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IRS Proposed Rules Address Premium Tax Credits, Benchmark Premiums, And Pediatric Dental Plans - Health Affairs (blog)

Google IRS Federal Income Tax - Thu, 2016-07-07 07:20

Health Affairs (blog)

IRS Proposed Rules Address Premium Tax Credits, Benchmark Premiums, And Pediatric Dental Plans
Health Affairs (blog)
... people with incomes between 100 and 400 percent of the federal poverty level (FPL) afford marketplace coverage, the ACA offers them (if they do not have minimum essential coverage through a public program or an employer) advance premium tax credits ...

Categories: Tax news

Report Uncovers Stonewalling of Illegal Obamacare Payments - Americans for Tax Reform (blog)

Google IRS Federal Income Tax - Thu, 2016-07-07 07:07

Americans for Tax Reform (blog)

Report Uncovers Stonewalling of Illegal Obamacare Payments
Americans for Tax Reform (blog)
The Obama administration has been illegally funding Obamacare “Cost Sharing Reduction” (CSR) payments for years over the objections of IRS officials, according to a report released today by the House Ways and Means Committee and the House Energy and ...
GOP report calls ObamaCare payments unconstitutionalThe Hill

all 8 news articles »
Categories: Tax news

Looks like full steam ahead for 385 - Politico

Google IRS Federal Income Tax - Thu, 2016-07-07 07:02

Looks like full steam ahead for 385
Politico
They scoff at federal estimates that compliance costs will total $13 million, The Wall Street Journal's Richard Rubin reports. “The government's estimate assumes compliance .... MASS. DEDUCTION: Massachusetts is taking steps toward joining 34 other ...

and more »
Categories: Tax news

IRS Damper on Medical Marijuana, Smokes Clinics - ValueWalk

Google IRS Federal Income Tax - Thu, 2016-07-07 06:04

ValueWalk

IRS Damper on Medical Marijuana, Smokes Clinics
ValueWalk
“Interestingly, while the Drug Enforcement Administration has stepped aside on the enforcement of this still illegal substance in states where allowed, the IRS (using Section 280E of the tax code) has not. ... The taxpayer is arguing that the code was ...

and more »
Categories: Tax news

Virginia Man To Serve 4 Years For ID Fraud Scheme - PYMNTS.com

Google IRS Federal Income Tax - Thu, 2016-07-07 04:19

PYMNTS.com

Virginia Man To Serve 4 Years For ID Fraud Scheme
PYMNTS.com
Court documents confirm that the overall case involves the filing of at least 12,000 fraudulent federal income tax returns in order to obtain roughly $42 million in total funds. A statement from the U.S. Department of Justice states that King pled ...

Categories: Tax news

Dentist pleads not guilty to tax fraud - Citizens Voice

Google IRS Federal Income Tax - Thu, 2016-07-07 01:01

Citizens Voice

Dentist pleads not guilty to tax fraud
Citizens Voice
Charles Musto pleaded not guilty Wednesday to felony charges of filing false tax returns and impeding the administration of tax laws. Federal prosecutors allege Musto tried to swindle the IRS by concealing income in multiple bank accounts at many banks ...

and more »
Categories: Tax news

How to hunt for buried US savings bonds - Detroit Free Press

Google IRS Federal Income Tax - Wed, 2016-07-06 20:41

Detroit Free Press

How to hunt for buried US savings bonds
Detroit Free Press
You'd receive an IRS Form 1099-INT. Save your ... Some tax tips: Do not somehow think you can use savings bonds issued in 1986 to pay for a child's college education and cleverly avoid federal income taxes on your interest earned. The special tax break ...

Categories: Tax news

Despite Impasse, New Jersey Has Good Options for Transportation Funding, Tax Reform

Tax Foundation - Wed, 2016-07-06 14:45

New Jersey Governor Chris Christie (R) has shut down most highway projects in the state after lawmakers could not reach a deal last week to revamp its nearly empty Transportation Fund. Last week, the state passed a budget, but the state Senate rejected an Assembly-passed gas tax increase/sales tax decrease tradeoff deal, so the impasse continued on transportation projects.

The Assembly plan, AB10 and AB12, trades a 23-cent gas tax increase for a sales tax cut. The Senate’s plan, by contrast, also increases the gas tax by 23 cents, but features a phaseout of New Jersey’s estate tax instead of lowering the sales tax.

