Tax Law Blog | IRS Tax Attorneys

This week, President Obama signed into law the Car Allowance Rebate System (C.A.R.S.) - a  program that pays consumers up to $4,500 in tax credit for trading in their cars or trucks for more fuel efficient vehicles.

As the New York Times reports, you will need to check if your vehicle qualifies for the trade-in credit. You can check out The National Highway Traffic Safety Administration web site to see if you are eligible to participate in the program. Generally, to qualify your car must be:

• at most 25 years old.

• gets 18 miles a gallon or less.

• drivable.

• registered.

• insured for the past year.

The government, which is very focused on bailing out the devastated automotive industry, is allocating $1 billion for the program.

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President Obama roiled the business community Monday by proposing to hike taxes on income generated outside the United States. The changes, which supposedly would close loopholes and remove incentives to export jobs and investment, would bring an estimated $210 billion to the Treasury over the next decade. We’re all for closing loopholes and ending tax shelters that enable the wealthy to hide income. But we’re not convinced that changing tax law can stop corporations from steering jobs and capital to countries with the lowest costs.

The smallest piece of the package, and the easiest to support, is devoted to overseas tax havens used by wealthy individuals. The administration aims to crack down on individuals who conceal income in foreign shelters and the companies that assist them. Obama also wants to eliminate a technique that many multinational businesses use to shift profits from operations in high-tax jurisdictions to those in low-tax ones. We support efforts to prevent companies from playing shell games overseas, although the administration’s proposal may help foreign treasuries more than the IRS.

The most troubling pieces of the package are the ones aimed at “removing tax incentives for shifting jobs overseas.” In particular, Obama wants to reduce a tax break for companies that invest in foreign subsidiaries but don’t bring the profits back to be taxed at the (presumably higher) U.S. rate. The underlying assumption is that foreign investments hurt American workers and should be discouraged by the tax code. But there’s growing evidence that U.S. companies’ foreign investments lead to more investment at home too, as they expand the research and development and administrative work at their headquarters to support their global expansion.

All of the other major industrialized nations have recognized the domestic benefits that multinationals can bring, and they no longer attempt (or have agreed to stop trying) to tax income that their companies earn outside their borders. Washington has to recognize that multinational companies move jobs and factories to lower-cost countries for many reasons and that making its tax code more punitive to foreign investment won’t reverse that process. Instead, it’s more likely to drive more of those corporations out of the U.S. or into the arms of foreign suitors. There are better ways to encourage multinationals to invest here and to reduce the distortions caused by unequal global tax rates — for example, by broadening the corporate tax base and reducing rates so they’re more competitive internationally, or by improving U.S. workers’ skills. Obama’s proposal, however, is more about populism than effective tax reform.

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There is quite a bit of movement in this week’s list of the Top 5 Recent Tax Paper Downloads, with a new #1 paper and new papers debuting on the list at #4 and #5:

1.  [250 Downloads]:  2008 Developments in Connecticut Estate and Probate Law, by Jeffrey A. Cooper (Quinnipiac) & John R. Ivimey (Reid & Riege, Hartford)

2.  [186 Downloads]:  Huford:  Family Limited Partnership Practice Pointers, by Wendy C. Gerzog (Baltimore)

3.  [144 Downloads]:  The Case for the Carbon Tax: How to Overcome Politics and Find Our Green Destiny, by Roberta F. Mann (Oregon)

4.  [131 Downloads]:  Hdden Taxes, by Brian D. Galle (Florida State)

5.  [125 Downloads]:  Choice of Entity: Considerations and Consequences, by Ellen P. Aprill (Loyola-L.A.) & Sanford Holo (Musick Peeler & Garrett, Los Angeles)

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A couple of days ago, I mentioned my fleeting feeling of wealth each tax season. That rich feeling comes from adding up the various amounts I collected the previous year from an interesting collection of clients. Invariably, there’s a job or two I forgot about.

I know I should do a better job of tracking my income, especially since it’s a part of how the hubby and I pay our bills.

Then there are the tax reasons for know how much I make.

I’m not just talking about the big, file your 1040 on April 15 reason.
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President Obama’s plan to expand health care coverage by raising taxes on the wealthy is drawing accusations that he wants to do it at the expense of charitable giving.

