‘Bush-ama’ tax cuts: The $2.2 trillion decision

May 4, 2010: 12:10

NEW YORK (CNNMoney.com) — They’re often called the “Bush” tax cuts. But at this point they might as well be called the Bush-ama tax cuts.

That’s because President Obama has embraced the tax relief measures introduced in 2001 and 2003, proposing they be extended indefinitely for most Americans. If lawmakers do nothing, the measures expire Dec. 31.

The tax cuts lowered income and investment tax rates, boosted the child credit, reduced the estate tax, and narrowed inequalities affecting married taxpayers.

Another reason for the new Bush-ama moniker: Like President Bush, President Obama has not called on Congress to pay for the cost of the tax cuts. In fact, the extension of the cuts is exempt from the new “pay-go” rules that Obama signed into law recently.

Extending the tax cuts for most Americans will increase the federal deficit by an estimated $2.2 trillion over 10 years.

Deficit hawks are uber-frustrated.

“Why do you spend over $2 trillion in your budget — the most you spend on any single policy item — on your predecessor’s tax policy, which you repeatedly explain is to blame for the deterioration and unsustainability of our nation’s fiscal outlook?” Diane Rogers, chief economist for the Concord Coalition, wrote in her blog Economistmom.com.

In a nod to deficit reduction, Obama did propose that lawmakers let the tax cuts expire for high-income households, couples making more than $250,000. Doing so would reduce the deficit by $678 billion from where it would be if the cuts were extended for everyone.

But recently, while he didn’t say so explicitly, Obama seemed open to rethinking his campaign promise not to raise taxes on the middle-class. In an interview last month, he said he would weigh recommendations from the bipartisan fiscal commission he created to suggest ways to put the U.S. fiscal house in order.

“We should be able to solve this problem without putting a burden on middle class families,” he told CNBC. “Having said that, I’m also going to wait for the fiscal commission to provide me [with] their best recommendations. … At a certain point, what we’ve got to do is match up money going out and money coming in.”

The next 7 months

The commission won’t report its recommendations until Dec. 1. In the meantime, it’s not clear when Congress will take up the issue of the 2001/2003 tax cuts. One theory is that they’ll vote to extend them before their August recess to score political points before the midterm elections in November.

“It would look ugly to go home and campaign for five weeks without having done something for the middle class,” said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.

On the other hand, the legislative agenda is already fairly packed.

Anne Mathias, director of research at Concept Capital’s Washington Research Group, is in the camp that believes Congress may not address the issue until December.

It’s also not clear yet how long lawmakers might opt to extend the tax cuts. There had been a push by both parties to make them permanent. But some believe extending them for a year or two may be the smartest move given current political and economic constraints.

IOUSA Solutions’: Deficit explosion

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, proposes that lawmakers extend the tax cuts to the end of 2012, and then use the prospect of making them permanent as a “sweetener” to draw votes for a serious deficit-reduction deal. No deal, no tax cuts.

“This would turn the expiration of the tax cuts at the end of 2012 into a realistic action-forcing hammer … . Otherwise, the task of stabilizing the debt goes from really hard to nearly impossible,” MacGuineas wrote in a blog post.

No matter how long the tax cuts are extended, no one should bank on low rates forever, Stretch cautioned. The country’s long-term fiscal condition is too precarious for that.

“No matter what happens, Americans’ taxes are going up one way or another. The middle class is going to have to be called on to help reduce the deficit. There’s not enough fiscal capacity if we just tax the top 3%,” Stretch said.

Federal Income Taxes on Middle-Income Families at Historically Low Levels

By Chuck Marr and Gillian Brunet

Middle-income Americans are now paying federal taxes at or near historically low levels, according to the latest available data. That’s true whether it comes to their federal income taxes or their total federal taxes.

■Income taxes: A family of four in the exact middle of the income spectrum will pay only 4.6 percent of its income in federal income taxes this year, according to a new analysis by the Urban Institute-Brookings Institution Tax Policy Center. This is the second-lowest percentage in the past 50 years.

■ Overall federal taxes: Middle-income households are paying overall federal taxes — which include income as well as payroll and excise taxes — at or near their lowest levels in decades, according to the latest data from the Congressional Budget Office (CBO).

Federal Income Taxes Have Declined Significantly in Recent Decades

Federal income taxes on middle-income families have declined significantly in recent decades (see Figure 1).

In 2000, the year before the 2001 tax cut that President Bush and Congress enacted, the median-income family of four paid 8.0 percent of its income in individual income taxes, according to Tax Policy Center estimates — a smaller share than in any year since 1967 (except for 1998 and 1999). [1] The Bush tax cuts further reduced middle-income tax obligations.