Here’s a breakdown of the proposals with their revenue impacts:

Both Plans:

Increase the gas tax by 23 cents and include other fuel-related tax increases. Assembly revenue impact: +$1.1 billion in 2017, +$1.2 billion annually by 2022. Senate revenue impact: +$1.2 billion in 2017, +$1.3 billion annually by 2022. Increase pension and other retirement income exclusions from state personal income tax. Revenue impact: -$60 million to -$90 million in 2018, -$135 million to -$193 million by 2022.

Assembly Plan (AB10, AB12) (Fiscal Note here):

Decreases sales tax from 7 percent to 6.5 percent for 2017 and to 6 percent for 2018. Revenue impact: -$376 million in 2017, -$1.74 billion annually by 2022. Total revenue impact: -$699.4 million to -$757.4 million by 2022.

Senate Plan (S2411) (Fiscal Note here):

Phases out estate tax over four years (eliminated in 2020). Revenue impact: -$120 million in 2018, -$550 million annually by 2022. Adds charitable deduction for personal income tax Revenue impact: -$140 million to -$280 million in 2018 and thereafter. Expands Earned Income Tax Credit Revenue impact: -$122 million in 2017, -$137 million annually by 2022. Adds new 7 percent tax on jet fuel Revenue impact: +$123 million to +$160 million Total revenue impact: +$1.1 billion in 2017 and +$140 million to +$375 million by 2022.

The Assembly plan results in a sizable net tax cut for New Jersey residents, while the Senate plan is an overall tax increase, with a heavier tax increase in 2017 being tempered in later years by the phaseout of the estate tax and the phase-in of a more generous pension income exclusion.

Behind the transportation funding problem in New Jersey is a gas tax that has lost much of its revenue productivity. In 1968, the 7 cent-per-gallon tax was worth an inflation-adjusted 47.5 cents per gallon, but the value has dropped by 66 percent since because of inflation. New Jersey’s current combined gas tax rate of 14.5 cents is second lowest in the nation. 

The 23-cent fuel tax increase is accompanied by an important constitutional amendment that would refurbish New Jersey’s Transportation Fund. The amendment wholly dedicates all revenue from motor fuel taxes and other petroleum taxes to transportation projects. New Jersey residents must pass the amendment on the upcoming November ballot, but it can become statutory until then if the legislature wishes.

Constitutionally setting aside the increased gas tax revenue to transportation is good policy. It would better tie road maintenance costs to road users who benefit, and would decrease the likelihood of general fund bailouts. In 2015, for example, New Jersey had to use $433 million of its sales tax revenue to shore up the Transportation Fund.

At the same time, the legislature shouldn’t lose sight of the two broad-based tax reforms that could make New Jersey residents better off. Lowering the sales tax by a percentage point is a laudable, straightforward effort to lessen New Jersey’s high tax burden.

The estate tax, a tax on death, should be reformed as well. New Jersey joins Maryland as the only states with both an estate tax and an inheritance tax. Phasing out the estate tax—which has increasingly come under scrutiny by some notable left-of-center economists—would be an important step for New Jersey for both competitiveness and economic growth.

Truly great reform could include all three of the blockbuster elements: gas tax right-sizing, sales tax reduction, and estate tax elimination. New Jersey, which has struggled to develop a concrete tax agenda in recent years, has a true opportunity for bipartisan reform here.

Categories: Tax news

Midyear Strategies to Cut Your 2016 Tax Bill - Kiplinger Personal Finance

Google IRS Federal Income Tax - Wed, 2016-07-06 12:42

Kiplinger Personal Finance

Midyear Strategies to Cut Your 2016 Tax Bill
Kiplinger Personal Finance
If you got a big refund, maybe you should adjust your withholding, if you're still working, or your estimated tax payments for 2016 if you're paying on investment and retirement income. The average ... The total is divided by a factor provided by the ...

and more »
Categories: Tax news

Lunch Links: Teamsters Say No to Soda Taxes; No Missouri Tax Cut; New Jersey May End Pennsylvania Tax Pact

Tax Foundation - Wed, 2016-07-06 09:45

Today is July 6, the 81st birthday of the present Dalai Lama. Tibet as recently as the 1950s had a quasi-feudal social system, with hereditary “treba” (“taxpayer”) families responsible for owning land and paying taxes, with lighter tax obligations owed by householder peasants and indentured peasants.

