Tuesday, March 31, 2009

Social Security Surplus gone by 2010

Recession Puts a Major Strain On Social Security Trust Fund
As Payroll Tax Revenue Falls, So Does Surplus
By Lori Montgomery
Washington Post Staff Writer
Tuesday, March 31, 2009; Page A04

The U.S. recession is wreaking havoc on yet another front: the Social Security trust fund.

With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund's annual surplus is forecast to all but vanish next year -- nearly a decade ahead of schedule -- and deprive the government of billions of dollars it had been counting on to help balance the nation's books.

While the new numbers will not affect payments to current Social Security recipients, experts say, the disappearing surplus could have considerable implications for the government's already grim financial situation.

The Treasury Department has for decades borrowed money from the Social Security trust fund to finance government operations. If it is no longer able to do so, it could be forced to borrow an additional $700 billion over the next decade from China, Japan and other investors. And at some point, perhaps as early as 2017, according to the CBO, the Treasury would have to start repaying the billions it has borrowed from the trust fund over the past 25 years, driving the nation further into debt or forcing Congress to raise taxes.

The new forecast is fueling calls for reform of the Social Security system from conservative analysts, who say it underscores the financial fragility of a system that provides a primary source of income for millions of Americans.

"It suggests we better get working on Social Security and stop burying our heads in the sand," said Sen. Judd Gregg (N.H.), the senior Republican on the Senate Budget Committee. "The Social Security trust fund, though technically in balance, is going to put huge pressures on taxpayers very soon."

Many liberal analysts reject the notion that Social Security needs fixing, arguing that the system is projected to fully support payments to beneficiaries through 2041 -- so long as the Treasury repays its debts. But they agree that the news is not good for the federal budget.

"This is not a problem for Social Security, it's a problem for fiscal responsibility," said Christian Waller, a public policy professor at the University of Massachusetts at Boston and a senior fellow at the Center for American Progress. He said the new estimates would force President Obama and his budget director, Peter Orszag, "to stay on track in what they have set out to do, and that is rein in deficits."

The CBO, Congress's nonpartisan budget scorekeeper, released its most recent estimates for the Social Security trust fund last week as part of its final budget projections for the fiscal year that begins in October.

The trust fund has long taken in more in revenue from payroll taxes and other sources than it pays out in benefits. Last August, the CBO predicted that surplus would exceed $80 billion this year and next, then rise to around $90 billion before slowly evaporating by 2020. But the rapidly deteriorating economy -- particularly the loss of more than 4 million jobs -- has driven those numbers much lower much faster, with the surplus expected to hit $16 billion this year and only $3 billion next year, then vanish entirely by 2017.

CBO is not the official arbiter of the trust fund's health; that task falls to the Social Security trustees, a panel of Cabinet secretaries and others who are expected to issue a new report later this spring. In his budget, Obama predicted that the trust fund surplus would hit $30 billion this year, according to Mark Lassiter, a spokesman for the Social Security Administration.

But that number, too, is far less than the $80 billion the trustees had forecast for 2009. In addition to declining revenues, Lassiter said the system is likely to incur higher expenses due to big jumps in new retirement and disability claims. Both are expected to rise by at least 12 percent this year compared with 2008.

"There are some people who are, in fact, delaying retirement" because the plunging stock market took a huge bite out of their retirement accounts, Lassiter said. "But the stronger trend is that people who are losing a job are looking for other sources of income. And if you're of retirement age, you're going to go ahead and file for Social Security benefits."

Though Obama has pledged to address the precarious financial situation of Social Security, the administration currently has no plans to do so. Under pressure from congressional Democrats who argued that Social Security should not be at the top of the new administration's agenda, the White House last month dropped a proposal to name a task force to reexamine the program.

During the campaign, Obama proposed applying payroll taxes to annual earnings over $250,000 help fund Social Security after the surplus vanishes. With the new numbers, some analysts said, the president might be forced to step up the timetable.

