Tuesday, July 08, 2008
Tax day was a few months ago, but if you haven’t filed a return it is in your best interest to do so as soon as possible. Even if you filed an extension with the IRS, or cannot afford to make any payment, you still need to file a federal tax return. But do not be worried, filing a past due return is not as difficult as you may think.
Gather All Financial Information
Before you even think about sitting down to prepare a tax return, first make sure to gather all of your financial information for the years you plan to file a return for. This will help you easily identify all income, deductions, and credits to include in your return. Some of the document you will need include:
- A copy of last years tax returns.
- IRS Form W-2 from all employers.
- IRS Form 1099 for all self employed individuals, and anyone with profit from capital gains or interest and dividends.
- Social Security numbers for dependents.
- A copy of the last tax return filed.
Prepare and File all Necessary Forms
You can download all necessary forms from IRS.gov, just search for the forms you need, print them out, and follow the attached instructions to complete them. Make sure to sign and date your tax return, then send it to the address at the end of the instructions.
Note: if you have received a notice from the IRS, then make sure you mail your return to the address on your notice. Always double check this address, as it may be different from where you usually send your returns.
Make a Payment
If you cannot afford to make a payment to the IRS then do not let it stop you from at least filing a return. If you can pay, the IRS accepts the following payment methods: credit card, electronic funds transfer, check, money order, cashier’s check, or cash.
To make a payment by credit card, you can call or visit the website of the following approved vendors.
- Official Payments Corporation – 1-800-2PAYTAX (1-800-272-9829).
- Link2Gov – 1-888-PAY1040 (1-888-729-1040).
To make a payment by check, money order, or cashier’s check, you should:
- Make your payment payable to ”United States Treasury”
- Include your SSN or EIN, tax period, and information on the attached forms
- Mail to the address listed at the end of your instructions
Cash payments can only be made in person at a local IRS Office. To find the closest IRS office to your home visit IRS.gov.
Last week, the Internal Revenue Service (IRS) reached out to the world's biggest accounting firms asking them to help in their quest to crack down on tax evasion. This move comes just days after a US court ruled the IRS could track down taxpayers suspected of evading US taxes by using Swiss bank accounts. The ruling demanded that the banks hand over records identifying American taxpayers that have foreign accounts.
Barry Shott, a deputy IRS commissioner, sent an e-mail to the six largest account firms claiming, “we are concerned generally by what we are seeing and hearing about the way some foreign banks are behaving with relation to the payment of US taxes by their customers.”
The US Justice Department estimates that up to 20,000 taxpayers have avoided paying nearly $300 million in taxes by abusing laws on Swiss bank accounts. “People should take notice that the secrecy surrounding these accounts is rapidly fading,” claimed IRS commissioner Doug Shulman.
Thursday, July 03, 2008
According to the New York Times, over 840 huge American corporations saved an estimated $265 billion because of a one-time tax break Congress passed to help bring home profits that had been hidden in overseas accounts. Below is an excerpt from the article, but you can view the full version at NYTimes.com.
The windfall resulted from a temporary tax deduction for big corporations, which were keeping billions of dollars in profits in overseas subsidiaries and out of the hands of the Internal Revenue Service.
The total amount brought back to the United States was far above some estimates, according to the data, which provides new details on the tax break.
American companies can typically defer paying taxes on foreign profits as long as they keep that money outside the United States. When companies bring the money back, they usually pay the top corporate tax rate of 35 percent.
In recent years, the biggest and wealthiest companies in the United States have increasingly set up foreign subsidiaries and used them either as foreign operations or offshore repositories.
The subsidiaries, many in offshore tax havens like the Netherlands, Ireland and the Cayman Islands, collectively held about $804 billion in foreign profits on which their American corporate parents had yet to pay any United States taxes, according to the IRS
A one-time tax holiday enacted by Congress in 2004 offered companies the chance to bring that money back at a reduced tax rate of 5.25 percent.
Some of the biggest names in corporate America decided to take advantage, in particular those in the pharmaceutical and technology industries. Pfizer brought back $37 billion, while Hewlett-Packard repatriated $14.5 billion.
In all, 843 corporations took advantage of the offer, according to recent IRS statistics of income data, bringing back $362 billion in foreign profits, paid to the parent corporations as dividends. Of that amount, $312 billion qualified for the tax break, giving those companies total tax deductions of $265 billion claimed from 2004 through 2006.
As we get closer and closer to November, the presidential candidates are continuing to make headlines. Especially when it comes to their economic views. Please enjoy the following excepts from recent coverage, and click the respective titles to read the full articles.
