1040Return.com News Alert for March

STIMULUS PACKAGE MEANS FAMILY OF FIVE MIGHT SEE $2,100 IN JUNE
 

The rebates would be based on the taxpayers' 2007 tax return. Those who file extensions or file late would likely receive their checks later than regular files according to an U.S. Treasury spokesman. The checks will be sent out automatically. You do not need to apply.

Once the law is enacted, it will take about two months for the IRS to start sending out checks. The timing of the stimulus package means the tax agency will be addressing this issue during the busiest time of the regular filing season.

Examples of the rebate as offered by Rep. John Boehner, R-Ohio:

Proposal he would be eligible for a base amount of $300 for himself (because his earned income was at least $3,000). His earned income would also be sufficient to get $300children's bonus for each of his two kids, for a total rebate of $900. Mr. and Mrs. Jones have five children. After taking available credits and deductions, their 2007 taxable income was $95,000, leaving them with a federal income tax liability of just over $16,600. Under the proposal, they would get the full base amount of $1,200. They would also qualify for children's bonus of $1,500 bringing their total check to $2,700. Mr. and Mrs. Senior are retired. As a result of their investment income, the couple paid $4,000 in federal income taxes in 2007, meaning they would get the full base amount of $1,200. They had no dependent children, so there is no children's bonus.

Mr. and Mrs. Ipo have one child. They were able to retire young but still collect dividends and capital gains form a business they sold a few years ago. The couple paid $19,000 in federal income taxes on the income in 2007. They would therefore qualify for the base amount of $1,200. They would also qualify for a children's bonus of $300, because they paid at least $1 of federal income tax in 2007 (even though they had no earned income), for a total check of $1,500. Mr. and Mrs. Withers are lawyers, with a combined income in 2007 of $300,000. They have four children. Their income is too high to qualify for either the base amount or the children's bonus. They would not receive a check.

For the rebates, the definition of a child is the same as the definition used for the regular child tax credit. A qualifying child is an individual under age 17 residing with the taxpayer for more than half of 2007.

The Internal Revenue Service logo is the latest casualty of these rampant rip-offs. This is not the first time the IRS is dragged into a phishing scam. According to a recent news report, many online users receive an e-mail sent through an e-mail address tax-refunds@irs.gov, directing them that they are eligible for a tax refund ranging from $100 to $400. The IRS logo is used to make it more believable. Hoping to get a refund even if they are not qualified, some online users are lured to another page requesting personal and financial information such as credit card information and Social Security numbers. The IRS has already issued a new warning to the public, discourage the community from divulging personal information online. Because of its reputable image, it has the power to lower down the defenses of online users so they will not question the authenticity of the e-mail. It clearly emphasizes the power of logos to the minds of the consumers. Moreover, it warns small businesses to strictly monitor the use of their logo design for it can be used to deceive other people.

Nearly two decades ago, the Social Security Administration attempted to put forth a similar rule restricting appeal rights and instituting new procedural complexities. It was quickly abandoned in the face of public outcry.

To date, eleven House Committee and Subcommittee chairs, including the chairs of the Committee on Ways and Means, the Committee on Energy and Commerce, the Committee on the Judiciary, and the Committee on Oversight and Government Reform have sent letters objecting to the regulation. These letters can be viewed at http://waysandmeans.house.gov/.

A federally empowered panel that has spent the past two years hearing testimony across the nation advised that Congress must raise the gas tax significantly to avert what one member called a coming "catastrophe" to our economy and way of life.

The panel said the transportation system, already stretched thin, can expect to accommodate 120 million to 150 million more people in the next 50 years, mostly in metropolitan areas.

But some prominent Washington legislators reacted coldly to the gas tax idea. The panel also recommended a major national study on mechanisms for replacing the gas tax by about 2025 with a system to charge drivers per mile their cars are driven.

Georgia transportation officials interviewed were uniformly glad to hear of the panel's concern with the federal bureaucracy and process delays in getting projects done. State Transportation Board Chairman Mike Evans said he appreciated that approach and the advocacy of a distance-based driving charge. Raising the federal gas tax, "is a loser for us," he said, because about 10 percent of Georgia's money end up getting siphoned off to other states. He would prefer to see Georgia find a way to fund its own needs, he said, "We need to take care of our own business."