"Over the past 25 years, the government has gotten used to the fact that Social Security is providing free money to make the rest of the deficit look smaller," said Andrew Biggs, a resident scholar at the American Enterprise Institute. "Now they've essentially got to pay their own way, at least a little more fully.

"Instead of Social Security subsidizing the rest of the budget," he said, "the rest of the budget will have to subsidize Social Security."

Monday, March 30, 2009

Middle-Income Tax Relief

Washington, D.C. (March 30, 2009)
By WebCPA staff

Senate Finance Committee Chairman Max Baucus, D-Mont., has announced legislation that would make existing tax breaks permanent for working families and individuals.

The measures would make permanent the 2009 exemption levels for the alternative minimum tax and index them for inflation, while permanently allowing personal credits against the AMT.

It would make permanent the 10, 25, and 28 percent individual tax rates (the 15 percent tax rate is already permanent), and make permanent the reduced threshold of $3,000 for the refundable portion of the child tax credit. The proposal would also make permanent the 2009 estate, gift, and generation-skipping transfer tax laws and index the exemption amount.

“Today we’re offering a piece of certainty during an uncertain time for millions of hardworking, honest Americans,” said Baucus. “These measures are not excessive or outrageous, but timely and targeted, and will build on earlier efforts to stabilize the economy,” he said.

Original co-sponsors of the Baucus legislation include Sens. Jay Rockefeller, D-W.Va., and Charles Schumer, D-N.Y.


Bringing in more revenue from corporations
One revenue raising idea is a reform of the deferral rule for U.S.-based multinationals. Currently, a U.S.-based company doesn't need to pay income tax on its foreign subsidiaries' profits unless and until the money is brought back to U.S. shores.

The provision makes it more attractive for companies to invest in countries with lower tax rates.

"Obama is serious about going after deferral," said Anne Mathias, director of research at Concept Capital.

The administration has said it wants to make a change but has yet to propose any specifics.

One idea discussed by lawmakers is to eliminate the deferral option so companies have to pay tax on their overseas profits when earned.

"The government doesn't want to subsidize U.S. companies to invest overseas," said tax policy expert Eric Toder, a senior fellow at the Urban Institute.

Another idea is to preserve the deferral option but prohibit companies that use it from deducting expenses incurred to support their overseas operations until they bring their profits back to U.S. shores.

The deduction measure would be "unwieldy," Mathias said. It would be hard for companies to separate deductible expenses from non-deductible ones when they stem from the same personnel or systems used to support U.S.-based and offshore operations. "It's simpler to just take away the deferral," she said.

Already corporations are lining up lobbyists to shoot down the idea. Kies, who served as the head of the Joint Committee on Taxation when Republicans controlled Congress, is one of them.

"This isn't a theory. We've tried this before and it ended disastrously," he said.

Kies noted that between 1986 and 2004, U.S.-based international shippers were denied deferral. The number of U.S.-based shippers shrank. When Congress reinstated deferral in 2004, the tax was cited as a cause of the decline for the U.S. shipping industry.

In other efforts to tax U.S. money abroad, Congress is trying to crack down on offshore tax havens, increasing enforcement both against the individuals who shelter their money in other countries and the banks that help them do so.

Extending tax cuts
Obama has proposed making permanent the income tax cuts put into place during the Bush administration for couples making less than $250,000 and for single filers making less than $200,000.

Senate Finance Chairman Max Baucus, D-Mont., has introduced legislation that would do just that.

On the other side of the debate are some tax experts and federal deficit hawks who worry about the effects tax cut permanency on the country's revenue and debt levels.

The Tax Policy Center estimates extending the cuts for middle and lower income families would reduce revenue by more than $2 trillion over 10 years relative to current law, which assumes the tax cuts would expire by 2011.

