Thursday, July 29, 2010 When the Tax Hikes Are Coming

When the Tax Hikes Are Coming: ""

When the Tax Hikes Are Coming
Rick Newman, On Wednesday July 28, 2010, 5:00 pm EDT

If you love class warfare, your moment has arrived. The next several weeks, leading up to the November elections, are sure to be filled with resounding political invective over who should pay for Washington's profligate spending over the last decade. Democrats will argue that the rich and near-rich should pony up, since they have the most money to start with. Republicans will point to the needy, arguing that they've been getting too much aid for too long. Tea Partiers will struggle to decide whose benefits should be cut in order to achieve the smaller government they envision. All around, livelihoods will be threatened. Instead of the "silly season," the midterm elections will feel like the angry season.

It sounds very entertaining. But if you'd rather stick your fingers in your ears until November 3, feel free: For all the shouting that's on the way, it's not hard to predict what's going to happen.

Tax policy over the last 20 years has swung left and right based on the ideology of the governing party. But America can no longer afford the luxury of a manic tax code driven by what the party in power thinks is fair. Instead, simple math is now taking over. Revenue from individual income taxes, for example, was relatively stable between 1970 and 2000, ranging from about 8 to 10 percent of GDP, according to the Congressional Budget Office. After the Bush tax cuts of 2001 and 2003, that figure fell to a record low of about 7 percent. The late, great recession drove it even lower.

If federal spending had fallen by a similar amount during the last decade, President Obama might be able to extend all those tax cuts once they expire at the end of this year, and declare America Low-Tax Nation. But of course government spending has gone up and up, thanks to two overseas wars, skyrocketing Medicare and Medicaid costs, and a brutal recession that drove tax revenue down at the same time the government spent more than $1 trillion in stimulus aid. The resulting federal debt, about $14 trillion, is now as big as the entire economy. If it continues to mushroom as forecast, the debt will eventually crush us all via rising interest rates, stagnant growth, and pure shame.

It's the job of Obama and his fellow politicians to make sure that doesn't happen, and they're thinking about getting around to it some day, maybe. Most economists feel the solution is a combination of tax increases and spending cuts, since doing one or the other alone would be too draconian to disguise with the usual opposite-speak out of Washington. The first real opportunity to do something arises this fall, since income taxes for most Americans will automatically go up unless Congress and Obama extend some of the Bush tax cuts. Here's what's likely to happen:

Wealthy taxpayers are going to pay more. Obama wants to raise the top two income brackets from the Bush-era levels, which means the top rate will rise from 35 to 39.6 percent and the rate in the next bracket will rise from 33 to 36 percent. That effectively means that taxes will rise for individuals with income over $200,000 and couples earning over $250,000 (after accounting for deductions). There will also be new limits (same as the old ones, before the Bush cuts were enacted) on the total amount of allowable deductions, which will bump a few additional people into these higher brackets. To enact these "tax hikes" on the wealthy, Congress doesn't need to do anything--it will happen automatically at the end of 2010, once the Bush tax cuts are over.

There's a lot of "debate" about this, but for the Democrats who control Congress, the political calculus is irresistible. Those who would fall into the two higher brackets account for just 3.4 percent of all taxpayers, according to the Tax Policy Center, and those people tend to be Republicans anyway. So few Democratic votes would be at stake. And Republicans themselves have been bellyaching about how important it is to start attacking the debt. Republicans counter by arguing that enacting any tax increase in a weak economy is dangerous, because it could crimp spending just when it's needed most. There's truth to that, but the majority of evidence suggests that tax increases on the wealthy would cut into what they save, not what they spend. The media will treat this whole issue as a huge drama, but the fact that a Democratic Congress would have to pass a new law to prevent higher taxes on the wealthy weighs heavily in favor of a tax increase. Call your accountant.

The middle class will get a temporary pass, but it will only defer the inevitable pain. Obama has pledged no new taxes on the middle class, and no matter how implausible that is, it's hard to see him breaking that promise in his first term. Besides, raising the income tax rates on the majority of taxpayers would be risky in a lousy economy, so the odds are high that Congress will extend the Bush tax cuts for those who fall below the $200,000/$250,000 thresholds. The Senate, which moves slower than the House, may not get to that before the November elections, so the action may come in the lame-duck session that follows, leading to plenty of high-volume gamesmanship right up until the elections. But not much will change for the majority of taxpayers.

