You know that you’re getting a Federal refund. What should you do with that money? Honestly, many taxpayers have that money spent before they get their return prepared. But if you’re planning to put all or part of that refund into savings, you might consider buying a US Savings Bond.
Most taxpayers know that they have the option to have their tax refunds directly deposited into a personal account. But most people don’t know that the refund can be deposited into more than one account. Form 8888 allows the taxpayer to split their refund in up to three accounts. These can be a checking, savings, IRA, or brokerage account. On top of that, you can also buy a savings bond or two.
Form 8888 allows you to purchase Series I bonds for yourself or as a gift. Use Part II to buy paper bonds. Just fill in the amount you want the bond to be. If you’re buying the bond as a gift, you need to fill in the recipient’s and the co-owner/beneficiaries’ name along with the amount of the bond (line 5a or 6a). If the bond is for you, just fill in the bond amount on line 4. The paper bonds will be mailed to the bond owner.
You can also use part I of Form 8888 to add money to your TreasuryDirect account and allocate the money to buy a gift bond or buy a bond for yourself.
Using Form 8888 to buy savings bonds is an easy way to save part of your refund for the future.
Here we go again.
The Tax Policy Center estimates that for 2013, 43% of all tax household will not pay any federal income tax. That figure is down from 2010 when it was 47%. Actually the percentage has been decreasing since 2009 when it hit a haul all time high of 50% The Tax Policy Center estimates that by 2022 the percentage will be back down to about 34% (It was 37% in 2007 before the recession and all the tax cuts.).
If 47% sounds familiar, it should. It was a big issue during 2012 election. While the Tax Policy Center figure only covers federal income tax, too many people missed the federal income tax part. Their basic argument was that the almost half of the population was not paying taxes at all. Not true! Taxpayers who didn't pay federal income taxes were still paying all the other taxes. This means that they're paying sales tax, state and local income tax, property tax, gasoline excise taxes and sin taxes on cigarettes and alcohol. On top of those taxes, another 29% of tax households will pay payroll taxes for Social Security and Medicare in 2013. The few remaining that are not paying payroll taxes are generally retired or have income under $20,000 for the year.
The reason this large percentage of the taxpayers are not paying federal income tax is because they have a combination of low income and they qualify for a variety of exemptions and deductions and credits which reduces their tax liability to zero. 86.4% of household paying no tax will have income under $50,000 (67% have income below $30,000). Using 2012 figures, a married couple with two children making $35,000 will have a taxable income of $7,900 after their married filing joint standard deduction and four exemptions are subtracted from their income. The tax on $7,900 will be $792. They can then use the child tax credit to reduce that $792 down to a zero tax liability. All of this is perfectly legal.
The U.S. tax code is not simply about raising revenue to operate the government. It has also become a tool to bring about certain social behaviors. The mortgage interest deduction is designed to encourage home ownership. Individual Retirement Accounts and the retirement saver credit help taxpayers save for retirement. There are several ways the tax code helps with education costs. These deductions and credits are available to anyone who qualifies for them. There is no law that says you can’t use them to reduce your tax to zero.
It's easy to hear about the number of taxpayers not paying federal tax and try to make them villains. But most are hardworking people who are taking advantage of deductions and credits available to anyone who qualify. They are our parents, grandparents and children. And I bet most would be willing to have a tax liability in exchange for more in their paycheck.
Business owners looking for information on health insurance can now get help with a new wizard that has been added to business.usa.gov.
Business.usa.gov is a collective of fourteen federal government agencies that are working together to help taxpayers start and grow their business. The idea is to connect the user to the information they need no matter which agency oversees the program. Beside info on starting and growing a business, taxpayers can find information on exporting, hiring employees, getting financing and answering tax questions. This is a fairly new website which the creators expect to grow as they get feedback from the users.
The health insurance wizard has been added to help businesses understand their options as the Affordable Healthcare Act (ACA) is being implemented. Through the wizard, business owners can focus in on the information on health insurance specific to their situation. The information will be based on the business location, the number of employees and what plans they already have in place. The wizard will also provide links to other information about the ACA such as tax credits.