Reviving the estate tax
As things stand now, it would pay off mightily for heirs if their relatives die in 2010 -- the estate tax is slated to expire for that year and that year only. Come 2011, it's scheduled to revert to its 2001 level, where only the first $1 million of an estate would be exempt from the tax and the taxable portion of the estate would be taxed at rates up to 55%.

Obama has called for the estate tax to be made permanent at its 2009 levels adjusted for inflation going forward. That would mean the first $3.5 million of one's estate would be exempt from estate tax and taxable portions of the estate would be taxed at rates no higher than 45%.

Baucus included the provision in legislation he introduced last week.

Kies expects that lawmakers may pass a one-year extension of the 2009 estate tax parameters for 2010, and then include a more permanent extension in a broader piece of tax legislation next year.

The Tax Policy Center estimates making the 2009 levels permanent would reduce revenue by more than $300 billion over 10 years.

Curbing health insurance tax breaks
Health reform is one of the administration's leading agenda items that lawmakers are likely to take up in earnest this year. But many legislators favor paying for Obama's health reserve fund by limiting the tax break that employees receive when they buy their health insurance through work.

Right now the portion of premiums paid by employers is treated as tax-free compensation. And there is no limit on how much employers may contribute.

Lawmakers are considering capping the amount that would be treated as tax free.

Hiking taxes on carried interest
The president's 2010 budget calls for a portion of the profits paid to managers of hedge funds and private-equity funds to be taxed as ordinary income rather than as an investment gain. In other words, it would be subject to a much higher tax rate than the 15% long-term capital gains rate that the managers have been paying.

The administration estimated the provision could raise $24 billion over 10 years.

But the top tax writers in the Senate -- Baucus and Charles Grassley, R-Iowa -- indicated last week that change may not be coming in the near term.

"Private equity interests, I'm told, are not going to be paid in carried interest for the next several years," Baucus said, noting that it's less of an issue than it was when the money was flowing like water, according to Congress Daily.

But he allowed for the possibility that the proposal will be "in the mix" when international tax reform is considered in 2010.

Make permanent the Making Work Pay credit
The new tax credit for middle and low-income families, worth up to $400 per worker ($800 per working couple) is in place for 2009 and 2010.

The president proposed in his budget to make it permanent, but as of right now the idea is not likely to make it into lawmakers' budget resolution. That doesn't mean, however, it won't make it into future tax bills.

The Tax Policy Center estimates making the credit permanent would reduce revenue by $537 billion over 10 years. To top of page

Saturday, March 21, 2009

Support for donations

Only donations to qualified 501(c)(3) organizations are tax deductible and if a single contribution is $250 or more, there must be contemporaneous acknowledgment from the charity, meaning it must be in the taxpayer's possession by the due date of the tax return. Many charities still neglect to issue a required acknowledgment.

Take the recent case of Gomez v. Commissioner, T.C. Summary Opinion 2008-93. In this case, the taxpayer wrote 10 checks to the church totaling $6,100, each one over $250. He was audited, and he presented the cancelled checks as proof of the donations. Despite this, the IRS disallowed the donations because the taxpayer had not obtained a contemporaneous written acknowledgment from the church as required under IRC §170(f)(8). He got the acknowledgment at the time of trial, but it was too late. The Tax Court upheld the disallowance. So, even though the taxpayer had absolute proof of his donations, they were disallowed because he had not satisfied the substantiation requirements.

The acknowledgment must state the value, if any, of the goods or services the donor received in exchange for the donation. Most charities now include a statement, "No goods or services were provided in exchange for the donation."

And cash donation is generally not tax deductible. The taxpayer must have some documentation to support all donations claimed.

Tax consequence on foreclosures


Briefly, for recourse acquisition debt, the lesser of the amount of the debt or the FMV (fair market value) is the selling price. The "seller" has exchanged the property for the debt and, if the property wasn't worth the amount of the debt, the difference would be COD (cancellation of debt) income.

For non-recourse acquisition debt the selling price is the amount of the debt, regardless of the FMV of the property. There is no COD income because the "seller" was not liable beyond the amount of the debt.

