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End Of Income Tax?

One of the foundational issues in tax policy is the difference between income and consumption taxes.  Currently, the US has both as do most of the states.  The notion of eliminating one and having the other pick up the lost revenue comes up from time to time.  In recent campaigns, the proposal of a “flat tax”, an increased rate of sales tax for everyone, came up on the national level.  More recently, the idea has surfaced in a few states.

The key difference ideologically is that income tax taxes the money you take in, while consumption taxes (which include both sales and use taxes) tax the money you spend.  Advocates of reduced or eliminated income tax argue that income taxes entail the government deciding where money should be invested, while consumption taxes permit people to decide for themselves where their money will go.  Defenders of income tax usually fire back that absent some sort of government control, we would lack investment in roads, bridges and other infrastructure.

In the states where repeal of income tax is proposed, the proposals are drafted to be revenue neutral, that is to end income tax without reducing the income of the state.  The proposals accomplish this either by increasing sales tax rates, or by eliminating various deductions or exceptions to the sales taxes.  The advocates of these plans say removing personal and corporate income taxes will make their state more appealing to businesses and individuals, encouraging them to move there.  That would mean more jobs in the state and also, since more people means a broader tax base, more tax income.

Those opposed to the proposals say sales taxes, as compared to income taxes, unfairly burden lower income individuals.

For more information on this or other tax law matters, contact Horowitz Law Offices.

Disclaimer.

Lesser Discussed Insights of the American Taxpayer Relief Act of 2012 Part 3

By now, everyone knows the American Taxpayer Relief Act of 2012 raised the income tax rates for the highest earners to 39.6%.  Most everyone knows the American Taxpayer Relief Act of 2012 raised capital gain and qualified dividends rates for the highest earners to 20% (before adding the Obama care 3.8%).  Some people even know the American Taxpayer Relief Act of 2012 reinstated phase-out’s of personal exemptions.  Finally, whoever has received a 2013 paycheck already knows their take home pay is reduced due to the expiration of the 2% Payroll Tax Holiday.

In this series of posts, we’ll look at some of the provisions of the American Taxpayer Relief Act of 2012 that aren’t getting as much coverage but which may have significant consequences to many taxpayers.

In the run up to the passage of the American Taxpayer Relief Act of 2012, both Republicans and Democrats made considerable noise about limiting itemized deductions.  Proposals range from hard caps on deductions, to limits based on a percentage of income.  The final law does provide for itemized deductions to phase out at the $250,000 level for individuals ($300,000 for married taxpayers filing jointly).  What has received less coverage is the fact that the new law did not include a new phase-out structure for itemized deductions.  Instead Congress used the existing structure known as PEASE limitations, which were put into place in 1990.  This phase-out structure provides that itemized deductions cannot be eliminated beyond 80%.  Put another way, all taxpayers will receive at least 20% of their itemized deductions.

For more information on the American Taxpayer Relief Act of 2012 and how it affects you, or for other tax law concerns, contact Horowitz Law Offices.

Disclaimer.

Lesser Discussed Insights of the American Taxpayer Relief Act of 2012 Part 2

By now, everyone knows the American Taxpayer Relief Act of 2012 raised the income tax rates for the highest earners to 39.6%.  Most everyone knows the American Taxpayer Relief Act of 2012 continued the estate and gift tax exemption of $5,000,000.00 per person or decedent ($10,000,000 for a married couple) adjusted for inflation (the 2013 exemption is estimated at   $5, 250,000).

For the last several years, estate law has been in flux, hardly an ideal situation for estate planning.  Provisions made one year could, with the passage of news laws or the expiration of old ones, could become obsolete.  With the American Taxpayer Relief Act of 2012, the estate planning landscape has stabilized.  New laws are of course always a possibility but for the first time in several years, the specifics of estate law don’t have an expiration date attached to them.

If you have not updated your estate documents in a few years, you will certainly want to look at them now.  The gift tax exemption is considerably higher than it was just a few years ago.  Most estate plans establish a marital trust, a residuary trust and a generation skipping trust.  The permanent effect of the higher exemption when applied to documents drafted more than two years ago (even within the last two years if care was taken to avoid adverse results) can result in leaving substantially less or even no funds subject to unfettered control by your spouse.

For more information on how the American Taxpayer Relief Act of 2012 affects you, or for other tax law concerns, contact Horowitz Law Offices.