Obama missing chance to campaign as a tax cutter – Few people know that they'd get more under Democrats
Democratic presidential candidate Sen. Barack Obama is trying to avoid two traps that have doomed previous Democrats: Being seen as a "tax-and-spend liberal" who is soft on national security. He's making progress on one trap, but not the other.
Obama's silence on taxes is a bit puzzling, because independent analyses of his plan compared with Sen. John McCain's well-advertised tax cuts show that the vast majority of Americans would be better off under Obama than McCain.
That bears repeating: Obama would cut taxes for ordinary people more than McCain would.
According to the Tax Policy Center's analysis of the two candidates' tax plans, 80% of taxpayers would get more from Obama's cuts than from McCain's. About 95% of taxpayers would pay less under Obama than under current law (which ends many of the tax breaks passed in the past decade).
McCain and Obama on Tax Reform
Hardly anyone disagrees with this statement: The nation's tax system is a mess. The U.S. tax code is riddled with far too many deductions, credits, exemptions, exclusions, phase-ins, and phase-outs. Nobel laureate Milton Friedman noted half a century ago that constant changes in the tax code discourage long-term planning by households and businesses. He was right, but that has not stopped Democrats and Republicans from tinkering with taxes ever since the income tax was imposed in 1913.
Perhaps it is the safest forecast in politics and economics that history will repeat itself when it comes to the tax code. It's going to get even more complex next year, since both Sen. John McCain and Sen. Barack Obama are proposing major tax initiatives.
For instance, among his proposals, McCain wants to make the 2001 and 2003 tax cuts permanent (with the exception of the estate tax repeal), phase in a two-thirds increase in the dependent exemption, and offer a voluntary alternative tax with two rates and a larger standard deduction and exemption.
McCain will repeal the AMT. Wait, no ...
...not exactly. The presidential candidate has been saying he would eliminate the so-called "wealth tax" that threatens the non-wealthy. But now he supports a more modified plan.
Sen. John McCain's pledge to repeal the Alternative Minimum Tax has morphed into a promise to phase it out.
Translation: More than 4 million households would continue to pay the so-called "wealth tax" under his proposal during his term if elected. And the tax likely would remain on the books long after the presumptive Republican nominee left office.
But McCain's amended AMT policy would still end up protecting most of the folks who would be unfairly trapped by the tax, which otherwise would raise a ton of revenue from middle- and upper-middle-income families instead of the wealthy, for whom the tax was initially intended.
Obama tax plan too big a burden on rich, some say
Though the Illinois senator's plan would pump billions of dollars into the system, it also would fundamentally change how the program is funded. Many economists said the economy would be hurt by sending some rich folks' overall tax burden soaring past 60%, which one analyst said Obama's proposal would do.
His plan would work like this: Those who earn $102,000 annually or less, a figure that's adjusted each year for inflation, would continue to pay the 6.2% Social Security tax, while their employers also paid 6.2%.
Obama asks donors to help Clinton pay off debt
Sen. Barack Obama has asked top contributors to help former rival Sen. Hillary Clinton retire the debt from her failed presidential campaign, an Obama campaign source said. Obama and Clinton ran a protracted race for the Democratic presidential nomination that left Clinton with a campaign debt of more than $22 million when she bowed out this month.
About $12 million of that amount is money the senator from New York loaned to the campaign herself. Obama asked members of his National Finance Committee to contribute to Clinton's campaign if they were so inclined, but he did not direct them to do so, the Obama campaign source said Tuesday
Obama Jabs at McCain Tax Cuts
Sen. Barack Obama told a crowd of predominately white, middle class voters today that his tax plan will provide three times more relief than Sen. John McCain’s proposed cuts. He charged McCain with only helping the wealthiest families, saying that his tax cuts will only go to households earning more than $2.8 million a year.
“Now, I don’t want to embarrass anybody but how many people here make more than $2.8 million a year,” Obama asked the audience here, “If you’re there, I want to know you because we’re still fundraising!”
Friday, June 20, 2008
On June 17, 2008 President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act (HR 6081). The new law provides tax cuts for members of the military who are receiving combat pay, saving for retirement or purchasing their own homes. It will also ease rules for military families hoping to qualify for the earned income tax credit, make penalty-free withdrawals from their pension plans, and access unspent amounts held in their health flexible spending arrangements. Below a summary of the legislation from
the Library of Congress. To learn more about the bill, including voting records, news and blog coverage, check out
Open Congress.org.