There is so much information and mis-information about the ACA that business owners no doubt feel confused. The information on business.usa.gov’s healthcare section is coming from the government agencies who are implementing the law and will hopefully focus business owners on the information they need to make the best health insurance decisions for their business.
Thanks to WebMD for the head’s up.
Earlier this month, I posted about questions I was receiving that Kansas had cut the gambling loss deduction. I had heard nothing about the change but reached out to other tax pros and Taxdood responded about changes in Ohio law. Today, Taxdood wrote about Kansas cutting the gambling loss deduction and linked to a Topeka Capital Journal article.
It seems that as part of their marathon legislative session this year, Kansas lawmakers dropped the gambling losses deduction beginning in January of 2014. The rational is that gambling is discretionary and by cutting the ability to deduct losses they expand the tax base without targeting lower income taxpayers.
All gambling winning are reported as income but gambling losses up to the amount of winnings can be deducted as an itemized deduction on the federal level. For tax year 2013, this reporting will be the same on the Kansas return KS-40. From 2014 on, all gambling winning will carry from the federal return but losses will have to be subtracted from itemized deductions on Kansas.
The legislators managed to get this by the gambling lobbyists and according to the Topeka Capital Journal article there doesn’t seem to be a big rush to fight it now.
On June 26, 2013, the Supreme Court of the United States (SCOTUS) handled down a ruling in what has become known as the Windsor case which will have a major impact on income taxes in the future. In the ruling, the SCOTUS threw out section 3 of the Defense of Marriage Act (DOMA)
DOMA was passed in September of 1996 and set the federal definition of legal marriage as between one man and one woman for all federal regulations and interpretation. This was challenged by Edie Windsor who was denied the estate tax marriage deduction when her female partner of over forty-five years passed away. The couple was registered as domestic partners in New York, their state of residence, and was legally married in Canada. Before reaching the SCOTUS, the case had been heard in District Court which ruled that section 3 of DOMA was unconstitutional in Ms. Windsor’s case. The case was appealed to the US Circuit Court of Appeals which agreed with the district court’s ruling. The final appeal was to the SCOTUS which also agreed that section 3 was unconstitutional because it denied equal treatment under the law in violation of the 5th amendment.
The definition and rules for marriage have long been a state’s right to set. This ruling does not change that fact. What it does say is when a state recognizes same sex marriage, the federal government must treat that couple the same as they would treat a traditional marriage. A legally married man and a woman in New York would have been entitled to the marriage deduction on an estate tax return and therefore, Ms. Windsor is also entitled to the deduction since New York recognized her domestic partnership and marriage.
The IRS has announced that they are working on regulations on how same sex marriage will be handled for tax purposes. By allowing same sex couples to file married filing joint (or separately), the ruling will impact not just filing status but everything related to the filing status; IRAs, health insurance and fringe benefits, tax rates, phase-outs to mention a few. But extending the married filing joint/ separate filing status to any legally married couple raises some unique questions. Will this ruling be retroactive and will we be able to file amended returns for open years? Will we have to file amended returns for back years if a couple would have qualified as married? What happens when a same sex couple married in a state that recognizes the union move to a state that does not recognize the marriage? If a state recognizes common law marriages, will that apply if the spouses are of the same sex?
Tax pros will be dealing with the effects of the Windsor decision for a long time to come. But right now we can’t do much but speculate until the IRS can write the rules we’ll need to follow.
Just after I tweeted about NAEA (National Association of Enrolled Agents) announcing in an email that the IRS is talking about closing two of the e-Services programs on August 11th, I received an e-News for Tax Professions from the IRS with the same information.
