Tax Topics for Tough Times
Stock market down. Double-digit unemployment. Business
closures. Corporate bailouts. Most of us are feeling the effects of
a tight economy in one way or another.
I certainly hope things are going well for you. But, if you’re feeling
the pinch. I want to pass along some ideas that can save precious
dollars at tax time.
Lost your Job? I know you’re busy looking for alternatives, but
you can save taxes by paying attention to:
Unemployment. Don’t forget – the first $2,400 of unemployment
benefits in 2009 is tax-free. The rest is taxable. I can help figure
whether this will cause a problem when you file your 2009 return.
Call me.
Job Training. Most vocational schools are “qualifying
educational institutions”. This opens the door for valuable tax
benefits. Be sure to ask before you sign up.
Moving Expense. If you are forced to re-locate, there are
valuable deductions for moving to the new job site. Keep track of
all costs.
“Consultant” vs. Employee. If you are considering working as
a “consultant”, we need to talk. Tax law will say you are “self-
employed”. There’s a world of difference in how you claim your
deductions, and in how you pay taxes.
Credit Woes? If you manage to negotiate a reduction in credit
card or other consumer debt, call me right away. Any cancelled
debt balance is income to you! The fancy name is “cancellation of
debt” income – but, it’s definitely taxable. Call me.
Home Foreclosed? The issue is cancelled debt again. Suppose
you owe $200,000 on a home, and cannot keep up the payments.
If the bank foreclosures, and sells the property for say, $160,000,
you probably will see the $40,000 shortfall reported as income. It
may be possible to use tax laws to exclude the income. Rules are
complex, and I need information on the debt and any refinancing
you did. Some loans get re-negotiated. Similar rules apply. This is
a very tricky area of tax law.
Portfolio Down? If you are looking at a statement showing your
holdings have declined, this is simply a “paper” loss. No tax relief
applies until you “realize” the loss by selling the assets. And that’s
a very tricky investment decision. I need to warn you of a limit of
$3,000 in overall losses you may claim in any one year. If you
decide to sell a significant part of your holdings, please call me.
The investment decision is yours, but I can help by clarifying the
income tax effects of your decision.
Similar rules apply to a pension fund. The value may be down, but
there is no immediate tax relief.
Pension Withdrawals? If you turn to your pension or IRA to
help you to “ride out the storm”, please call me first. There are
serious tax issues if you touch any ‘retirement-like” funds before
age 59 ½. Both an income tax and a penalty may apply. There are
some ways to remove the penalty, but simple “hardship” is rarely
a good enough reason. You need to know the cost of what you
might choose to do before you decide. Borrowing may prove to b
a cheaper choice than tampering with pension money. You must
make your own decisions. My job is to help you make informed
choices.
Who Pays the Most Tax?
We’ve all heard “the rich hardly pay any tax”. Is this true? Nope!
IRS statistics for 2008 income tax returns might surprise you.
The wealthiest definitely pay the most tax. But, your guess of what
is considered “wealthy” may be a shock, too.
Be careful! The chart below needs some thought. The Census
Bureau counts people – IRS counts tax returns. We have 304
million Americans, but only 138 million tax returns. A family might
file a single return. Those with very low income are not required to
file at all. Few returns come from Americans under age 18.
Imagine that all tax returns are stacked in a huge pile in order of
their reported income, with the hightest incomes on top, and the
lowest income on the bottom. Looking closely at this giant stack.
All Tax Top 1% Top 5% Top 10% Top 50%
Returns
Number of
Returns 138 1.38 6.92 13.8 69.2
(Millions)
AGI N/A $ 388,806 $ 153,542 $ 108,904 $ 31,987
(Dollars)
Share of 100.0 22.1 36.7 47.3 87.5
Income
(percent)
Tax Share 100.0 39.9 60.1 70.8 97.0
(percent)
Number of Returns: This row counts only returns with positive
income. It is possible to have a return with negative income.
AGI refers to Adjusted Gross Income. It’s the bottom number on
Page 1 of Form 1040. Not all “income” is included. Tax-exempt
interest is not. Social Security income may be absent, or part may
be included. A business or rental can have negative income.
Tax Share is surprising. The top 1% of returns generate nearly
40% of all income tax revenue, but had only 22% of all reported
income. Also note – the top 50% of returns pay 96.7% of all
income tax. The lower 50% of returns pay only 3.0% of all
income tax, or about 26 billion. In truth, the lower 50% collect
more than they pay, because of the earned income credit, but this
credit come from Social Security taxes, not income tax!
Surprised? Many couples with an income just over $100,000
probably consider themselves to be “middle income”. IRS would
definitely call them “wealthy” and place most of them in the top
10% of all incomes.
Santos Associates, FEDERALLY AUTHORIZED TAX
PRACTITIONERS, can help you with your accounting, tax
and financial planning needs. Call today for an appointment &
consultation. We are not attorneys, we can refer competent
council upon request.