2007 Tax Year Approaching

We just received our early release version of our 2007 tax software. With all of the tax changes in the state legislature, I wasn't quite sure whether the state was using the credit/flat tax system, dual system, or the traditional system for 2007. In case anyone else was wondering the state is using the dual system for the 2007 tax year. It is pretty incredible how not-beneficial the flat tax is to me.

Traditional 100 dollars of tax
Flat 2458 dollars of tax

December is pretty boring in the tax world. I'm thinking of asking my boss to lay me off for the month of December.

Rangel & the AMT

One of the most daunting issues facing American taxpayers is the alternative minimum tax. This piece of the American Internal Revenue Code came about in 1969, when Congress heard testimony that 155 wealthy individuals paid little or no tax in 1966 (the average inflation-indexed income of the 155 individuals would be near 1 million dollars today) Instead of fixing the problems in the regular tax code, Congress introduced a new tax system based on adding certain regular income tax adjustments or deductions back into taxable income. (extremely vague description) If the AMT is lower than the regular amount of tax than no AMT is owed otherwise the difference is added onto to regular amount of tax and the taxpayer pays AMT in full.

This has been one of the most poorly crafted pieces of the Internal Revenue Code. For starters it was not adjusted for inflation so therefore it is affecting more and more of the middle class taxpayers, it disallows deductions for state and local income taxes creating a double taxation effect in some cases, and many other serious problems.

I have commented on Charles Rangel, and his expressed desire to repeal the AMT. In a recent news letter from the National Association of Enrolled Agents it appears that serious AMT reform is likely not going to be a menu item this year with leaders from the House and the Senate both introducing additional 1 year inflation patches. However the house is still working on a massive reform package that will, among other things, include an elimination of the Alternative Minimum Tax. Some of his other initiatives include, expending the child tax credit, the earned income credit, and the standard deduction, all tax provisions that are beneficial to middle and lower income taxpaying families. The article also mentioned nearly 1 trillion dollars in tax increasing offsets. I would assume that this would include increasing the capital gains rates back to their pre-Bush levels. This would be a bad move, taxing savings and investments heavily is not the right idea, as we enter a phase in American history where retirees will outnumber workers by a significant margin, and our Social Security system is still in peril of being broke before this era is complete, we need to keep as much savings and investment income in the hands of American taxpayers as possible.

Now the AMT also adds another element to the voucher issue. It was brought up at the end of my last post that it may be better if we support school choice to get the law enacted now and have the legislature fix the flaws in the legislation later. For me though the AMT is like a bright red flag against this kind of approach, Jeremy from Jeremy's Jeremiad eloquently stated the problem in earlier comment on this blog:

"I'd love to be able to buy the idea you guys have proposed that there is a possibility that the voucher program could be made to disappear if it is a flop. The problem is that I can't think of another example of an entitlement program that was easily revoked after government started handing the money out...even when the vast majority of beneficiaries were wealthy types who didn't need the entitlement in the first place.

This plan is a great example of a possible perfect storm of government waste that can't be undone. If things go poorly and only 2-3% of public school students use the vouchers do you really think Republicans will agree the experiment they've invested so much political capital in is a failure? They'll let it go another 10 years. By then all the rich kids who never would have been in public schools in the first place will be receiving vouchers (and they likely won't be the small $500 subsidies the program currently hands out to wealthy people...some legislators are already apologizing for how small those vouchers are). Will the Republican legislature be able to count on many of its rich donors to go along with revoking the state entitlement that helps pay for their kids private schools?"

That is what I finally have seen as the end result of the HB 148 and 174 voucher plan. If bad law is enacted, it becomes institutionalized and entrenched. In my experience government may see the error of past legislation, but usually it isn't until there have been years of waste and misappropriation. Even after lawmakers see the error it is difficult to remove the error because of constituents who now view the "experiment" as an entitlement.

I would rather (however unlikely this may be) that lawmakers revisit the proposal, find a means of making vouchers a truly cost-efficient means of providing school choice to taxpayers while creating savings for public schools.