This year, the Making Work Pay tax credit, which President Obama and Congress enacted as part of the 2009 American Recovery and Reinvestment Act, is providing a credit of $800 to married joint filers ($400 to single filers). A median-income family with two children thus will receive an $800 tax cut in the return it files this year.

With the new tax cut, the median family’s federal income taxes will equal just 4.6 percent of its income in 2009. That is lower than in any year since 1955 (the first year for which these data are available) except for 2008, when another stimulus-related tax cut was in effect.

The 4.6 percent effective tax rate — the percentage of its income that a family pays in taxes — is well below the 15 percent marginal tax rate that a family of four in the exact middle of the income spectrum faces. Typically, such a family reduces its effective tax rate by taking the standard deduction (or, in some cases, itemized deductions), personal exemptions, and tax credits such as the child tax credit. The Making Work Pay tax credit further reduces that family’s effective tax rate.

Overall Federal Taxes Also at Low Levels

The decline in income taxes on middle-class households in recent years has driven a decline in these households’ overall federal taxes.

Households in the middle fifth of the income spectrum paid an average of 14.2 percent of their income in overall federal taxes in 2006, the latest year for which data are available, according to CBO.[2] This is just slightly above this group’s effective tax rate of 13.8 percent in 2003, which was the lowest level since at least 1979.

Most Americans pay more in payroll taxes, which support Social Security and Medicare, than they do in income taxes. Thus, the 14.2 percent figure reflects the impact of payroll taxes far more than income taxes.

Due to the impact of the recession and the temporary tax cuts in the Recovery Act, particularly the Making Work Pay tax credit, CBO data for 2009 (when they become available) will likely show that middle-income families faced significantly lower effective overall federal tax rates than in 2006.

End Notes:

[1] Tax Policy Center, “Historical Federal Income Tax Rates for a Family of Four,” April 12, 2010. The Tax Policy Center’s estimates were derived by updating (using Treasury’s methodology) a 1998 Treasury Department analysis that examined changes since 1955 in the percentage of income that the median-income family of four pays in federal income taxes.

[2] The CBO study covers the 1979-2006 period and includes federal income, payroll, and excise taxes. Congressional Budget Office, “Historical Effective Federal Tax Rates, 1979-2006,” April 2009.

You owe the IRS 99 days of hard work

Stuart Rohatiner, CPA, JD

By Blake Ellis, staff reporter

NEW YORK (CNNMoney.com) — This year, it’s going to take the average American 99 days to earn enough money to pay the IRS. That’s one day longer than last year.

“Tax Freedom Day” marks the date that most Americans have earned enough money to pay their federal, state and local taxes, and this year that day arrives on April 9, according to the Tax Foundation’s annual calculation, which is based on government tax and income data.

Tax Freedom Day arriving one day later than it did last year means most Americans will have to work that much harder — for more than three months — just to pay their 2010 taxes.

The number of days Americans have to work to pay off their taxes has declined steadily since 2007. That’s due to a handful of tax cuts, certain income tax provisions that were repealed for 2010 and because the recession has reduced tax collections faster than it has cut income, according to the Tax Foundation.

But while it will take people less time to earn the money this year than it did in 2007, Americans will still spend more on taxes in 2010 than they will on food, clothing and shelter combined, the Tax Foundation said.

State-by-state:

Each state has its own Tax Freedom Day. The day arrived earliest in Alaska and Louisiana — on March 26 — because of “modest incomes and low state and local tax burdens,” the Tax Foundation said.

Mississippi, South Dakota and West Virginia celebrated soon after, on March 28, March 29 and March 30, respectively.

Connecticut, the state with the highest per capita income, will be the last to celebrate. Tax Freedom Day won’t arrive until April 27, the 117th day of the year.

New Jersey, New York, Maryland and Washington will join Connecticut as the last states to celebrate. In these states, Tax Freedom Day will fall on April 25, April 23, April 19 and April 15, in that order.

‘Tis the Season for Catching Tax Scofflaws

By CATHERINE RAMPELL

If your fear of getting caught for tax fraud starts to spike in the next few weeks, it’s probably by design. The Internal Revenue Service appears to deliberately ramp up publicity of its tax

Stuart Rohatiner, CPA, JD

 fraud cases just before Tax Day, a new study finds.

