Do you need to file your taxes?
So the IRS could decide to audit your 2013 tax situation five years (or more) from now, and hit you with a tax bill plus interest and penalties. In contrast, if you file a 2013 return showing zero federal income tax liability, the IRS generally must ...
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The Federal Tax Levy
The IRS could also issue a notice of levy to the taxpayer's employer for the taxpayer's wages, or to a company for which the taxpayer performs services as an independent contractor. A levy of wages or other periodic income continues until released or ...
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Updated IRS tax return app now available
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Tennessee legislators are currently considering several bills that would eliminate or draw down the state’s tax on interest and dividend income. This tax is called the “Hall” tax in Tennessee, named for Senator Frank Hall, who created the legislation back in 1929. These proposals appear to have some legs, as organizations in Tennessee and at the national level have called for the outright repeal of the tax, citing it as a relatively inexpensive way for Tennessee policymakers to reduce taxpayer headache, increase business competitiveness, and reduce taxes on savings vehicles. We find that repealing the Hall tax would move Tennessee up from 15th to 11th in our State Business Tax Climate Index, our ranking of business tax friendliness:
2014 State Business Tax Climate Index Score with Hall Tax Repeal
Hall Tax Repeal
Note: Rankings assume repeal is in place as of our snapshot date of July 1, 2013.
Tennessee is a bit of an anomaly in that it does not have a tax on wage income, but still requires individual taxpayers to go through the onerous compliance process of filling out state income tax forms, but only on their interest and dividend income. The only other state that does this is New Hampshire. I’ve actually heard the Hall tax called the “asterisk tax” before, because every time you put state income taxes on a map, Tennessee has an asterisk that notes this peculiar practice.
While this tax only collects 0.9 percent of Tennessee’s state and local revenue, it comes at great economic cost. First, the Hall tax form is filled out by thousands of people each year, even filers with very small tax liabilities, and this costs time and money. Second, it taxes income that is generally used as a savings vehicle for consumption later in life, which harms economic growth and is a hindrance to life planning (this in part led to a higher exemption level for senior citizens that took effect in 2013). Third, the Hall tax is a double tax, because corporate profits are the source of interest and dividends, and corporate profits are already taxed once through the corporate income tax.
So why is this tax still around? Part of the problem is that some of the Hall tax revenue is dispersed to localities, which lobby to fiercely guard any reductions in taxing power, even if the reforms are worthwhile or improve the state’s competitiveness and the well-being of residents.
Don’t be fooled by hyperbole though. Hall tax reductions or elimination won’t result in sizeable budget impacts on localities. The Tennessee Advisory Commission on Intergovernmental Relations concluded back in 2004, “the state and most local governments in Tennessee are not to any significant degree dependent on [Hall tax] revenue for funding general government operations.”
That study also found that Hall tax revenue is among the most volatile of revenue streams in the state and local toolkit. In Nashville, for example, collections ranged from $7.4 million in 2010 to $14 million in 2013. Localities have managed to plan around those swings in revenue as a result of economic cycles, and this hasn’t resulted in slashes to school, police, and fire protection funding. In the same manner, Hall tax reduction as a result of policy changes can similarly be met with prudent planning on the part of localities.
As of the 2004 report--the Beacon Center of Tennessee tells me they will be posting more recent figures shortly--almost all cities (92 percent of them) gathered less than five percent of their revenue from Hall tax distributions, and no county in Tennessee relied on the Hall tax for more than 0.5 percent of revenue. There were six small cities (population less than 5,000 people) that leaned on the Hall tax for a more sizeable chunk of revenue, and so the state could consider solutions ranging from locality consolidation, a local aid program that phases out over time, or the localities changing property tax policy.
Regardless of what Tennessee chooses to make it work with the localities, keeping the Hall tax around isn’t advisable going forward. It’s a superfluous tax in a state with an otherwise well-structured code.
More on Tennessee.
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According to an analysis by the Americans for Tax Reform, U.S. Olympic gold medal winners may have to pay up to $9,900 to the IRS. They calculate this by assuming gold medalists already have adjusted gross income of at least $400,000 and multiplying 39.6 percent by the cash prize of $25,000. They also show the approximate tax bill of all other medalists and income tax brackets.
U.S. Tax Rates per Bracket
Max. Tax Liability on Gold Medal Prize of $25,000
Max. Tax Liability on Silver Medal Prize of $15,000
Max. Tax Liability on Bronze Medal Prize of $10,000
Source: Americans for Tax Reform
In the same week as this analysis, Congressman Blake Farenthold (R-TX) proposed a bill that would effectively exempt Olympic winnings from taxation. He feels that this is a “needless tax,” and “we need a fairer system for all, and eliminating this unnecessary tax burden on our athletes is a good way to start.”
