Tax Law Blog | IRS Tax Attorneys

As New Jersey looks to fill another budget hole (by the way, the sun came up today too), there is currently much debate along political lines over whether or not New Jersey’s recent income tax hike in 2004 led to high-income people fleeing the state.

Did at least one person move because of it? Almost assuredly yes. Did everyone move? Of course not. The answer lies somewhere in between. But while it may be difficult to measure the extent to which the tax hike led people to move because one must hold all other factors constant (like the fact that people have been moving south and west in the United States generally for the past couple decades or so), we can all agree that it is merely an empirical question that should not depend upon one’s political bents. But as is too often the case in tax policy, empirical interpretation is guided by one’s initial bent on tax policies as opposed to the other way around.

While the following calculations aren’t a definitive answer to the question of how much did the New Jersey tax hike in 2004 matter given that we aren’t holding all other factors constant, they should give us some indication of how much it mattered. Using the best available IRS income data by state for those tax returns earing over $200,000 (see below), I perform a quick and crude back-of-the-envelope “dynamic” calculation of the effect on income earned by those making over $200,000 from the tax hike.

From 2003 to 2004, the number of returns earning over $200,000 in the U.S. grew by over 17 percent, while in New Jersey, they grew by 13.3 percent. If you assume that this entire difference was due to the tax increase, we can estimate that there would have been 168,124 returns with AGI over $200,000 filed in New Jersey in 2004 had there been no tax increase. And further assuming that New Jersey’s per capita income amount in the 200k+ range grew slower because of this (essentially assuming that very, very high income people were more likely to leave), I estimate that income earned over $200,000 in New Jersey would have been $54.78 billion in 2004 instead of the actual estimate of $50.49 billion in 2004. This implies a tax-induced 8 percent reduction in income earned above $200,000 under what I would consider fairly generious assumptions in favor of high mobility.

Assuming that about 79 percent of all the income earned by those tax returns above $200,000 is earned by those above $500,000 (reasonable based upon IRS data for NJ for 2001) and assuming that the entire reduction in income was concentrated for those above $500,000 (who were hit significantly by the tax increase), the aggregate reduction in income earned above $500,000 in AGI in New Jersey as a result of the tax increase would be approximately 10 percent. Therefore, based upon my very crude estimation procedure, given that the percent increase in the tax rate was nearly 41 percent, I think it’s safe to say that New Jersey’s income tax hike in 2004 increased revenue despite any dynamic response effect.

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The I.R.S. finally published Form 8804, Annual Return for Partnership Withholding Tax (Section 1446).  Form 8804 is used by partnerships with U.S. effectively connected income that is allocable to foreign partners.  Although the 2008 form is now completed, the instructions to this year’s form have not yet been released.

It is remarkable that the I.R.S. is still publishing forms for the 2008 year that are due April 15, 2009.  If a tax preparer uses software to complete Form 8804, he/she must now wait until the software provider updates its software to include the new form.  Presumably, updating the form should not take much time, given that there were no law changes this year related to the form and it is virtually identical to last year’s form.  Of course, this brings up the question as to why it took the I.R.S. so long to change the “2007” at the top of the form to “2008.”

On March 18, 2009, the I.R.S. also updated Form 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax.  Form 8805 is filed separately for each foreign partner, and if taxes have been withheld, the foreign partner must attach a copy of the Form 8805 to their U.S. income tax return to claim credit for the taxes paid on their behalf.

It is possible to extend the filing date for Forms 8804 and 8805.  However, it is astounding that the I.R.S. has delayed the publishing of these forms until less than one month before their due date.

Fight the IRS today.

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The costliest item in the economic stimulus plan passed by Congress is a tax credit of up to $400 for individuals earning less than $75,000 year.

Married couples earning less than $150,000 could claim a benefit of up to $800 under the provision, which has a price tag of $116 billion over 10 years, according to the congressional Joint Committee on Taxation.

The Senate approved the $787 billion stimulus plan 60 to 38 last night. Hours earlier, the House passed the plan 246 to 183. The package goes to President Barack Obama for his signature, providing the first major legislative victory of his administration.

The plan includes $212 billion in tax cuts and $575 billion in spending that Obama says will create or save 3.5 million jobs.