Here are some interesting links I came across:

Teamsters Oppose Soda Taxes: The Teamsters 29th International Convention approved a resolution putting the powerful union on record opposing soda taxes. The Philadelphia local, meanwhile, sent letters to politicians who voted yes on the soda tax to expect no further support from the union. (PR Newswire / Citified) Arkansas Ends Year With $177 Million Surplus: The surplus was driven by strong individual and business tax collections. (Arkansas Business Journal) California Income Tax Extension on Ballot: In November, California voters will decide whether to extend higher income taxes on those who earn more than $250,000 a year, with a top rate of 13.3 percent on income above $1 million (up from 10.3 percent). The taxes were approved in 2012 and will expire at the end of 2018 unless extended. (Sacramento Business Journal) San Francisco Muses Payroll Tax for Housing: Three legislators and some activists are pushing a 1.5 percent payroll tax on tech companies to pay for homeless and housing services but also transparently to punish them for sparking a housing boom in The City. San Francisco’s budget is currently a healthy $9.6 billion and there’s already a payroll tax on employers. The City is adding about 3,600 new housing units a year. (The New York Times / Curbed San Francisco) No 2017 Tax Cut for Missouri: Missouri’s 2014 tax package set into place 10 years of individual income tax cuts and a “small business” gimmick, but would only go into effect if tax revenue grew at least $150 million over last year. Actual growth was $77 million, so the first year of the tax cut will be postponed until at least 2018. (Tax Foundation / St. Louis Post-Dispatch) New Jersey May End Tax Reciprocity with Pennsylvania: Gov. Christie (R) directed his staff to investigate the impacts of ending the tax reciprocity agreement between New Jersey and Pennsylvania whereby the states agree not to tax each other’s residents. The pact, which dates to 1977, means New Jersey residents only pay New Jersey taxes even if they work in Pennsylvania, and Pennsylvania residents only pay Pennsylvania taxes even if they work in New Jersey. Back in 1977, New Jersey had a 2.5 percent top income tax rate and Pennsylvania had a 2 percent top income tax rate so there wasn’t much of a gap; today, New Jersey’s is 8.97 percent and Pennsylvania’s 3.07 percent. (NJVT)
Categories: Tax news

Tax Proposals in the 2016 Democratic Platform, Explained (Part 1)

Tax Foundation - Tue, 2016-07-05 20:30

Last Friday, the Democratic National Platform Committee released a draft version of the 2016 Democratic Party platform.

While party platforms are usually inconsequential documents, a great deal of attention has been paid to this year’s Democratic Party platform, which was crafted jointly by representatives of Hillary Clinton and Bernie Sanders. Many observers believe that the platform will signal the future policy direction of the Democratic Party, following a contentious presidential campaign that divided the Democratic base on several issues.

One issue on which Clinton and Sanders had major disagreements was tax policy. As my colleague Alan Cole pointed out a few months ago, the tax plans issued by the Clinton and Sanders campaigns were so radically different that it’s almost difficult to believe that the two belong to the same party. To take one example, the Sanders tax plan would increase taxes by more than 15 times as much as the Clinton plan would.

As a result, it is fascinating to read through the tax policy proposals in this year’s Democratic platform and examine the extent to which Clinton’s or Sanders’ ideas won the day. On some issues, such as tax relief for the middle class and financial transactions taxes, the platform reflects Clinton’s priorities. On others, such as payroll taxes and the treatment of overseas profits, the document clearly mirrors Sanders’ proposals.

Over the next few days, we’ll be going through 18 tax policy proposals that are mentioned in the 2016 Democratic platform, in order of appearance. Alongside each proposal are a few lines of commentary about how each proposal might work, as well as its relationship to the Sanders and Clinton tax plans.

Here are the first six tax policy proposals listed in the Democratic platform:

1.      “We will make sure Social Security’s guaranteed benefits continue for generations to come by asking those at the top to pay more, and will achieve this goal by taxing some of the income of people above $250,000.”

Currently, the Social Security payroll tax only applies to each individual’s first $118,500 in wages and self-employment income. As a result, middle- and low-income Americans pay a higher share of their income in payroll taxes than high-income Americans. Many tax policy analysts have suggested broadening the payroll tax base by raising the cap above $118,500 or otherwise reducing the amount of wages that are not subject to the Social Security payroll tax.