Disclaimer.

Lesser Discussed Insights of the American Taxpayer Relief Act of 2012 Part 1

By now, everyone knows the American Taxpayer Relief Act of 2012 raised the income tax rates for the highest earners to 39.6%.  Most everyone knows the American Taxpayer Relief Act of 2012 raised capital gain and qualified dividends rates for the highest earners to 20% (before adding the Obama care 3.8%).  Some people even know the American Taxpayer Relief Act of 2012 reinstated phase-out’s of personal exemptions.  Finally, whoever has received a 2013 paycheck already knows their take home pay is reduced due to the expiration of the 2% Payroll Tax Holiday.

In this series of posts, we’ll look at some of the provisions of the American Taxpayer Relief Act of 2012 that aren’t getting as much coverage but which may have significant consequences to many taxpayers.

Let’s discuss the Alternative Minimum Tax and its integration into the American Taxpayer Relief Act of 2012.  As background, for years and years, taxpayers with very little if any tax preferences have been surprised they are subject to Alternative Minimum Tax.  The reason is taxpayers fall into the “doughnut hole” (sometimes referred to as the “sweet spot”) when their income is high enough to begin the partial or total phase-out of the Alternative Minimum Exemption.  The significance is that whether the result of falling into the “doughnut hole” or as the result of classic tax preference items such as real estate taxes or state income taxes some taxpayers’ tax liability in 2013 and beyond may not feel the effect of the high income 39.5% in the context of the American Taxpayer Relief Act of 2012 since their Alternative Minimum Tax may have already exceeded their tax liability using the higher 39.5% rate.  For these taxpayers, their tax liability remains the same except for the effects of the personal exemption and itemized deduction phase-out.

For more information on how the Taxpayer Relief Act of 2012 affects you or for other tax law concerns, contact Horowitz Law Offices.

Disclaimer.

Nexus

The recent debate over the so-called “Amazon tax”, while obviously about what its name would suggest, mainly the power of states to tax online retailers like Amazon, is really a debate about nexus.  Nexus means all the connections between a taxpayer, whether a person or a corporation, and a political jurisdiction–a state in this case.  Those connections can be affiliate marketing contracts, sales to state residents, physical presences within the state, and so on.  The key point is this: once your nexus passes a certain point, a certain threshold, you will be deemed to be “doing business” in that state and that means the state has the power to tax your sales.

The most clear cut case of nexus is when you have a physical presence in a state.  It should be noted that while a brick and mortar presence is the gold standard as it were of nexus, employees and contractors within a state can also count.  The recent Amazon tax debate is really over extending, or perhaps clarifying, the definition of nexus.  It seems fairly obvious that having affiliate marketers in a state constitutes a nexus, but is that enough to qualify as doing business in that state and thus open the company up to that’s states sales taxes?  The answer of the new laws passed in Illinois and other states has been, simply enough, yes.

In many cases, nexus can be a nebulous concept.  It can be difficult to tell if a particular company or other taxpayer’s presence within a state is sufficient to make them liable to that state’s taxes.

For more information on nexus or other sales tax and use tax concerns, contact the Chicago tax lawyers at Horowitz & Weinstein.

Legal Disclaimer.

State Cracks Down on Gas Station Sales Tax Evasion

Within the last 18 months the Illinois grand juries have indicted 14 gas station operators, charging they withheld a portion of the sales tax they owed to the state.  Attorney General Lisa Madigan has said more than one-fourth of Illinois gas station operators have underreported their fuel taxes.  Along with the Illinois Department of Revenue, Madigan is now investigating the state’s gas stations as well as tax preparers involved in the cases.

Last year’s tax amnesty program saw many gas station operators coming forward.  With the program now over, those who could have participated but did not will now face doubled fines and interest.

In addition to the owed taxes, those the state has indicted face penalties for tax evasion and interest on their unpaid taxes.

For more information on sales tax audits, tax evasion cases, or other tax law concerns, contact the Chicago tax lawyers at Horowitz & Weinstein.

Disclaimer.

The American Jobs Act

Last week President Obama presented The American Jobs Act to a joint session of Congress.  The Act includes a number of measures, all billed at helping the still reeling economy and in particular the job market.  In addition to allocating money to schools, for projects to improve infrastructure and modifications to unemployment insurance, the Act contains a number of tax provisions.