Heroes Earning Assistance and Relief Tax Act of 2008 -Amends the Internal Revenue Code to provide tax benefits and incentives for military personnel.
Title I: Benefits for Military - (Sec 101) Exempts married taxpayers who file a joint tax return from the identification requirement for the 2008 recovery tax rebate if at least one of the filers is a current member of the Armed Forces.
(Sec. 102) Makes permanent the election to treat combat zone compensation as earned income for purposes of the earned income tax credit.
(Sec. 103) Makes permanent the exemption from the first-time homebuyer rule for veterans using mortgage revenue bonds to purchase a residence. Increases the issuance limits on mortgage revenue bonds for veterans in Alaska, Oregon, and Wisconsin to $100 million after 2009. Revises the definition of "qualified veteran" for mortgage bond financing eligibility purposes to eliminate the pre-1977 active duty requirement and to reduce the eligibility period to 25 years.
(Sec. 104) Requires tax-qualified pension plans to entitle survivors of plan participants who die while on active military duty to additional benefits and benefit accruals provided under such plans for participants who resume and then terminate employment due to death.
(Sec. 105) Treats differential wage payments to an employee as a payment of wages for income tax purposes. Defines "differential wage payment" as any employer payment to an individual serving on active duty in the uniformed services for more than 30 days that represents wages such individual would have received if such individual were performing services for the employer.
Treats an individual receiving differential wage payments as an employee and treats such payments as compensation for retirement plan purposes.
(Sec. 106) Allows members of the uniformed services whose retired pay in any taxable year is reduced due to an award of disability compensation by the Department of Veterans Affairs (VA) an extension of the three-year limitation period for filing tax refund claims until one year after the date of a disability determination. Limits the period for which such refund claims may be filed to taxable years beginning more than five years before the date of a disability determination.
(Sec. 107) Makes permanent the penalty exemption for premature withdrawals from retirement plans for individuals called or ordered to active military duty on or after December 31, 2007.
(Sec. 108) Makes permanent the authority of the Social Security Administration (SSA) to disclose tax return information to the VA for purposes of making veterans benefit determinations.
(Sec. 109) Allows a tax-free rollover of any military death gratuity and any group life insurance payment to a survivor's Roth individual retirement account (Roth IRA) or to an education savings account.
(Sec. 110) Allows an active Peace Corps volunteer an election to suspend the running of the five-year period for determining ownership and use of a principal residence for purposes of the tax exclusion of the gain from the sale of such a residence.
(Sec. 111) Allows certain small business employers a tax credit for up to 20% of the differential wage payments made for the benefit of active duty members of the Armed Forces.
(Sec. 112) Allows an exclusion from gross income for bonus payments made by a state or political subdivision to current or former members of the uniformed services (or dependents) for service in a combat zone.
(Sec. 113) Makes permanent the exclusion from the gross income of certain employees of the intelligence community of gain from the sale of their principal residences without regard to otherwise applicable five-year residential use and holding requirements.
(Sec. 114) Allows a tax-free distribution of unused benefits in a health flexible spending arrangement to any member of an Armed Forces reserve component who is ordered or called to active duty.
(Sec. 115) Exempts certain state and local payments to and benefits for volunteer firefighters and emergency medical responders from federal employment and unemployment taxes.
Title II: Improvements in Supplemental Security Income –
(Sec. 201) Amends title XVI (Supplemental Security Income for the Aged, Blind, and Disabled) of the Social Security Act to treat cash remuneration paid to a member of the uniformed services as earned income and certain housing payments to such members as in-kind support and maintenance for supplemental security income (SSI) program purposes.
(Sec. 202) Excludes state annuity payments to blind, disabled, or aged veterans for purposes of SSI benefit determinations.
(Sec. 203) Excludes any cash or in-kind benefit paid to an AmeriCorps participant from SSI income eligibility and benefit determinations.
Title III: Revenue Provisions –
(Sec. 301) Sets forth additional rules for the tax treatment of high-income individuals who relinquish U.S. citizenship or residency to avoid U.S. taxation (expatriates). Treats all property of expatriates as sold for fair market value on the day before the expatriation date and includes gain (over $600,000) or loss from such sale in their gross income. Allows expatriates to elect to defer payment of any tax resulting from expatriation if adequate security for payment of such tax is given.
Requires 30% withholding of tax for certain items of deferred compensation payable to expatriates.
Imposes a separate tax on gifts and bequests from expatriates exceeding $10,000, payable by the recipient of such gift or bequest.
