The New Congress

This past week we elected some old and some new people to represent us. We are about to see the largest shift in Congress in half a century with Republicans picking up 61 seats in the House. What does this mean in tax land?

This shift will alter the nature of the House Ways and Means Committee - the committee that writes tax laws. Currently it has 26 Democrats and 15 Republicans. Come January that ratio is likely to flip-flop, becoming over 60% Republican. The changes in the Senate Finance Committee will be less significant.

But before we get to January we have a Lame Duck session to wade through. Many anticipate that taxes will be the major productive work addressed in the last month of the year. These sessions are usually unpredictable. Those who have lost their seat and do figure to return can move toward what they think is best without regard to the political fall-out. The Democrats will want to move a few things forward before losing power, allowing them to boast about what they've accomplished. Republicans will welcome the new-found cooperation, but politically they may be motivated to stall and provide those successes after then have a majority and can boast for being responsible for the results.

At stake are a lot of important tax issues. These include permitting a charitable contribution directly from an IRA without recognizing income (or a deduction). There are also the tax changes from 2001 and 2003, enacted to help restore our economy after September 11, 2001 and other economic problems of the day. Do we still (or again) need support for our economy?
Also on the list (we hope!) is the dreaded AMT. Currently about 27 million families are destined for that. Typically Congress does a 1-year patch to reduce that to about 4 million. Certainly there are 23 million families counting on this action again?

It will be interesting to watch. Then we'll need new tax forms or instructions, and all of that will not start until January. To all those wanting to jump on their tax return in early January we can only say: "You want it when?!"

Problem of No Estate Taxes

You would think that no taxes would be a good thing, correct? (Well, maybe not if you're trying to balance a government budget. But we elect others to worry about that.)

Turns out there is a little problem that we don't have a clear resolution yet.

Many people are familiar with the old "step=up" in basis. What is that you ask if not familiar? We pay income taxes on income or gains from selling assets. So if you purchase something for $100, then later sell it for $300, you have $200 of income to pay taxes on.

Many items inherited were purchased a long time ago when prices were much lower. (Think about a residence owned for 50 years.) Under the expired tax laws inherited property is revalued to the fair market value at the time of death. Under current law there is the same step-up for up to $1.3M in assets, plus an additional $3M for items inherited by the spouse of the deceased. These step-ups allow a family to keep the "family farm" in the family after death.

How are these step-ups recorded? On the Estate Tax Form 706. But with no estate tax this year then Form 706 is not required. So there is no way to identify what assets are being included in the $1.3M (or $4.3M) for future tax purposes.

OK, this will never affect me personally either. But it is an issue for some. There is rumor that the IRS is developing a new form to document this and the new form will be attached to the individual's tax return. If this could be an issue for you, then stay alert - it could make a big difference in your future taxes.

Taxing Wealthy Slowing Economy?

Our President is planning to address our nation's financial woes through tax increases on the most wealthy 3% of the nation. Whether you agree with that plan or not, I hope you will agree that the financial issues are complex and the solutions are not obvious from any perspective.

In this post I hope to point out a complexity that maybe you have not considered. Most of the workers in the US work for small companies. Many economist and politicians acknowledge that our struggling economy will heal through our small businesses. What is not often connected is that the potential for higher taxes on business owners will cause very cautious behavior. Certainly many small businesses are owned by those making less than the top 3%, but the uncertainty is still paralyzing.

The point is? Small businesses are not hiring. They can't. Already there is new health care requirements with uncertainty of what that will really cost. There are tax credits to offset some of those expenses, maybe, but if you add employees you begin to disqualify yourself for the tax credits. And then maybe taxes will increase?

Business owners are faced with the dilemma that adding employees could lead to unrepairable damage to the finances of the business. It is a real possibility that such hiring could contribute to failure of the business. Then all the employees and the owner become unemployed.