While it is true that we do need a fairer tax system and that this makes good politics in the midst of our patriotic support of our athletes, this bill would do better to address the fundamental reason why our tax code is unfair.
The United States is currently one of the only countries in the world that taxes all income earned, no matter where it is earned. Whether you are an Olympic athlete, a teacher, or a banker, you have to pay taxes to the IRS on income earned in a foreign country. Having to pay taxes on foreign income is unfair. You are essentially paying for services even though you are not benefitting from them. Whether you should be taxed on your income in a foreign country is entirely up to the tax authorities in that country and shouldn’t be up to the IRS. Excluding Olympic winnings, but still requiring others to pay taxes on their foreign income is definitely not any better.
In addition, Representative Farenthold makes the tax system more complicated in a sense. The current means by which you pay taxes abroad requires you to file taxes multiple times (once to the country in which you live and again to the United States) and calculate your foreign tax credit. Rather than moving in the right direction by exempting all foreign-based income, he is proposes to add another exclusion to an already complex tax code.
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Recently, former NFL player Jeff Saturday lost his appeal of an income tax assessment by the city of Cleveland. Jeff Saturday was taxed by the city of Cleveland for a game even though he was injured and did not travel to Cleveland. Instead, he stayed in Indianapolis for rehabilitation on his injury. However, the city argued that it had the right to tax his income as if he would have traveled to the city. This sort of complexity and misunderstanding has become commonplace in the realm of enforcement of income tax collection on out-of-town professional athletes, sometimes called jock taxes.
The city of Cleveland argued that it has the right to tax income for the sick days of employees, and argued that Saturday not traveling with the team because of an injury was the equivalent of a sick day. Saturday appealed to the Board of Tax Appeals (BTA), which ruled against him. The BTA ruled that it did not have the authority to examine the method used to calculate his tax liability ("games-played" method) or whether the city should be allowed to tax someone who didn't travel to the city. The BTA ruled that it only had the authority to review whether the city Tax Administrator properly followed Ohio law, and it ruled that the Administrator properly calculated Saturday's income according to the law.
In a separate case, the BTA also ruled against Hunter Hillenmeyer, a former NFL linebacker, who also sued the city over the method used to calculate his tax liability. Hillenmeyer also lost his appeal because the BTA ruled that it could not review whether the games-played method is the proper method to calculate income tax. It ruled that it only had the authority to examine whether the Tax Administrator followed Ohio law when calculating Hillenmeyer's tax liability. Both players argued that the city should be required to use the "duty days" method of calculating tax liability, rather than the games-played method.
The city currently uses the games-played method, which means it takes the number of games played in the city and divides it into the number of games the player was eligible to play in overall that season. The city then multiplies this number by the player's income, which results in the percentage of income that is attributable to the city. That income is then taxed at normal income tax rates. In this case it means that the city divided the one game Hillenmeyer played in Cleveland into the 20 total games he was eligible to play in (4 preseason games and 16 regular season games), then multiplied that percentage by his income to arrive at the percentage of income attributable to the city, and then taxed that income.
The duty days method is commonly used by other states and cities and works in much the same way, except that it takes into account all days spent working for the team instead of only counting games. For example, a state using the duty days method would count up the number of days the player spent playing games, practicing, and attending team meetings, then it would divide that number into the total number of days the player engaged in those activities overall during the season. The state would then take this number and multiply it by the player's income. This would result in the percentage of income attributable to the city, which is then taxed at normal income tax rates.
Players typically prefer the more commonly used duty-days method because it results in a lower tax bill. It is also arguably a more accurate way to apportion an athlete's income among locations because it takes into account all of the activities that an athlete is required to undertake for his team. Calculating what Hillenmeyer's tax bill would have been using the duty-days method is difficult without knowing details of the team's practice and meeting schedule, but would likely result in the city apportioning somewhere around 1/170th of his income, rather than 1/20th, which would result in a much lower tax bill. Jeff Saturday hasn't commented on whether he plans to appeal yet, but Hillenmeyer's attorney recently indicated that he plans to appeal to the Ohio Supreme Court in order to have his constitutional arguments heard.
See more of our work on jock taxes.
By Patrick Temple-West WASHINGTON (Reuters) - Squabbling on Capitol Hill over the U.S. Internal Revenue Service continued on Friday with Democrats accusing Republicans of prolonging multiple investigations into a nine-month-old controversy at the tax agency for political gain. "We are concerned ... that congressional Republicans are wasting taxpayer dollars and continuously using the (IRS) 'investigations' for political purposes for the November election," two U.S. House of Representatives Democrats said in a letter to IRS Commissioner John Koskinen. U.S. representatives Sander Levin and Elijah Cummings in the letter asked Koskinen to estimate how much time and money the IRS has spent responding to investigators. There are six ongoing investigations of the IRS, Koskinen has said.
