget problems by requiring withholding on bonuses and special payments at a rate approximately 1/2% higher thanthat maximum tax bracket. For those  with  large  bonusesthis could commonly lead to large refunds at tax  filing  time,  but in  general  amounts tended to be small and no major aberration results.

For those employers paying very large bonuses and/or special payments, it is not uncommon foremployers to reduce the withholding so that withholding actually approximates the employees realtax obligation. After all, the objective of withholding  is to have your liability paid on an ongoingbasis.

But apparently NY State has lost sight of this. It is spending our tax dollars to send examiners into the field in order to go after those who are trying to withhold  the  correct amount of tax.

In a case with which I am familiar, the State Department of Taxation is attempting to fine an employee for not withholding taxes at levels that would have caused the taxpayer to have a $300,000  overpayment. This is not pay-as-you-go, this is extortion pure and simple.

Whose money is it anyway?

Kill the Golden Goose Why Don't You

by | FREEDOM, GOVERNMENT, TAXES

David and Ruby had a once in a lifetime windfall earning themselves a $600,000 long term capital gain. When I told them that their federal tax liability on this gain was $100,000 they accepted this as the price ofliving in the U.S. But when I told them that their NY State and City tax on this gain was $80,000 they were dumbfounded. After all, David said, wasn’t the NY State and City tax usually 1/3 or less of the federal tax?

Yes usually. But NY State and City have been taking advantage of its most productive residents in a most underhanded way. Agricultural states give benefits to their farmers, and oil states give benefits to their producers, but NY State and City gouge their successful Wall Street investors.

When in 2003, Congress reduced the maximum on capital gains and qualified dividends from 35% to 15%, this portended a huge windfall for the securities industry so much of which is located – and pays huge taxes to – the State and City of New York.

But in (in) actions of unfathomable and irresponsible greed, neither the State nor the City legislatures made any corresponding reductions in their tax rates. Unfathomable because it led to the ridiculous relationship that David and Ruby experienced causing them to wonder if they should continue to stay in New York. Irresponsible in that it accelerated the move of the securities industry out of New York.

Although it’s true that New York securities industry profits are now higher than ever before, it is happening despite a steadily decreasing portion of this industry operating from New York. And when the industry returns to more normal time, we will sorely miss the business that was chased away by New York’s anti-securities industry tax policy.

NY’s US Senators and Congressmen decried (and voted against) the tax rate cuts on capital gains and dividends that did so much for Wall Street and the jobs it creates. The rate cuts passed anyway, leading to prosperity and surplus for the local economy.

However, these cuts are slated to expire in 2010 and New York State’s representatives keep taking about increasing rates on those involved in New York’s bedrock industry.