A string of prominent organizations and U.S. Secretary of Transportation Mary Peters have advocated distance-based charges. Experts say relying on the gas tax is increasingly a problem because of the growing popularity of hybrids, improving gas mileage, and efforts to lower dependence on foreign oil. The report notes that a study of distance-based charges would have to consider privacy issues. Such a system means tracking where people drive, and erasing that information would make it impossible to rectify billing mistakes.

BEST RETIREMENT PLAN TO BEQUEATH DEPENDS ON HEIR

Start with IRAs. If a non-spouse inherits a traditional IRA or a Roth IRA, he or she could re-title the account as an inherited IRA and stretch withdrawals across his or her lifetime. Withdrawals from an inherited traditional IRA would be taxed at ordinary income-tax rates; Roth withdrawals would be tax-free.

A federal pension law enacted two years ago made it possible for non-spouse beneficiaries to roll inherited 401(k) assets into a separate IRA designated as an inherited account, rather than having to take a lump-sum distribution and pay all the taxes at once. But so far, the Internal Revenue Service has interpreted that law to mean that employers are allowed to provide for inherited IRA rollovers but that is not mandatory.

One other caution: Even if a beneficiary is lucky enough to inherit an IRA, a few court cases say inherited IRAs are not bankruptcy proof. IRA owners worried about the state of their beneficiaries' finances, and the chance that an inherited IRA could be seized as part of a bankruptcy proceeding, may want to set up IRA trusts to help protect those assets, making sure they use up-to-date trust language directing annual withdrawals that meet minimum-distribution requirements.

3. A taxpayer's income is excluded from taxation when the taxpayer rejects or renounces United States citizenship because the taxpayer is a citizen exclusively of a State (sometimes characterized as a "natural-born citizen" of a "sovereign state"), that is claimed to be a separate country or otherwise not subject to the laws of the United States. This position includes the argument that the United States does not include all or a part of the physical territory of the 50 States and instead consists of only places such as the District of Columbia, Commonwealths and Territories.

4. Wages, tips and other compensation received for the performance of personal services are not taxable income or are offset by an equivalent deduction for the personal services rendered, including an argument that a taxpayer has a "claim of right" to exclude the cost or value of the taxpayer's labor from income or that taxpayers have a basis in their labor equal to the fair market value of the wages they receive, or similar arguments described.

5. United States citizens and residents are not subject to tax on their wages or other income derived from sources within the United States, as only foreign-based income or income received by nonresident aliens and foreign corporations from sources within the United States is taxable.

6. A taxpayer has been untaxed, detaxed, or removed or redeemed from the Federal tax system though the taxpayer remains a United States citizen or resident.

7. Only certain types of taxpayers are subject to income and employment taxes, such as employees of the Federal government, corporations, nonresident aliens, or residents of the District of Columbia or the Federal territories, or similar arguments.

8. Only certain types of income are taxable, for example, income that results from the sale of alcohol, tobacco, or firearms or from transactions or activities that take place in interstate commerce.

9. Federal income taxes are unconstitutional or a taxpayer has a constitutional right not to comply with the Federal tax laws.

10. A taxpayer is not a "person" within the meaning of §7701(a)(14) or other provisions of the Internal Revenue Code.

11. Only fiduciaries are taxpayers, or only persons with a fiduciary relationship to the United States are obligated to pay taxes, and the United States or the Service must prove the fiduciary status or relationship.

12. Federal Reserve Notes are not taxable income when paid to a taxpayer because they are not gold or silver and may not be redeemed for gold or silver.

13. In a transaction using gold and silver coins, the value of the coins is excluded from income or the amount realized in the transaction is the face value of the coins and not their fair market value for purposes of determining taxable income.

14. A taxpayer who is employed on board a ship that provides meals at no cost to the taxpayers as part of the employment may claim a so-called "Mariner's Tax Deduction, or the like, allowing the taxpayer to deduct from gross income the cost of the meals as an employee business expense.