Debt borrowed based on the equity of the house do not qualify for relief.

Wednesday, March 18, 2009

Dodd facing fresh political firestorm

When will politicians learn to speak the truth?

Sen. Chris Dodd (D-Conn.) looks like he may be facing a fresh political firestorm.

Dodd just admitted on CNN that he inserted a loophole in the stimulus legislation that allowed million-dollar bonuses to insurance giant AIG to go forward – after previously denying any involvement in writing the controversial provision. .

“We wrote the language in the bill, the deal with bonuses, golden parachutes, excessive executive compensation that was adopted unanimously by the United States Senate in the stimulus bill,” Dodd told CNN’s Wolf Blitzer this afternoon.

“But for that language, there would have been no language to deal with this at all.”

Dodd had previously said that he played no role in writing the controversial language, and was not a part of the conference committee that inserted the language in the bill. As late as today, Dodd’s spokeswoman denied the senator’s involvement.

The AIG bonuses have caused a political firestorm, with Republicans and Democrats alike looking to lay blame for who’s responsible, and leading lawmakers looking to revoke the bonuses.

Dodd’s role in the legislation will likely come up as he faces the likelihood of a tough re-election. Former GOP congressman Rob Simmons announced he was running this week, and has already taken issue with Dodd’s stewardship as chairman of the Senate Banking Committee.

Monday, March 16, 2009

IRS: 2008 Was a Big Year

Washington, D.C. (March 13, 2009)
By WebCPA staff

The Internal Revenue Service released its 2008 IRS Data Book showing big increases last year in tax filings and revenue.

The report describes activities conducted by the IRS from Oct. 1, 2007, to Sept. 30, 2008, and includes information about returns filed, tax collections, enforcement and taxpayer assistance, as well as the IRS budget and workforce.

During fiscal year 2008, the IRS collected more than $2.3 trillion in taxes (net of refunds) and processed more than 250 million returns (up from 235 million in fiscal 2007). More than 101 million returns, including 58 percent of individual income tax returns, were filed electronically.

More than 118 million individual income tax return filers received tax refunds that totaled almost $270.4 billion. Filers also received more than $95.7 billion in economic stimulus payments. In fiscal year 2008, the IRS spent an average of 41 cents to collect each $100 of tax revenue.

In terms of gross collections, including adjustments and credits, in fiscal 2008, the IRS collected $2.75 trillion, compared to $2.69 trillion in fiscal 2007.