Infrastructure construction makes up a large part of the bill’s spending provisions, including $29 billion for highways, $17.7 billion for mass transit and rail and $18.8 billion for clean water and flood control projects.

The plan provides $87 billion for Medicaid, the health insurance program for the poor. It contains $39 billion for unemployed workers in families, including provisions extending jobless benefits for 20 additional weeks in most states and 33 additional weeks in states with high unemployment rates. It also increases weekly benefits by $25.

The bill spends $25 billion to provide subsidies to help jobless workers keep their health benefits by paying 65 percent of their premiums for nine months for married couples who earn less than $250,000.

Senior Citizens

The bill authorizes a one-time $250 payment for senior citizens, disabled veterans and disabled people living on Social Security benefits.

The measure’s tax-related portions include a $70 billion reduction in the alternative-minimum tax this year that would spare more than 24 million households from paying the levy. The provision would waive the AMT on so-called private-activity bonds, a type of municipal bond used to fund airport runways, housing projects, sewage-treatment plants and other facilities that benefit the public but aren’t explicitly city-run endeavors.

The bill allows businesses to write off the cost of equipment purchases more quickly. Another provision eases tax burdens on companies that restructure debt without entering bankruptcy.

The legislation repeals a tax rule issued by the Internal Revenue Service last September that made banks’ losses more valuable as tax deductions for those banks acquiring other financial institutions.

Earned Income Tax Credit

The earned income tax credit, a benefit for the working poor, would be expanded. And families who don’t earn enough to pay income tax would be eligible to claim the $1,000 child credit.

For homebuyers, the bill increases the value of a tax credit enacted last year by $500, to $8,000, and waives a requirement that the break be repaid over a 15-year period. The credit would still be limited to couples with income of less than $150,000 and to first-time buyers.

Buyers of new cars will be able to deduct the sales tax on the purchase, regardless of whether they itemize deductions.

The legislation consolidates tax incentives for higher education into a $2,500 credit that could be claimed by most working families. And it makes college-related book and computer purchases eligible for the write-off for the first time.

Other tax breaks for individuals include a waiver of taxes on the first $2,400 of unemployment benefits.

Wage Tax Credit

For businesses, the bill provides a 40 percent tax credit for the first $6,000 of wages paid to military veterans and “disconnected” youths, those who haven’t had regular employment or attended school in the past six months.

It also allows owners of small businesses to exclude 75 percent of profits from capital gains taxes, provided they owned the company for at least five years.

Among other spending measures, state and local governments will get $53.6 billion to prevent cuts in education services and for school renovations. The measure allocates $15.6 billion to increase higher education Pell grants by up to $500.

Other spending includes $19 billion for health-care technology programs, $20 billion to increase food stamp benefits, $4 billion for state and local law enforcement agencies and $4 billion to help train unemployed workers.

Financial companies that get money from the Federal Reserve and government rescue funds will face stricter rules for hiring foreign workers under the H-1B visa program. The visas are sought by U.S. businesses for highly trained overseas workers.

The provision requires companies that want to apply for a visa on behalf of a foreign worker not to dismiss employees in similar positions 90 days before and 90 days after requesting the visa. The companies also will have to prove they attempted to recruit a U.S. worker before requesting the visa.

The plan retains “Buy American” provisions for material used in construction projects it funds, though such rules cannot be implemented in a way that violates international trade agreements.

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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.

Make sure to get your maximum refund. Why should the IRS get to keep a penny of your money?

For 2007, you got to take off as much as $3,400 from your income for each qualified exemption you have, up from $3,300 in 2006. (The level rises to $3,500 in 2008.) Despite myths to the contrary, these include children who are full-time students under age 24, regardless of how much income they may have. As your income increases, your exemption deduction may decrease. For 2007, on a joint return, your exemption deduction were phased out between adjusted gross income of $234,600 and $357,100.

For singles, the numbers are between $156,400 and $278,900. With the exemption rising in 2008, the phaseouts increase as well.

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If you, your spouse, or your children attended college in 2000, you may be able to take advantage of the Hope Scholarship Credit or the Lifetime Learning Credit on your 2000 federal income taxes.

The Hope Scholarship Credit provides a tax credit for 100% of the first $1,000 and 50% of the second $1,000 of qualified tuition and expenses of each eligible student in your family who is enrolled at least half time in either the first or second year of post secondary education. This could be anybody.

