Thursday, January 31, 2013

New York Times and Your 2012 Form W-2

There is an interesting tax article in today’s The New York Times. It discusses the new reporting of employer-provided health insurance on your 2012 W-2. It shows up in Box 12 of the W-2 with code “DD,” and the amount includes both the portion you paid and the portion your employer paid. The article discusses the surprise for some people upon realizing the cost of this benefit.

Being The New York Times, the article had to include some mind-numbing pro-statist comment, and here it is:

The tax-free treatment of employer-provided health benefits is the largest tax break in the tax code, costing the government roughly $180 billion a year in lost revenue, or 80 percent more than the home mortgage interest deduction, according to the administration.”

COMMENT: Where I live, the government costs us. We do not cost the government anything. 

Wednesday, January 30, 2013

The Washington Post On Income Taxes In 1914

"Congress went well toward the limits of its constitutional functions, in the estimation of many good lawyers, in the enactment of this law which grants inquisitorial powers that in the hands of careless officials could prove a menace to the country."

COMMENT: They were right.

You Can Start Filing Tax Returns Today

Today the IRS finally starts accepting 2012 individual tax return filings.  It is January 30, 2013.

Why so late? You recall that Congress passed, and the President signed, a tax bill on January 1, 2013. This tax bill was retroactive to 2012. While the IRS tried to anticipate what would be in the bill, to do so exactly is nearly impossible. The IRS in turn separated the tax changes into two categories: those affecting the most people and the balance of the changes. It has programmed those changes with the widest effect, and this first category of taxpayers can begin filing today.

So if you claim state sales tax (because your state does not have an income tax), claim an education deduction or claim schoolteacher expenses, you can begin filing today.

What if you claim depreciation, own and rent a duplex or have a kid in college and claim an education tax credit (rather than a deduction)? You are in the second group and have to wait until late February or March. Your tax preparer can prepare your tax return, but he/she cannot send it to the IRS until then.

Here is the list of tax changes and forms included in the second category, if you wish to labor through them:
  • Form 3800 General Business Credit
  • Form 4136 Credit for Federal Tax Paid on Fuels
  • Form 4562 Depreciation and Amortization (Including Information on Listed Property)
  • Form 5074 Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
  • Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations
  • Form 5695 Residential Energy Credits
  • Form 5735 American Samoa Economic Development Credit 
  • Form 5884 Work Opportunity Credit
  • Form 6478 Credit for Alcohol Used as Fuel
  • Form 6765 Credit for Increasing Research Activities
  • Form 8396 Mortgage Interest Credit
  • Form 8582 Passive Activity Loss Limitations
  • Form 8820 Orphan Drug Credit
  • Form 8834 Qualified Plug-in Electric and Electric Vehicle Credit
  • Form 8839 Qualified Adoption Expenses
  • Form 8844 Empowerment Zone and Renewal Community Employment Credit
  • Form 8845 Indian Employment Credit
  • Form 8859 District of Columbia First-Time Homebuyer Credit
  • Form 8864 Biodiesel and Renewable Diesel Fuels Credit
  • Form 8874 New Markets Credits
  • Form 8900 Qualified Railroad Track Maintenance Credit
  • Form 8903 Domestic Production Activities Deduction
  • Form 8908 Energy Efficient Home Credit
  • Form 8909 Energy Efficient Appliance Credit
  • Form 8910 Alternative Motor Vehicle Credit
  • Form 8911 Alternative Fuel Vehicle Refueling Property Credit
  • Form 8912 Credit to Holders of Tax Credit Bonds
  • Form 8923 Mine Rescue Team Training Credit
  • Form 8932 Credit for Employer Differential Wage Payments
  • Form 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit

There is some rhyme or reason to what the IRS is doing. Category two changes require more extensive programming. In addition, those tax attributes tend to appear on more complicated returns. These returns – as a rule of thumb – are prepared later in the filing season or are extended.

Monday, January 28, 2013

Expatriates And The New ObamaCare Taxes

What is our government going to do next to U.S. expats?

An expat is an American who lives – and possibly works – overseas. An expat has domiciled in a foreign country. How does this happen? One easy way is the military or foreign service. One has reason to be overseas, enjoys the lifestyle and develops roots in another country. I have family, for example, that are unlikely to return to the United States. Why would they? They have lived overseas for decades.