Friday, March 13, 2009

2008 IRS e-file Refund Cycle Chart

Transmitted & Accepted (by 11:00 am) between...Direct Deposit Sent*Paper Check Mailed*
Jan 16 and Jan 22, 2009Jan 30, 2009Feb 6, 2009
Jan 22 and Jan 29, 2009Feb 6, 2009Feb 13, 2009
Jan 29 and Feb 5, 2009 Feb 13, 2009Feb 20, 2009
Feb 5 and Feb 12, 2009Feb 20, 2009Feb 27, 2009
Feb 12 and Feb 19, 2009 Feb 27, 2009Mar 6, 2009
Feb 19 and Feb 26, 2009Mar 6, 2009Mar 13, 2009
Feb 26 and Mar 5, 2009 Mar 13, 2009Mar 20, 2009
Mar 5 and Mar 12, 2009Mar 20, 2009Mar 27, 2009
Mar 12 and Mar 19, 2009 Mar 27, 2009 Apr 3, 2009
Mar 19 and Mar 26, 2009Apr 3, 2009Apr 10, 2009
Mar 26 and Apr 2, 2009Apr 10, 2009Apr 17, 2009
Apr 2 and Apr 9, 2009Apr 17, 2009Apr 24, 2009
Apr 9 and Apr 16, 2009Apr 24, 2009May 1, 2009
Apr 16 and Apr 23, 2009 May 1, 2009 May 8, 2009
Apr 23 and Apr 30, 2009May 8, 2009May 15, 2009
Apr 30 and May 7, 2009May 15, 2009May 22, 2009
May 7 and May 14, 2009May 22, 2009May 29, 2009
May 14 and May 21, 2009May 29, 2009 Jun 5, 2009
May 21 and May 28, 2009Jun 5, 2009Jun 12, 2009
May 28 and Jun 4, 2009Jun 12, 2009Jun 19, 2009
Jun 4 and Jun 11, 2009Jun 19, 2009Jun 26, 2009
Jun 11 and Jun 18, 2009Jun 26, 2009Jul 3, 2009
Jun 18 and Jun 25, 2009Jul 3, 2009 Jul 10, 2009
Jun 25 and Jul 2, 2009Jul 10, 2009Jul 17, 2009
Jul 2 and Jul 9, 2009Jul 17, 2009Jul 24, 2009
Jul 9 and Jul 16, 2009Jul 24, 2009Jul 31, 2009
Jul 16 and Jul 23, 2009Jul 31, 2009Aug 7, 2009
Jul 23 and Jul 30, 2009Aug 7, 2009Aug 14, 2009
Jul 30 and Aug 6, 2009Aug 14, 2009Aug 21, 2009
Aug 6 and Aug 13, 2009Aug 21, 2009Aug 28, 2009
Aug 13 and Aug 20, 2009Aug 28, 2009Sep 4, 2009
Aug 20 and Aug 27, 2009Sep 4, 2009Sep 11, 2009
Aug 27 and Sep 3, 2009Sep 11, 2009Sep 18, 2009
Sep 3 and Sep 10, 2009Sep 18, 2009Sep 25, 2009
Sep 10 and Sep 17, 2009Sep 25, 2009 Oct 2, 2009
Sep 17 and Sep 24, 2009Oct 2, 2009 Oct 9, 2009
Sep 24 and Oct 1, 2009Oct 9, 2009Oct 16, 2009
Oct 1 and Oct 8, 2009Oct 16, 2009Oct 23, 2009
Oct 8 and Oct 15, 2009Oct 23, 2009Oct 30, 2009
Oct 15 and Oct 22, 2009Oct 30, 2009Nov 6, 2009

Thursday, March 12, 2009

Spending Bill Boosts IRS Funding

Washington, D.C. (March 12, 2009)
By WebCPA staff

The $410 billion spending bill approved Tuesday evening by the Senate to help fund the federal government for the rest of the year includes funding for some nine federal agencies, including the Internal Revenue Service.

The controversial measure, which had been come under fire for roughly 8,500 earmarks, includes $428 million for the IRS, a 4 percent increase.

The bill will provide double-digit budget increases to some regulatory agencies, such as the Consumer Product Safety Commission and the Commodity Futures Trading Commission which will each receive funding increases of 31 percent, while the Food and Drug Administration will receive a 19 percent boost.
The spending bill is exclusive of the already approved $700 billion financial bailout and the $787 billion economic stimulus package.

The bill passed by a 62-35 margin. The measure passed in the House February 25.

President Obama acknowledged the spending bill’s pet projects, calling the measure “imperfect,” but vowed to sign it. He pledged to eliminate the measure’s projects that contained “no legitimate public purpose.”

Wednesday, March 11, 2009

Taxpayers Filing Earlier and Banking Larger Refunds

WASHINGTON — Taxpayers are filing earlier and receiving larger refunds so far this year, according to early filing season statistics released today by the Internal Revenue Service.

As of Feb. 27, 2009, the IRS had received 56 million individual tax returns, a slight increase over the previous year. And, the average individual refund was $2,869, a 9 percent increase or $232 more than the same time last year.

The IRS notes that possible reasons for the larger refunds may include taxpayers benefiting from the recovery rebate credit and other tax breaks such as the first-time homebuyer credit and the additional standard deduction for real estate taxes. The average refund amount generally will decrease slightly as the filing season progresses.