16. A "reparations" tax credit exists, including arguments that AfricanAmerican taxpayers may claim a tax credit on their Federal income tax return as reparations for slavery or other historical mistreatment, that Native Americans are entitled to an analogous credit, or are exempt from Federal income tax on the basis of a treaty, or similar arguments.

17. A Native American or other taxpayer who is not an employer engaged in a trade or business may nevertheless claim, an amount exceeding all reported income, the Indian Employment Credit under §45A, which explicitly requires, among other criteria, that the taxpayer be an employer engaged in a trade or business to claim the credit.

18. A taxpayer's wages are excluded from Social Security taxes if the taxpayer waives the right to receive Social Security benefits, or a taxpayer is entitled to a refund of, or may claim a charitable-contribution deduction for, the Social Security taxes that the taxpayer has paid.

20. A taxpayer is not obligated to pay income tax because the government has created an entity separate and distinct from the taxpayer, a "straw man", that is distinguishable from the taxpayer by some variation of the taxpayer's name, and any tax obligation are exclusively those of the "straw man."

21. Inserting the phrase "nunc pro tunc" on a return or other document filed with or submitted to the Service has a legal effect, such as reducing a taxpayer's tax liability.

22. A taxpayer may avoid tax on income by attributing the income to a trust, including the argument that a taxpayer can put all of the taxpayer's assets into a trust to avoid income tax while still retaining substantial powers of ownership and control over those assets or that a taxpayer may claim an expense deduction for the income attributed to a trust.

23. A taxpayer may lawfully avoid income tax by sending income offshore, including depositing income into a foreign bank account.

24. A taxpayer can claim the §44 Disabled Access Credit to reduce tax or generate a refund.

25. A taxpayer may claim the §6421 fuel tax credit, which is limited to gasoline used in an off-highway business use, even though the taxpayer did not purchase and use gasoline during the taxable period for which the credit is claimed for off-highway business use.

26. A taxpayer is allowed to buy or sell the right to claim a child as a qualifying child for purposes of the Earned Income Tax Credit.

28. A tax assessment is invalid because the assessment was made from a substitute for return, which is not a valid return.

29. A statutory notice of deficiency is invalid because the taxpayer to whom the notice was sent did not file an income tax return reporting the deficiency or because the statutory notice of deficiency was unsigned or not signed by the Secretary of the Treasury or by someone with delegated authority.

30. A Notice of Federal Tax Lien is invalid because it is not signed by a particular official or because it was filed by someone without delegated authority.

31. The form or content of a Notice of Federal Tax Lien is controlled by or subject to a state or local law, and a Notice of Federal Tax Lien that does not comply in form or content with a state or local law is invalid.

33. Verification that the requirements of any applicable law or administrative procedure have been met may only be based on one or more particular forms or documents.

34. A Notice and Demand is invalid because it was not signed, was not on the correct form, or was not accompanied by a certificate of assessment when mailed.

35. The United States Tax Court is an illegitimate court or does not, for any purported constitutional or other reason, have the authority to hear and decide matters within its jurisdiction.

36. Federal courts may not enforce the internal revenue laws because their jurisdiction is limited to admiralty or maritime cases or issues.

37. Revenue Officers are not authorized to issue levies or Notices of Federal Tax Lien or to seize property in satisfaction of unpaid taxes.

38. A Service employee lacks the authority to carry out the employee's duties because the employee does not possess a certain type of identification or credential.

39. A person may represent a taxpayer before the Service or in court proceedings even if the person does not have a power of attorney from the taxpayer, has not been enrolled to practice before the Service, or has not been admitted to practice before the court.

40. A civil action to collect unpaid taxes or penalties must be personally authorized by the Secretary of the Treasury and the Attorney General.

41. A taxpayer's income is not taxable if the taxpayer assigns or attributes the income to a religious organization.

42. The Service is not an agency of the United States government but rather a private-sector corporation or an agency of a State or Territory without authority to administer
the internal revenue laws.

43. Any position described as frivolous in any revenue ruling or other published guidance.

Adding to the list, IR-2008-008 has announced the following frivolous claim to avoid:

While individuals abroad have been hit with higher U. S. tax bills, the law appears to have had little effect on the international employment plans of top U. S. companies.