The Act calls for payroll taxes to be cut in half on the first $5 million in payroll.  The White House says this will cover 98% of businesses in the country.  The Act also calls for an elimination of the payroll tax for firms that increase their payroll by adding staff.  This measure is currently capped at $50 million in payroll increases.

The 100% expensing measure passed as part of the extension of the Bush Tax Cuts last winter would be extended through 2012.  The Act also contains a number of additional reforms and regulatory reductions to help entrepreneurs and small businesses.

For workers, the Act will cut payroll taxes in half for 160 million workers in 2012, extending the payroll tax cut passed last winter.

As with any legislation, the American Jobs Act is likely to change before (and if) it becomes law.

For more information on the American Jobs Act, payroll taxes, or other tax related legal concerns, contact the Chicago tax lawyers at Horowitz & Weinstein.

Disclaimer.

Reportable Transactions

The IRS has recently clarified the rules regarding failure to report reportable transactions and clarified the penalties for failing to do so.  There had previously been some uncertainty around the issue, specifically how provisions in the Small Business Jobs Acts of 2010 had affected the regulations and the penalties.

The IRS has since clarified the situation.  Failure to report reportable transactions means failing to include any information required by the Internal Revenue Code when submitting a return or other statement.

The new regulations the IRS released have clarified several issues such as the window for leniency on failure to file and the penalty amount for failure to file, but the IRS has not yet clarified other issues such as how exactly those penalties are computed.

For more information on failure to report cases or other IRS and tax related legal concerns, contact the Chicago Tax Lawyers at Horowitz & Weinstein.

Disclaimer.

2011 OVDI Deadline Extended

Because of Hurricane Irene, the IRS has decided to extend the application deadline for the 2011 Offshore Voluntary Disclosure Initiative to September 9th.  The deadline had previously been August 31.  This extension also applies to Report of Foreign Bank and Financial Accounts (FBAR) forms.

The OVDI is a tax amnesty initiative by which taxpayers with undisclosed offshore or foreign tax liabilities receive reduced penalties in exchange for coming clean with the IRS.

For more information on the current OVDI or for other offshore and foreign tax concerns, contact Horowitz & Weinstein.

Disclaimer.

The Affiliate Tax, Then and Now

In 1992 the Supreme Court ruled in a case about mail order that a state could not charge sales tax on an out-of-state company unless that state had sufficient nexus within that state.  The gold standard since then has been a brick and mortar presence.  Companies with physical stores in a state charge sales tax on online purchases for that state while companies without physical stores do not.

In 2008, New York passed a first of its kind law that expanded the definition of nexus to include companies with affiliate ties to that state.  The statute stated that if a company received business through referrals from New York affiliates, then that company had sufficient presence within the state to be charged sales tax.  Since 2008, eight states have passed their own versions of New York’s law, Rhode Island, North Carolina, Colorado, Illinois, Arkansas, Hawaii, Connecticut and California.  For the most part in these states, e-retailers like Amazon have responded by discontinuing their affiliate programs rather than charging sales tax.

Currently Vermont, New Mexico, Massachusetts, Missouri and Minnesota are all considering affiliate tax bills of their own.  Meanwhile South Carolina and Texas have given Amazon in particular, the online retailer that has become somewhat of the flagship in this debate (they have sued to have the New York law declared unconstitutional and are sponsoring a ballot measure to repeal California’s law) special protections against sales tax to encourage the company to build facilities within their states and bring jobs.

The 1992 Supreme Court ruling left open the possibility for Congress to pass new laws, to set new rules for interstate commerce, thus allowing mail order and online retailers to be required to collect sales tax.  For several years now a proposal for this has waxed and waned in popularity and exposure, something called the Streamlined Sales Tax Agreement.  The idea is that states join the Agreement and agree to abide by some common rules for sales tax in exchange for the ability to collect sales tax on out of state retailers.  The biggest push in support for this measure has come most recently from Senator Dick Durbin (D-IL) who has introduced the Main Street Fairness Act into the Senate.  It would provide official Congressional support for the SSTA and would allow it to go into effect once 10 states approved it.

Perhaps most importantly, online retailers like Amazon and Overstock.com have put their support behind Senator Durbin’s initiative, arguing it is the fairest resolution to the current debate.

For more information on the affiliate tax, other sales or use tax issues, or for assistance with any tax law concern, contact Horowitz & Weinstein.

Disclaimer.

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