As a Group, 70 Percent of Families Will Receive More Benefits Than They Pay in Taxes Under Obama Plan:

Washington, DC, September 21, 2009 -- New reports from the Tax Foundation show that President Obama's policy proposals will increase the financial dependence of middle-income Americans on the federal government.

"Attempts to put 'price tags' on health care and cap-and-trade proposals vary among government agencies and think tanks," said Tax Foundation President Scott Hodge, "but one vital question has been left unanswered: Counting all federal taxes and spending, how would these policies affect American families' financial ties to the government? The foundation's new 'fiscal incidence model' answers that question." "Currently the bottom 60 percent of the income spectrum receives more in federal spending than they pay in federal taxes," said Hodge. "By 2012, if President Obama's proposals on taxes, health care and climate change become law, 70 percent of American families will, as a group, be receiving more in federal spending than they pay in federal tax."

Even if none of Obama's policies becomes law, the extent of current income redistribution is remarkable: The top-earning 40 percent of families will transfer $826 billion to the bottom 60 percent in 2012. If Obama's policies become law, the federal government will redistribute nearly $1 trillion from the top-earning 30 percent of families to the bottom 70 percent (those earning up to $109,000). In fiscal year 2010, the lowest-income families will receive $10.44 in federal spending for every dollar in taxes they pay. Middle-income families, who are the targeted beneficiaries of many Obama policies, will receive $1.15 in government spending benefits for every dollar they pay in taxes.

When only taxes are analyzed, Obama's policies lead to tax increases for a curious mix of rich and poor families. Families earning less than $23,700 are disproportionately affected by regressive cap-and-trade policies and higher tobacco taxes, and those earning more than $280,000 will see their tax payments go up because of higher income tax rates. On net, however, when spending is included, the lowest-income households gain more than $2,200 while the highest-income families lose more than $127,000.

"The taxes paid by the wealthiest families swamp any benefits they receive from government, even when counting national defense as largely benefitting high-income people," Hodge said. "As lawmakers consider important and far-reaching tax and spending policies such as health care and cap-and-trade, they should have a basic understanding of what might be called a 'fiscal accounting' of how government benefits families receive compare to what they pay in taxes. It's only within this framework that properly informed decisions can be ma

WHAT THIS ALL MEANS: Federal tax and spending policies are already very heavily tilted to the poor and middle-class, even before we consider the Obama administration's budget proposals. The 2010 statistics:

- The lowest-income families will be targeted for $10.44 in spending for every dollar they pay in taxes.
- Middle-income families receive $1.15 for every dollar they pay in taxes.
- The top 40 percent of families pay more in taxes as a group than they receive in government spending benefits. In the case of the highest-income families, they are currently targeted for 43 cents in government spending for every dollar they pay in taxes.

Obama's tax and spending policies will further shift the tax burden toward upper-income families and spending policies to lower- and middle-income families. Surprisingly, Obama's policies will increase the number of families who are net "receivers" of government spending (those who get more back than they pay in taxes). As a group, the bottom 70 percent of families will be net receivers of government spending under Obama policies, up from the 60 percent who are collectively net receivers under today's policies. Of course this means that the number of "givers" will collectively shrink from the top 40 percent of families to the top 30 percent.

The Top 1% Pays More Income Tax Than the Bottom 95%

Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the "rich" are not paying their fair share of taxes. Indeed, the IRS data shows that in 2007—the most recent data available—the top 1% of taxpayers paid 40.4% of the total income taxes collected by the federal government. This is the highest percentage in modern history. ...

Remarkably, the share of the tax burden borne by the top 1% now exceeds the share paid by the bottom 95% of taxpayers combined. In 2007, the bottom 95 percent paid 39.4% of the income tax burden. This is down from the 58% of the total income tax burden they paid twenty years ago. To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.

House Surtax Won't Have Noticeable Impact on Small Business

Citizens for Tax Justice has released House Surcharge Proposal Unlikely to Have Noticeable Impact on Small Businesses:

1. Only about one in one-hundred are rich enough to be subject to the surcharge
2. The surcharge paid by the rich would be less than they got from the Bush tax cuts
3. Only a tiny fraction of small business owners would pay the surcharge
4. Even for those few small business owners who would pay the surcharge, the surcharge would have no effect on their hiring decisions
5. The health care reform that will be funded by the surcharge will make it cheaper to hire workers

CLAIMS COURT AGREES WITH TAX COURT: LLC LOSSES NOT AUTOMATICALLY PASSIVE

Last month the Tax Court shot down an IRS argument that limited liability company losses are automatically "passive" under rules drafted for old-fashioned limited partnerships. Yesterday the Court of Claims agreed with the Tax Court. Ruling for the taxpayer on summary judgement, the Claims Court explicitly followed the Tax Court, explaining:

Finally and most importantly, an LLC is not "substantially equivalent" to a limited partnership. As discussed above, unlike a limited partnership, an LLC allows all members to participate in the business while retaining limited liability.