The paper, by Joshua D. Blank and Daniel Z. Levin, looked at press releases issued by the Department of Justice’s Tax Division from 2003 to 2009 in which the agency announced a civil or criminal tax enforcement action against a specific taxpayer identified by name. They found that the number of press releases issued by the I.R.S. per week more than doubles in the fortnight preceding April 15 compared to the rest of the year:

The authors suggest that this trend is probably part of the I.R.S.’s fraud deterrence strategy:

By presenting individual taxpayers with vivid examples in which the I.R.S. has detected tax fraud — whether it involves a popular celebrity’s phony business deductions, a high-profile banker’s offshore bank account or a local tire salesman’s underreporting of gross  income — the government may provide an individual taxpayer with available images that showcase the I.R.S.’s detection capabilities. Because the government consistently provides more of these images to individual taxpayers during the weeks leading up to Tax Day than it does during other times of the year, individual taxpayers may draw upon these available images as they teeter on the decision to claim questionable tax positions on their annual individual tax returns. … In reality, a rational individual taxpayer should recognize that the chance that the I.R.S. will detect and challenge a claim of an illegitimate tax position is very low (1.03 percent in 2009).

12 Different Ways to Cut Your Taxes:

Looking to cut your taxes this year? You can if

1. You bought a house. Congress extended the valuable homebuyer break beyond first-timers. If you already owned a home but bought a new one after Nov. 6, 2009, you may be entitled to a credit worth 10% of the purchase price, up to $6,500. Even if you buy in 2010 — you have until April 30 to sign a contract and until June 30 to close — you can claim the credit on your 2009 return. The fine print: You have to have lived in your old home for five consecutive years of the past eight. Plus, the new home must be your principal residence and must have cost $800,000 or less. Of course, first-time homebuyers also benefit, with a credit of 10% of the price up to $8,000. So if a child or someone else you know finally kicked the renting habit in 2009 — or plans to in early 2010 — have him or her check irs.gov for dates and income restrictions.

Income Limits (for repeat homebuyers)

Full credit up to $225,000

Partial credit up to $245,000

2. You’ve got a kid in college.  New for 2009 and 2010, the American Opportunity Tax Credit. With it, you can claim $2,500 per student per year for the first four years of college.  Still on the books are the Hope Credit, which provides $1,800 per student for the first two years of college, and the Lifetime Learning Credit, which offers up to $2,000 per return. But you can’t take more than one of them in any given year for any one student. So most people should go with the more valuable AOTC, which also has higher income caps.

Income Limits

Full credit up to $160,000

Partial credit up to $180,000

3. You got a new set of wheels. If you bought a new car, light truck, motor home, or motorcycle after Feb. 16, 2009, you can deduct the sales taxes you paid on up to $49,500 of the vehicle’s price. You don’t need to itemize to take this special one-year write-off — making it especially valuable for high earners who typically have their itemized deductions clipped or who might otherwise get hit by the alternative minimum tax (AMT). Traded in a Junker through the Cash for Clunkers program? You can take this break too. If you normally opt to deduct your sales taxes in lieu of state and local taxes on your Schedule A — a choice made by many people in low-income tax states — you would have been allowed to write off auto sales taxes anyway. But you should run the numbers to see if you’d be better off using this new provision vs. itemizing, as many itemized deductions are subject to being added back in with the AMT.

Income Limits

Full break up to $250,000

Partial break up to $260,000

4. You were out of work. You collected unemployment:  This income is usually taxable, but for 2009 only, the first $2,400 of it is tax-free. Households in which both spouses collected unemployment can exclude $4,800. So if you chose to have taxes taken out of your weekly benefits, you may end up getting a better-than-expected refund. Potential savings:  $672 per recipient

5.You looked for a job: As long as you’ve been seeking work in the same field as your last position, your expenses — including those for travel, career coaching, and résumé services — qualify as miscellaneous deductions, and you can write them off to the extent that they (combined with other deductions like safe-deposit fees) exceed 2% of your adjusted gross income (AGI). You can take this break even if you weren’t out of work.

Potential savings: $840 if you had a $140,000 income and $5,800 in these and other miscellaneous expenses. You paid the full tab for health insurance: Most taxpayers don’t have enough out-of-pocket medical expenses to meet the steep threshold for deducting them: You can write off these costs only to the extent that they exceed 7.5% of your AGI. But if you were out of work last year and had to pay for COBRA or other health insurance, there’s a good chance those costs may have put you over the limit — especially if your income fell too. (The average family paid $4,776 for COBRA last year, even with the subsidy that was part of the economic relief package, according to data from the Kaiser Family Foundation.) Aspirin and eyeglasses count toward the write-off; see IRS publication 502 for a list of other qualifying expenses.

Potential savings: $132 if your income was $70,000 and you paid average COBRA costs plus another $1,000 in medical bills

5. You helped those in Haiti. Though the earthquake occurred in 2010, you don’t have to wait until next year to deduct your contributions to nonprofits providing disaster relief. Congress fast-tracked a bill that lets you deduct donations made before March 1, 2010 on your 2009 tax return.

6. You had investment losses. The average stock was still down 29% from its October 2007 peak. If you sold securities at a loss in 2009 and you had owned the shares for more than a year, those losses can come in handy now. You can use them, as well as any losses you carried over from 2008, to offset capital gains you may have reaped by selling investment winners as the markets recovered. You can also use up to $3,000 in net investment losses to offset ordinary income. And any leftover losses can be carried forward to reduce your 2010 taxes.

