Tuesday, Aug. 18
Posted 4 p.m. EDT
Private tax collectors are back
Who would have thought that the IRS is more humane than local tax collectors? Not me.
But that's apparently the case. Some local jurisdictions are turning to private debt collection, a system the IRS had the good sense to do away with earlier this year.
A growing number of counties, school districts and cities, however, are selling their delinquent tax bills to private companies.
At first glance, it seems like a win-win.
Local governments get money without having to hassle with collection efforts. Investors in the systems get a potentially high return (albeit at a higher risk) that for many is more appealing than other investment options, especially now that CDs rates are virtually zero and the stock market is still trying to find its footing.
Of course, the big loser is the delinquent taxpayer.
Now I'm not saying that folks shouldn't pay their property (and other) tax bills. But in this economy, taxes are understandably being bumped to the bottom of the must-pay list.
That's where the private tax lien collector creates more problems. Whereas a local tax assessor-collector might be more willing to listen to a neighbor's tale of financial woe and work out a deal, not so the disinterested third party who is just in it for the money.
Or as a county official in Ohio told the New York Times, "In the beginning, you're getting this immediate windfall of cash. But when you think about abandoned properties, foreclosed properties -- the cost to the community is far more expensive than the short-term benefits."
What's more amazing to me is that the Internal Revenue Service figured this out.
Not only has the federal tax collector stopped using private debt collectors, IRS Commissioner Doug Shulman has instructed his staff to talk with delinquent taxpayers to help them meet their tax obligations in a way that doesn't cause them even more financial problems.
Which brings me back to my opening question: Who would have guessed that the IRS has more of a heart than local tax collectors?
Friday, Aug. 14
Posted 11 a.m. EDT
The estate tax won't die
For a subject we tend to avoid, there's sure been a lot of talk about death of late. Most of it has centered around erroneous reports that health care reform will create "death panels" that will decide who gets life-saving treatments.
Thank goodness for the sanity of taxes, where death talk is a bit more constructive.
If you're a tax fan (and aren't we all?), you know the estate tax -- or "death tax" as its opponents like to call it -- is scheduled for termination on Jan. 1, 2010. That's not going to happen.
The House has been working on a short-term fix that will keep keep 2009 estate tax rules in place.
That means that if your estate -- essentially everything you own when you pass away, including but not limited to your home, bank accounts, investments, retirement benefits, insurance policies, collectibles and personal belongings -- is valued at $3.5 million or less, your heirs won't have to worry about dealing with the federal estate tax. If it's more than that, then the IRS will tax the excess at 45 percent.
Before enactment in 2001 of tax law changes that started phasing out the estate tax, the estate exemption was just $675,000 and the tax rate was 55 percent. The exemption was slated to increase to $1 million and the tax rate on the excess to stay at 55 percent.
But the law change has been gradually increasing the estate exclusion amount and gradually decreasing the tax rate for the last seven years. And in 2010, the estate tax was to be gone, but for that year only. In 2011, it was scheduled to return at the more onerous 2001 law levels.
If you could get folks in Washington, D.C., to be honest, they'd tell you they never really expected the estate tax to be zeroed out or for it to return at the higher incarnation. Changes were always going to be made to keep it in some less stringent form.
Representatives and Senators had hoped to have the estate tax deal done for good by now, but things -- stimulus bills, auto company bailouts, health care reform, the August recess -- keep getting in the way.
So now the goal is to get a temporary fix in place that will maintain this year's estate tax status quo. Then lawmakers can work on making it permanent, or as permanent as any legislation can ever be, in 2010.
There is a possibility that Congress could get its act together and make the long-term changes to the estate tax. But just in case, this short-term deal is in the works.
One quick reminder: Some states have their own estate and inheritance taxes. Bankrate's state tax directory has general estate tax information for each state. But if you have a loss in your family, check with your state's department of revenue for specific rules and filing guidance.