Free File Alliance and IRS kick off 'Free File' online tax services
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The IRS opened for tax season on Jan. ... There were several federal income tax deductions and credits that expired at the end of 2013, and while these changes won't impact your 2013 tax return, this information will be helpful for 2014 tax year planning.
Yesterday the Treasury Department announced that 630 Americans renounced their U.S. citizenship in the fourth quarter of last year, bringing the total for 2013 to 2,999 – almost double the previous record set in 2011. In the last four years 7,246 Americans have renounced their citizenship, far exceeding the total number that left in the twelve years before that, 1998-2009. See the chart below.
According to international tax attorney Andrew Mitchel, there are three main causes:Increased awareness of the obligation to file U.S. tax returns by U.S. citizens and U.S. tax residents living outside the U.S.; The ever-increasing burden of complying with U.S. tax laws; and The fear generated by the potentially bankrupting penalties for failure to file U.S. tax returns when an individual holds substantial non-U.S. assets.
As Andrew notes,
The U.S. is almost the only country in the world that requires its citizens that live permanently in another country to continue to file tax returns and pay taxes in the country of citizenship. Most people, especially those living abroad, are unaware of the unique way in which the U.S. taxes its citizens and long-term residents. Many believe that income earned from foreign sources is not subject to U.S. tax, and that while residing overseas there is no need to file U.S. tax returns. This is not an unreasonable belief, considering that most countries in the world operate in that way.
Regarding penalties for not filing:
Although each form carries its own penalty, the “standard” penalty for failing to file many of the forms is $10,000. That is, the $10,000 penalty applies per year and per form. If an individual should have been filing 3 of the disclosure forms for the past 6 years, the penalties could be $180,000 or more (10,000 X 3 X 6). Potential penalties of this magnitude are quite common, even for individuals of modest means.
Of course, the “elephant in the room” penalty is for intentionally failing to file the FBAR (Report of Foreign Bank and Financial Accounts --- now FinCEN Form 114). The monetary penalty for a willful failure to file this form is the greater of $100,000 or 50% of the account balance at the time of the violation. For example, say an individual has retired overseas and has accumulated a life savings of $1,000,000 that has been deposited in a foreign bank account. If that individual intentionally does not file the FBAR for 4 years, the penalty would be $2,000,000 (twice the amount of the cash in the bank).
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Tax historian and expert Joseph Thorndike comments in Forbes today on a new scientific study urging reduced meat consumption to address global climate change. The scientists venture outside their wheelhouse for a rather unimaginative solution: use the tax code to punish meat purchases with a hefty new tax.
We can all dream up things we’d like to tax out of existence. Like sugary sodas. Or excessive antibiotic use. Or inequality. All these tax innovations have something to be said for them. (Although I find many — and especially those on food products — to be unforgivably regressive, paternalistic, and haphazard.)
But sin taxes — or to use the more dispassionate and technical term, Pigouvian taxes — have a serious problem. They complicate the principal function of a tax system: raising money to pay for government.
He's absolutely right. Read the full column here.
Last week, we were recognized as one of the top 150 think tanks in the world in four separate categories in the seventh annual Global Go-To Think Tank Index.21st Best Policy Study/Report Produced by a Think Tank (State business tax climate index) 35th Best Advocacy Campaign 63rd Best Institutional Collaboration Involving Two or More Think Tanks 63rd Think Tank to Watch
More than 1,950 scholars, policymakers, and journalists participate in an international survey of more than 6,500 think tanks worldwide. This results in a ranking the top 150 groups based on a set of 18 criteria, including: quality and quantity of publications, media reputation, reputation of staff among scholars and analysts, ability to bridge the gap between policymakers and the public, and impact on society.
It’s exciting to be recognized for our efforts at the federal, state, and local levels by an international committee. Policymakers, reporters, and taxpayers regularly rely on the Tax Foundation’s research and analysis, and the report’s recognition of our work is evidence of our continually growing impact.
We're certainly grateful that there is such an interest in how to make the tax system better and how our work contributes to those efforts.
Produced by the Think Tanks and Civil Societies Program at the at the University of Pennsylvania, its purpose is to “increase the profile and performance of think tanks and raise the public awareness of the important role think tanks play in governments and civil societies around the globe.”
