Tax and Personal Finance Tips

The Nations Pulse on Tax Problems

There are two movements currently in the US reflecting citizens’ concerns. The two movements are Occupy Wall Street and the Tea Party. Intuitively, one is inclined to think that the movements represent an opposite social and economic philosophy. But this may not be as clear cut as one may think. 

One could think, economically speaking that the Tea Party movement is about the allocation of resources. They want to cut programs in favor of others. Welfare and social programs do not represent high priority, military does. 

Occupy Wall Street seems to be concerned with distribution of those resources. Their movement, if one can reduce it to a snippet is about who gets and pays what. There is an overlapping, however, in issues of concern. 

While the Tea Party may be concerned about the allocation of resources, they also delve into the distribution of those resources when they call for abolishing social programs to balance the budget. Conversely, the Occupy movement may be concerned with wealth distribution, but they care about resource allocations when they demand the protection of environment. 

Taxes are no different than those social and economic issues. If one wants to anticipate the position of the Tea Party toward taxes one may guess that the movement would want to reduce taxes (as they do,) and reduce the size of the IRS. If IRS elimination as a collection agency is espoused by either movement, it would be the Tea Party movement that would do so. 

The Occupy Wall Street would probably call for a higher collection of taxes and this may entail reinforcing or augmenting the size and role of the IRS. The Occupy Wall Street movement specifically wants higher taxes on higher income people. 

Although the two movements seem to be starkly opposit when it comes to taxes, there may be an overlapping zone where both share some goals. In both movements, at the middle class level they do not want to pay more taxes. They may share fear of intrusion of the IRS in our life with its arsenal of IRS audits and IRS collection actions such as IRS levy, tax lien and others. 

Congress has tried to mitigate the effect of the IRS actions against the average citizen by creating the Taxpayers Advocate, by creating IRS tax resolution procedures such as installment agreement and offer in compromise. Such tax relief mechanisms many times provide the tax help desperately needed for some citizens. Many other times citizens suffer from IRS audits, back taxes consequences and aggressive collection actions. 

For tax purposes, beyond collection and taxing of individuals and corporations the two movements most likely do not have the reengineering of taxes as a high priority. And this is regrettable.

Wage Garnishment and the Non Filing Tax Problems

Here is an actual case of a taxpayer that owed no taxes. Her wages have been garnished. Her telephone has been disconnected. Her special needs child was left in the dark. All was brought upon her by the fact that she did not file the returns. Typically, the issue wage garnishment or a bank levy or both whether you are self-employed or wage earner. 

The standard procedure is to negotiate an installment agreement or an offer in compromise if there is a tax debt owed after filing the unfiled returns. This case was different because the taxpayer ended up not only with zero tax liability, but rather was entitled to a refund. 

Technically the IRS does not know if she was going to owe back taxes or not. But upon close examination we know that the IRS has her w-2 records and they could see that she has paid substantial taxes every year. Should they have given her a break? I think they should. But that would require mercy and a personal treatment which may not be available in the quarter of bureaucracy. Here is my letter to the IRS which would shed light on the case. I am writing to the revenue officer handling her case: 

"I have prepared the tax returns from 01 to 2010 for the taxpayer referenced above.  As a result I found that the total tax liability over those years was only $4,737.  This is because the taxpayer was owed refunds for most of the prepared years. Please see the attached exhibit. 

The total refund that would have been paid to the taxpayer for all those years was $26,476 of which she lost $15,417 barred by the statute.  She is now entitled only to $11,059 that should be available to the taxpayer before payment of any tax liability. 

That refund applied against the total liability of $4,737 would give the taxpayer a final net refund of $6,332 after paying for any taxes due for previous years. 

My calculation does not enter the penalty or interest on the $4,737 nor does it account for any interest due on the refund available to the taxpayer.  Furthermore, the taxpayer will be entitled to the money garnished from her wages because her refund is sufficient to pay for any back taxes owed. 

It is very unfortunate that she had exposed herself to that situation.  I have always advised in my speaking engagements that filing in time is the most crucial thing that taxpayers should adhere to. 

She had suffered needlessly because she was not in compliance. I would have prepared the taxes earlier for her. I could not get a hold of her to sign the returns because her phone was disconnected. All her phones including her children's. 

We could not reach her by email either because the utility was cut off.  This is devastating when you have a child (over eighteen) who is handicapped with special needs wondering why she was in the dark and why the TV which is her only window to life was cut off. 

As the taxpayer explained to me that was the hardest thing for her not, to mention the summer heat without the AC that she left the child in. We had to personally pay her some money for the gas to come to the office to sign the returns and buy some groceries.  She admits that it was all her fault and she learned a lesson to use her own words. 