The respite, however, will be short-lived. One reasonable guess is that the Bush cuts will be extended by only two years, forcing Washington to deal with them again in 2012--when the economy, presumably, will be stronger. At that point or soon after, Congress will have to get serious about new taxes--and there aren't nearly enough wealthy Americans to finance a solution, at any tax rate. "We've been selling government services at 80 to 90 percent of their cost," says Clint Stretch, managing principal for tax policy at Deloitte Tax. "We're going to have to start selling them at a premium to pay for the discounts in the past."

Possibilities include not just higher tax rates on those who already pay, but a host of scaled-back deductions--including the mortgage-interest deduction for home purchases--and a new value-added tax that could raise the cost of most goods and services. Exemptions for lower-income workers could be narrowed as well, so more people pay taxes. The tumult will be fascinating, since voters are likely to revolt no matter how bankrupt American becomes or what is fiscally prudent. But for now, politicians are looking the other way.

The "making work pay" credit has a good chance of being extended for one more year, through 2011. This was part of the 2009 stimulus plan that reduced the tax burden for individuals by $400 and for couples by $800, up to income thresholds of $95,000 and $195,000. It was initially put into effect for 2009 and 2010; Obama wants to extend it through 2011, and he'll probably get his wish. The tax credit benefits about three-quarters of all taxpayers, and can plausibly be counted as additional "stimulus" that will help the economy recover. So it has popular appeal despite an estimated cost of about $60 billion in lost government revenue for each year it's in effect. It wouldn't be surprising if Obama pushed to extend this into 2012 as well, to claim credit for middle-class tax cuts in an election year.

Estate taxes have nowhere to go but up, especially since they were cut to nothing at all for 2010. There are two basic issues: What the tax rate should be, and what portion of an estate should be exempt from taxes before the government takes its share. Most proposals are coalescing around an exemption of between $3.5 million and $5 million, and tax rates that range from 35 to 50 percent after that. Conservatives loathe the "death" tax, complaining that it's a second levy on money's that already been taxed once. But unbeknownst to them, lean times have turned public opinion squarely against the super-rich, who are the only ones really affected by estate taxes. After the 2010 holiday, a reinstatement seems inevitable.

The real battle over higher taxes and lower spending will probably kick off following the 2012 elections. "The choices are all very, very ugly," says Stretch. The first part of any serious effort would probably be sharp spending cutbacks, which have to affect Social Security and Medicare recipients if they're going to be meaningful, since that's where much of the money goes. When that produces howls of outrage, lawmakers will turn to widespread tax hikes to spread the pain around. But new taxes are never popular, and the rancor could push a solution even further into the future. Compared with that, this year's elections might seem downright cheerful.

Tuesday, July 27, 2010

Insurance for product or service often bad deal
Kathleen Pender
Tuesday, July 27, 2010

It's hard to buy anything these days without being asked, "Would you like to purchase insurance with that?"

Earlier this month, I bought a new car and was offered an extended warranty and a separate policy that covered the paint job alone. (These sales pitches always get me wondering whether I should keep looking for a more reliable car.)

Last week, I got a story pitch on tuition insurance, which covers unreimbursed college expenses if a student has to drop out due to illness, injury, disability or death - but not if the student leaves voluntarily, graduates early, gets expelled or flees campus because of a contagious disease or epidemic.

You can buy insurance for vet bills, vacations, contact lenses and weddings.

This type of insurance is almost never necessary, and when it is, it's almost always cheaper if you buy it from someone not affiliated with the product or service being sold, says J. Robert Hunter, the Consumer Federation of America's insurance director.

That's because the sellers of these policies compete by offering the biggest kickbacks to retailers, travel providers or others involved in the sale, not the best deal to consumers.

When buying insurance, Hunter says to remember the two C's: It should protect you against a financial catastrophe (losing your contact lenses hardly qualifies). And it should be comprehensive. For example, "if you have a good term-life policy, you don't need" insurance that will pay your mortgage, auto loan or credit card if you die.

