A surprise tax cut for the (almost) rich

Are you worried about your taxes going up next year? They might for some high earners. But some not-quite-rich taxpayers could end up with a surprise tax cut.

If the Bush tax cuts expire for the nation's top earners, people making a pinch less than the wealthiest Americans, who don't quite qualify for the new top two tax brackets, could find themselves in an even lower bracket next year.

The White House says you’re wealthy if you make $250k a year. But what about cost of living?

"We should end up with a sweet spot in the middle of the higher income brackets," said Robert Kerr, senior director of government relations at the National Association of Enrolled Agents. "This is an unintended benefit of the new plan that many people don't realize."

The government is defining the wealthiest Americans as individuals with taxable income of more than $195,550, ($200,000 in adjusted gross income) and joint filers with taxable income over $237,300, ($250,000 in adjusted gross income).

These taxpayers could be hit with higher tax bills next year as the tax rates for the top two brackets return to pre-Bush administration levels of 36% from 33%, and 39.6% from 35%.

But under Obama's tax plan, the 28% income tax bracket would be widened. According to estimates from Congress's Joint Committee on Taxation, if your taxable income is between $171,850 and $195,550, you would fall into this "sweet spot" and be moved from the 33% tax bracket to the 28% bracket and could end up saving more than $1,000 a year.

Does $250,000 make you rich?

Say you're a single filer with a taxable income of $195,550, taking one personal exemption and a basic standard deduction.

In 2010 you fell into the 33% tax bracket and paid $49,648 in income taxes. But if Obama's tax plan is passed, you will drop down to the 28% tax bracket and will owe $48,310, resulting in a $1,338 tax savings.

That goes for joint filers too. Those with income between $209,250 and $237,300 will also move into the 28% bracket. So joint filers making $237,300 will owe $54,399 under Obama's plan, $1,691 less than the $56,090 they owed this year.

As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.

New ways to raise taxes

Politicians aren't ready to admit that taxes are going up on most Americans. Here are some of the areas where governments will try to raise money. If you're hoping that tax hikes on the rich will solve America's debt crisis, you're sorely mistaken the power of the wealthy.

President Barack Obama's budget proposal would raise taxes on upper-income earners by $969 billion over the next 10 years, yet the federal debt would continue to bomb. To boost government revenue further, he'd raise an additional $122 billion from multinational companies, $90 billion from banks, $37 billion from oil companies and $24 billion from hedge funds and private-equity firms. All told, that's about $1.2 trillion. And it would barely make a dent. We'd still have huge deficits, and the national debt just keeps growing.

Taxing the rich will be one of the hot political stories this year. It will also divert attention from a much bigger story: Sooner or later, almost everybody in America is going to pay more in taxes.

One reason is that spending on Social Security, Medicare and Medicaid -- which equals 56% of all federal outflows -- continues to skyrocket, and cutting those programs, just as baby boomers begin to retire, would be political suicide. Few politicians in Washington want to cut defense, which leaves little else on the chopping block.

At least 35 states face their own budget shortfalls this year, with revenue in many states coming in below projections that were weak to start with, according to the National Conference of State Legislatures. When federal stimulus spending winds down in 2011, many states anticipate a "cliff effect," in which their revenues plunge. That means money will have to come from somewhere else, and there aren't enough rich people to provide all the funds.

"It's inevitable that the government will have to find a way to have a truly middle-income tax increase," says Clint Stretch of consulting firm Deloitte Tax. "The trick is, how?"

Politicians, of course, don't want to admit that most of their constituents face stinging tax hikes. And until there's no other choice, they'll try to raise funds without having to mouth the T-word. As federal, state and local governments get desperate, here are four of the mechanisms elected officials will try to use to raise funds without getting run out of office:

Expanding existing taxes

Raising income tax rates is so unpopular that most politicians consider it a last resort. Raising state and local sales taxes is a bit more tolerable, and it's even better if you're simply expanding a tax that already exists.
Some states, for example, could expand sales taxes to things not already covered, such as restaurant meals, salons, business services, Internet connections, and phone or cable TV service. It also makes sense to crack down on people evading existing taxes, by increasing the fines for late payments and underpayments, and conducting more inspections to catch merchants and others who may be skirting their obligations.