Thus taxing the "wealthy" prevents, or at least limits, potential job growth. Uncertainty is just as bad. Or worse. My own opinion is that employment numbers will not improve significantly any time soon. We have too much "retooling" or retraining of the workforce before they can be employed in areas that we still need. Too many of the old jobs will never come back. But our tax situation is not helping. This will be a long road.

US Treasury Bank Accounts?

For those of us in the tax return preparation business, we are well aware of the continuing saga related to Refund Anticipation Loans, or RALs. Proponents lament about how necessary these are to get refunds to taxpayers who critically need these for rent payments, car repairs, etc. Those opposed to the practice point out that rent is due 12 months a year, so if it is so critical, what do they do for the other 11 months?

The real issue is the high interest rates that are generally charged. I've commented on this before - over 100% annual rate is not uncommon. It is a process of shifting money from those who desperately need it to those who have built strong businesses on the practice. Proponents point out that the high interest rates are necessary because of the high risk in having the loan paid.

We view it as "usury" and do not participate in those loans.

A few weeks ago the IRS announced that they would no longer transmit to Electronic Return Originators, or EROs (those who submit e-filed tax returns) an indicator as to whether or not the refund would be paid or diverted to pay other debts (e.g., back child support). That indicator was used by banks to determine whether to approve the RAL or not. If the IRS indicated that the refund would not be paid, the loan was not granted. Direct deposit refunds have been within 2 weeks for a few years already and there are efforts to move those to about 3 days.

In response promoters of RALs pointed out that direct deposit is of little value to those who do not have bank accounts. Thus giving taxpayers loan checks allow them to go to check cashing businesses and get their money. (Note another high-cost service provider in that path.)

It looks like the government has a solution for that too - Treasury bank accounts for those without bank accounts. We do not have all the details yet, but there is a program being assembled that will allow taxpayers to setup a limited-use bank account with the government to accept those refund checks and have access to the cash.

It will certainly be interesting to watch how this develops. This could be a real winner for those who traditionally seek RALs, putting hundreds of additional dollars in their pockets each year.

Tax Return Due Dates

As a courtesy, many extended tax returns are due today. These dates have changed over the last few years and thus it is easy for all of us to get confused. Here are the dates for common returns assuming a calendar year tax year (as of today). For fiscal year returns simply adjust the month accordingly.

Individual returns (i.e., 1040):

Due date is April 15, and extension is until October 15.

Partnership and fiduciary returns (i.e., 1065 and 1041 generally for trusts):

Due date is April 15, and extension is until September 15.

Corporation returns (i.e., 1120 and 1120S):

Due date is March 15, and extension is until September 15.

Note that all such dates are extended if they fall on a Sunday, Saturday, or holiday.

Finally, a word of caution to those using professional preparers (which is the majority of taxpayers including over 60% of the individuals filing tax returns): Do not expect your preparer can handle you providing your information just before this deadline. You are not the only one who has waited until the last minute. Thus many tax return businesses assert their own earlier deadline.

And if you're late? There are penalties to pay - potentially steep ones.

Now, excuse me, but we've tax returns due today....

Nanny Tax

David Cay Johnston recently posted an article on the Nanny Tax. This is a tax that, honestly, most people do not know about. This is the payroll taxes that each of us owe if we hire someone to come work in our home. Such as a house cleaner. Or a regular baby sitter or someone to watch our children. Or the gardener that cares for the lawn.

Yeah, payroll taxes.

The tax does not require the complicated payroll tax forms (e.g., Form 941) but instead is paid with our regular federal income taxes using Schedule H. But it is not exactly trivial to fill out.

The compliance rate? Pretty small numbers. And one of the more difficult items to catch as well.

The downside? There are a lot of people who will not see much, if anything, from Social Security. When Schedule H is not filed, then there is no employment record for the person who did the work. So no unemployment benefits. No disability protection. No retirement benefits. No survivor benefits.