Remember the 3.8% ObamaCare tax on net investment income? This one applies if you are single and have over $200,000 of income or are married and have over $250,000. It is an additional tax on your “investment income”, a term that is still being defined. For our purposes, let us just say that it includes interest and dividends.

A quick example. You are American, single, live and work in Canada, make $200,000 and have $40,000 in dividends. First, congratulations, even though you are a bad person for being successful. Second, the additional ObamaCare tax on your dividends will be $40,000 times 3.8% or $1,520.

You say to me: Steve, my taxes in Canada are higher than in the United States. I know that the U.S. allows a foreign tax credit. Since I paid Canadian tax, I should get a dollar-for-dollar credit. I won’t owe anything, right?”

For many years that would have been right. It appears that it is no longer right, however.

The reason is that the ObamaCare 3.8% tax may not be a “creditable” tax. That means that the foreign tax credit cannot reduce it. It appears that you will be writing a check to Uncle Sam for $1,520, no matter what taxes you paid Canada.

What a mess for American expats.

Since we have waded into these waters, let us also mention the additional 0.9% Medicare tax. That tax also applies at $200,000/$250,000, but it applies to your earned income. Think salary and bonus.

Here is the problem: the United States has a totalization agreement with 24 countries (I believe) to sidestep expats paying into two national retirement programs. There is a totalization agreement between the U.S. and U.K., for example. You will pay U.S. social security or U.K. national insurance, but not both. If the 0.9% were actually a “Medicare” tax, then it would (likely) be picked up under the totalization agreement. An American expat subject to U.K. national insurance would then not be subject to the ObamaCare 0.9% tax.

But then ... who knows for sure? There is no coherence to this rave, other than Washington’s ongoing obsession with taking more of your money. This is not a healthy system. 

Friday, January 25, 2013

Taxpayer Advocate Reports That Taxes Are Too Complicated

In the Taxpayer Advocate 2012 Annual Report to Congress, Nina Olson states that it takes U.S. taxpayers more than 6.1 billion hours to complete all the tax filings required by the tax system.

Think about this for a moment. It takes more than 3 million full-time employees to administer the U.S. tax system.

I am one, of course. Still, ... good grief!

Here are other observations:

  • Individual taxpayers find return preparation so overwhelming that about 59 percent now pay preparers to do it for them. Among unincorporated business taxpayers, the figure rises to about 71 percent."
  • According to a tally compiled by a leading publisher of tax information, there have been approximately 4,680 changes to the tax code since 2001, an average of more than one a day."
  • From FY 2004 to FY 2012, the number of calls the IRS received from taxpayers ...increased from 71 million to 108 million, yet the number of calls answered ... declined from 36 million to 31 million."
  •  ... among  the callers who got through, the average time ... waiting on hold increased from just over 2½ minutes in FY 2004 to nearly 17 minutes in FY 2012."
  • The IRS receives more than ten million letters from taxpayers each year responding to IRS adjustment notices. ... the IRS ... cannot timely process nearly half of its pending correspondence...."
  • In 2012, TAS conducted a statistically representative national survey of over 3,300 ... sole proprietors. Only 16 percent said they believe the tax laws are fair. Only 12 percent said they believe taxpayers pay their fair share of taxes."

 Here is one that gave me pause:
  • ·        We believe it is important to increase taxpayer awareness of the connection between taxes paid and benefits received. We have recommended that Congress direct the IRS to provide all taxpayers with a “taxpayer receipt” showing how their tax dollars are being spent. This “taxpayer receipt” ... should be provided directly to each taxpayer in connection with the filing of a tax return.”

 And you knew this one was coming:

  • In each of the last two fiscal years, the IRS budget has been reduced, and it appears the IRS budget will be cut further in the current year. The continued underfunding of the IRS poses one of the greatest long-term risks to tax administration today.”

My Take? I believe that the IRS is underfunded, and that such underfunding represents a risk. I point out, however, that the underfunding is greatly attributable to governmental overreach, although it may be fair to say that the President and Congress have left the overreach on the IRS’s doorstep. 

And a receipt?! No thank you. I am aware of how my money is spent. That is a big part of the problem.

I have very much come to like Nina Olson. No one in Washington will listen to this report, however. Not this crowd. Not this year.