More taxpayers choose to receive their refunds through direct deposit each year. As of Feb. 27, more than 84 percent of all refunds were issued through direct deposit, up from 81 percent for the same period last year.

While the IRS has issued almost 3 percent more refunds this year compared to the same time last year, the number of taxpayers who choose to receive their refunds quickly and safely through direct deposit is up almost 7 percent compared to the same time last year. On Feb. 27, the average direct deposit refund totaled $3,063.

The IRS cautioned that year-to-year analysis of total returns filed will be an anomaly this year because last year’s results include those returns filed for the economic stimulus payment. As the year progresses, the IRS expects to receive and process more individual income tax returns during 2009 than in 2007 but fewer than in 2008.

Monday, March 9, 2009

How long should financial records be kept?

Liz Pulliam Weston, Money Talk
March 8, 2009

Dear Liz: Since tax filing season is upon us, it's a good time to get rid of statements and records we don't need. How long should we keep such things as tax records, credit card statements, mortgage payment statements, utility bills, etc?

Answer: Most tax-related documents should be kept for seven years unless the paperwork concerns a potentially taxable investment or asset, such as your home or stocks bought outside a retirement account. In that case, keep the paperwork as long as you own the investment or asset, plus seven years.

For example, hang on to the paperwork created when you bought your home, such as sales contracts, deeds, mortgage paperwork, appraisals and surveys, as well as the costs of any home improvements, since they can help reduce any potential tax bill when you sell. You can dispose of all this documentation seven years after you sell the property.

Why seven years? Your greatest risk of audit is in the first three years after you file your return, but you can still be audited up to six years later if you substantially underreport your income. Since we file our returns in the following year -- last year's returns are due in April of this year, for example -- adding seven years to the tax return year will give you the year that you can toss your return's documentation. This year, for example, you can toss tax-related documents filed for the 2002 tax year.

You might want to hang on to the actual return, though. They typically don't take up much room and may come in handy. One reader who discovered errors in her Social Security statements, for example, was able to get those corrected because she still had the tax returns for those years.

If it's not tax-related, your holding times vary. You typically can ditch credit card statements and utility bills after a year, for example. Old insurance policies can be shredded after they've lapsed or been replaced, and there's no chance you'll file a claim against them.

You can dispose of your pay stubs after comparing them with your annual W-2 form. (Keep your year-end pay stub too, if it shows information that's not on your W-2, such as tax-deductible union dues.)

Many people these days simply scan all their paperwork into their computers and discard the originals. The actual paper isn't as important as the information on it, and most sources -- including the IRS -- accept electronic documents.

Just make sure to back up regularly and keep those backups in a safe place somewhere off site. A secure website or a safe deposit box are two options.

Friday, March 6, 2009

CA tax refund being mailed

The State Controller has begun releasing the delayed refunds, including $1.96 billion in personal income tax refunds and $181 million in bank and corporate tax refunds. The Controller anticipates all of the delayed payments will be made within the next several weeks on a "first in, first out" basis.

For more info, read http://www.sacbee.com/1095/story/1678567.html

Thursday, March 5, 2009

Sen Baucus' alternative

Below is an excerpt from the article linked below. If Sen. Baucus' alternative is enacted, it will raise tax for millions of Americans, not just the 1.2% so called rich Americans, making $200,000 for singles and $250,000 for married couples.

Senator offers another approach

Baucus pointed to one possible alternative. He asked Geithner whether the administration would consider generating new revenue by curbing or eliminating the tax break offered to employees when they buy health insurance policies through their companies.

Currently, the portion of their premiums paid by the employer is treated as tax free income to employees, meaning they pay no income tax on that subsidy, nor do they pay Social Security or Medicare tax on it.

The health insurance exclusion is the federal government's single biggest tax expenditure, worth $246 billion in forgone revenue in 2007, according to the Joint Committee on Taxation.