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Jesse Myerson has made a splash lately, writing a Rolling Stone piece that sounded communist even if it wasn't, and a less disguised "why you're wrong about communism" piece for Salon. Someone today sent me a piece that he actually wrote late last year, advocating a land tax to replace all other taxes:
If we want a real overhaul/simplification of the tax code, the way to do it is to tax land value. It might be the only tax we need. No sales tax. No income tax. No payroll tax to fill a Social Security trust fund. No corporate income tax that, as we can plainly see, offshores profits. No need to tax labor and industry at all. Just tax the stuff that humans had nothing to do with creating, and therefore have no basis to claim ownership over at all. You’ll find that almost all of it is “owned” by the fabled 1 percent.
This idea, popularized by economist Henry George, is one that historically has had support from left and right. The left supports it in the belief that wealth comes primarily from land, taxing it prevents excessive wealth accumulation and speculation, and that it would be progressive since the poor don't usually own land. (These arguments were first made over a century ago, and our switch from an agricultural economy to a more service-based economy may undermine some of them.) The right supports it because a land tax, unlike other taxes, does not discourage productive activity since no more land can be created, and taxing land instead of income is less harmful to investment and development.
That said, while it's a nice idea, the actual numbers may give people pause. Federal, state, and local governments in the United States collect about $4.2 trillion in taxes each year. (They spend slightly more than that, resulting in a budget deficit, but ignore that for now.) All land values in the United States is a bit tricky to calculate, as it involves adding up different state measures. My back-on-the-envelope guesstimate has all privately-held land value in the U.S. totaling about $13 trillion. Structures add about another $35 trillion, for a total of just under $50 trillion in property values.
Just looking at land values as a tax base, raising $4.2 trillion on a base of $13 trillion means a hefty land tax rate: 32 percent a year. People complain today when their property taxes edge above 1 percent! Even if you tax land and structures, that would require about an 8 percent annual property tax rate. A land tax might be better for economic growth and discouraging land speculation, but those tax rates would be a tough sell for people!
Maryland, like all states with an income tax, gives taxpayers a credit for income taxes paid to other states. However, since 1975, Maryland has only allowed taxpayers to use the credit to offset state income taxes, not local income taxes. Each county in Maryland (plus Baltimore City) imposes a local income tax, with rates of up to 3.2 percent. (16 other states impose local income taxes.)
Taxpayer Brian Wynne has challenged the state’s practice. Wynne is one of seven owners of Maxim Healthcare Services, which was an S Corporation operating in several states. Because Maxim was an S Corporation, the income flowed through to the owners, including Mr. Wynne. He reported his share of the corporation’s income on his state income tax return and claimed a credit for income taxes paid to other states. The Comptroller’s office adjusted his credit to disallow the portion of the credit that offset his county income taxes, which resulted in a substantially higher income tax bill. Mr. Wynne filed suit and the Maryland Tax Court ruled in favor of the Comptroller. The appeals court reversed, finding for Wynne. The highest court in Maryland, the Court of Appeals, also sided with Wynne.
The Court of Appeals primarily held that the denial of a credit to offset county income taxes violated the Constitution because it discriminated against interstate commerce. Specifically, the court pointed out that taxpayers whose income is derived wholly in-state would have lower tax bills than similarly situated taxpayers who earn part of their income in other states. This burdens interstate commerce by discouraging individuals from entering into and participating in markets in other states. The court also pointed out that this problem would be alleviated if the state allowed taxpayers to offset county income taxes with a credit for taxes paid to other states, as other states do and as the state does with state income taxes.
Maryland is now appealing to the U.S. Supreme Court, which in turn has asked the U.S. Solicitor General to give his opinion on Maryland’s practice of not allowing taxpayers to use credit for taxes paid to another state to offset local income tax liability.
The Court of Appeals is correct that not allowing a taxpayer who pays income taxes to other states to offset county income taxes results in double taxation and discourages active participation in interstate markets. Those of us interested in sound tax policy can only hope that the Supreme Court doesn’t take the case or, if they do, that they uphold the Court of Appeals’ decision.
One tax downside to the new legal marijuana industry in Colorado and Washington State is disparate tax code treatment. While all other businesses (including illegal businesses!) can deduct their business expenses from their revenue and pay tax only on the difference, marijuana businesses are explicitly denied the business expense deduction.
It's in the tax code at 26 U.S.C. § 280E:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
Marijuana is currently on Schedule I. The Drug Enforcement Administration (DEA) and the Food and Drug Administration (FDA) determine what substances are on Schedule I and Schedule II, and consequently, which drug businesses can deduct their expenses on their taxes.
This is an unfair and considerable burden -- businesses earn anywhere from 0 to 20 percent or so in profits, and usually tax is paid on some part of that. If marijuana businesses can't deduct their expenses, that means as much as 35 percent federal tax on their receipts, plus the hefty state sales tax.