Avoidable taxes

A new levy is more palatable when politicians can make the case that you don't have to pay it if you choose not to.
Consumers might be able to offset new gasoline taxes, for instance, by driving less or buying more-fuel-efficient cars. Some states are mulling new energy or carbon taxes, with part of the pitch being that you can make up the difference by using less energy.

Then there are the classic "sin" taxes on cigarettes and booze, which are only for people with unhealthful habits -- and have already gone up in more than a dozen states, according to the National Conference of State Legislatures. One new "sin" that could end up taxed: junk food.

Online taxes

This is controversial, because it could force online merchants to figure out tax rates for thousands of localities. But New York and a few other states are trying to impose regular sales taxes on Internet purchases, to replace revenue lost when those transactions don't take place in a physical store. A legal challenge to the so-called Amazon.com tax is pending in a New York court, and if the government wins, more states are sure to follow up with their own Internet taxes.

Health care taxes

You'd think health care was already expensive enough, but at least nine states have upped taxes on hospitals and other providers over the past year, according to National Conference of State Legislatures. Of course, many of those added costs will be passed on to insurers, businesses and, ultimately, consumers.

As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.

Deadlines Extended for Certain Retirement Plans in Eight States

IR-2010-77, June 21, 2010

WASHINGTON — The Internal Revenue Service is providing administrative relief for sponsors of defined contribution plans, such as section 401(k) plans, that were affected by the storms and other severe weather in those counties in Alabama, Connecticut, Massachusetts, Mississippi, New Jersey, Rhode Island, Tennessee and West Virginia declared Presidential Disaster Areas during the period from March 1 through May 31, 2010.

Notice 2010-48 administratively extends to July 30, 2010, the April 30 deadline for restating affected pre-approved defined contribution plans and, if applicable, for submitting determination letters to the IRS, to July 30, 2010. The section 401(b) remedial amendment period for these retirement plans is also extended to July 30.
The relief provided by this notice is in addition to the statutory relief already provided by the IRS, under section 7508A of the Internal Revenue Code, to taxpayers affected by the federally declared disasters in these eight states during the period from March through May 2010.

The notice details the scope of the relief provided by this administrative action and further defines the conditions under which a plan qualifies as an affected plan. A plan is an “affected plan” only if any of the following locations relating to the plan were in the federally declared disaster areas at the time of the disasters:

1. The principal place of business of the employer that maintains the plan;
2. The principal place of business of the employer that employs more than 50 percent of the active participants covered by the plan;
3. The office of the plan or the plan administrator;
4. The office of the primary record keeper serving the plan; or
5. The office of any advisor that had been retained by the plan or the employer at the time of the storms or other severe weather that is directly involved with the adoption of the plan or the submission of a determination letter application to the IRS.

This relief applies to the following disaster situations:
Connecticut victims of March 2010 severe storms and flooding. See, News Release CT-2010-35, June 1, 2010.

Tennessee victims of April-May 2010 severe storms and flooding. See, News Release AL/TN-2010-56T, May 5, 2010.

Alabama victims of April 2010 severe storms and flooding. See, News Release AL/TN-2010-55A, May 4, 2010.

Mississippi victims of April 2010 severe storms, tornadoes and flooding. See, News Release LA/MS-2010-21, April 30, 2010.

New Jersey victims of March 2010 storms and flooding. See, News Release NJ-2010-32, April 5, 2010.

Massachusetts victims of March storms and flooding. See, News Release MA-2010-15, March 31, 2010.

Rhode Island victims of March storms and flooding. See, News Release RI-2010-11, March 31, 2010.

West Virginia victims of March storms and flooding. See, News Release WVA-2010-12, March 31, 2010.

As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.

IRS Provides Tax Help, Guidance to Gulf Oil Spill Victims; Special Assistance Day on July 17

IR-2010-78, June 25, 2010

The Internal Revenue Service (IRS) will be providing guidance to individuals and businesses affected by the oil spill in the Gulf of Mexico; it announced a number of new efforts to help affected taxpayers, including a special Gulf Coast Assistance Day on July 17. The IRS is closely monitoring the situation in the Gulf.