Friday, Aug. 7
Posted 11 a.m. EDT
Clunkers plus tax breaks equal nice auto savings
Clunker cash is back! The Senate voted Thursday night to put an additional $2 billion into the program, officially known as Car Allowance Rebate System, or CARS. It took effect on July 24 and was scheduled to run until Nov. 1, or until the original appropriation amount ran out.
As everyone knows by now, that almost happened. Cash for clunkers, as it's popularly known, has been so successful this summer that the House and Senate had to add more cash to the fund. The new money should get the program at least through August, and Congress can act again if CARS needs more money when lawmakers return to Capitol Hill after their late-summer break.
The program's popularity is obvious. Owners of qualifying gas guzzlers can get a rebate of up to $4,500 that can be used to purchase a more fuel-efficient vehicle.
Even better for buyers, as is typically the case with rebates, be they tax checks from the government or price cuts from retailers, the CARS money doesn't count as taxable income.
Doubling up: As you might expect, car dealers are taking full advantage of the government's help in getting people to their lots. Many dealerships are also offering manufacturer cash-back and financing incentives. Take them up on it. These added car carrots won't prevent you from cashing in on the CARS rebate.
When next tax filing season rolls around, you could get even more help from Uncle Sam if the fuel-efficient auto you buy is a hybrid. On your 2009 return, you can claim the tax credit for the hybrid purchase.
You remember this deal, don't you? There's no one credit amount; it's determined car-by-car depending on each model's fuel efficiency, as well as based on overall manufacturer sales. The more hybrids sold, the smaller the tax credit gets until it disappears.
Unfortunately for Toyota and Honda fans, credits for those automakers' popular hybrids have already been eliminated because so many Priuses and Accords were sold years ago.
Ford hybrid buyers also will find a smaller credit for that domestic manufacturer's hybrids, and the break will be reduced again on Oct. 1. So if you're thinking a Ford hybrid is for you, you need to get to a dealer by Sept. 30 to get the most credit still possible on a fuel-efficient Ford hybrid.
Note that the hybrid tax break is a tax credit. That means it's a dollar-for-dollar reduction of your tax bill and could help you even zero out what you owe the IRS.
The IRS keeps tabs on hybrid vehicles that qualify for the credit, as does the federal government's FuelEconomy.com's hybrid tax incentives site.
Tripling up: Finally, be sure to keep your purchase paperwork so you'll know just how much sales and excise tax you can deduct.
The stimulus bill signed into law in February created a new deduction for state and local sales and excise taxes paid on the purchase of certain vehicles. This write-off applies to taxes on a new auto (or light truck, motorcycle or motor home) bought between Feb. 17 and Dec. 31 and which costs $49,500 or less. If you buy a more expensive vehicle, you won't be allowed to deduct tax on the amount over the purchase price threshold.
Live in a state with no sales tax? Lucky you, even when it comes to this tax break. The IRS has ruled that car buyers who live in states without sales taxes still will get some relief under this new law.
Friday, July 31
Posted 11 a.m. EDT
IRS targets housing credit tax cheats
There are anecdotal reports that the housing market is, in some areas, starting to recover.
The new -- and improved, thanks to the 2009 stimulus bill -- first-time homebuyer credit is one of the reasons cited for the hopeful real estate stirrings.
But as often happens with taxes, every silver lining has a cloud. Some folks, it seems, are illegally claiming the first-time homebuyer credit. And some tax professionals are helping them.
One such preparer just got nabbed.
James Otto Price III of Jacksonville, Fla., pled guilty this week to falsely claiming the first-time homebuyer credit on a client's federal tax return. He now awaits sentencing, which could get him up to three years in jail, a fine of as much as $250,000 or both.
Price's plea was the IRS's first successful prosecution related to first-time homebuyer credit fraud. It probably won't be the last.
The agency has 24 open criminal investigations into similar homebuyer credit fraud cases. Make sure you aren't added to that investigation list.
If you plan to claim the credit, follow all the new credit rules.