The proposal referenced in the Democratic platform – taxing “some of the income of people above $250,000” – appears to be a toned-down version of one of Sanders’ proposals: to apply the Social Security payroll tax to all payroll above $250,000. A recent Tax Foundation publication found that this proposal would raise $720 billion in federal revenue over 10 years, with a relatively small amount of economic harm.

2.      “We support a financial transactions tax on Wall Street to curb excessive speculation and high-frequency trading, which has threatened financial markets. We acknowledge that there is room within our party for a diversity of views on a broader financial transactions tax.”

Over the past few years, as dissatisfaction with the American financial industry has grown, the idea of a financial transactions tax (FTT) has grown popular in left-wing policy circles. A FTT would levy a tax on individuals every time they trade a stock, bond, or other financial instrument. Opponents of FTTs note that they are likely to discourage trading, reduce liquidity, and tax the same economic activity several times.

The issue of a financial transactions tax was a point of major disagreement between Clinton and Sanders during this year’s campaign. Clinton favored a miniscule tax, specifically targeted at high-frequency trades, to discourage market volatility and unfair practices. Sanders called for a broad tax on nearly all financial transactions, with a top rate of 0.5%. While Sanders claimed that his FTT proposal would raise $300 billion a year, more credible estimates have placed the revenue from his proposal at $50 billion.

Here, the Democratic platform appears to take Clinton’s position, by calling for a FTT specifically designed to “curb excessive speculation and high-frequency trading.” However, the platform throws a bone to Sanders supporters by acknowledging that some Democrats desire a “broader” financial transactions tax.

3.      “Democrats will claw back tax breaks for companies that ship jobs overseas…”

This line in the Democratic platform probably refers to a novel proposal that the Clinton campaign floated in March: denying certain corporate tax deductions and credits to companies that move their operations overseas.

It is unclear exactly how this proposal would work. From news reports, it seems that Clinton would deny the R&D credit, the domestic production deduction, and other tax incentives to companies that reduce their U.S. employment. Importantly, Clinton’s proposal would “claw back” tax benefits that businesses have already received, going back several years, making this proposal retroactive.

4.      “…eliminate tax breaks for big oil and gas companies…”

The federal tax code contains several provisions that treat oil, gas, and coal companies differently than other businesses. Most of these provisions allow fossil fuel companies to deduct more of their expenses up front, leading to lower taxes. The Congressional Research Service estimates that, in 2013, the federal government lost $4.8 billion due to tax preferences for fossil fuel companies (compared to $13.4 billion in tax preferences for renewable energy).

Both Clinton and Sanders would eliminate all tax preferences for fossil fuel companies. In addition, both candidates would also limit the ability of certain fossil fuel companies to claim foreign tax credits for their business activity overseas. The Democratic platform reflects the consensus of the two candidates on this issue.

5.      “…and crack down on inversions and other methods companies use to dodge their tax responsibilities.”

The U.S. tax code levies a higher tax burden on companies headquartered in America than on companies headquartered in other countries. It is relatively easy for a U.S. company to change the location of its headquarters, by having a foreign company purchase its shares or assets. This process is known as an inversion, and more than 20 U.S. companies since 2012 have used this maneuver to move their headquarters abroad and lower their U.S. taxes.

Since inversions became more popular a few years ago, many Democratic lawmakers have decried the trend (Clinton has gone so far as to call the practice a “perversion") and offered targeted measures to penalize companies that invert. Republicans tend to treat inversions as a symptom of larger problems with the corporate tax system, and argue instead for broader reforms.

Clinton and Sanders have both proposed numerous measures that would target companies that engage in inversions. The Clinton tax plan would categorize any companies with more than 50 percent U.S. ownership as domestic businesses, and would require companies leaving the U.S. to pay an “exit tax” on their tax-deferred profits. Sanders’ plan would redefine “domestic business” to include foreign companies that acquire U.S. businesses. The Democratic platform does not choose between one approach or the other.

6.      “We will end deferrals so that American corporations pay U.S. taxes immediately on foreign profits and can no longer escape paying their fair share of United States taxes by stashing profits abroad.”

Since the introduction of the corporate income tax in 1913, U.S. corporations have not been required to pay U.S. taxes on profits earned by their foreign affiliates until the profits are brought back to the United States parent. This provision is known as deferral, and it partially mitigates the double taxation that the U.S. tax system imposes on profits earned abroad.