(Sec. 302) Treats certain foreign subsidiaries of U.S. companies performing services under a contract with the U.S. government as U.S. employers for purposes of Social Security and Medicare employment taxes.
(Sec. 303) Increases the minimum penalty for failure to file an individual income tax return to $135 or 100% of the amount required to be shown on such return.
Title IV: Parity in the Application of Certain Limits to Mental Health Benefits - Amends the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 (ERISA), and the Public Health Service Act to extend through 2008 parity requirements applicable to mental health benefits offered by group health plans
According to Web CPA, earlier today a judge ruled against the IRS in support of the Freedom of Information Act. The ruling will basically force the IRS to stop defying previous orders and turn over statistical information to outside researchers. Below is a quote from the article, but you can read the full version at
Judge Orders IRS to Turn Over Agency Statistics on Web CPA.
“The case dates back to 1976 when graduate student Susan Long prevailed in an FOIA lawsuit against the IRS, and the agency had to begin providing her with audit and examination data. After the court order, Long used the IRS data to report on the IRS's performance for nearly 30 years.
However, in 2004, the agency stopped complying and refused to provide the information, claiming that the data would violate taxpayer privacy. Long, now a professor at Syracuse University and co-director of its Transactional Records Clearing House, filed suit in 2006. She has obtained a court order from Judge Marsha Pechman of the U.S. District Court for the Western District of Washington, who ruled that the 1976 court order remains enforceable.
The ruling requires the IRS to turn over thousands of pages of agency statistics to TRAC, to produce data electronically and stop redacting the information, and to produce samples of other requested statistical information. Judge Pechman further denied the IRS's requests that the consent decree be modified, holding that the IRS was not in a position to request relief because it had violated her orders.
Long estimates that the IRS will initially have to turn over approximately 100,000 pages of statistical tables and probably 10,000 pages per month thereafter. The data will concern tax audits, including comprehensive details on the audits of individuals, detailed reason for tax audits, how priorities have changed over time, how much time the IRS is spending on audits, and official priorities on large corporate audits, tax shelters and pass-through entities, providing a detailed picture of IRS policies and practices.
Wednesday, June 18, 2008
Since summer lands right in the middle of the year it makes for a great time to review your financial situation and plan a tax strategy for the rest of the year. Follow these top 10 summertime tax tips from the Roni Deutch Tax Center® tax professionals, and you will be prepared for tax season come this January.
1. Update and organize your financial records
Can you think of a better way to spend a beautiful summer day then staying inside and organizing your financial documents? Ok, you can probably think of hundreds of activities you would rather do, but it is important to make sure your financial records are in order. This will allow you to review your information and prepare for the rest of the year. In addition, this activity can either be chipped-away at or taken care of all at once. Thus, if there is one, blistering hot day in July or August, you might decide to devote it to document organization and tax planning.
2. Hire a young family member during summer break
If you have a child, or know someone who has the summer off, you could consider hiring him or her to work for your business (if you have one). This can help you lower profits by writing off additional payroll expenses, and can provide quality working experience to a child or family friend.
3. Send your child or dependent to camp
If you have a child or qualifying dependent that has the summer off from school, and you do not have a business to hire them at, then you can always send them to a day camp. You can then write off the expenses under the child and dependent care credit. However, you can only use the credit for day camps, not over night camps.
4. Donate unneeded winter clothing
Now that it is hot outside, you probably do not have any need for a closet full or long pants, coats, thermal underwear, etc. So why not donate them to charity? Just make sure you get a receipt for the donation so that you can the donation amount in your charitable contributions.
5. Take a business trip
If you have to travel for a business reason this summer, then you can deduct your airfare, hotel expenses, meals, etc. Although the trip must be for a qualifying business purpose, there are still many professional conferences offered in spots like Las Vegas, Hawaii, or the Caribbean.
6. Throw a company party
If you throw a company party, picnic, barbecue, etc., then you can deduct half of all related costs on your next tax return. These types of events are great for employee morale and are great for summertime when people are usually in a more festive mood.
7. Trade in for a hybrid
This tip may be a bit more expensive than most of our readers were hoping for, but if you buy a qualifying hybrid this summer, you can claim an alternative motor vehicle credit and save on gas. And with gas prices getting dangerously close to $5 a gallon, this purchase can correlate to huge tax savings by lowering the amount you pay in federal excise taxes on gas.
8. Get checked up
Health is always important – especially when there is a potential tax deduction to consider. Thus, take some time this summer to make your family’s medical, dental and eye doctor appointments for the balance of the year. You will then maximize your family’s medical expenses – and, hence, medical deduction – for the year.