I'm Back -- Sort of....

Well I have been on a two-month apathy hiatus, and frankly I've really enjoyed it. However, it is time to return to my neglected child. Really not much has been interesting me lately in politics. The voucher debate has fueled up more, however I am so out of touch with the current discussion that attempting to join the debate again would require far more time than I am currently willing to spend. As my father so often said, "it is better to be quiet and appear to be an idiot than to open your mouth and confirm that you are an idiot." So I thought I would simply touch on a few things that have interested me over the past several weeks.

1. President Bush's proposal to offer Federal financing as an option to homeowners in sub prime mortgages who are facing or may face foreclosure -- Unfortunate, but a very predictable result of the mortgage products that were frivolously used to put many people in houses they couldn't afford. The main subject of this problem are ARM's (adjustable rate mortgage's) these loans offered lower interest only payments for a number of years until, after two to five years, the interest rates reset and payments of principal began becoming due. These loans are epidemic in St. George -- for duration of the boom, it was used as the loophole to get lower income families into homes that were ordinarily unaffordable. This is unfortunate, but likely one of the only means of averting epidemic foreclosures. It appears that, at least in Utah, steps are being taken to regulate the mortgage industry and the types of loans that they peddle. (80/20 ARM's may be a thing of the past) I believe I called the housing mess, and I hope it levels out soon.

2. "Barack Obama outlined his plans for changing the tax code, should he become president. Like rival former senator John Edwards (D-NC), Obama proposes to lower the filing burden for taxpayers with simple returns by requiring that the IRS send them pre-prepared returns that would simply require their signatures. Obama also wants to give families a $1,000 tax credit to offset payroll taxes, create a “universal homeowners’ tax credit,” and eliminate income taxes for seniors making less than $50,000. He would raise rates on capital gains and dividends to offset some of his plan’s costs. Notable is Obama’s silence on the AMT, which is recognized almost universally as one of the major problems in the tax code."(NAEA Ealert Newsletter)

I find some of his proposals rather interesting -- some I possible agree with (depending on the specifics) and some I adamantly oppose. First the proposal I oppose, I agree with the Senator that filing a tax return can be difficult and burdensome. However, I have a real problem with the government predetermining my allowable deductions and exemptions. I could see this creating a whole new line of information reporting burdens for businesses and charities, and/or a whole new audit red flag based solely on whether or not you filed the IRS' prefilled tax return. Some of the items I agree with are credits to offset payroll taxes, universal homeowners credit, (depending on specifics) and exempting income tax for seniors with income below 50,000 (although I think he should extend that to single moms and married families). I disagree with increasing the cap gain and dividend rates, but my disagreement is purely ideological -- I think the lower cap gains and dividend rates have been a great benefit to our economy.

3. Rock Concerts are sweet -- In high school during the mid-90's, I was a mosh-pit/rock concert connoisseur. I've mellowed drastically since then -- until September 12th when I attended the Muse concert. It was sweet! The band came back out and performed the BEST encore I have ever enjoyed. My wife (bless her soul didn't know better, it was her first concert) bought reserved seats keeping the kick-arse mosh pits below out of reach, but it brought me to the realization that children and manhood are no reason to stop enjoying the finer things in life.

Anyways, thats my update. I'm trying to care about politics again, but apathy isn't all that bad and I may enjoy it a little longer. To the pro-voucher crusaders -- keep up the fight. To everyone else -- have fun and good luck.

Fair Tax -- Would it Rid Us of the IRS?

Today was the Republican Debate's, and with three kids running around I wasn't able to listen to much of the debate. One part I was able to listen to was regarding the idea of a fair tax. Under the fair tax, we would pay a national sales/consumption tax of 23% and there would be no more income tax, Social Security tax withholding and we would all live in a magical world where there would be no IRS. Although there are many issues with the fair tax that I dislike (the propensity for this tax being a tool of special interests and lobbyists just to name one) one issue that is easily clarified is the fair tax will not rid the nation of the IRS.