A few years ago the IRS ran a study where they audited 45,000 tax returns for the Household Employee, or nanny. They found $12 million in unpaid taxes. They also found $11 million in over-paid taxes. That generated some nice refunds.

Recent law changes increase the filing requirements related to this. Thank you Health Care. But the best I can offer here is if you do pay someone on any regular basis to do work at your home, discuss this with your tax professional.

"Hello, this is the IRS...."

Nothing like answering the phone and hear the party on the other end identify himself or herself as from the IRS. That could probably give your heart a start!

A phony phone call? It could be. But it could also be real!

Historically the IRS always sent a letter first. No longer. Now a common practice is to call and speak with the taxpayer and to start collecting information.

One problem is that it may not be clear what the real issue is (or issues are) that is/are under audit. Thus it is best to not provide much information without knowing the IRS agenda and what your options are. (Confirming your address is probably fine.) And of course it is difficult to know for sure that it really is the IRS calling.

Fortunately, if you respond stating that you desire representation then the auditor is required by law to immediate cease inquiries on the subject. They will probably ask who your representative is, as they need to send a letter to your representative, so that is fine. If your taxes were prepared professionally by someone capable of representing you then you can give them that person's name. You will also want to contact that person immediately to establish a representation relationship.

If you did not have your taxes prepared by a person qualified to represent you, then explain that you will be obtaining representation and get the contact information for the IRS auditor so that they can be contacted by your representative. Then locate an Enrolled Agent. (That title will likely change in a few months, but no announcement yet.)

Finally, while the IRS will usually send a letter, and sometimes phone, they do NOT send email. If you receive an email message disguised to look like it came from the IRS then you should forward it to phishing@irs.gov.

Refund Anticipation Loans - Bye bye?

If you're reading this blog (Thank you!) then you are probably seeing other news items and have read, over the last 3 days, about a change at the IRS and how this will impact the Refund Anticipation Loan (RAL) business and users. I'll offer my thoughts on this too.

For those unaware, this paragraph will have the short details. The IRS receives from other branches of the government information about what taxpayers owe. This could be related to Social Security, back child support, whatever. They do NOT receive information about what the issue is. When a tax return is e-filed the IRS in the acknowledgment indicates if the refund will be processed normally or if there is an "offset" from a prior tax problem or other government agency that will cause the refund to be held. Banks use this flag to help determine whether or not to write a loan to the taxpayer allowing for the early refund. Without this information if the bank chooses to issue the loan it really does not know if the loan will be repaid by the IRS or not.

The expectation is that RALs may die a quick death. Some speculate that if a taxpayer has had a RAL from the same bank for multiple years then maybe the bank will write the loan anyway. Of course the taxpayer does not choose the bank - that is done by the tax professional in their annual contract. Others speculate that RALs will continue but the fees will escalate significantly to pay for the additional risk that the bank must take.

Many advocates are very please with this happening. Why? The majority of these loans take money out of the pockets of those who need the money the most. One report indicates that in 2008 over $700 million was skimmed away from the low-income portion of our population. One tax preparation chain indicated that their average interest rate on these loans (assuming it expedites the refund by 1 week) was over 80%. I personally have seen these loans at around 180% annual interest rate. The NY state banking department reported loan interest rates approaching 700% in some extreme cases. (Can you spell usury?) One chain even reported in its financial statements that it lost money on tax return preparation but made a profit due to the RAL business. Tax return preparation is just a loss-leader for them.

Others argue that people need these loans. Really? They argue that people are in dire straights - behind on their rent, or with a car in the shop - and these loans are the only way to meet payment commitments. Hmm. For the last 12 months there was no loan coming in. How was the rent paid then? Do these people voluntarily put themselves in this predicament simply because they know they can get that loan money next week? Might they behave differently if it could take one additional week?

Currently almost all refunds are paid within 10 days. A RAL will shorten that to 1-3 days. The IRS has piloted a new e-file system that will provide refunds in 3 days. That's not yet available to everyone, but it was used this past year on many of the simpler returns. Those are the same returns that generally end up with a RAL. Granted this 3-day refund from the IRS is only available to those who choose direct deposit.