I hope that the prepared returns will help my client remove the garnishment and restore her life to dignity and some normalcy to pick up where she left off and pay back whoever she relied on for what they have given her in the difficult past weeks." 

This letter is on its way to the IRS officer. Let us hope that she will remove the garnishment with all the evidence that we are providing. They should release it by law. But with the IRS you never know.

Update: the IRS released her wage garnishment. The taxpayer has resumed her normal life again

Overview of the American Jobs Act

WhiteHouse.gov has a fact sheet about President Obama's recent proposal to stimulate the economy and create jobs, The American Jobs Act. Here's a summary of the main points.

Tax Cuts to Encourage Hiring and Growth

• Cut the payroll tax in half for the first $5 million in payroll which would affect 98% of businesses.
• Payroll tax holiday for adding workers or increasing wages. ($50 million cap)
• Extend 100% expensing for new investment in plants and equipment into 2012.
• Administrative, regulatory and legislative measures to help small firms access capital to start and expand.

Rebuilding and Modernizing America

• Tax credits from $5,600 to $9,600 to encourage the hiring of unemployed veterans.
• Invest $35 billion to prevent layoffs of up to 280,000 teachers, while supporting the hiring of tens of thousands more and keeping cops and firefighters on the job.
• Modernize at least 35,000 public schools across the country.
• Investments in infrastructure and a bipartisan National Infrastructure Bank, to modernize roads, rail, airports and waterways.
• A New “Project Rebuild” to put people to work rehabilitating homes, businesses and communities.
• Expand access to high-speed wireless Internet.

Pathways Back to Work for Unemployed Americans

• Unemployment insurance reform, including benefit extensions, work-sharing, and bridge to work programs.
• A $4,000 tax credit to employers for hiring long-term unemployed workers.
• Prevent discrimination against unemployed workers.
• Expand job opportunities for low-income youth and adults.

Tax Relief for Workers and Families

• Cut payroll taxes in half for 160 million workers in 2012.
• Allow more Americans to refinance their mortgages at today’s interest rates.

Fully Paid

• Ensure that the American Jobs Act is fully paid for with additional deficit reduction.

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VIDEO: Hurricane Victim Tax Relief

From Fox Business, here's a short video that explains the tax relief available for the victims of Hurricane Irene.



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VIDEO: Hurricane Victim Tax Relief

From Mint.com, here's an infographic that explains 529 Plans for tax-advantaged college savings.



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VIDEO: Highway Use Tax

From the IRS, here's a short video about the three month extension to file Highway Use Tax Return, Form 2290, for truckers and other heavy vehicle owner/operators



Watch on the IRS's YouTube Channel

INFOGRAPHIC: Tax Loopholes

From Loans & Credit, here's an infographic that shows some to the more commonly used, legal ways to avoid taxes.



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Is Doing Nothing a Fix for the Deficit?

From TaxVox, Howard Gleckman asks the question, "What would happen if Congress and the White House just closed up shop for a couple of years and let fiscal policy run on autopilot?" That's actually a valid question, because that's essentially what will happen if Congress’ budget super committee fails and Washington is still locked in political gridlock at the end of next year. Based on the Congressional Budget Office chart below, short- and medium-term deficits would be greatly reduced, but the U.S. would likely have another recession.



Current law means if all the Bush/Obama tax cuts expire at the end of 2012, the Alternative Minimum Tax would hit 20 million households, Medicare cuts physician payments by one-third and all discretionary spending would be cut by 5%. That would reduce the deficit to 1.6% of GDP in 2014.

This strategy has two problems. First, it won't fix long-term fiscal problems without getting medical costs under control. Second, the austerity measures would likely trigger another recession, which ultimately would negatively affect deficits even more.

Reducing discretionary spending alone probably won't fix the problem Making significant but gradual changes in health care costs, short-term stimulus and long-term deficit reduction is needed.

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VIDEO: Tax Extension Deadline

From the IRS, here's a short video about the October 17, 2011 deadline for taxpayers who requested a filing extension.



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Creating a Debt Reduction Plan

No one can borrow money forever. At some point, individuals, like governments, must reduce their debt or it will greatly hinder their economic freedom. From Mint.com, here at some steps to take to reduce personal debt.

Track
You need to know where your money is going in order to see what can be cut.

Balance
After finding out where your money goes, you need to make sure you are spending less than what you have coming in. See if there's a way to lower your biggest recurring expenses.

Refinance
Try to aggregate your debt at a lower overall rate. You may be able to transfer loans to favorable credit card rates.

Rental Income
Create revenue streams that don't require your direct involvement to reduce your debt burden. One practical way is through renting or licensing property.

Investment Income
As your debt drops and your credit rating improves, look for chances to lend capital at more favorable rates.

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