Even large companies are putting tax reimbursement arrangements with overseas employees under a microscope. While many large companies offer overseas employees tax equalization programs to ensure they will pay no more in taxes than they could for a similar salary at home, increasingly companies are looking at whether they can "localize" employees. That means if an employee is on foreign assignment for an indefinite period, and is making a career in a foreign location, corporations may not offer tax equalization plans. Previously some companies had policies limiting tax equalization periods, but they were not as eager to enforce them.

Internal Revenue Code Section 1091(a) denies a taxpayer a loss from the sale of stock or securities when the taxpayer repurchases substantially identical stock or securities within 30 days before or after the sale date. The taxpayer is denied the loss currently but adjusts the basis of the replacement stock or securities upwards by the denied amount.

1. Does a purchase of substantially identical stock or securities by the taxpayer's IRA or Roth IRA before or after the sale date result in the denial of the loss under IRC Section 1091(a), and

2. If such a loss is denied to the taxpayer, does the IRA or Roth IRA receive a higher basis in the stock it purchased.

'to be "qualified," policies issued on or after January 1, 1997 must adhere to regulations established by the National Association of Insurance Commissioners. Among the requirements are that the policy must offer the consumer the options of "inflation" and "nonforfeiture" protection, although the consumer can choose not to purchase these features. Policies purchased before January 1, 1997, are grandfathered and treated as "qualified" as long as they have been approved by the insurance commissioner of the state where they are sold. Benefits from reimbursement policies, which pay for the actual services a beneficiary receives, are not included in income. Benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included in income except amounts that exceed the beneficiary's total qualified long-term care expenses or $270 per day for 2008, whichever is greater.

It has been known for a long time that obsolete state tax systems are not producing the revenue states need. What is becoming clear today is that those tax systems are not only failing to keep up with the dramatic shifts in the U. S. economy they are a drag on economic growth.

The new economy is more than a swing from manufacturing to services. Thanks to new technology and telecommunications, products can be purchased as easily from an outlet 3,000 miles away as from one down the block. Small businesses are increasingly vital. They now account for about a third of the value of U. S. exports. Moreover, the service economy is moving toward a further evolution: It is becoming increasingly knowledge-based. Where managerial and professional jobs accounted for roughly one-fifth of total employment in 1979, such jobs are now moving past the one-third mark.

To take one example, there is the outmoded way in which telecommunications companies are taxed. A reliable, high-quality and affordable telecommunications system is essential to the economic competitiveness of states and the country as a whole. Yet these systems are subject to very high taxation rates in a number of states by an approach set when the industry, dominated by one telephone company, was highly regulated. The result is a damper on the telecom industry. According to a 2004 report by the Council on State Taxation, the average effective rate of state and local transaction taxes for telecommunication services is around 14 percent, compared with about 6 percent for general businesses nationwide.

That is not the only fallout from antiquated state tax systems. They are often unfair, under-taxing one portion of the economy at the expense of others. In many states, for example, a number of services including things such as tattoo parlors, car washes and gardeners, are free from any sales tax, while tangible goods, things such as pencils, cars and garden hoes, are subject to a higher tax rate to make up for the slack. Over the past year, the Pew Center on the States has researched the question of how state tax systems can adjust to a new economy in which fundamental business rules have been changing.

There is now evidence that low tax rates by themselves are not a silver bullet. In his New Economy Index, Rob Atkinson, president of the Information Technology and Innovation Foundation, measures the progress of states in adapting to the new economy by looking at factors such as workforce creation, entrepreneurial activity and patent creation. Five of the eleven lowest scoring states on his list are among those having the lowest tax burden: Alabama, Montana, Oklahoma, South Dakota and Wyoming. As Tom Clark, executive vice president of the Metro Denver Economic Development Corporation and the Denver Metro Chamber of Commerce puts it, "If low tax rates were the only factor, Wyoming would be the economic epicenter of the world."

An aligned area in which states are gaining some control is in taxing a growing array of new business structures. The new entities are similar to corporations but have a more flexible ownership structure.

Take S corporations. The simple problem is that they pass all their profits through to shareholders and are essentially immune from corporate taxes. These profits are taxed by a state personal income tax imposed on the individual shareholder. There are now some 3.6 million S corporations in the United States. Obviously, this means that whenever a company elects to use this form, the state may lose some revenues and the problem is even more intense for the nine states that do not tax income.