Sanders has long advocated for repealing the deferral of foreign-source income, as a way of increasing taxes paid by U.S. corporations. This would be a radical and unprecedented change to the U.S. tax system. It would likely raise more than $850 billion in additional taxes on businesses over a decade. Ironically, it would also encourage more corporations to engage in inversions, because ending deferral would raise taxes only on corporations headquartered in the U.S.

Amazingly, the Democratic platform committee has incorporated Sanders’ call to end deferral into the draft 2016 platform. This is a major victory for Sanders’ ideas and policies. As things stand right now, most congressional Democrats and President Obama would be unlikely to support this proposal in the Democratic platform.

Categories: Tax news

UK Pledges Corporate Rate Reduction

Tax Foundation - Tue, 2016-07-05 13:15

Over the weekend, the United Kingdom’s Chancellor of the Exchequer, George Osborne, pledged to lower the corporate income tax rate to 15 percent from the current 20 percent. In pledging the rate cut, Osborne cited the need to keep the UK competitive as it exits the European Union.

Interestingly, this time last year, Osborne had pledged to lower the UK’s corporate income tax rate to 18 percent by 2020. Already, the UK has some of the of the lowest corporate taxes when it comes to the community of developed nations. With this latest pledged rate reduction, the UK will continue to increase its competitive edge in the global business climate.

What does this mean for the United States? For one, it shows that we are far behind the rest of the industrialized world when it comes to reducing the tax burden placed on corporate income. Countries worldwide have been consistently cutting their top marginal corporate tax rates, while the United States has maintained its comparatively high rate. At 39 percent, the U.S. corporate income tax rate is behind only Chad (40 percent) and the United Arab Emirates (55 percent), and the highest among industrialized nations.

If the United States sticks to the trend of maintaining its high corporate rate as other countries lower theirs, our country will attract less and less investment, impacting wages and job growth. Most of the world has taken steps to lower corporate taxes, and there are voices in the United States calling for the same. When it comes to attracting business and income growth to our shores, the United States should take a page out of the UK’s (and the rest of the developed world’s) book.

Categories: Tax news

Lunch Links: North Carolina Boosts Standard Deduction; Bag Tax Impact Mixed; July State Tax Changes

Tax Foundation - Tue, 2016-07-05 07:45

Today is July 5, the 58th birthday of cartoonist Bill Watterson, creator of Calvin and Hobbes (1985-95). There are so many good C&H strips, but I suppose I should link to the one that lightly pokes fun at the IRS.

Here are some interesting links I came across:

Analysis of the House Republican Tax Plan: Our new report looking at the plan is out. Also see coverage from The Wall Street JournalPolitico, and The Hill. (Tax Foundation) GAO Looks at Overpaid Tax Credits: The Government Accountability Office calculated overpayment error rates for the Earned Income Tax Credit (29 percent), the Child Tax Credit (12 percent), and the American Opportunity Tax Credit (25 percent). The overpayments total $29.5 billion per year, and the GAO says the credits’ complexity and difficulty of verification are to blame. (TaxProf) Olympic Medal Tax Break Up Again: With the Summer Olympics in Rio around the corner, Reps. Blake Farenthold (R-TX) and G.K. Butterfield (D-NC) are pushing a bill to exempt the prize money that medal winners get from federal income tax. Gold medal winners get $25,000, silver medal winners get $15,000, and bronze medal winners get $10,000. (Roll Call) North Carolina Approves Budget: The approved budget includes an increase in the standard deduction, the amount of a taxpayer’s income not subject to income tax, effective this calendar year. The current standard deductions of $7,500 (single) and $15,000 (married filing jointly) will rise immediately to $8,000 (single) and $16,000 (married filing jointly), and rises again for 2017 to $8,750 (single) and $17,500 (married filing jointly). The state also changes service apportionment to market sourcing, and provides clarification when sales tax is due on repair, maintenance, and installation services. (Raleigh News & Observer / North Carolina General Assembly) Pennsylvania Still Debating: While Pennsylvania approved a record $31.6 billion budget (a 5 percent boost over last year), they didn’t agree on how to pay for the increase. The parties are as much as $150 million apart. (News Works) Bag Tax Impact Evaluated: Montgomery County, Maryland, imposed a 5-cent tax on disposable shopping bags in 2012. Four years later, some mixed results: plastic bags are issued less at convenience stores, pharmacies, and department stores, but are growing at grocery stores. Plastic bags trapped in streams have dropped 9 percent, from 856 in 2011 to 777 in 2015, but only 281 so far this year. Proponents can claim victory either way: if bag usage doesn’t go down much, it raises revenue. The tax has raised $10.4 million since going into effect. (The Washington Post) Illinois Topless Bar Tax Generating $500K a Year: In 2013, Illinois imposed a tax on businesses with adult live entertainment. The tax, either tiered-based on gross receipts or $3 a head, generates about $532,000 a year, barely half the original projection. The money goes to rape crisis centers. A similar tax in Nevada survived a constitutional challenge but one in Texas was struck down. (ABC / Associated Press / Tax Foundation) State Tax Changes Taking Effect July 1: We have a rundown. (Tax Foundation)
Categories: Tax news