9. Purchase an energy-efficient air conditioner
It takes a lot of energy to cool a house on a 110-degree day in August. If you upgrade to an energy-efficient air conditioner, you can save on the overall cost of cooling your home, and take additional tax credits on qualifying purchases.
10. Meet with your accountant
Accountants are usually quite a bit slower in the summer months. This is a great time for you to meet with your accountant or financial planner to review your total tax situation, and plan your strategy for the rest of the year. That way there will be no surprises this tax season when you get ready to file.
Friday, June 13, 2008
The IRS recently announced that interest rates for the calendar quarter beginning July 1, 2008, will drop by one percentage point. The new rates will be:
- Five (5) percent for overpayments [four (4) percent in the case of a corporation];
- Five (5) percent for underpayments;
- Seven (7) percent for large corporate underpayments; and
- Two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000.
These rates are computed from the federal short-term rate based on daily compounding determined during April 2008.
As the Presidential season continues, and the economy on every taxpayer’s mind, the candidates tax views are continuing to get attention in the media. Please enjoy the following excepts from recent coverage, and click the respective titles to read the full articles.
Poll shows Obama with economy edge
More Americans believe Sen. Barack Obama is better suited to handle the No. 1 issue on voters' minds — the country's economic woes – than his likely rival in the fall election, Sen. John McCain.
In what could be a warning sign for the presumptive Republican presidential nominee, a new poll released by CNN and the Opinion Research Corporation found that 50 percent of registered voters nationwide say the Illinois senator would best handle the economy, while only 44 percent said the same for McCain.
Obama, Democrats Embrace Fog of Complex Tax Plans: Amity Shlaes
Welcome to the new era of tax intelligence. If a tax idea doesn't sound as if it were written in a seminar at Swarthmore College, it is stupid. The more complex, the better.
Democrats are adroit at developing such proposals. The party appears to favor plans that serve at least two seemingly unrelated ends: We should punish oil companies while soothing middle-class mothers (windfall-profits-tax revenue plan). And we should curtail carbon emissions while paying tribute to the glories of the free market (cap-and-trade legislation).
McCain calls Obama tax plan a threat to all Americans
A day after Senator Barack Obama launched a broad assault on the economic plan of presidential rival John McCain, McCain hit back yesterday by asserting that Obama's tax proposals would ensnare millions of ordinary Americans and further weaken the economy.
McCain, speaking to small-business leaders in Washington, D.C., said Obama's plans to restore higher tax rates for upper-bracket taxpayers, increase the capital gains tax rate for the richest families, and possibly raise the cap on Social Security taxes would affect not just the wealthy, but also moderate-income voters and independent businesses.
Obama Fires Back on Taxes
Barack Obama dismissed as old-style politics John McCain's and the Republican Party's warnings that he would be a tax-and-spend liberal. Most Americans, Sen. Obama said, would pay lower taxes if he were elected president.
The presumed Democratic nominee, taking questions from reporters Tuesday, also indicated he would raise the 15% capital-gains tax on the income from sales of investments to about 20% – not the near-doubling to 28% that Republicans and others have warned Sen. Obama would seek and would put the economy at some risk by doing so.
McCain Camp Distorts Obama's Tax Policies, Exaggerates Their Adverse Impact
Sen. John McCain's camp is attempting to convince Americans that their taxes will increase dramatically with Sen. Barack Obama as president. The presumptive Republican nominee has repeatedly said that Obama would enact "the largest tax increase since the Second World War." A surrogate for McCain, former Hewlett-Packard CEO Carly Fiorina, insists that Obama has not proposed "a single tax cut" and wants to "raise every tax in the book."
A Preliminary Analysis of the 2008 Presidential Candidates' Tax Plans
If enacted, the Obama and McCain tax plans would have radically different effects on the distribution of tax burdens in the United States. The Obama tax plan would make the tax system significantly more progressive by providing large tax breaks to those at the bottom of the income scale and raising taxes significantly on upper-income earners. The McCain tax plan would make the tax system more regressive, even compared with a system in which the 2001–06 tax cuts are made permanent. It would do so by providing relatively little tax relief to those at the bottom of the income scale while providing huge tax cuts to households at the very top of the income distribution.