It is true that, individual wage earners would be rid of any dealings with the IRS, but small business owners would have a much more powerful and demanding partner in their businesses'. Their are certain state and Federal taxes that are called trust fund taxes (Social Security, Federal Withholding, Medicare tax, and sales tax are a few of them) these taxes carry a powerful punch for those who fail to fully comply with the legal requirements of these laws. The penalty can amount to as much as 100% of the tax that was owed, add on interest and these types of taxes have been the death of many a business enterprise. Another problem with trust fund taxes are the propensity for misappropriation of trust funds -- entrusting 100% of the nation's tax funds to struggling small business owners creates a huge opportunity for fraud. Another problem is the vagueness of most states sales tax laws (after which I assume the national fair tax would be modeled). For example, Utah's sales tax rules (as far as I have experienced) are some of the most vague tax rules I have ever come across I have detailed the vagueness of Utah sales tax at least once or twice in the contents of this blog, and I don't feel like going through it again.

Although a large percentage of the nation would be rid of dealing with IRS, small business owners would find a much more ruthless and powerful IRS reaching its hand into their daily business dealings. This tax would raise the taxes of the poor and the middle class by raising the cost of living, it would be extremely costly to implement, and it would raise the cost of doing business and have a discouraging effect on entrepreneurship in this country. I don't believe the fair tax would be a wise choice for the tax policy of this country.

Three Cheers for Rangel -- Comprehensive AMT Reform

It appears that Charles Rangel (D-NY) is still working to keep his word regarding reforming the dreadful Alternative Minimum Tax. Although Senate Finance Committee Chairman Sen. Max Baucus (D-MT) is pushing for another one year patch, Congressional leaders Rangel and Neal are pushing for and AMT exemption for couples with income up to $250,000. There are a few other notable tax changes that Rangel and Neal are pushing for among those include, an increase the standard deduction, and possibly expand the EITC and child tax credit. In order to remain Revenue neutral Rangel and Neal propose to raise taxes on those with incomes above 500,000 dollars, the Congressmen do not expound on how high they would raise taxes.

Although I am hesitant to give a full unqualified thumbs up to the Rangel proposal (due to the vague explanation of the 500k + tax hike). I applaud the efforts to continue lessening the tax burden of the poor and middle class families. The push to reform the AMT is a breathe of fresh air to the "sweep it under the rug" approach to AMT reform that Congress has taken for the past several years. For a Democrat Congressman Rangel isn't that bad.

Healthcare -- My Paradigm Shift

As most paradigm shifts occur, mine comes due to very difficult personal issues.

Out of school my first job (the one which I am still employed) is in a very small firm that hasn't provided health care coverage for its employees. I don't curse my employer -- small employer health care plans are about as affordable as the individual employees providing their own insurance. It was soon after this that my doctor noted that my second child didn't gain sufficient weight in her first year, the doctor noted concerns that she may be susceptible to host of different conditions. In this case my wife and I were left with prayer and faith as the strongest source of comfort -- it worked our daughter is robust and healthy. Now my one year old son has been diagnosed with a possibly debilitating disorder known as leukodystrophy (there are several classes of this disorder and the doctors are still uncertain as to the exact type) Fortunately, CHIP enrollment opened again and the income requirements have raised to a level that my children finally qualify.

However, it has been a heart-aching experience over the past year being unable provide my son with all of the health care that his caring physicians have suggested. Not to mention lacking health insurance on my wife and myself has been frightening at times, lets just say I exercise religiously and I drive extremely cautiously. There are many benevolent organizations that have provided my son with therapeutic services virtually cost free, for all of which I am extremely grateful. These events have led me to question my long-held stance that health care needs to remain a fully privatized venture.