Next proponents of RALs point out that many taxpayers do not have bank accounts and there fore are unable to use direct deposit. Isn't a Social Security number and photo ID all that is required to open a bank account? Maybe the slice of our population that will be disadvantages is more narrow that previously acknowledged. Who is unable to have a Social Security number and photo ID???

Interesting that this target slice of our neighbors that get the RAL check, after paying hundreds of dollars to save a few days, must then go to a check cashing business and pay fees again, since they do not have a bank account to deposit the check. No wonder opponents point out that significant money is being siphoned away from the poor and channeled to the rich. This whole process smells of this.

People survived for decades without quick access to their refunds. Proper tax planning will reduce those refunds to a rather minimal amount anyway. People will adjust to the extra delay - where it will really exist. The bottom line will leave a lot more money in the pockets of the lower-income portion of our population. That seems like a good thing.

Oh, the other issue is that some people use this method to pay the tax preparer. That appears to also be in danger. The IRS did state that there is a proposal in process to offer a new capability for that in the 2012 filing season (tax year 2011). So maybe the burden of having to directly pay for services received will only last one year. That too we can survive. To genuinely help our poor, it seems worth it.

The Issues with Income Reporting

If you have been following recent news related to reporting of income, then maybe you can skip this first paragraph. What's the deal? Part of the health bill passed back in March requires business to report to the IRS when they pay another business more than $600 in any year. This is done on Form 1099-MISC. So what changed? First, it now applies to purchase of supplies in addition to services. Second, it now applies to payments to corporations rather than just individuals and partnerships.

The Fort Worth Star Telegram just published an article addressing this. Their point was this is expected to close a $19 billion tax gap. What could possibly be wrong with collecting $19 billion of under-paid taxes each year? And the author rationalizes that business are tracking who they pay and how much anyway. So to require the software to spit out the Form 1099-MISC at the end of the year (something not all bookkeeping software currently does) should be no big deal.

Here is the issue: Many small businesses do not track all expenditures through an accounts payable module that tracks the vendors. We don't - we don't run accounts payable! We actually pay for products and services when we purchase them. The most common example is the purchase of office supplies from stores like Office Depot, Staples, Office Max, etc. (If you think $600 sounds like a lot of office supplies try pricing printer toner and replacement drums.) Can you imagine having to collect tax identification numbers from every store you buy from just in case you have to report it? I can just see me asking the young clerk behind the register what the tax id number for the business is....

One change since the initial bill already made is to exempt payments made by credit cards. That will help if you always pay by credit card. But now not only do businesses need to track which business they purchased from, but how they paid.

I'll agree that $19 billion is a bit more than chump change, but it certainly would help if they also put into place the requirements to make the task manageable.

Job Hunting Expenses Deductible?

In case you have been sleeping the last couple of years, times are tough. Unemployment is in the 10% range (depending on where you live) and under-employed rates are estimated closer to 16 or 17%. Face it - a lot of people are looking for work.

In certain cases your expenses you incur hunting for that new job just might be deductible to lower your income taxes. Of course there are a few rules....

• Same occupation - you must be looking for a job in the same occupation that you were working in. If you are looking for a change in the work you do, then no deductions. That makes it pretty difficult for those coming from an occupation with excess capacity (e.g., home building). By the way, the same rule applies to educational costs - if the education is to permit you to work in a different occupation (with very narrow definitions for education) then the expense is not deductible.t
• Not your first job - expenses you incur to obtain your first job are not deductible. If you think about it, this is a repeat of the previous bullet. After all, your previous occupation was probably a student - high school, college, whatever. Or maybe homemaker - same thing.
• Travel expenses - these might work, but you must be careful on this one. Spending half a day looking for a job during a week stay in Hawaii won't cut it. To deduct these expenses your personal time on the trip (i.e., time not looking for a job) should be minimal.
• Minimum break in the action - if you take very much time off you will disqualify the deduction. That does not mean you must find that replacement job soon, but you must start looking pretty soon.