Friday, June 06, 2008
Sen. Barack Obama is now widely considered the presumptive Democratic presidential nomination, while Sen. John McCain has held the corresponding Republican title for a few weeks now. Come November, one of these two gentlemen will likely be elected as the next Commander-in-Chief of our Nation. Although we still have a long campaign season ahead of us, I think it is important to analyze their tax views today. The economy is changing and in the next five months, the economic conditions are likely to get even worse. Therefore, it is crucial to understand their tax views now so that we can begin to plan for the future of our country’s economy.
Mortgage Crisis
Obama
The ongoing mortgage crisis is a problem that is affecting more and more American families every day. To help protect home ownership and fight mortgage fraud, Obama has presented a multi-tiered plan designed to help families facing foreclosure and also monitor the mortgage industry better to avoid future problems.
Obama supports the Stop Fraud Act that provides a definition of mortgage fraud and rules and regulations to help stop the problem. The act also requires the Government Accountability Office to evaluate lending practices and report their findings to congress.
In addition to helping solve the problems in the mortgage industry that are causing record foreclosures, Obama also wants to help the families that are being affected. His plan includes counseling to families on the verge of facing foreclosure, as well as a proposal for the creation of a fund to assist homeowners. The fund would include help for families looking to refinance their homes, as well as credits to help offset the loss homeowners take when selling their houses.
The final component of Obama’s mortgage relief plan is to create a universal mortgage credit. Currently, the United States tax code only encourages families to purchase a home with a tax deduction. However, it is currently only available to taxpayers that itemize their returns. This leaves out about 2/3 of Americans who elect to take the standard deduction. Obama would like to create a universal mortgage credit that he claims will benefit an additional 10 million homeowners.
McCain
Senator McCain also has is own take on the mortgage crisis. His plan is called the new “Home Plan,” which aims to provide help to those hurt by the housing crisis. McCain claims that his plan will allow every deserving homeowner the opportunity to trade in a burdensome mortgage for a more manageable one that will reflect his or her home’s current value.
But exactly “who” is deserving? According to McCain’s website, eligible individuals include those Americans that hold a non-conventional mortgage taken after 2005. The house will need to serve as the home owner’s primary place of residence and he or she will need to be able prove they cannot meet current payments, but would be able to comply with a new 30 year fixed rate mortgage.
McCain has also called for the immediate formation of a Justice Department Mortgage Abuse Talk Force that would investigate corruption and fraud in the mortgage industry. The Task Force would also work with the State Attorneys General to identify abusive practices in the mortgage industry.
The Difference
Although Obama’s plan seems more substantive than McCain’s, they both attempt to help solve the countries mortgage problem. However, as with many other issues Obama’s seems to target lower income families namely those that do not itemize which typically correlates to families that make under $50,000. I think it is also interesting to note that they both propose the creation of a government agency to monitor the mortgage industry, but they propose them for different branches of the government.
Lower Income Americans
Obama
Sen. Obama’s tax plan seems in line with his redistribution of wealth ideals. His economic plans surround the idea of giving every lower-income American an opportunity to better themselves. The centerpiece is his "Make Work Pay" tax credit that would encourage Americans to take control of their lives, while providing tax relief to both low and middle income taxes. The credit would offset federal taxes on the first $8,100 of a taxpayers earnings and would essentially generate a credit of up to $500 for single persons or $1,000 per family. According to Obama, this credit would eliminate income taxes for at least 10 million low-income Americans.
Another of Obama’s more popular tax views is to help make higher education more affordable. He would do this through creating a credit to reimburse taxpayers for the costs of obtaining a college education. According to his plan, the credit would reimburse taxpayers on the first $4,000 they spend on a college education. Obama’s campaign claims that it will cover two-thirds of the cost of attending a public college or university.
Obama would also like to expand the child and dependent care tax credit, which would provide relief to families that struggle to afford child care expenses while they are at work. The credit currently provides up to $3,000 for the first child and $6,000 for two or more children. Obama would like to change the limit to a full 50% of child care expenses, which would provide millions of families with thousands of dollars in tax credits.
McCain
As with most Republicans, McCain’s tax plan is more geared to middle and upper income Americans. However, one major component of his campaign has been “Immediate Help for American Families.” In this plan, he claims to target policies that will provide relief to American taxpayers facing rising gas and food prices and record foreclosures. However, it is unclear how McCain’s actual proposals will do that. Specifically, McCain target opaque issues like corn and sugar subsidies, trade barriers, and the Strategic Petroleum Reserve (SPR). While we all know that nothing happens over night, it is even more unclear how these changes in these policies will immediately help the American taxpayer as McCain claims.
One of the tax cuts McCain supports is raising the personal exemption for dependents from $3,500 to $7,000. This would help any working taxpayer with dependents they have to provide for, regardless of income level.