Although, I am well acquainted with inefficiencies of a few despised Federal agencies I'm growing (in small steps) to believe that nationalized health care my not be as bad as I have sometimes lamented. I'm not suggesting that the idea of Walter Reed Medical Center's nationwide doesn't repulse me, but a system in which anyone can get (grantedly sub par) health care as opposed to no health care is gaining some appeal to me.

I still have some strong points in opposition. The horror stories of VA medical centers are one example, and the needed increases in tax revenue to pull off such a policy shift are colossal. I heard somewhere the absurd suggestion of a "fat" tax, an idea in tax policy that may create a whole host of new eating disorders.

Something needs to be done to provide affordable health care to all Americans, I'm afraid we all know the answer and for some of the reasons cited above we are loathing to admit it.

Arnold v. Commissioner -- A Strong Case for Regulation of Unlicensed Tax Return Preparers

I have been regularly reading Tax Court Decisions, in preparation of taking the Tax Court exam for admission of non-attorneys. It is considered one of (if not the) most difficult tests in the field of taxation. Yesterday, the U.S. Tax Court released TC Memorandum 2007-168 Arnold V. Commissioner. This case involves a tax accountant husband and a realtor wife who each operated separate S-Corporations for which neither paid themselves W-2 wages, each corporation deducted a myriad of expenses for which no substantiation existed, and to top all of that on their 2002 and 2003 income tax returns claimed Earned Income Credits of $352,854 and $489,827 (the earned income credit is a welfare vehicle to provide an income supplement to low income Americans that has a maximum allowable credit of around $5,000)

The most interesting move the court and the IRS made in regards to this case is treatment of owner compensation. S-Corporation officer-shareholders are required to be paid as employees however in this case the IRS and the Tax Court determined that the Arnolds were each subcontractors of their separate S-Corporations liable to SE tax rather than back FICA tax. The decision is unclear if they had appointed employees as officers, but generally this issue is one where the IRS will reclassify distributions as wages an add on much heavier employer quarterly penalties.

The most unbelievable part of this case is the amounts claimed EIC for 2002 and '03 of a third of a million and a half million dollars respectively. One of the first things any tax preparation class will teach you is the earned income credit is only worth five thousand dollars, and only if your income is in a narrow range is the EIC worth even that amount. For anyone to claim as much EIC as Mr. Arnold claimed is laughable, but for a man who others come to for their tax advise to commit such a brazen act of fraud is alarming. If this man were licensed I am sure his license will soon be (if not already) revoked. However, unless this man is enjoined by a court and without legislation, he can still prepare tax returns without a license (after his jail time, I assume he will do time)

Congress has been debating, and last I heard, is expecting to pass a requirement for all individuals engaged in the practice of tax return preparation to pass a written examination and be subject to the same ethical and continuing education requirements in tax practice to which CPA's, attorneys, and enrolled agents are obligated. This is a strong step in adding oversight to a sector whose conduct has blackened the reputation of a needed and valuable industry. I hope Congress broadens licensing to all tax preparers so that anyone practicing tax at least has to meet a minimal competency requirement, and the IRS will have greater strentgh in keeping unscrupulous swindlers from continuing to use tax as a vehicle for their malfeasance.

Health Benefits, Equality, and the 2008 Presidential Election

Every campaign year many campaigns use accessible, affordable, and equitable health care as a campaign promise. If we can or are to make health coverage equitable and obtainable for everyone, the question is how? I am of the school of thought that this should be done without us dragging our efficient and advanced free market health care system to the depths of Canadian health care or as Pete Ashdown once erroneously said the efficient model of VA hospitals. (Do we really want Walter Reed Medical Center's infamous building 18 to become a norm of American Health Care?)


However, health care coverage in this country is no where near accessible, affordable, and equitable for all Americans. For instance small employers health coverage is extremely unaffordable due the way group plans are written -- the smaller the group the bigger the per employee premium is. In many cases it is worse than that, employers who can't afford the extremely expensive small group plans leave their employees purchasing health care as individuals. Here is where the income tax code currently falls short of providing the desired equity we Americans so desperately seek. From a taxation standpoint, if you are covered by an fairly large employer-sponsored plan you receive pretty solid benefits, otherwise you may are hosed one way or another. Here is a breakdown of Health care and taxation:

Employees Covered by Employer

-- No income tax on premiums paid from wages
-- No FICA and Medicare tax on premiums from wages
-- No State income tax on premiums from wages
-- Employees of a large employer receive coverage at very little cost
-- Employees of a small employer pay significantly larger premiums.