UBS told to hand client info to French taxman

Yahoo Tax - Tue, 2016-07-05 02:00

Swiss banking giant UBS said Tuesday it had been ordered to hand over client information to the French tax authorities, amid allegations it orchestrated a vast system of tax fraud in France. UBS said the Swiss federal tax administration (FTA) had demanded that it provide information about former and current clients living in France, based on data from 2006 to 2008, following a French request for international administrative assistance.


Categories: Tax news

Interest Treatment in the House GOP Tax Plan

Tax Foundation - Fri, 2016-07-01 09:45

One of the most important provisions in the new House GOP tax plan is the disallowance of the business deduction for net interest expense. While this is not the sort of tax provision that most individuals handle on a day-to-day basis, it is important for the way businesses are run and financed, and worthy of consideration.

The plan explains the provision here:

Under this Blueprint, job creators will be allowed to deduct interest expense against any interest income, but no current deduction will be allowed for net interest expense. Any net interest expense may be carried forward indefinitely and allowed as a deduction against net interest income in future years.

This post is intended to explain briefly why interest was deductible before, and why lawmakers are now rethinking that policy.

The basic idea is that if interest received is “income” then interest payments are a kind of anti-income, or an expense that should be deductible. There’s a variety of places where the tax code does this; for example, in the treatment of alimony payments. If you taxed alimony income and didn’t deduct alimony payments, then the same unit of salary or wage income would be taxed two times.

The same is true in our treatment of business-to-business payments. If Netflix pays Disney some money for the rights to some movies, then Netflix gets to deduct that money, and it’s counted as income for Disney. So naturally, if Netflix has a loan, its payments to the lender should be deductible expenses, and the lender should pay taxes, right?

Maybe not. Here’s why the House GOP plan is beginning to consider the issue differently:

A system that adds a deduction and requires income reporting of that deductible expense is inevitably going to allow more creative tax planning strategies than one that doesn’t. In the case of alimony income, for example, people likely overreport their deductions and underreport their income. Corporate tax planning is a bit more complicated than this, but it develops a similar issue, where the hole in the tax base created by the interest deduction ends up being far larger than the taxes on interest income coming in.

A key thing to remember here is that not all lenders actually pay taxes on interest income in the U.S., because some lenders aren’t subject to U.S. taxes on interest income. An example of this might be a large university endowment, or a large foreign fund.

This is especially important because the U.S. has an unusually high corporate income tax rate. One common strategy for U.S. businesses is to use leverage (borrowing) substantially, in order to have a lot of deductible interest payments to count against its income. Then, you try to make those interest payments to someone who would have a lower marginal tax rate, which saves money overall on the scheme. This is a means for profit shifting, the phenomenon where corporate income is reported less in jurisdictions with higher tax rates.

Another reason to consider this change is that dividend payments, a different kind of corporate financing, are not deductible. Economists call this the bias of debt finance over equity finance. As a recent Tax Foundation report describes it:

When a corporation wants to fund a new project it can either finance it through equity (issue of new stock) or it can borrow money. There are many non-tax reasons that a corporation would choose one funding mechanism over another, but the current tax code treats debt financing more favorably than equity financing. Specifically, there are two layers of taxation on equity financing and only one layer of taxation on debt financing.

Suppose a corporation decides to raise money to purchase a machine by issuing new stock. When this investment earns a profit the corporation needs to pay the corporate income tax. It then needs to compensate the original investors, so the corporation distributes the after-tax earnings as dividends. The investors then need to pay tax on the dividends they receive from the corporation. This equity-financed project nets two layers of tax, one at the corporate level and one at the shareholder level.