So what kind of things are deductible? It includes items such as resumes, referrals, job counseling including interview training, fees to employment or placement agencies, and as indicated above sometimes travel expenses.

These expenses are potentially deductions from income, not tax credits. This means you must be itemizing your taxes to take advantage of it.

While this sounds great, remember that all such issues in taxes are always subject to the facts and circumstances in each case. You would be best to discuss this with a tax professional, and I'd suggest an Enrolled Agent (and that name will likely change later this year). But when you discuss this with your tax preparer, remember when they discourage the deduction it is not because they are trying to maximize your taxes. Their job is to help you avoid being on the wrong end of an examination by the IRS or state authority. Lay out the facts, and take their advice.

Asset Expensing for Small Businesses

When a business purchases some asset (e.g., computer, desk, truck, shelving, etc.) the business cannot necessarily write that purchase off as an expense. The tax rules dictate that if the asset is projected to last longer than a year, then the expensing must be spread out over multiple years. This process is called "depreciating" and it can cause the eyes to roll backwards for business owners and some tax preparers as well.

There is a provision, however, that allows small businesses to expense these items in the year that the asset begins to be used (not the year it is purchased). The code section is 179 and you will hear accountants and tax preparers talk about "179ing it."

Currently this provision is limited to small businesses. The way that is done is by setting a phase out based on total purchases. Currently a business can "179" or expense up to $250,000 in purchases providing total assets purchased are not excessive. By the time total purchases reach $800,000 the maximum expensing allowed is reduced to zero.

Both Democrats and Republicans agree that this provision is good for a sputtering economy and are interested in raising those limits to reach more businesses. Currently the target levels are up to $500,000 in purchases expensed being phased out to zero when total purchases reach $2,000,000.

This is worth watching if you are a business owner. While passage is likely, it isn't the law until it becomes the law. We'll watch Congress to see what they do.

Stock Dividends Taxable - At What Rate?

Under current tax law qualified dividends are taxed at the lower capital gain rates. For taxpayers in the lower two brackets (10% and 15%) those are taxed at a whopping 0%! For other individual taxpayers the rate is 15%. Unfortunately, that will end after 2010 unless Congress changes the rules. Unless changed, the current law will return those rates to ordinary income beginning January 1, 2011. That means the rate could be as high as 39.6% - more than double the current tax rate. Beginning in 2013 there will be an additional tax on the higher income taxpayers raising it 2.8% more.

What are qualified dividends? It is the dividends paid on stock you own for 60 days before and after the dividend date. More importantly, it generally applies to mutual funds, where most casual (and many savvy) investors invest their money.

Senate Finance Committee Chairman Max Baucus (D-Mont) has stated that Congress must address this dividend rate. Without action, the tax increase will hit most income levels in our country. Most in Congress seem to agree. The question is do they make a short-term change of two years, for example, to give Congress time to develop a comprehensive plan? Or make it permanent? And how to manage the offsets?

I think it is fairly safe to expect a change, at least affecting taxpayers with total income of $200,000 or below. But for now we do not know what it will look like.

And of course, Congress has failed to act before when everyone agreed that action was needed. Look at our current Estate Tax situation....

More on Estimating Taxes - This time for the Wealthy

Here is a short note for the wealthy taxpayers in California. To most of us this does not apply.

Many are familiar with the "safe harbor" tactics to avoid penalties for under payment of our estimated taxes. Some are a bit tricky to predict, except for the one that compares our estimated taxes to the total tax liability of the prior year. For most of us that hurdle is 100% of the prior year. For those in the upper class it is 110% of the prior year's tax liability.