“I don’t understand why the administration would try to create any disincentive that reduced any donations to charity,” Sen. Pat Roberts, R-Kan., said.

Yet critics say that is exactly what the president’s proposed budget will do by limiting the charitable giving tax break for families earning more than $250,000 dollars per year.

The $634 billion down payment on expanding health care coverage would come from a $318 billion increase over 10 years in taxes on the wealthy, defined as couples making more than $250,000 per year and individuals making more than $200,000.

The tax increase would occur in 2011 by reducing the benefit the wealthy get on tax deductions. For example, taxpayers in the current top tax bracket of 35 percent could see their tax deduction for every $1 given to charity drop from 35 cents to 28 cents.

The most recent IRS statistics from 2006 show that families earning more than $250,000, which represents less than 2 percent of all taxpayers, was responsible for about 28 percent of all giving, amounting to more than $81 billion dollars in charitable gifts.

Treasury Secretary Timothy Geithner sought to assure concerned senators Wednesday that taking away some of that group’s tax break won’t have a significant impact on their giving.

“Our view is that will have modest effect on actual giving and the most important thing you can do for overall charitable giving is make the economy strong,” he said. “That has the biggest effect on giving as a whole.”

Yet a study released this week by the Center on Philanthropy shows 47 percent of affluent households say they would give less if their tax deductions for charitable giving was reduced. That news comes at the same time 93 percent of professional fundraisers report that the economy is already having a noticeable, negative impact on their efforts. Critics of Obama’s plan say the timing couldn’t be worse.

“It will reduce the contributions to charities as Americans are relying more on charitable assistance,” Roberts said.

The Council on Foundations said in a statement, “We are opposed to proposals which will significantly depress incentives for charitable giving. In these hard economic times, we need to make sure tax and regulatory policy encourage growth in philanthropy.”

The one silver lining may be a spike in short-term giving as donors try to beat the changes coming in 2011.

Hire a tax attorney if your taxes are as close to as big of the mess as the United States Economy.

The American Recovery and Reinvestment Act of 2009 expands the first-time homebuyer credit to include purchases made before Dec. 1, 2009.

The IRS announced Feb. 25 that for first-time homebuyers who purchase in 2009, the maximum credit is $8,000 and can be claimed on a buyer’s 2008 federal tax return.

The credit is claimed using Form 5405.

For first-time homebuyers who bought in 2008, the maximum credit is $7,500 and must be paid back over a period of 15 years.

Here’s a handy list of codes for the 1099-R:

1 Early distribution, no known exception

2 Early distribution, exception applies

3 Disability

4 Death

5 Prohibited transaction

6 Section 1035 exchange

7 Normal distribution

8 Excess contribution

9 Cost of life insurance protection

A May be eligible for 10-year tax option

D Excess contribution

E Excess annual additions

F Charitable gift annuity

G Direct rollover

J Early distribution from Roth IRA

L Loans treated as deemed distributions

N Recharacterized IRA contribution

P Excess contribution

Q Qualified distribution from a Roth IRA

R Recharacterized IRA contribution

S Early distribution from a SIMPLE IRA in the first two years, no known exception

T Roth IRA distribution, exception applies

For specific information on each of the codes, you can check out the instructions for form 1099-R.

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If you’re unemployed, your tax bill will probably decline:

Deduction for medical expenses. Co-payments, deductibles and other unreimbursed medical expenses are deductible only if they exceed 7.5% of your adjusted gross income.
The income cut-off prevents most people with jobs and employer-provided health insurance from deducting medical expenses. But if your income has declined and you’re paying more for health care, the threshold could become easier to cross.
Under a federal law known as COBRA (Consolidated Omnibus Budget Reconciliation Act), you can continue your former employer’s coverage for at least 18 months. To maintain coverage, though, you must pay the entire premium, plus an administrative fee. These expenses qualify for the medical expense deduction, says Leslie Laffie, tax analyst for Thomson Reuters.

Many employees who can’t afford COBRA opt instead to buy an individual insurance policy. Premiums for these policies are also deductible, Laffie says. And if you’re required to pay a specific amount out-of-pocket before your insurance kicks in, those payments also count toward the medical expense deduction.