“This is a very difficult time for many people affected by the oil spill in the Gulf of Mexico. As residents of the region cope with the evolving situation, I want to assure them that the IRS will be doing everything it can to provide tax help to those who need it,” IRS Commissioner Doug Shulman said. “We encourage anyone who has an issue with the IRS to contact us and explain their hardship, and we will work with them to find a solution. We’ll do everything we can under current law to help taxpayers.”

The guidance released today is based on current law, and it explains how recipients of payments from BP should treat the payments for tax purposes. According to the current law, BP payments for lost income are taxable in the same way that the wages or business income these payments are replacing would have been. The law treats compensation for lost wages or income differently for tax purposes than compensation for physical injuries or property loss, which generally are nontaxable.

Every person can have unique financial circumstances, so the IRS encourages taxpayers to review their tax situation or talk with their tax preparers about the implications of payments or compensation from the oil spill.

To help people in the Gulf Coast area dealing with tax issues, the IRS also announced a special assistance day on July 17 in seven cities. Taxpayers and tax preparers will be able to work directly with IRS employees to resolve tax issues, including specific topics related to the oil spill. The IRS will hold the Gulf Coast Assistance Day in four states:

• Alabama: Mobile.
• Florida: Panama City and Pensacola.
• Louisiana: New Orleans, Houma and Baton Rouge.
• Mississippi: Gulfport.

Times and specific locations will soon be announced.

Taxpayers with problems related to the Gulf spill will soon be able to reach IRS personnel through an IRS toll-free telephone line. Specially trained IRS personnel will be available to help people with tax questions relating to the oil spill.

The IRS encourages taxpayers in the Gulf struggling with payment or collection issues to call the agency. The IRS continues to have a number of ways to help taxpayers dealing with oil spill issues or other economic hardship issues, including:

• The Taxpayer Advocate Service is available for those taxpayers experiencing issues with navigating the IRS.
• Postponement of collection actions in certain hardship cases.
• Added flexibility for missed payments on installment agreements and offers in compromise for previously compliant individuals having difficulty paying.
• IRS employees will be permitted to consider a taxpayer’s current income and potential for future income when negotiating an offer in compromise.
• Accelerated levy releases for taxpayers facing economic hardship.

As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.

12 Taxes in Health Care Law

As many as a dozen taxes in the new health care law violate President Barack Obama’s campaign pledge not to raise taxes on families earning less than $250,000 and on individuals earning less than $250,000. This we all knew would be a really hard thing to keep as a promise and now we see the president wasn’t able to keep this promise.

At least seven of these taxes directly affect health consumers regardless of income, such as the individual mandate to buy insurance, the employer mandate, the tanning tax, and limits and penalties on health savings accounts. In addition, Republicans argue that the tax impact of the law should include indirect taxes, such as the annual taxes on the health care sector that will be passed on to consumers.

On many occasions during the 2008 presidential campaign, candidate Barack Obama pledged that, if elected, he would ensure that Americans earning less than $250,000 a year would not see a federal tax increase of any kind. ,

“I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increases,” the Illinois senator told a crowd in Dover, N.H. on Sept. 12, 2008. “Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.” This is going to be probably not the case for many of our citizens.

“If your family earns less than $250,000 a year, you will not see your taxes increased a single dime. I repeat: not a single dime,” the president said.

The bulk of the $500 billion in tax increases in the new health care law targets households earning $250,000 and individuals earning $200,000 -- for example, the increase in the Medicare payroll tax. But many of the taxes hit the general public at large.

The individual mandate, for example, will require all legal U.S. residents to purchase a government-approved health insurance plan beginning in 2014. Once the reconciliation bill is voted on in the Senate to amend the law signed by Obama this week, the individual mandate will require a single person to pay 2.5 percent of their income or $695 if they do not purchase health insurance.

Generally, a single person making $30,000 or more will have to pay a 2.5 percent penalty if they do not carry health insurance. A person making less than $30,000 will have to pay $695. This penalty/tax is found in Section 1501 of the bill for “requirement to maintain minimum essential coverage.