These types of credit insurance policies "usually pay very low benefits to people with claims, on average less than 40 cents of every premium dollar," Hunter says.

By comparison, auto and homeowners insurance pay out 70 to 80 cents of each premium dollar in claims.

Hunter says consumers should consider five types of insurance: health, auto, homeowners, life if you have dependents and long-term disability if you are single.

Norma Garcia, a senior attorney with Consumers Union, says she would also consider renters insurance if your landlord's policy does not cover your belongings. But she would see what an employer provides before buying disability insurance.

Hunter calls himself a dog lover but would never buy pet insurance. "I work with rescue animals, border collies. I know that there are a lot of young, healthy border collies being euthanized. If I have an old one, as much as I love it, I am not going to spend $25,000 (on vet bills) when I could get a young, healthy one."

Pet insurance might make sense if you treat your pets like children, but these policies typically have many exclusions.

They might not cover conditions that are pre-existing, preventable, hereditary, common in a certain breed, that occur in the first month of coverage or after the pet reaches a certain age.

"Frankly, there are so many exclusions, you could end up paying more than it's worth," says Garcia.

Hunter and Garcia say they would generally avoid travel insurance sold when making travel plans.

"Travel agents receive a commission on this sale, which often drives the payout ratio below 50 percent of premium," Hunter says.

Also check to see if some of your travel fears - such as fear of death or lost luggage - are covered by existing insurance such as life or homeowners. He adds that many travel policies have significant exclusions and complicated procedures for getting your money back.

Hunter says travel insurance might make sense for an older couple that have spent their life savings on a trip and are so worried they might get sick and have to cancel that they can't sleep.

If you do buy it, Garcia also advises going through a third party. "If you go through the tour operator or cruise line and they go bankrupt, you will not be protected," she says.

Before you rent a car and pay for a collision damage waiver, check to see if your auto insurance policy will cover damage to the vehicle. Most will, although you usually have to pay the deductible.

Also, many credit cards will pay for a collision if you rent with that card. Again, check to see if there is a deductible or any limitation.

Hunter's group encourages consumers to ask three questions: Do I really need this insurance? If so, do I already have coverage through my life, health, disability, homeowners or auto insurance? If not, are there less expensive options?

If you are thinking of buying insurance with a product or service, you don't have to buy it on the spot. And the price might be negotiable.

When I bought my car, after rejecting the salesman's offer for the extended warranty, the finance person offered it at half the price. I'm taking my chances.

Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at Read her blog at

Monday, July 26, 2010

IRS relief for small nonprofits (7-26-2010)

IRS Commissioner Doug Shulman announced that the IRS is providing relief for small nonprofit organizations that are at risk of losing their tax-exempt status because they have missed, or are about to miss, the deadline for filing Form 990-N or Form 990-EZ.

The program offers two types of relief:
  • They are extending the filing deadline to October 15 for organizations with gross receipts of $25,000 or less. These are the groups that have to file the Form 990-N, the e-postcard.
  • Larger organizations, which are eligible to file the Form 990-EZ, may file their three delinquent returns and pay a small fee ($100 - $500). As long as they file by October 15, they won’t lose their tax exemption.
No relief is available to larger organizations that have to file the Form 990, or to private foundations that file Form 990-PF.

For more information on this program and a list of organizations at risk of losing their tax-exempt status, go to,,id=225889,00.html.

Tax Foundation Offers Bush Tax Cuts Calculator
Washington, D.C. (July 23, 2010)
By WebCPA Staff

The nonprofit Tax Foundation has introduced an online calculator that allows taxpayers to compare how they would fare if all the Bush tax cuts expired as scheduled at the end of this year.

The calculator, at, also allows taxpayers to try out two other possible scenarios: what would happen if the Bush tax cuts of 2001 and 2003 were extended into 2011 or made permanent, or what would happen if President Obama’s budget is adopted, which includes a combination of expirations and extensions.

Taxpayers can type in basic information (such as their filing status, wage income and number of dependents), along with optional more detailed information (such as capital gains and dividend income, state and local taxes paid, and other itemized deductions), and determine what their federal income tax burden would be in 2011.