The Difference
Obama’s tax plan is much more favorable to lower income Americans than McCain’s. He supports programs like the "Make Work Pay" credit that will not only help lower income Americans, but also encourage them to work. It is also interesting to note that both candidates support tax credits designed to help families or anyone taking care of dependents.
Higher Income Americans
Obama
Senator Obama is a big believer in our progressive tax system – and he is not afraid to hide that. So one of the first things Obama is set to do is letting President Bush’s 2001 and 2003 tax cuts to selectively expire. By "selectively expire", Obama endorses extending those tax cuts on the rates for all but the top two income tax brackets. In addition, Obama also advocates increasing the income cap on payroll taxes. This would essentially be a huge tax increase for taxpayers earning between $97,000 and $250,000, which goes against Obama’s prior commitment to not raise taxes on individuals making less than $250,000.
Although Obama voted "nay" on repealing the Alternative Minimum Tax (AMT), he does support a revamp of the tax. The specific details of his plan are a bit hazy, but Obama has claimed he would like to index the tax according to inflation so that it does not affect middle-income Americans.
McCain
McCain is a strong supporter of lowering taxes to encourage economic growth, which is the dominant economic stance of the Republican Party. Not only does he support renewing the Bush tax cuts, but he also favors numerous tax cuts. McCain hopes to reduce taxes on Capital Gains, Interest, Dividend, Investment income, and even corporate tax rates.
McCain is a strong supporter of repealing the Alternative Minimum Tax (AMT), which would be a tax cut for the upper middle income taxpayers. However, if McCain wants this tax fully repealed, then he is going to have to strike a deal with Congress, and it seems highly unlikely that he would get enough support to make this drastic and costly change.
Although McCain had originally voted against the Bush tax cuts, he now claims to support an extension of the plan. “I voted to extend them because it would have the effect of having a tax increase,” claimed McCain when asked about his flip-flop. “The tax cuts have increased revenues enormously. They've been very beneficial. The problem is that spending has lurched completely out of control. My proposal was to restrain spending. I do not support tax increases. And the effect of not making them permanent would have the effect of a tax increase.”
Another controversial component of McCain’s tax plan is his hope to revise the current laws on charitable contributions. Under his plan, taxpayers that give charitable contributions in the form of stock, real estate, bonds, or artwork would not be able to take a tax deduction for the current, inflated value of the gift. Instead, they would only be allowed to take a deduction for the original cost of the asset. McCain claims this would only affect the richest Americans who take advantage of this loophole to reduce their tax liabilities. However, the plan has been met with loud criticism. The current administration has publicly stated “anything that would take money away from a charity is a step in the wrong direction.”
The Difference
It is no surprise that McCain’s tax views favor the upper income Americans, as he supports the full extension of President Bush’s tax cut. On the other hand, he does support the repeal of the AMT, which is being levied on more of middle income Americans each year. Although Obama does support other tax breaks for the middle class, he does not want to repeal the AMT.
Capital Gains
Obama
One of the more controversial aspects of Obama’s tax proposal is his hope to nearly double the taxes levied on Capital Gains. The current tax rate on Capital Gains is 15%, and Obama hopes to raise it to 28%. "At a time when Americans are working harder than ever, we are taxing income from work at nearly twice the level that we're taxing gains for investors," Obama claims. "We've lost the balance between work and wealth."
When questioned about his plan’s to nearly double the rate, Obama claims that he wants to raise the tax for fairness, not for revenue. One of his arguments is that the top 50 hedge fund managers made $29 billion last year, but paid lower tax rates then their secretaries did. Obama wants to restore the rate back to what it was in the Clinton era. Although the rate is much lower today than it was a decade ago, it is being levied on a lot more people. Investing is not only for the rich any more – millions of middle income America invests in stocks, retirement accounts, and mutual funds.
Additionally, Obama also fails to mention that the 28% Capital Gains rate was dropped to 20% during President Clinton’s time in office and studies show that the federal government’s revenue from Capital Gains actually increased. Then, when President Bush dropped the rate down to 15% the revenue increased yet again.
McCain
McCain plans to keep the current Capital Gains tax rates. He claims that since these taxes are voluntary, they should not be taxes as ordinary income. In order to make a profit, someone must sell a stock. Further taxes could distort decision-making, increase the use of tax shelters, and even lower the federal government’s revenue. Additionally, McCain claims that this tax policy actually helps lower income Americans, as half of all capital gains end up benefiting persons earning less than $50,000 a year.