But now there is a new group - those with income over $1,000,000. Beginning with 2009 there is no longer a California safe harbor by comparing to last year. If you hope to avoid under payment penalties, you must make payments exceeding 90% of your current year's tax bill (which you do not know yet).

And as always, at all levels of income, you cannot just wait until April to pay last year's taxes and avoid those penalties. It must be paid through out the year at the current required rate (which seems to change each year in California!).

Good luck!

Guessing Your Tax Bill

We're past the half-way mark of 2010. For those whose primary income comes from wages or salary, your tax payments are taken out of your check. But for many they must estimate their future tax bill and make estimated payments. The second one of those is now late - it was due June 15.

Problem is, what will your taxes be? This is not the normal issue of the year not being over. That is easily resolved by making estimated payments for the quarter based on income of the quarter.

No, this is a bigger problem. Many tax provisions are expiring (or expired) and while we expect these to be renewed, Congress has not done that yet. Will they? This year? Next year? Who knows - yet you need to know that for estimating the tax liability.

So what kinds of things are we talking about?

• Tax on dividends
• AMT (typically a yearly adjustment - but how much?)
• Capital gain rates (The President promised no change for incomes below $250k/year. OK, make that $200k/year. Well, maybe $175k/year. But Congress hasn't balanced the books on those provisions yet.)
• Energy credits (not all, but some)
• Direct charitable contributions from your IRA (over 70.5 years of age)
• Estate tax issues
• Property tax deduction with the Standard Deduction (not itemizing)
• Educator income adjustment ($250 for classroom supplies)
• College tuition income adjustment (not the credits - that's different)

These are but a few that impact individuals. Sure, there has been a bill or two introduced to address various sets of these, but none have gone very far, and most get pet project attached that ensure they will not pass without time-consuming changes.

Now Congress is about to take off for the summer, and then there will be the election recess, and, well, it looks like a bunch of stuff might hit in December from the lame duck Congress. That means the IRS will have little time to update all the forms, and the problems will just ripple from there....

One would think those in Congress didn't have to pay taxes or worry about such things. Wait, maybe that's too close to home........

A Cash Business

Ever wonder how many business around you deal primarily in cash? And if they do that to facilitate not reporting their income for tax purposes? This has some interesting ramifications....

Of course we all know that failing to report any income for tax purposes is income tax fraud. (Some people mistakenly think you are not required to report income below some threshold, such as $600.) Sometimes people think about such tax fraud as simply cheating the IRS (or FTB or whatever your state authority is called). In reality, you cannot cheat the IRS - they are just a business office. You can only cheat your neighbors and other citizens who end up paying your share.... But I digress....

Some "cash businesses" have discovered that they hurt themselves more than they helped. Many of these owners are nearing retirement and figured to sell their business in order to finance their retirement. The problem is, their business will not sell for much. Why? Because it has not been reporting much income. Buyers insist on seeing filed tax returns to determine the value of the business. If it was not reported, then it doesn't exist. Otherwise it is taxable.... (And you thought I was heading into the "no credits" area for Social Security.)

But there are other problems too. Over the last 2 months we've watched with horror the problem in our Gulf states due to the oil spill. This is not the place to address whether such drilling is appropriate or not, but we will take the position that a company is responsible for the damage it causes. One of those restitution moves is to compensate the citizens of that area for lost wages, earnings, or however they buy their groceries or pay their rent or whatever. I'm not sure how smooth the mechanism that BP set up is working, but again that's not the issue here. It turns out that a lot of business in that area is done on "cash." That's right, a good part of that is not being reported. Whether that is unreported revenue for a business or unreported wages to the employees, it is not in the system. You guessed it - not recorded? Doesn't exist. And why would you expect BP to pay compensation for what was never lost in the first place?

This of course is making a terrible situation even worse. But frankly, the people in the area did choose to operate outside the law. They have been cheating the citizens of the US, so now do they want us to compensate them for doing that? What a mess!