“The fate of the 2001 and 2003 tax cuts remains uncertain, and congressional leaders seem poised to leave things that way through the August recess — and perhaps through the November elections,” said Tax Foundation president Scott Hodge in a statement. “Regardless of what happens, our tax calculator at can help give taxpayers a better sense of how these policies will affect them — whether all the Bush tax cuts are extended or just those affecting families earning less than $250,000 a year, or if all the tax cuts expire.”

For example, if Congress fails to act to extend the Bush tax cuts, the federal income tax burden for a married couple filing jointly making $80,000 with two children would be $2,137 higher in 2011 than if all the tax cuts were extended.

The calculator also allows for more detailed tax information. For example, consider a married couple making $500,000 with two children; long-term capital gains of $50,000; dividend income of $5,000; other income of $10,000; a state and local income tax deduction of $30,000; $10,000 in real estate taxes paid; and $40,000 in other itemized deductions. Their federal income tax bill would be $22,782 higher in 2011 if all the Bush tax cuts expire.

On the calculator page, fields left blank will automatically be counted as zero. Users may hover the mouse cursor over an item to get a more detailed description of each field. For more information, they can see a short video explanation of how the calculator works,

The calculator at is part of a series answering frequently asked questions about the expiration of the Bush tax cuts, available online at

Saturday, July 24, 2010

U.S. Bank Failures This Year Surpass 100
FDIC Closes Seven Banks in Seven States; Total Seizures in 2010 Now 103

(AP) U.S. bank failures this year have surpassed a bleak milestone of 100 as regulators shut down banks in Georgia, Florida, South Carolina, Kansas, Nevada, Minnesota and Oregon.

The seven bank seizures announced Friday bring to 103 the failures so far in 2010. The pace of bank closures this year is well ahead of that of 2009, which saw a total of 140 banks shuttered amid the recession and mounting loan defaults. That was the highest annual tally since 1992, at the height of the savings and loan crisis.

The pace has accelerated as banks' losses mount on loans made for commercial property and development. Many companies have shut down in the recession, vacating shopping malls and office buildings financed by the loans. That has brought delinquent loan payments and defaults by commercial developers.

The Federal Deposit Insurance Corp. said it took over Crescent Bank and Trust Co., based in Jasper, Ga., with about $1 billion in assets; Sterling Bank of Lantana, Fla., with $407.9 million in assets; Williamsburg First National Bank of Kingstree, S.C., $139.3 million in assets; Thunder Bank of Sylvan Grove, Kan., $32.6 million; SouthwestUSA Bank, with one branch in Las Vegas, $214 million; Community Security Bank of New Prague, Minn., $108 million; and Home Valley Bank of Cave Junction, Ore., $251.8 million.

Renasant Bank, based in Tupelo, Miss., agreed to assume the assets and deposits of Crescent Bank and Trust. Iberiabank of Lafayette, La., is acquiring the assets and deposits of Sterling Bank. First Citizens Bank and Trust Co. of Columbia, S.C., is assuming the assets and deposits of Williamsburg First National Bank, while Bennington State Bank in Salina, Kan., is taking the assets and deposits of Thunder Bank.

Roundbank of Waseca, Minn., is assuming those of Community Security Bank. Plaza Bank, based in Irvine, Calif., is acquiring the deposits of SouthwestUSA Bank and $137.3 million of the assets. The FDIC will retain the rest for eventual sale. South Valley Bank & Trust in Klamath Falls, Ore., is assuming the assets and deposits of Home Valley Bank.

The failure of Crescent Bank and Trust is expected to cost the deposit insurance fund about $242.4 million. The resolution of Sterling Bank is estimated to cost $45.5 million; that of Williamsburg First National Bank, $8.8 million; Thunder Bank, $4.5 million; SouthwestUSA Bank, $74.1 million; Community Security Bank, $18.6 million; and Home Valley Bank, $37.1 million.

By this time last year, regulators had closed 64 banks.

The number of bank failures is expected to peak this year and be slightly higher than the 140 that fell in 2009. Twenty-five banks failed in 2008, the year the financial crisis struck with force, and only three succumbed in 2007.

The growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $20.7 billion as of March 31.

The number of banks on the FDIC's confidential "problem" list jumped to 775 in the first quarter, from 702 three months earlier, even as the industry as a whole had its best quarter in two years.

