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....