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9 posts from February 2013


Education Expense Relief

The new tax law package has some good news for families who are seeking tax relief for education expenses.

The American Opportunity Tax Credit, a refundable tax credit for undergraduate college expenses, has been expanded for another 5 years to 2017.  This credit provides up to $2,500 on the first $4,000 of qualified education expenses.

Holding booksCoverdell Education Savings Accounts (aka Education IRAs) have been made permanent and now allow higher contribution limits of $2,000 a year.  Money in these accounts grows tax-free and is tax-free when withdrawn if used for eligible education expenses. You can make 2012 contributions through April 15, 2013. 

The Lifetime Learning Credit is available for anyone who is taking a college course.  It allows a nonrefundable tax credit on eligible expenses even if you are only taking one class.  Parents or the student may be able to claim up to $2,000 of qualified expenses.  There is no limit on the number of years the credit can be claimed. 


"Fair" Tax Controversy

It’s tax preparation season for Americans, and it’s only natural for us to be questioning the need for income taxes, how income taxes are spent, and income tax rates. Hand holding money

For the past few years, the debate to end income taxes altogether in favor of consumption taxes has gained momentum.  A positive spin labels the taxation method “fair” taxes as only consumers who can afford to buy products and services would pay the tax that would then fund government programs that benefit everyone.  However, many experts say sales taxes cannot be relied upon to work that way.

As a review, the idea is to eliminate federal income taxes and replace them with sales and use taxes on everything a consumer buys.   Proponents say it would replace the following federal income taxes:

  • personal
  • estate
  • gift
  • capital gains
  • alternative minimum
  • Social Security
  • Medicare
  • self-employment
  • corporate taxes

Arguments against a federal consumption tax say it would have to be so high to replace income tax revenues it would affect consumer spending and product demand.

They also worry how it will affect the availability and price of products and services which are already subject to excise taxes before they hit the marketplace.

While much of the attention has been focused on a nationwide federal sales tax, state-by-state lawmakers are also considering a variety of income tax changes that could add to the mix.   

For example in Missouri, House Joint Resolution 25 proposes a constitutional amendment that “phases out state individual income tax and replaces the current state sales and use tax with a state sales tax on retail sales of new tangible personal property and taxable services.”

Another bill, HB 422, would authorize Missouri to enter into a “multistate Streamlined Sales and Use Tax Agreement” and phases in a flat income tax rate, eliminates all state tax credits and increases the sales and use tax.”

Those who oppose consumption taxes question how consumers will behave if they have to pay both federal and state sales taxes on every purchase they make. 

Some estimate that a federal sales tax would have to range between 15% and 20%.  State sales taxes ranging from 3% to 12% could be added to that.  Additional regional sales taxes for things like highway construction, schools, special projects and more also have rates that may add another 1% to 5% to the total.

What would happen if all purchases of products and services would be subject to an average 25% to 35% sales tax or higher?  The debate on the effects of switching tax rates and taxing methods has spread nationally and has gained momentum as lawmakers search for ways to boost sagging economies.  For more on the ups and downs of the sales tax debate, watch this edition of McRuer Money Minutes.


Roth Tax Reminder

Tax docs in brownIf in 2010 you conducted a Roth IRA conversion and opted to split recognizing the income between 2011 and 2012, remember you may still need to report half of the resulting taxable income on your 2012 return.

A special 2010 conversion rule allowed taxpayers who opted to convert a Roth IRA in that year to split the amount of reportable taxable income from the conversion between a 2011 and 2012 tax return.

Because the conversion was two years ago, you may need to be reminded that you have the remaining half of the taxable income to report on your 2012 return.  This does not apply to taxpayers who already reported the total amount on their 2011 return.

This reminder applies to Roth conversions in 2010 from traditional IRAs and conversions from workplace retirement plans, including in-plan rollovers to designated Roth accounts.