The Difference
The differences between McCain’s and Obama’s views on Capital Gains are quite simple. Obama favors doubling the tax rate and McCain wants to keep it at current levels. Although it may seem unfair for Capital Gains to be taxed at lower rates than income, there is some evidence that supports the belief that it encourages economic growth. The federal government’s revenue from Capital Gains has increased since the rate was lowered. You cannot argue against facts. Finally, raising a tax for fairness and not for revenue is not a sound economic policy.
Senior Citizens
Obama
Another controversial area of Obama’s tax plan is hope to eliminate all federal taxes imposed on senior citizens making under $50,000 per years and not requiring them to file tax returns. This may be a good way to get the senior vote, but in reality it is a very complicated tax proposal. His plan gives special tax treatment to a group if individuals based solely on their age. Does it seem fair that a single mother working two jobs should have to pay taxes on her $49,000 income, whereas her retired grandmother would pay noting on the same income amount?
Additionally, not requiring some senior citizens to file tax returns could make things complicated. Retired Americans usually have income from multiple sources including capital gains, dividends, Social Security, retirement plans, etc. With no tax returns, it might make it more difficult for the government to monitor compliance among the elderly.
McCain
Although McCain has not proposed a radical change to senior’s tax rates, he has claimed that he would like to reduce Medicare premiums. According to his website he has a “comprehensive, pro-market health care and Medicare reforms to reduce health care costs and control increases in premiums -- while delivering high-quality health care.” However, the details on the reduction and how the lost revenue will be recovered is still unknown.
The Difference
Since people tend to vote at a higher rate as they age, it is no surprise that both candidates favor economic policies that favor senior citizens. Like the almost forgotten “Gas Tax Holiday,” these plans are just good campaigning material and I doubt either plan will materialize after the election.
Tax Reform
Obama
Another interesting component of Obama’s tax plan is his idea of reforming the IRS and the way American’s file their tax returns. Although he does not want to change the foundation of American taxes, he does want to “simplify” the tax code. Obama has claimed that his simplified tax code would allow anyone with a bank account to complete their taxes in minutes if they take the standard deduction.
Obama’s plan also calls for the IRS to send out tax forms pre-filled with the taxpayer’s financial information. In a perfect world, this would make filing taxes easier for every American. However, we do not live in a perfect world and Obama’s proposal is full of holes. Making this happen would be a huge change for the IRS, who already have enough problems. In addition, it would open the floodgates for large-scale identity theft. The information contained in a tax return is highly sensitive and could be easy to use for identity theft.
Finally, Obama wants to reform the way the federal government deals with undocumented immigrants. He would not only like to require illegal aliens to file tax returns and pay income taxes, but would also require them to pay back taxes and the associated penalties and interest. This could potentially generate millions of dollars in new federal revenue.
McCain
There are three major changes that McCain would like to see take effect when it comes to the way American’s pay taxes. The first of which is his desire to make additional increases more difficult by requiring a 3/5 super majority for any tax increases. This will, in effect, give the minority in congress more power and leverage to negotiate trades for important votes.
The second plank of McCain’s tax reform plan is his desire to simplify the estate tax. McCain seeks an immediate, permanent reform to the estate tax, raising the exemption to $10 million while cutting the tax rate to 15%. McCain and estate tax reformers have stated, “the “death tax” tells people it is better to consume today than to invest in the future. That doesn’t make sense.”
Finally, McCain also proposes an overhaul of our taxation system. However, instead of pre-filled forms, McCain is suggesting an alternate, companion system for collecting revenue based upon a flat tax rate. The first step of his plan is expanding the current 15% tax bracket to include married taxpayers earning up to $70,000 and single taxpayers earning up to $35,000.
The more controversial aspect of the plan is to offer the flat tax system as an alternative to our current, progressive tax system and the myriad of credits, exemptions, deductions, carryover rules, and different tax rates for different forms of income. Under McCain’s plan, all taxpayers would be taxed on all of their income at a set, single tax rate. The flat rate would be set at 19% for the first two years, 17% thereafter.
The Difference
All of McCain’s and Obama’s tax plans have their respective support, but none of them seem like good options. Under Obama’s plan filing tax returns would be easy but there would be large-scale threat of identity threat. McCain’s proposal to make tax increases highly difficult in a time of economic doubt and ongoing military expenses seems like a bad idea. In addition, the flat tax system is a favorite of the upper class. However, his plan to raise increase the 15% tax bracket would provide tax relief to millions of middle income Americans.