Self-Employed Coverage

-- Premiums are deducted from Adjusted Gross Income (AGI)
-- Nearly the same effect as employee's covered by an employer.

Employees who have to cover themselves

-- Premiums are not deducted from AGI
-- Taxes are paid for FICA and Medicare on wages used to pay premiums
-- Premiums can be deducted as a severely limited itemized deduction (A floor of 7.5% of AGI in most cases taxpayers do not have enough medical expenses to deduct)

In this regard President Bush's recent health care tax proposal in the 2007 State of the Union address, would be a step in the right direction. The proposal plans use the Internal Revenue Code to allow those taxpayers who self-fund their own health insurance would pay no FICA, Medicare, or Income tax on the wages used to purchase health insurance. The change would also require those who benefit from larger-employer plans to recognize some income on some of the premiums covered by their better large-employers health plans. The proposal would level the playing field between those who have large-employer health care coverage and those who have pricey small-group or self coverage. This is one of the most innovative ideas I have heard regarding health care. Due to the fact that the rabid anti-war movement has the Bush administration on the ropes regarding Iraq, a meaningful and innovative domestic policy change like this has little chance of passage.

I do hope to hear more innovative ideas like this from the current field of presidential candidates on both sides of the isle.

(P.S. I wrote an similarly titled earlier post that was inspired by a year-old OneUtah post, which I erroneously and unbelievably thought was current. I guess that's what happens when you live in a cave for the 1st four months out of the year.)

Deadline for Taxes

Here I am at 1:30 AM, and I am no longer productive working so I thought I would throw out my last minute tip.......

1. File an extention -- This is something that many people are afraid of, but remarkably it can provide many benefits. Some positive benefits include -- more time to save money to make deductible traditional or SEP IRA contributions for 2006, sanity for your accountant, lower audit risk (although denied by the IRS) statistically extended returns have a slightly lower audit rate. The major con is a two edged sword -- extending lentghens the statute of limitations 6 months, providing the IRS more time to audit and you more time to amend returns an collect refunds. Although the extra 6 months to the IRS examination department is daunting, the extra time to claim refunds on amended returns can be invaluable in some cases.

2. Pay the State of Utah on time -- If you owe tax on your return, payment on the deadline is important. Remember an extention only extends the time to file, not pay! However, if you owe both the Federal government and the State of Utah and cannot afford to pay both -- pay Utah in full on time. Utah's penalty for not paying on time is 10% or 40 bones, if you owe less than 400 dollars or less you could have as much as a 40% penalty for $100 tax or a 400% penalty for $1 tax for not paying on time! Ouch! The IRS is much kinder and gentler on this issue, the Federal penalty for not paying on time on extention is .5% a month up to 5% of the tax owed. Both carry a 8% interest factor. Moral is pay Utah on time or suffer the consequence.

I'll be signing off untill the 18th.

Happy Filing.

The New Tax System

State income taxation is one of the biggest issues that Green Jello has focused on. After the recent session, I feel almost completely in the dark as to what to expect next tax year.

I know the duel plan was dropped and the flat tax system was modified with some credits for charitable giving, mortgage interest, and dependency exemptions. These developments sound very encouraging that the legislature may have found a way to make the tax cut beneficial for all Utahns at all income levels. However, I have been completely unsuccessful at finding actual numbers on how these credit will work.

If anyone has any links to hard numbers on how the tax credits are written please let me know about it. As an empiricist accountant, running on faith is an annoying proposition. Nonetheless, I'm excited to have the taxpayer-minded legislature in office that we now have.