The IRS provides worksheets and examples in Publication 590 for Roth IRA conversions and Publication 575 on reporting pension and annuity income for conversions to designated Roth accounts. 

Finally, taxpayers who made Roth conversions in 2012, or are planning to do so in 2013 or later years, must report the conversion using Form 8606


Is that Taxable?

QuestioningA general rule to consider is if you're earning income, you'll owe some amount of taxes on it.  Remember, income includes not only money, but also property and services.  

Even unemployment benefits are categorized as income and are taxable.  Though there are some important exceptions to the rule to review as taxpayers compile their income statements for this tax season.

Here’s a quick review of a few key income resources that are not taxable:

  • Welfare benefits
  • Damage awards for physical injury or sickness
  • Child support payments
  • Most gifts, bequests and inheritances
  • Cash rebates from a dealer or manufacturer
  • Reimbursements for qualified adoption expenses

Sometimes taxpayers are confused about life insurance proceeds.  Generally, life insurance proceeds paid to you following the death of an insured person are not taxable, but if you redeem your own life insurance policy for cash, any amount you receive above the cost of the policy is taxable.

For details on all taxable income, click here for the latest information. 


Worst States for Tax Rates

New “tax climate” rankings have been released giving a state-by-state view of the overall impact of all types of taxes on your pocketbook.   The range of the tax impact in the Midwest goes from average to not-so-good.

The Tax Foundation’s 2013 State Business Tax Climate Index compiles information for Upside down money out of pockets lawmakers and economists who use the results to compare their state’s tax rates to other states as they debate the effects of tax rate increases. 

The numbers are also used to see how attractive one state may be compared to another as competition to lure job-producing businesses heats up.

The new report shows overall (with #1 being the best ranking and #50 the worst) Missouri ranks #16, Kansas #26, Nebraska #31 and Iowa #42.

The rankings include the combined impact of individual income taxes, sales taxes, unemployment insurance taxes, property taxes and corporate taxes.  Some states benefit by not charging one or more of the major taxes.

The top ten states with the lowest overall tax impact are: #1 Wyoming, #2 South Dakota, #3 Nevada, #4 Alaska, #5 Florida, #6 Washington, #7 New Hampshire, #8 Montana, #9 Texas, and #10 Utah.

The states with the worst overall tax impact are: #46 Rhode Island, #47 Vermont, #48 California, #49 New Jersey and #50 New York.

The numbers show the state with the most improved ranking is Maine, moving from #37 to #30, which benefited in part from a repeal of their alternative minimum tax.  Michigan jumped from #18 to #12 following the implementation of a flat 6% corporate income tax replacing a complicated system that was accused of offering unfair tax preferences. 

As debates rage over how to increase jobs and turn around sagging economies, the Tax Foundation warns attention needs to be paid to what’s happening across state borders.  The report says, “They need to be more concerned with companies moving from Detroit, Michigan, to Dayton, Ohio, rather than from Detroit to New Delhi.”

To check out the overall tax ranking and an explanation of what you are paying in your state, click on these links for an individual summation:





The Impact of State Taxes

Here's an interesting article from The Fiscal Times titled "The 10 Worst States for Taxes".  To find out more about specific tax rates in Midwestern states, check out our blog titled, "Worst States for Tax Rates" that details the states with the best and the worst overall tax impact.  We also provide you links to review data on Missouri, Kansas, Iowa and Nebraska.


Guns and Taxes

Gun trainingWhat do guns and taxes have in common?  More than you may realize.

Heated debate on gun control is causing a re-emergence of arguments on the effect of excise taxes, sometimes referred to as “hidden” taxes, as analysts determine the economic impact of changing laws.

Early on, excise taxes were termed “luxury” taxes affecting mostly higher income individuals.   Excise tax is based on quantity and is a flat amount per item.  Some excise taxes are called “sin” taxes.