Calls to change the tax exclusion have been made before both because the subsidy does not discourage workers from being more cost-conscious in their health care decisions and because it favors only those who get insurance through an employer, not those who buy policies on their own.

During last year's campaign, Obama said that while he wanted to reform health care, he would not seek to overturn the tax-free subsidy for those who get their insurance from their jobs.

Without committing to Baucus' suggestion in particular, Geithner seemed to indicate that the administration might be willing to reconsider its deduction proposal.

"We recognize there [are] more paths to [paying for health reform] than what we laid out in the budget," he told the Finance Committee. "But we wanted to put it on the table to prove the credibility of our commitment to do this, concrete proposals that would achieve that."

Wednesday, March 4, 2009

Key Democrats oppose Obama's tax deduction plan


WASHINGTON – President Barack Obama's proposal to limit itemized tax deductions for high earners is running into opposition from key Democrats in Congress who worry that charities and the housing market would be hurt. Senate Finance Committee Chairman Max Baucus questioned Wednesday whether the proposal was viable, a day after his House counterpart also expressed reservations.

Treasury Secretary Timothy Geithner said tax increases on families making more than $250,000 a year are necessary to make a down payment on health care reform and to limit future budget deficits. But, he said, he was willing to work with lawmakers on proposals they objected to.

"We recognize there are other ways to do this," Geithner told the Finance Committee.

Baucus, a Montana Democrat, said he thought the administration would be flexible on the proposal. "They want health care reform as much as I do," he told reporters.

Geithner and White House budget director Peter Orszag returned to Capitol Hill on Wednesday for a second day of hearings on Obama's $3.6 trillion tax and spending proposal. Both faced tough questions about the tax package.

Obama's budget calls for setting aside $634 billion over the next 10 years as a down payment on health care reform. Half the money would come from tax increases on upper-income earners; the other half from cuts to Medicare and Medicaid.

Obama's budget calls for two tax increases on couples making more than $250,000 and individuals making more than $200,000. He wants to increase the top tax rates from 35 percent to 39.6 percent by allowing a tax cut enacted under President George W. Bush to expire in 2011.

He also wants to limit the deductions those families can claim for charitable donations, mortgage interest and state and local taxes.

Without the new limits, a taxpayer in the proposed 39.6 percent tax bracket could save $396 in taxes from a $1,000 reduction in taxable income. Obama wants to limit deductions to the 28 percent bracket, starting in 2011, meaning the same taxpayer would save only $280.

The higher tax rates are a good bet to become law because Obama campaigned on the change and Congress would not have to do anything to enact them. Once the Bush tax cuts expire at the end of 2010, the higher rates would take effect.

But some key Democrats are wary of limiting deductions.

"I don't want to prejudge anything, but it is certainly one that I am having difficulties with," said Sen. Robert Menendez, D-N.J.

On Tuesday, Rep. Charles Rangel, chairman of the tax-writing House Ways and Means Committee, said he, too, had reservations about the proposal.

"I would never want to adversely affect anything that is charitable or good," the New York Democrat said.

Republicans have been even more critical of the proposal, saying it would reduce charitable donations at a time when many charities are struggling.

"There are people with the means to help. Why would you make it harder for them to do it?" said Rep. Thaddeus McCotter, chairman of the Republican Policy Committee.

Geithner said the change would merely restore the same deduction limits that were in place when President Ronald Reagan left office.

Trade Rep Nominee to Pay Back Taxes

I have sympathy for Mr. Kirk. His motive was good, his problem was he used an unqualified paid preparer. We should always report all 1099 income received. IRS matches them every year with tax returns in a program called CP-2000. Not reporting income is asking for trouble.

Washington, D.C. (March 3, 2009)
By WebCPA staff

Ron Kirk, the Obama administration’s nominee for U.S. Trade Representative, has agreed to pay $9,975 in back taxes he owed on $37,750 in speaking fees.