Claims Court: Thompson, NO. 06-211 T (Fed Cl)
Tax Court: Garnett, 132 T.C. No. 19

THE HEALTH CARE SURTAX WILL HIT ONLY A FEW BUSINESSES: JUST THE GOOD ONES

When you look at how much economic activity gets hit by the surtax, the picture looks different:
The surtax means pass-through businesses that account for 60% of small business profits will be sending more money to the government instead of developing new products, opening new locations, and hiring new employees. Or, more likely, they will be spending money on people trying to change their tax strategies to keep their money from going into the black hole of out-of-control government spending.

Are You Ready For 50% Income Tax Rates

Healthcare reform begins in earnest now that House Democratic leaders have officially introduced a $583 billion bill to pay for the overhaul. Money, as usual, has been the biggest hurdle so far. Lawmakers have been struggling to come up with ways to pay for expanding medical coverage to the nearly 46 million uninsured Americans. Details of H.R. 3200, America's Affordable Health Choices Act of 2009, were revealed on Tuesday. It would raise the necessary revenue in large part via a graduated surtax on higher-income earners.

In 2010, the House bill would institute a:
• 1 percent surtax on joint filers with adjusted gross income (AGI) between $350,000 and $500,000 (between $280,000 and $400,000 for single filers);
• 1.5 percent surtax on couples filing jointly who have AGI between $500,000 and $1 million (between $400,000 and $800,000 for single filers); and
• 5.4 percent surtax on joint filers with AGI greater than $1 million (greater than $800,000 for single taxpayers).

Don't forget state rates: But those percentages are just the added federal tax bite. Calculations by the nonpartisan Tax Foundation indicate that if the maximum 5.4 percent surtax is enacted, the wealthiest taxpayers in 39 states would face a combined federal-state rate of more than 50 percent. "That means government would be taking more than half of every additional dollar from high-income taxpayers," said Tax Foundation President Scott Hodge. The problem for these higher-income earners is that states, facing budget crunches of their own, have been raising taxes on them.

Five hardest hit states: Residents in Oregon would be hit the hardest, according to Tax Foundation figures. The combined top rate in the Beaver State would be 57.54 percent.
Joining Oregon on the top five list with the highest effective marginal tax rate on wealthy residents would be Hawaii, New York, California and Rhode Island.

The Tax Foundation breaks out the rates for residents of those states in the table below if the 5.4 percent surtax becomes law. The calculations also assume that the current state and local income tax rates will remain through 2011 and that the top federal taxable income rate rises as scheduled to 39.6 percent.

State Avg. Local Rate Top
State Rate + Top Federal + Health Care + Medicare = Top Rate
Oregon 11.00% + 39.6% + 5.4% + 2.9% = 57.54%
Hawaii 11.00% + 39.6% + 5.4% + 2.9% = 57.22%
New York 8.97% + 39.6% + 5.4% + 2.9% = 56.92%
California 10.30% + 39.6% + 5.4% + 2.9% = 56.58%
Rhode Island 9.90% + 39.6% + 5.4% + 2.9% = 56.22%

Remember, this is just the beginning, but with the introduction of the H.R. 3200, the issue has once again picked up speed. House Committee markups are scheduled for this week and the Senate Health, Education, Labor and Pensions (HELP) Committee, which had been struggling to piece together its version of healthcare reform, agreed on a proposal (but still just one of many to come) on Wednesday.

IRS: Defective Chinese Drywall May Qualify for Casualty Loss Deduction

The IRS has sent this letter to Sen. Jim Webb (D-VA), explaining that homeowners may be able to deduct losses caused by defective Chinese drywall as casualty losses under § 165(c)(3):
[Y]our constituents['] ... homes were constructed with Chinese drywall. The constituents said that Chinese drywall emits putrid smell and gas causing various health problems, as well as extreme and unusual corrosion of pipes, air conditioning coils, and electrical appliances. They indicated that these problems arose soon after construction of the homes, with the result that the homes are uninhabitable. ...

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, and unusual. Damage or loss resulting from progressive deterioration of property through a steady operating cause is not a casualty loss. ...
The EPA and the Consumer Product Safety Commission are investigating the reported problems with Chinese drywall. If it is determined that Chinese drywall emits an unusual or severe concentration of chemical fumes that causes the extreme and unusual damage you describe, affected taxpayers can qualify for a casualty loss deduction.

Supreme Court watches as state tax collectors dip into Capital One's wallet

Out-of-state state tax collectors just got a boost from the country's high court. The U.S. Supreme Court today decided against hearing an appeal from out-of-state companies that Massachusetts officials say owe it taxes. Bay State tax collectors set their sites on credit-card giant Capital One Financial. Massachusetts officials said that since the Virginia-base company made beaucoups money from cardholders who live in their state, Cap One should fork over more than $2 million in taxes to the Massachusetts treasury.

The Department of Revenue was emboldened by a Massachusetts Supreme Court ruling that the state could tax out-of-state corporations if the businesses have a "substantial nexus" in the state.

Also involved in the case is Geoffrey, Inc., a subsidiary of Toys R Us. The Associated Press notes that Capital One offers credit cards that are used by Massachusetts residents and hires state-based collection agencies to go after delinquent accounts there. Geoffrey, Inc., licenses the use of Toys R Us trademarks for its stores in Massachusetts.