Homebuyer Tax Credit

Have you got that credit yet? Many have, including many who did not deserve it. We're looking at the new homebuyer tax credit worth 10% of the purchase price of the house, with a limit of $8000. The house must become and remain your primary residence.

But first the good news. Yesterday the House voted to extend the time period required to close escrow by three months. Under the current law, you must enter a binding contract to purchase the house by April 30, 2010, and then close escrow by June 30, 2010. That's today! The bill in focus here would extend the deadline to close escrow until September 30, 2010. This will help the estimated 180,000 homebuyers who entered a contract by April 30, 2010, but are expected to miss today's deadline.

Why are they missing the June 30, 2010, deadline? In many cases it is because the sales are "short sales" where the current mortgage holder is being asked to accept less than the full amount as pay-off of the loan. (Think Las Vegas where short sales are about 1/3 of all house sales.) These simply take more time.

Of course the House passing the bill does not make it a law - remember your days in the Political Science class? (Why is that called a "science" anyway?) But a similar measure is already in action in the Senate and all the Hill forecasters talk as this will eventually become law.

Oh, and what about those who didn't deserve the credit but got it anyway? Like the roughly 1300 prison inmates who managed to grab more than $9 million? The bill includes provisions to aid in information sharing between the IRS and state prison authorities in an attempt to prevent further fraud.

Update: This was signed into law on July 2, 2010.

Tax Return Preparer Regulation

OK, so in June this is probably more interesting to those of us who work in this industry than the average taxpayer....

It has been an interesting week in learning more about the IRS changes for tax return preparation. For those a bit behind the curve, this past January the IRS announced that beginning on January 1, 2011, only those registered with the IRS could prepare a tax return for hire. And registration was not coming at a simple price.

There are two significant changes for tax return preparers beyond basic registration (which almost all legitimate preparers had already done) which will now require a fee. The first is the requirement to take a test and actually prove you know what you're doing. That will be a big win for the taxpayer.

The second is required CE or continuing education. This doesn't sound like too big of a deal with all of the fluff continuing education available today. "But wait - there's more!" Beginning in January the only education that will be accepted is that which has been carefully analyzed by the IRS and approved as suitable. And instructors must be vetted as well. More wins for the taxpayer.

The challenge will be whether or not the IRS can get up to speed on education review by then. It could become a bit of a temporary nightmare for those of us in the industry. Many of us take update courses in January, and we expect those to address the changes Congress seems to make every December. How will instructors digest the new bills, update their materials, and then get those approved by the IRS in such a very short window? That will be a problem for the tax practitioners....

But every taxpayer continues to win, win, win!

A new tax about to hit...

Many recently rejoiced at the enactment of the new health care bill. But of course these things must be paid for (and I do not think we really know how expensive this one is going to be).

One of the ways we (the citizens of this country) will pay for this benefit is a new 10% tax on clients using tanning salons. This new tax becomes effective on July 1, 2010. So as we fly through the last half of June, if you frequent those salons, you might want to schedule your visit before the end of the month. The price will be going up 10% on July 1.

California RDPs must Split Income

The IRS Chief Counsel has issued a formal advice memo to IRS examiners (and tax practitioners) concerning California Registered Domestic Partners (RDPs). Based on California's community property laws, RDPs must now each report half their community-property income. This includes earned income (wages, salary, self-employed) as well as investment income. This is effective January 1, 2007.

Taxpayers are allowed but not required to amend their returns for 2007-2009.

What this means to California RDPs is that while they must file as "single" on their federal tax return, they only report have their income. But they must also report half of their partner's income. RDPs will continue to file as married (married-filing-joint or married-filing-separate) on their California return.

Healthcare to Taxes

For those excited about the new health care reform but realizing that we do have to pay for this, I've some mildly interesting news. I spoke with a fellow tax preparer this past week and she attended a mini-seminar on the related tax issues. She reported the syllabus was roughly 750 pages. That's a lot of new tax issues to contend with!