The former Dallas mayor routinely asked for his speaking honoraria to be donated to his alma mater, Austin College, but he made the wrong entries on his 2004-2007 tax returns for the income and charitable deductions, according to a report by the Senate Finance Committee. He explained to the committee in answers to a questionnaire that since he routinely asked for the speaking fees to be donated to Austin College, he did not think the honoraria counted as taxable income and his paid preparer agreed. However, he now plans to file amended tax returns.

His confirmation hearing is scheduled for Monday, March 9. Kirk is at least the fifth nominee for an Obama administration post to run into tax problems. Other problems have arisen with Treasury Secretary Timothy Geithner and Labor Secretary Hilda Solis, who were both confirmed. However, Health and Human Services Secretary-designate Tom Daschle and chief performance officer Nancy Killefer were forced to withdraw their nominations (see How (Expletive) Hard Is This?).

In Kirk’s case, he paid additional tax of $2,188 and additional interest of $139 last October for tax year 2006 after the IRS notified him that he had failed to report a speaking honorarium of $5,000 and dividend income of $819. The return was prepared by a paid tax preparer and filed jointly with his wife. The IRS identified the unreported income during a routine match of his Form 1099 income with the Kirks’ tax return.

Despite the tax problems, Senate Finance Committee Chairman Max Baucus, D-Mont., expressed his support. “Mayor Kirk is the right person for this job and I will work to move his nomination quickly,” he said in a statement.

Tuesday, March 3, 2009

California Real Estate Withholding Laws Change

Assembly Bill 3078 amended California Revenue and Taxation Code secs. 18662 and 18668 withholding laws effective Jan. 1, 2009, as follows:

▸ Withholding Rates: Non-California partnerships are now subject to withholding requirements on the sale of California real property at a rate of 3 and one-third percent of sales proceeds or 9.3 percent of gain. The alternative withholding rates for the sale of California real property increased to 10.8 percent for S corps and 12.8 percent for financial S corps.
▸ Installment Sales: Buyers are required to withhold on the principal portion of each installment payment if the sale of California real property is structured as an installment sale.

In addition, withholding amounts can be collected from the withholding agent if the withholding agent fails to withhold or remit the withheld amounts. The new statute provides a clearer method for assessment and collection of unremitted withholding.

IRS to Push 1099-MISC Compliance

Washington, D.C. (March 2, 2009)
By WebCPA staff

The Internal Revenue Service could be doing more to encourage businesses to report miscellaneous income payments on 1099-MISC forms, according to a new report.

While businesses reported about $6 trillion worth of such payments in 2006, the Government Accountability Office estimates that even a small share of payers that fail to submit the 1099-MISCs could result in billions of dollars in unreported payments on the payees’ tax returns. Data from the IRS suggests that payees are more likely to report such income on their tax returns if the IRS receives the payers’ information returns.

The IRS does not know to what extent payers fail to submit the required 1099-MISCs, but various sources point to the possibility of a significant problem. For tax year 2005, 8 percent of the approximately 50 million small businesses with assets under $10 million submitted 1099-MISCs, but the IRS does not know how many of the other 92 percent were required to report payments but did not.

Many business payments, such as payments to corporations, are not subject to 1099-MISC reporting. If even a small share of the businesses that did not submit a 1099-MISC should have, millions of 1099-MISCs could be missing with significant amounts of unpaid taxes by payees. The GAO’s prior work in 2003 also found significant 1099-MISC payer noncompliance by some federal agencies.

The GAO recommended that Congress should consider requiring payers to report payments to corporations on the 1099-MISC form. The GAO also recommended that the IRS should research the extent of payer noncompliance and the reasons for it, identify common reporting errors, and provide more guidance about 1099-MISC requirements. The IRS agreed with most of the recommendations. However, it disagreed with the suggestion of adding a tax return checkbox asking if payers have submitted the required 1099-MISCs and adding a chart to help payers navigate the detailed instructions for the form.