In contrast, the corporation could finance the same investment by borrowing money. When the corporation earns a profit from a debt-financed investment, it needs to pay the corporate income tax on its profits. But before the corporation pays its income tax, it needs to pay its lender back a portion of what it borrowed, plus interest. Under current law, corporations are able to deduct interest payments they make to lenders against their taxable income. Thus, profits derived from the debt-financed investment do not face a corporate level tax on the portion of the profit that is paid back in interest. The lender then receives the interest as income and needs to pay tax on it. The debt-financed project only nets a single layer of tax at the debt holder’s level.

Here’s a diagram of this current property of the tax code. It is definitely a bias or asymmetry worth reconsidering:

A description of the House plan from the Speaker’s office confirms the House was considering the issues described above:

The elimination of deductions for net interest helps to equalize the tax treatment of different types of financing and reduces tax-induced distortions in investment financing decisions. Providing neutrality takes the tax code out of marginal business decisions, letting market forces more efficiently allocate investment where it is most productive. It also eliminates a tax-based incentive for businesses to increase their debt load beyond the amount dictated by normal business conditions. A business sector that is leveraged beyond what is economically rational is more risky than a business sector with a more efficient debt-to-equity composition.

Several tax plans in the 2016 presidential campaign have considered elimination of the interest deduction, including Sen. Marco Rubio’s, which eliminated individual taxes so as to create a single layer of taxation, and former Gov. Jeb Bush’s, which kept two layers of taxation on both debt and equity investment. However, other lawmakers, such as Sen. Orrin Hatch, are looking to correct the same bias from another direction: by allowing a new deduction for dividends paid.

Categories: Tax news

How High Are Property Taxes in Your State? (2016)

Tax Foundation - Fri, 2016-07-01 07:15

States tax real property in a variety of ways: some impose a rate or a millage—the amount of tax per thousand dollars of value—on the fair market value of the property, while others impose it on some percentage (the assessment ratio) of the market value, yielding an assessed value.

Some states have equalization requirements, ensuring uniformity across the state. Sometimes caps limit the degree to which one’s property taxes can rise in a given year, and sometimes rate adjustments are mandated after assessments to ensure uniformity or maintenance of revenues. Abatements are often available to certain taxpayers, like veterans or senior citizens. And of course, property tax rates are set by political subdivisions at a variety of levels: not only by cities and counties, but often also by school boards, fire departments, and utility commissions.

Today’s map cuts through this clutter, presenting effective tax rates on owner-occupied housing. This is the average amount of residential property tax actually paid, expressed as a percentage of home value. Some states with high property taxes, like New Hampshire and Texas, rely heavily on property taxes in lieu of other major tax categories; others, like New Jersey and Illinois, impose high property taxes alongside high rates in the other major tax categories.

New Jersey has the highest effective rate at 2.11 percent and is followed closely by New Hampshire (1.99 percent) and Illinois (1.98 percent). On the other end of the spectrum, Hawaii has the lowest effective rate at 0.28 percent, and is followed closely by Alabama (0.40 percent), Louisiana (0.50 percent), and Wyoming (0.51 percent). How does your state compare?

Categories: Tax news

Independence Day: Taxes Then and Now

Tax Foundation - Fri, 2016-07-01 06:30

The history of taxation in the United States is a tumultuous one. Since our country’s founding, we have witnessed marginal tax rates on income ranging from zero to 94 percent, and federal revenues taking up less than 5 percent of our economy to more than 20 percent. With presidential candidates proposing more sweeping changes of their own, it seems the future of U.S. taxation will continue to be just as diverse. But what if we were to wind the clock back on our tax code? What was taxation like on the day a group of men in Philadelphia released a document that would change the world, 240 years ago?

Taxation in the United States in 1776 was incredibly different than what it is today. There were no income taxes, no corporate taxes, and no payroll taxes. Instead, the American Colonies (and to a larger extent, the British Crown) were primarily funded by tariffs and excise taxes. This means taxes primarily existed on imports of goods and services to the colonies, as well as on the sale of particular products.