There is now a Model S Corporation Income Tax Act that provides states with a template for how to tax S corporations and is endorsed by both the American Bar Association and the Multistate Tax Commission. It gives state lawmakers and tax administrators a way to think consistently about state tax treatment of pass-through entities.

.

When Robert H. Frank, an economics professor at Cornell University's Johnson Graduate School of Management, wants beginning economics students to help themselves to a heap of understanding of the subject's principles, he sends them off to conjure up a question that, eventually, they will have to answer using economic principles. Though there are, to a certain degree, limits, Frank makes it clear that many of life's most confusing questions, like the ones asking why retailers start the holiday season when summer's winding down and why there is disparity in pricing between black and white MacBooks, can be solved with economics. Learning from his student's research, Mr. Frank has been able to answer some of the most troubling of questions. Why did kamikaze pilots wear helmets? "You can offer some cost-benefit explanation," says Frank. "Maybe there is going to be turbulence on the way to the target, and the helmet will help him get there if he is protected. Maybe the target will not be there, and he will have to come back and you will want to keep him alive for another mission. I think more persuasive is that kamikaze pilots are first and foremost pilots, and pilots wear helmets. That is part of their identity as pilots. There are some interesting studies about the economics of personal identity." "If," adds Frank, "people can not function in the real world without a consistent, coherent personal identity, then that is part of the economics too." Why is Braille on the keys of drivethrough ATMs? So that manufacturers only have to produce one type of key. The short, sensible answer is that it is cheaper to do it that way.

Brand extensions are all the rage at the supermarket these days. Does it not dilute loyalty to the core brand when a company introduces the same product in 15 different flavors or scents? How many kinds of Tide does the world really need?

The questions that have most surprised Mr. Frank over the years are:

Why do the Japanese have virtually no swear words, while the Korean language seems to have plenty? The answer is that the samurai culture of Japan made it dangerous to run the risk of insulting someone, so people were cautious about how they spoke in Japan. There was never a similar tradition in Korea. Relating this question to economics is easy; again it is the cost-benefit principle. If you would like to insult a fellow do it in Korea. If you insult him in Japan it can be quite costly.

Baseball players who are named rookie of the year are not quite as good the next year. Why? Someone who gets rookie of the year almost invariably has had an unusually good season. People have good years and bad years. After an unusually good season it is likely you will have a more nearly normal one the next time.

Why do retailers kick off the holiday sales and music so early? There are a lot of sales to be had of that stuff if you are on the shelves before other retailers. If everyone else puts them on sale November 1, and you go mid-October, you are going to get the two-week window, where you are the only one who has them. Once you do that, it is going to be compellingly in their interest to follow suit and the date just keeps slipping back.

In 2003, Congress created Health Savings Accounts, HSAs, which went into effect in 2004 as an alternative to traditional medical insurance. HSAs can be offered through employers.

Similar to HSAs are Health Reimbursement Arrangements, HRAs, which can be used in conjunction with catastrophic health plans or other traditional insurance plans.

What advantages do HSAs and HRAs offer small business owners who want to provide health insurance to their employees?

HSAs and HRAs, when coupled with High Deductible Health Plans, offer a significant cost savings to employers via substantially reduced premiums. Small business owners who have traditional group health plans could save anywhere from 20 to 60 percent of their current annual health insurance costs.

What are the disadvantages of HSAs and HRAs?

The primary drawbacks are the high deductibles imposed by the HDHPs needed to create them, which may leave HSA and HRA holders facing the possibility of fairly significant expenses if they have serious medical bills.

Section 105 of the IRS tax code permits employers to reimburse employees for medical expense.

Does my insurance provider offer programs geared to help lower costs for traditional group health plans?

Many major insurance providers have designed group health plans specifically to meet the needs and financial concerns of small businesses.

1. Reducing benefits -eliminating dental or vision care coverage as an example.

2. Increasing the co-payments employees must pay when visiting physicians.

3. Shop around for the lowest cost plan.

Can I lower the percentage of the premiums I pay per employee? Is there a minimum I have to pay?