For married taxpayers with adjusted gross income from $80,000 to $100,000, or single taxpayers with adjusted gross income from $40,000 to $50,000, the amount of the credit you will be able to take is reduced.

The credit is not available for married taxpayers with adjusted gross income above $100,000 or single taxpayers with adjusted gross income above $50,000.
More.

In 1913, the Sixteenth Amendment to the U.S. Constitution was ratified. It empowered Congress to tax “incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” The Internal Revenue Code is today embodied as Title 26 of the United States Code (26 U.S.C.) and is a lineal descendant of the income tax act passed in 1913, following ratification of the Sixteenth Amendment.

While some states do not have an income tax (Nevada), all residents and all citizens of the United States are subject to the federal income tax. Not everyone, however, must file a return. The requirements for filing are found in 26 U.S.C. § 6011. As the largest contributor, its purpose is to generate revenue for the federal budget. In 1985 for example, the government collected over $450 billion in income tax from a total of $742 billion in total internal revenue receipts. The funds collected are essential for the shaping and preservation of a free market economy.

Some terms are essential in understanding income tax law. “Gross income” can be generaly defined as “all income from whatever source derived;” a more complete definition is found in 26 U.S.C. § 61. Other important definitions like “taxable income” and “adjusted gross income” can also be found in Chapter I of Title 26. These terms are not fixed nor should anyone be confident in understanding their true meaning after a cursory reading because their imputed definitions change with time. The Supreme Court, through case law, demonstrates the changing meaning of taxable income.

Individuals are not the only ones required to file income tax returns. Corporations do as well. While they are subject to may of the same rules as are individual taxpayers, they are also covered by an intricate body of rules addressed to the peculiar problems of corporations.
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As of 2007, there are about 138 million taxpayers in the United States. The Treasury Department in 2006 reported, based on Internal Revenue Service (IRS) data, the share of federal income taxes paid by taxpayers of various income levels. The data shows the progressive tax structure of the U.S. federal income tax system on individuals that reduces the tax incidence of people with smaller incomes, as they shift the incidence disproportionately to those with higher incomes - the top 0.1% of taxpayers by income pay 17.4% of federal income taxes (earning 9.1% of the income), the top 1% with gross income of $328,049 or more pay 36.9% (earning 19%), the top 5% with gross income of $137,056 or more pay 57.1% (earning 33.4%), and the bottom 50% with gross income of $30,122 or less pay 3.3% (earning 13.4%). If the federal taxation rate is compared with the wealth distribution rate, the net wealth (not only income but also including real estate, cars, house, stocks, etc) distribution of the United States does almost coincide with the share of income tax - the top 1% pay 36.9% of federal tax (wealth 32.7%), the top 5% pay 57.1% (wealth 57.2%), top 10% pay 68% (wealth 69.8%), and the bottom 50% pay 3.3% (wealth 2.8%).

Other taxes in the United States with a less progressive structure or a regressive structure, and legal tax avoidance loopholes change the overall tax burden distribution. For example, the payroll tax system (FICA), a 12.4% Social Security tax on wages up to $97,500 and a 2.9% Medicare tax (a 15.3% total tax that is often split between employee and employer) is a regressive tax on income with no standard deduction or personal exemptions.

The Center on Budget and Policy Priorities states that three-fourths of U.S. taxpayers pay more in payroll taxes than they do in income taxes.  The Tax Foundation has stated that the burden of the corporate income tax (a 15-39% tax) falls on customers and workers of the corporations, who are often not rich.
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The federal government of the United States imposes a progressive tax on the taxable income of individuals, partnerships, companies, corporations, trusts, decedents’ estates, and certain bankruptcy estates. Some state and municipal governments also impose income taxes.

The first Federal income tax was imposed (under Article I, section 8, clause 1 of the U.S. Constitution) during the Civil War, then again in the 1890s, and again after the Sixteenth Amendment was ratified in 1913. Current income taxes are imposed under these constitutional provisions and various sections of Subtitle A of the Internal Revenue Code of 1986, as amended, including 26 U.S.C. § 1 (imposing income tax on the taxable income of individuals, estates and trusts) and 26 U.S.C. § 11 (imposing income tax on the taxable income of corporations).
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