Miscellaneous itemized deductions. Expenses that fall into this category include tax preparation costs, safe deposit box fees and — significantly, for unemployed people — job search expenses. To claim this deduction, your combined miscellaneous expenses must exceed 2% of your AGI, so this is another break that becomes more accessible when your income has declined.

Your can deduct job-hunting costs even if your search was unsuccessful, Laffie says. However, you must seek a job in the same business or trade where you were previously employed to deduct those costs.

“If you were a teacher, you have to be looking for a job as an educator, vs. looking for a job as an engineer or accountant,” she says.

Deductible job-hunting expenses include résumé preparation, unreimbursed travel for job interviews, long-distance calls to potential employers and subscriptions to job-search websites, Laffie says.

Earned income tax credit. This tax credit is designed to help low- and moderate-income families offset the cost of paying Social Security taxes. For 2008, the maximum earned income tax credit for a married couple with two children is $4,824.

Last year, the IRS provided $48 billion in EITC payments to 24 million Americans, IRS Commissioner Doug Shulman says. Still, the IRS estimates that more than 20% of taxpayers who are eligible for the credit don’t claim it. That percentage could be even higher this year because of the economic downturn, Shulman says. “There may be a whole set of taxpayers who have never been eligible for EITC who this year are eligible,” he says.

In general, a married couple with two children is eligible for the EITC if their 2008 AGI was less than $41,646. If you’re eligible for the federal credit, you may also qualify for a similar credit from your state or local government. Twenty-two states, Washington, D.C., and Montgomery County, Md., offer residents an earned income tax credit. To find the complete list, go to www.irs.gov and click on “Earned Income Tax Credit.”

IRS Taxpayer Assistance Centers at about 170 locations around the country will be open Saturday, Feb. 21, to assist EITC-eligible taxpayers who can’t visit one of the centers during the workweek. To find the addresses and hours of these centers, go to the IRS website and click on “Contact My Local Office.”

While unemployment will lower your tax bill, it may not fall as much as you expect. That’s because the IRS treats unemployment benefits as taxable income, and some states do, too.

Most states allow you to have taxes withheld from your unemployment benefits, which are documented on form 1099-G. If you have other sources of income — such as wages from a spouse’s job — having taxes withheld might be a good idea, says Robert Seltzer, a certified public accountant in Beverly Hills.

But if unemployment benefits are your sole source of income, it’s probably not necessary, Seltzer says, because you probably won’t owe much — if anything — when you file your taxes. The Senate version of the economic stimulus bill would exclude up to $2,400 in unemployment benefits from taxes in 2009.

Contact the National Tax Firm of Ken Sheppard with help taking on the IRS.

As we near the final days of 2008, what continues to weigh heavy on the minds of many people is the slowing U.S. economy — unemployment has reached the highest percentage in years at 6.7 percent*, layoffs and business closures continue and the housing market remains weak. This year, lawmakers have passed more than a hundred new tax law changes intended to help millions of individual taxpayers. Jackson Hewitt Tax Service(R) encourages taxpayers to find out how these new tax credits and deductions can help lower their individual tax liability and possibly put more money back in their pockets this tax season.

“With more than a hundred pro-taxpayer credits and deductions, many taxpayers will qualify for new benefits that may not have been available last year,” said Mark Steber, vice president of tax resources at Jackson Hewitt Tax Service. “Taxpayers affected by these changes could see significant savings, and with the current recession, it is even more important that taxpayers get all of the tax benefits they deserve.”

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Effective for the year 2008, some taxpayers can save for retirement and earn a special tax credit. This credit, referred to as the “saver’s credit” can offset the first $2,000 contributed to the taxpayer’s IRA, 401(k) and other retirement plans.

There is a catch. The credit is only available to taxpayers which meet certain income criteria. The credit has been available as a permanent fixture since 2006 but the income amounts are indexed each year. Currently, they are:

Singles and married filing separately with incomes up to $26,500 in 2008 ($27,750 in 2009);

Married couples filing jointly with incomes up to $53,000 in 2008 ($55,500 in 2009); and

Heads of Household with incomes up to $39,750 in 2008 ($41,625 in 2009).
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