What sort of items were these tariffs imposed on? Primarily, they were levied on ships on a per-tonnage basis, slaves, tobacco, and alcoholic beverages. In all, the average tariff worked out to about 10 percent of the value of imports, with lower rates being imposed on goods from Britain than from elsewhere. This was part of the British Empire’s mercantilist policies, an economic system that has since been largely discredited.

Midway through the 18th century, the British Parliament began imposing excise taxes that are notorious to this day. In 1764, Parliament passed the Sugar Act, imposing a tax of one pence per gallon on molasses imports, equivalent to more than $2 a gallon today. Just a few years later, the Townshend Acts started making their way through the British government, one of which imposed a tax on tea of four pence per pound ($8 today). Opposition to these taxes culminated in the famous Boston Tea Party.

What is more, the Townshend Acts were used to pay the salaries of colonial governors and judges, a duty that previously belonged to the colonies, thus robbing the power of the purse from local governments. This added to the cries of of “no taxation without representation” - the idea that it was unfair to impose taxes on the colonies by the very parliament in which they had no representatives. This principle was central enough to the eventual Revolution that it was enshrined in the list of grievances against King George III in the Declaration of Independence:

“The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States… He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation: For imposing Taxes on us without our Consent.”

Today, our system of taxation is vastly different. In addition to having our tax policy decided by elected members of Congress, tariffs make up less than 1 percent of federal revenue today, compared to 90 percent of all revenue more than two centuries ago. However, this is mostly due to the advent of other forms of taxation, such as on individual and corporate income.

In fact, the United States still collects about $30 billion from tariffs annually. Picking randomly from the 3,629-page schedule, these include tariffs on goats, couscous, copper ore, soaps made from animal fat, fabrics made with metal thread, glass cones used for cathode-ray tubes, and fishing reels, just to name a few. There also still remains a series of excise taxes that bring in more than $70 billion annually. Besides the usual suspects of taxes on alcohol and tobacco, U.S. excise taxes also include charges on arrow shafts, certain types of truck tires, and liquid hydrogen.

Americans are incredibly passionate about the impact of taxes on their lives, and rightly so. Tax policy impacts nearly every facet of our everyday life, from our work decisions to the prices of the groceries we buy. Even 240 years ago, taxes played a critical role in contributing to this nation’s founding. While saying that the U.S. tax system changed considerably since our first Independence Day is an understatement, we should continue to honor the power of taxes on our livelihoods as we look towards future reforms of our tax code.

Categories: Tax news

Ex-congressman Grimm's restaurant partner gets 6 months in prison

Yahoo Tax - Thu, 2016-06-30 10:21

A onetime business partner of former U.S. Representative Michael Grimm was sentenced to six months in prison on Thursday after pleading guilty on Tuesday to a tax charge in a case related to an investigation of the convicted Republican politician. Bennett Orfaly, 52, was sentenced by U.S. District Judge Pamela Chen after pleading guilty in April to having aided and assisted in the preparation of a false tax return. While his plea pertained only to a tax return for the Pita Grill Murray Hill restaurant in 2009, prosecutors said that his scheme was broader and involved about $3 million in unreported gross receipts at five restaurants over a number of years.


Categories: Tax news

Atlantic City, N.J., hires lawyers to restructure debt

Yahoo Tax - Tue, 2016-06-28 16:28

Atlantic City, New Jersey's fiscally distressed gambling hub, has hired public finance attorneys to restructure some of its $240 million of outstanding bond debt, Mayor Don Guardian said on Tuesday. New Jersey law firm McManimon, Scotland & Baumann will work on reducing the city's debt load, much of which it took on to pay back casinos that won property tax appeals. City officials are meeting with the firm this week, Guardian told residents in a meeting Tuesday evening, which was livestreamed by the Press of Atlantic City.


Categories: Tax news

Texas ex-tycoon Wyly ordered to pay $1.1 billion for tax fraud

Yahoo Tax - Mon, 2016-06-27 15:33

A federal bankruptcy judge in Texas on Monday ordered former billionaire Sam Wyly to pay $1.11 billion in back taxes, interest and penalties after finding he committed tax fraud by shielding much of his family's wealth in offshore trusts. U.S. Bankruptcy Judge Barbara Houser in Dallas calculated the payout after ruling on May 10 that Wyly and his late brother Charles conducted a "deceptive and fraudulent" scheme to cheat the Internal Revenue Service. A lawyer for Sam Wyly could not immediately be reached for comment.


Categories: Tax news
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