The government will also mandate that employers provide health insurance for their employees. This mandate would include small businesses with revenues below $250,000 per year. If the employer does not provide health insurance, the business will have to pay a tax of $750 for each full-time employee. For the employer who requires a waiting period of 30-to-60 days, there is a $400 tax per employee and $600 per employee if the business takes longer than 60 days to comply. This is found in Section 1513 of the bill for “shared responsibility for employers.”

Under the new law, Americans would not be able to use pre-tax dollars from health savings accounts (HSA), flexible spending accounts (FSA), or health reimbursements accounts (HRA) to buy over-the-counter non-prescription medicines. This measure takes effect in 2011 and is supposed to bring in $5 billion dollars. This is found in Section 9003 of the law, under “Distributions for medicine qualified only if for prescribed drug or insulin.”

“Many of us expected the president would violate his pledge,” Boustany told CNSNews.com. “HSAs and FSAs are a prime example. There are other adjustments we will find as we dig into this law. The more the American people see, the more they will find how the amount of tax increases affects them personally.”

Further, the law increases the tax from 10 percent to 20 percent for non-medical early withdrawals from a health savings account for those under the age of 65. This measure takes effect in 2011 and is estimated to increase revenues by $1.3 billion. This is under Section 9004, “Increase in additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses.”

Beginning in 2011, the government will impose a cap of $2,500 on FSAs, which are now unlimited, as a means of raising $14 billion in revenue. This is under Section 9005, “Limitation on health flexible spending arrangements under cafeteria plans.”

Those seeking a tan without catching natural rays will find a new 10-percent excise tax on using indoor tanning salons. The tax, estimated to raise $2.7 billion, will take effect in July. This is under Section 10907, “Excise tax on indoor tanning services in lieu of elective cosmetic medical procedures.”

Now, medical expenses that exceed 7.5 percent of a person’s adjusted gross income can be deducted for tax purposes. But the new law raises that deduction threshold to 10 percent of adjusted gross income, meaning fewer tax deductions for someone with high medical costs. This provision starts in 2013 and is supposed to raise $15.2 billion in revenue. This is under Section 9013, “Modification of itemized deduction for medical expenses.”

The law also imposes a 40-percent tax on high-cost insurance plans reaching $10,200, but exempts union members unless the cost of their plan reaches $27,500. This is called the “Cadillac tax.” This tax is actually on the insurer. This goes into effect in 2018 and is estimated to raise $32 billion in revenue.

There is also a tax on insured and self-insured health plans for a patient-centered outcomes research trust fund. Boustany called this a slush fund for the Department of Health and Human Services to dole out grants.

The government estimates it will bring in $107 billion in revenue from new taxes on insurance companies, drug manufacturers and medical device manufacturers. These are three separate indirect taxes that will be passed on to consumers, Republicans contend.

“The annual tax on drug manufacturers and device makers will all be passed along to the consumer,” Rep. Cynthia Lummis (R-Wyo.) told CNSNews.com. “The high-cost plan will encourage some employees to join a union to get a 40-percent discount.”

“Frankly, you can say any tax is going to affect consumers. We didn’t need to really stretch to include too many other things,” ATR tax policy analyst Ryan Ellis told CNSNews.com. “We have seven that were pretty clear violations of President Obama’s pledge not to raise taxes on these people. The one you always hear people bring up is the Cadillac excise tax. That’s not a tax on people, that's a tax on the insurance company. We’ve never asserted that that is a tax [on consumers] because frankly it isn’t. We don’t need to make that argument because there are seven that clearly are.”

Just before signing the bill into law, President Obama said, “And this represents the largest middle-class tax cut for health care in our history.”

Obama signed the bill on Tuesday, Ways and Means Committee Chairman Sander Levin (D-Mich.) said in a statement that the law provides tax credits for four million small businesses.

“Today, in the greatest of American traditions – opportunity and community – we enacted a law that will improve the overall health of our citizens and the overall well-being of our nation,” Levin said in the March 23 statement. “This legislation was the product of generations of hard work, driven by the personal stories of so many who have suffered from a lack of health insurance and the devastation of rising health care costs.”

I have taken some of the quotes from the CNSnews.com article published on March 25th.

As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.