The first excise taxes were on carriages and whiskey.  Excise taxes on gasoline and telephones were called “luxury” taxes when they were first imposed.  Now most Americans consider such items necessities.  Raising these tax rates can have dramatic affects on consumer budgets as well as trigger a downturn in consumption.

Consider today’s gun control debate:   The Alcohol and Tobacco Tax and Trade Bureau collects excise taxes on firearms and ammunition from manufacturers and distributors before the products are touched by a consumer.  Numbers show gun sales alone result in annual business and excise tax collections of nearly $2.07 billion.  

Some experts say just the threat of government gun control has been an effective means of raising tax revenues as fear motivates consumers to stock up.  In the last fiscal year, the ATTTB reports tax revenues on the sale of firearms and ammunition have risen 45 percent which is the highest annual increase on record.

Yet, if prices and taxes are too high, or products are banned from the marketplace, it limits the number of people who are able to purchase products, thereby cutting sales and decreasing tax revenues.

No matter which side of the firearms debate you may be on, it’s likely you can’t escape paying excise taxes.  Among hundreds of items that fall under federal excise tax mandates are:

  • tires
  • gasoline
  • coal
  • vaccines
  • firearms
  • communications services including your telephone
  • air travel
  • heavy trucks and trailers
  • "gas guzzler" vehicles and more… 

Currently, most federal tax rates on excise taxes range from 1 percent to 15 percent or higher, when coupled with other types of taxes.

The excise tax on firearms and ammunition is generally 10 and 11 percent.   Many states collect excise taxes on top of these rates.  This is before sales taxes are calculated at the time of sale.

At a time of critical economic conditions and concerns for the country’s fiscal future, experts urge that debate about changes regarding taxation be as carefully considered as the compassion-motivated moral arguments.


New Guidance for Financially Distressed Homeowners

New guidelines to help financially stressed homeowners lower their monthly payments have been released.

House made of cashIt's part of the Home Affordable Modification Program or HAMP put together by the Treasury Department and the Department of Housing and Urban Development.  

The program's Principal Reduction Alternative, HAMP-PRA, allows qualified homeowners to reduce the principal of their home mortgage over three years. 

The new guidance offers updated information to distressed borrowers, mortgage loan holders and loan servicers as the program hopes to help homeowners avoid foreclosure.  

Find out more by checking out the recent news release from the IRS.



Phony IRS Websites & Email Scams

Even the IRS is being used by identity thieves who want to steal your personal information and your money.  They are using both the IRS name and logo in phishing emails and fake website scams.

Email Scams Caution tape

Taxpayers are being alerted that an email-based phishing scam is targeting Department of Defense military members, retirees and civilian employees.

It claims the recipient may be eligible to receive funds from the IRS and requests “verification” of personal and financial information. The email displays an address ending with “.mil” and appears to come from “Defense Finance and Accounting Services”. 

The thieves are using the information to empty a victim’s financial accounts or open new credit card accounts.

As the tax season shifts into full speed, a good rule of thumb to remember is you will never receive an unsolicited email from the IRS.

To launch the current tax season, the IRS recently updated its website and continually updates its online security practices.  Remember: the only valid web address regarding the IRS is www.irs.gov, though some taxpayers are being tricked by fake websites.

Fake IRS Websites

There is currently a scam that emails a taxpayer and offers a link to a website that looks almost identical to the IRS e-Services online registration page.  Don’t be misled.  Emails with links to websites that end in .com, .net, .org or another designation instead of .gov are NOT from the IRS.

Some taxpayers report they have also received unsolicited faxes requesting personal information on Form W8-BEN and other taxpayers have been sent text messages that claim to be from the IRS.

The best practice is to never open or respond to an unsolicited IRS request of any kind.

Should you find an unsolicited IRS notice in your email inbox, you may want to report it by forwarding the email to phishing@irs.gov.  You should also inform your tax preparation specialist.

Click here to read more information about these and other scams that are using the IRS name as well as what you should do should you become a victim.

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