7. You weathered a disaster. There were 59 federal disasters declared in 2009. If your house was damaged in one of them and your homeowners insurance didn’t pick up the full bill, you have money coming back to you — and you don’t need to itemize to get it. There is no limit on what you can claim (typically you can deduct only losses greater than 10% of AGI). And you can also retroactively apply any losses you can’t use to 2008 taxes. File amended returns to get your money quickly. One hitch: You must subtract $500 from the loss before writing it off.

8. You made energy-efficient home improvements. You can take a credit worth 30% of what you spent on energy-saving skylights, replacement windows, water heaters, and the like. (Go to energystar.gov to see what qualifies.) But instead of the $500 cap previously on this benefit, you can now claim a combined $1,500 for 2009 and 2010.

9. You own property but don’t itemize. Those who itemize their deductions typically get credit for their property taxes. But those who didn’t itemize missed out on this break in the past. For the 2009 tax year (as in 2008), joint filers who don’t itemize are allowed to deduct as much as $1,000 of those taxes.  Use the new Schedule L to nail down this deduction.

10. You picked up a second job. Many Americans took freelance work in 2009 to make up for smaller paychecks and shrunken investment accounts. Whether you spent time selling old baseball cards on eBay or consulting for a former boss, you probably have a business by IRS standards. And that gives you a whole host of write-offs, including costs of supplies, equipment, and work-related errands (55¢ a mile for business use of your car).

Better yet, if you’re running this side operation out of a home office — and not also using it as a TV room/guest room/playroom — you can deduct a prorated share of your utility bills and even your mortgage payments.

11. You moved for work. If you ended up relocating for a full-time position that’s at least 50 miles farther from your old home than your last job was, you can deduct your moving expenses on Form 3903. That includes the cost of the moving company or truck rental, boxes and tape, shipping your car or your pet, storing your things, starting and stopping utilities, and traveling to the new location.

12. You’re a high earner. This year anyone who doesn’t fall into the AMT zone will get some personal exemption for claiming their children as dependents. In previous years that exemption — $3,650 for 2009 — phased out at higher income levels. This year it phases down to $2,433, but not out. (Potential savings:  $852 per kid, assuming you’re in the 35% tax bracket) Typically, high-income-tax filers have to reduce their itemized deductions by 3% of the amount their AGI exceeds a certain threshold ($166,800 for single and joint filers in 2009). But for 2009 that reduction comes down to 1%.

(Potential savings: $142 for the average itemizer in the 28% bracket).

House OK’s deductions for Haiti on ’09 taxes

By Hibah Yousuf, staff reporterJanuary 20, 2010: 3:35 PM ET
NEW YORK (CNNMoney.com) — The House unanimously approved a measure Wednesday that will allow taxpayers to deduct cash donations to Haiti earthquake relief on their 2009 tax returns instead of having to wait to file the claims next year.

Leaders of the House Ways and Means Committee from both parties introduced a bill Tuesday that makes contributions made between Jan. 12 and Feb. 28 count toward an individual’s or family’s 2009 taxes.

The bill also allows contributions made through text messages to be deducted if cell phone bills are provided as proof of donation.

Committee chairman Charles Rangel, D-N.Y., said in a statement that the committee “developed this legislation to make it easier, and encourage people, to donate to the relief efforts in Haiti.”

Leaders from the Senate Finance Committee introduced an identical version of the bill Wednesday afternoon. A floor vote is expected later in the day.

“This bill is a clear signal Americans want to help Haiti battle back from crisis,” committee chairman Max Baucus, D-Mont., said in a statement.

Similar legislation, which Baucus said was “successful,” was passed in 2005 to boost contributions in the aftermath of the Indian Ocean tsunami that occurred in late 2004

Haiti donations exceed $220 million

Typically, charitable contributions count toward the year in which they are made. The current measure would mean taxpayers don’t have to wait until next year to claim the benefit on their 2010 tax returns.

Factoring in the deduction: The Haiti relief contribution would count as an itemized charitable deduction. Itemized deductions are typically taken when an individual exceeds the standard deduction.

For 2009, the standard deduction for those 65 and under is $11,400 if married filing jointly or a qualifying widow, $8,350 if filing as a head of household, $5,700 if single and $5,700 if married filing separately.

If your adjusted gross income for 2009 tops $166,800 or $83,400 if married and filing separately, your charitable contribution is subject to the reduction of itemized contributions, usually 1%.

For cash contributions, the deducted ceiling is typically 50% of adjusted gross income, although in 2005, Congress passed legislation allowing 100% of income. 

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