A majority of institutions posted profit gains in the January-March quarter. But many small and midsized banks are likely to continue to suffer distress in the coming months and years, especially from soured loans for office buildings and development projects.

The FDIC expects the cost of resolving failed banks to total around $60 billion from 2010 through 2014.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

Depositors' money - insured up to $250,000 per account - is not at risk, with the FDIC backed by the government. That insurance cap was made permanent in the financial overhaul legislation signed this week by President Barack Obama.

By AP Business Writer Marcy Gordon

Thursday, July 15, 2010

Senate Deliberates Fate of Expiring Bush Tax Cuts

This Professor Burman's comment that "It shows people respond to incentives" when Sen. Jim Bunning, R-Ken., asked about New York Yankees owner George Steinbrenner dying the same year the estate tax was not in effect has to be one of the most stupid things I've read in a while. Does he really believe Mr. Steinbrenner died intentionally in 2010 so his estate doesn't have to pay estate tax?

The Senate Finance Committee held a hearing Wednesday to discuss the soon-to-expire 2001 tax cuts and how to extend any of them without increasing the budget deficit or hurting economic growth.

Those included lowering income tax rates for all taxpayers, doubling the child tax credit from $500 to $1,000 a child and making the credit partially refundable, increasing the amount families could claim for the dependent care credit, eliminating the marriage penalty, and making it easier to deduct student loan interest.

“We made a lot of tax law changes in 2001 that have very broad support, throughout the Congress,” said Senate Finance Committee Chairman Max Baucus, D-Mont., in his opening statement. “But now we face a problem. These tax cuts are not permanent. They expire at the end of the year. The big questions before us now are whether we should make some of these tax cuts permanent, and if so, which ones?”

He added that the elephant in the room is the growing federal budget deficit, which is expected to exceed $1 trillion this year and remain high for the rest of this decade, according to the Congressional Budget Office.

Ranking member Charles Grassley, R-Iowa, balked at the label “Bush tax cuts” and noted that they were supported on a bipartisan basis at the time. “There’s a lot of talk about extending some, or all, of the 2001 and 2003 tax relief on only a temporary basis,” he added. “I question whether that really addresses the problem of uncertainty. Perhaps it just kicks that problem down the road a bit.”

Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, agreed that temporary fixes created uncertainty. “There’s nothing good about having the Tax Code up for grabs year after year,” he said.

Sen. Ron Wyden, D-Ore., asked the expert witnesses what would force tax reform onto the agenda in Washington. Leonard Burman, a professor at the University of Syracuse, noted that the deficit commission that has been meeting in recent months in Washington would create more demand for tax reform, along with the need for more government revenue.

He later noted that Congress “can't extend all the tax cuts because we wouldn't be able to pay for the government.”

Sen. Jim Bunning, R-Ken., asked about New York Yankees owner George Steinbrenner dying the same year the estate tax was not in effect. “It shows people respond to incentives,” Burman replied.

Sen. Mike Enzi, R-Wyo., the only accountant in the Senate, said he wished there were more accountants there. “When we talk about tax reform, I’m often accused of trying to protect the accountants to give them more work,” he said.

Carol Markman, a CPA at Feldman Meinberg & Co. in Syosset, N.Y., and former president of the National Conference of CPA Practitioners, talked about the new 1099 reporting requirements in the health care reform law and the impact of clients bringing in their 1099 forms to their CPAs. Enzi asked her how raising taxes on small businesses might hurt reinvestment by them. Markman said her CPA firm deals with what the AICPA defines as “microbusinesses.” “The businesses we deal with are not in those top two brackets,” she said.

She and other witnesses were asked about the 1986 tax reforms. Markman believes one of the biggest flaws with the Tax Reform Act of 1986 was the failure to index the Alternative Minimum Tax. Holtz-Eakin said the 1986 tax reform didn’t last long and became administratively impossible to carry out.

Donald Marron, director of the Urban Institute’s Tax Policy Center, was asked about whether there was more stimulative effect in extending tax cuts or increasing stimulus spending. He cited a study that found the greatest stimulative effect would come from extending unemployment benefits. In summing up the hearing, Wyden called for a bipartisan approach to reforming the Tax Code.

For more on George Steinbrenner, see