E-services is a service from the IRS which allows tax professionals to do a wide variety of services online. The programs the IRS is talking about cutting are the Disclosure Authorization (DA) and the Electronic Accounts Resolution (EAR). The DA allows forms 2848 and 8821 to be filed online and instantly get access to transcripts for clients. With EAR, a tax pro can help resolve account issues for a client and receive answers by email. With EAR, the tax pro deals with the same IRS employee until the matter is resolved.
The reason for the program cuts seems to be the low number of DAs and EARs filed through e-Services. Only about 10% of the DAs have gone through e-Services while only 3% of account issues have used e-Service. In order to prepare for the closures, the IRS is looking to improve their regular processes and looking for electronic replacements for the DA and EAR.
I use and like e-Services and I wouldn’t want to see any part of it cut. I file all the Forms 2848 I can through the system. But there are some clients that have to have their forms faxed in. So my question is of the 90% of the DAs that didn’t go through e-Service, how many actually could go? Two thirds of my Forms 2848 this summer had to be faxed because the clients hadn’t filed in years or didn’t have back year returns. (e-Service needs the Adjusted Gross Income from one of the last 3 years as a way to verify taxpayer identity.)
Working on an account problem through EAR is great because I am dealing with the same person and have an answer is writing. I don’t have to spend time on hold with the Practitioner Priority Hotline. And let’s face it the wait times there have been increasing with each IRS cutbacks.
I hope that tax pros will raise hell about these cuts and the IRS will at least delay the closures until they can improve the quality of the non-online programs.
While Washington DC is focused on the IRS tax exempt scandal and Federal tax reform seems to be on hold, the Kansas legislature keeps trying to change the state’s tax structure. On Thursday (May 30th), the Kansas House voted down a proposal to reduce the state sales tax on groceries to 4.9% while everything else would be taxed at 6.3%.
Last year, the Kansas lawmakers drastically changed the state income tax. Tax rates were decreased and standard deductions were increased for some taxpayers. The big change was removing business profits from taxation. To help pay for the tax cuts, the legislature cut many tax credits and deductions including the Food Sales Tax Refund. Kansas is one of the few states that adds sales tax to groceries. The Food Sales Tax Refund helped offset part of the burden of the sales tax on the lower income elderly, families with children and the disabled.
The latest proposal would reduce the sales tax on food to 4.9% while everything else would be taxed at 6.3%. The bill seemed to have support from the Kansas Senate and Governor Brownback but was defeated in the House by a 94-18 vote. The big issue is not the lower food rate but the 6.3% for everything else. The current state sales tax is 6.3% but that is scheduled to decrease to 5.7% in August. The Governor has been fighting to keep the higher rate to help pay for the income tax cuts passed last year and prevent a budget shortfall in the future. However, too many of the legislators do not want to explain any tax increase to their constituents back home.
The deadlock on the sales tax has forced a hold on the passage of a budget for the next two years. The new budget should go into effect in July of this year. The pressure is on state lawmakers because they have already gone over their 90 day legislative session. They are now up to day 97 with no true end in sight. And they are adding to any deficit with the additional cost of $35, 000 to $45,000 a day they stay in session.
It seems that the Kansas Legislature has taken a page from Congress’s last minute tax deal in January and is waiting until they are at their Fiscal Cliff to set the state’s budget and the taxes that will pay for it. Not a good example to follow.
Since there is a new set of phishing emails saying they’re from the IRS going around, a quick reminder. The IRS does not, repeat, does not initiate contact with taxpayers by email. No, not ever. They will send you a letter.
In my inbox this morning was an email that said it was from firstname.lastname@example.org. The subject line said that there was a complaint against me. Scary; a complaint and it’s from the IRS. But it’s not as scary as what might happen if I downloaded the rest of the message. A phishing scheme like this could contain a virus or request confidential information. So, don’t do anything but trash it.
The IRS has a lot of information of their website about phishing and what you can do if you receive an email that says it’s from them. The first line on the Phishing page is:
The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.
If you receive one, or more, of the latest phishing emails that say they are from the IRS (I’ve received 5 today), use their website to let the IRS know but don’t panic and most especially don’t open or download or respond anything on that email.