And if your tax preparer says it's OK for you to take the tax break, make sure he or she clearly explains just exactly how you qualify. I know it's hard to believe, but some preparers actually fabricate deductions and credits for clients and then put a portion of those fake tax savings in their own pockets. Look out for such a possibility if your tax pro's fee is based on your refund amount.
Remember, too, that even when someone else fills out your tax form, when you sign it, you are responsible for everything on it.
If you truly are a victim, you won't end up facing criminal charges, but you will still owe any taxes that you should have properly paid in the first place, along with and penalties and interest.
Friday, July 24
Posted 11 a.m. EDT
Health care reform and your taxes
The best reality show right now is playing out on Capitol Hill as congress works on health care reform.
Almost everyone agrees that that country's health care system is broken. But there is much less agreement on how to fix and how to pay for it.
Of course, payment will be in some form of taxation. Ideas have included so-called "sin taxes" on sugar-laden beverages, reducing or eliminating the tax break employers get for offering health care to workers, reducing the itemized tax deductions allowed higher-income filers and, the current front-runner, taxing the wealthy a little bit more.
The surtax on the wealthy has already made it through the House Ways and Means Committee. Under that proposal, in 2011 a 5.4 percent income surtax would be imposed on couples making more than $1 million a year.
But others earning less also would face smaller surtax charges. Couples making more than $350,000 would have to pay a surtax of 1 percent tax and those making more than $500,000 would face a 1.5 percent surtax.
Adding a new tax to folks who aren't millionaires, however, didn't sit too well with many members of Congress, and House leaders have let it be known they will adjust the legislation accordingly.
OK with Obama: During his prime time press conference Wednesday night, President Obama indicated that raising the tax threshold was OK by him: "To me, that meets my principle" that the cost of overhauling health care is "not being shouldered by families who are already having a tough time."
The Joint Committee on Taxation number-crunchers say that only the wealthiest 1.2 percent of taxpayers would pay the surcharge. Still, many in Congress, including the fiscally conservative Blue Dog Coalition of Democrats, are not convinced that the surtax is the way to go. They argue that it could cost small businesses.
A Washington, D.C., group, however, says otherwise. The nonpartisan, nonprofit Citizens for Tax Justice, or CTJ, says its research shows only around 4 percent to 5 percent of taxpayers who get more than half their income from small businesses they own or operate would pay the surcharge in 2011.
CTJ's full report also includes state-by-state estimates of the effect of the surtax.
Speaking of states: The other issue raised by opponents of the millionaire surtax to fund health care reform is how it would affect individuals' overall tax burden.
Another Washington, D.C.-based nonprofit, The Tax Foundation, ran its own numbers and found 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.
That's not an issue for me here in Texas. Not only am I nowhere near making $1 million a year, there's no state income tax in the Lone Star State. The same no-income-tax status also applies to residents of Alaska, Florida, Nevada, South Dakota, Washington and Wyoming. Two other states, New Hampshire and Tennessee, tax only dividend and interest income.
But for well-paid folks in most of the United States, the surtax could produce a costly combined tax bite. The hardest hit, according to Tax Foundation calculations, would be taxpayers in Oregon, Hawaii, New York, California and Rhode Island. The tax research group has a list of the effect on all states in its Fiscal Fact 178 look at the surtax.
More time for more work: Despite Obama's urging that Congress get a plan in place before recessing for most of August, the House and Senate leadership have acknowledged that timetable won't be met.
Part of the reason, aside from lawmakers not wanting to give up their annual late-summer break, is that there are a lot of committees involved.
Two panels, the Health, Employment, Labor and Pensions Committee, or HELP, and the Senate Finance Committee, get to have a say. HELP has already completed its work. The Finance Committee members are still hashing things out.
Across the Hill, three House panels are part of the process: The tax-writing Ways and Means panel has approved its bill, the one with the surtax. The Energy and Commerce and Education and Labor committees, however, still have work to do.
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