The two companies asked the U.S. Supreme Court to hear their argument that the Commerce Clause of the Constitution prohibits state officials from taxing out-of-state companies that do not have a physical presence in that state. The Justices said no, not specifically to their complaint, but to hearing it in the first place. So Massachusetts tax collectors should be knocking on Cap One and Geoffrey, Inc doors right about now.

529 Plan Assets for Technology

The American Recovery and Reinvestment Act of 2009 amended § 529(e)(3)(A) to add new clause (iii):

(iii) expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment (as defined in section 170(e)(6)(F)(i)) or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.

This language is quite broad, covering the "beneficiary and the beneficiary's family." As a result, it appears to cover not only a college student's laptop but also the family's home computer and related equipment, software, and Internet access. The language also is broad enough to cover Apple's iPhone, Sprint's Pre, Blackberry's Storm, and other smart phones.

IRS Extends Tax Break for New Car Purchases to Residents of States Without Sales Taxes

The IRS announced today (IR-2009-60) that the special deduction for sales taxes on a new car purchased in 2009 (after February 16) also extends to taxpayers in those states without a sales tax -- Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon. Taxpayers in these states who purchase a new car in 2009 can deduct other fees and taxes imposed by the state or local government. According to the IRS, Congress intended for these fees or taxes to qualify for this special tax deduction.

The deduction is available even if the taxpayer does not itemize deductions. The deduction is limited to the fees or taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home, or motorcycle. The amount of the deduction is phased out for taxpayers whose AGI is $125,000- $135,000 (single) and $250,000-$260,000 (married filing jointly).

Housing Credit Becomes Down Payment

The first-time homebuyer tax credit is changing yet again, this time to allow some buyers to get their hands on the tax money as a down payment. When it was created last year, it was a $7,500 (or 10 percent of the home's purchase price, whichever was less) tax break that basically operated as an interest-free loan that eligible buyers got when they filed their tax returns. It has to be repaid in subsequent tax filings.

Then came the American Recovery and Reinvestment Act. When that stimulus package was signed into law on Feb. 17, it included provisions that increased the credit for eligible 2009 purchases to $8,000 (or 10 percent of the home's purchase price, whichever is less) and made it a true credit that didn't have to be paid back. The IRS followed up the new law by allowing flexibility on when the credit could be claimed. Still, the tax break was available only after the qualifying taxpayers closed on their first home. That's now changing for some buyers.

HUD tweaks: A ruling by the Department of Housing and Urban Development (HUD) will allow some homebuyers to "monetize" their credit as a down payment. Eligible buyers can use their credit amount to secure a piggyback or bridge loan from private lenders, state housing agencies and some nonprofit groups and use that money as a down payment.

HUD Secretary Shaun Donovan, in announcing the plan, said the down payment option "will not only help these families to purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing." Donovan pointed to a home builders' study that claimed that the tax credit will stimulate 101,000 sales to first-time buyers. Another 59,000 home sales will follow, according to the study, by folks who then will be able to buy homes because first-time buyers purchased their properties.

The tax credit down payment program is available only for FHA loans and buyers still must follow some of the federally-insured loan rules. FHA loans will continue to require a minimum 3.5 percent down payment, which the buyers much come up with on their own. However, they can use loans from certain nonprofits and state and local housing agencies to reach the 3.5 percent amount. Any additional funds from a tax credit secured loan can be used as an additional down payment amount. The bridge or piggyback loan would be paid back when the homebuyer receives his or her tax credit.

Tax Amnesty in Connecticut and Maryland

Connecticut and Maryland are offering state tax amnesty programs in the wake of a six-month Internal Revenue Service amnesty program for taxpayers with unpaid offshore account income. On March 23, the IRS issued directives about the federal program, which generally trims civil penalties from the greater of 50 percent of the account value or $100,000, to a one-time payment of 20 percent of the account value, or 5 percent for an inherited account. The program involves filing up to six years of amended returns.

Connecticut's tax amnesty program, which covers numerous kinds of taxable income owed for tax periods ending on or before Nov. 30, 2008, runs from May 1 through June 25. Maryland's program covers taxes due on or before Dec. 31, 2008 and runs from Sept. 1 through Oct. 31. Under both programs, participants can avoid penalties and criminal prosecution and pay lower interest on back taxes.

The most recent prior amnesty state programs were in 2007 in Iowa and Texas, according to a Maryland Department of Legislative Services report filed with the bill, which detailed the fiscal impact of such programs. The amnesty programs offer greater incentives than many states' general voluntary disclosure policies, which allow delinquent taxpayers to file missing returns or correct old returns in exchange for leniency.

Special State Income Tax Rate on the "Rich"

The following states impose a special income tax rate on "The Rich."

State - Tax Rate - Applicable
Hawaii - 11.00% - Income > $ 200,000
California - 10.55% - Income > $1,000,000
New Jersey - 8.97% - Income > $500,000
New York - 8.97% - Income > $500,000
(plus NY City income tax rate of 3.648%, for a 12.618% rate)
Maryland - 6.25% - Income > $1,000,000
(plus country income tax that averages 2.98%, for a 9.23% rate)