Monday, December 31, 2012

Census Bureau Projects U.S. Population of 315.1 Million on New Year's Day 2013

Census Bureau Projects U.S. Population of 315.1 Million on New Year's Day 2013

Map of U.S. with Jan 1, 2013 and population projection overlay

As our nation prepares to begin the New Year, the Commerce Department's U.S. Census Bureau projects that on January 1, 2013, the total United States population will be 315,091,138. This represents an increase of 2,272,462, or 0.73 percent, from New Year's Day 2012 and an increase of 6,343,630, or 2.05 percent, since the most recent Census Day (April 1, 2010).

Component Settings for January 2013:

  • One birth every 8 seconds
  • One death every 12 seconds
  • One international migrant (net) every 40 seconds
  • Net gain of one person every 17 seconds

U.S. POPClock Projection  |  NIST photo of U.S. Smart Grid 

The U.S. Department of Commerce wishes you a Happy 2013!

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TaxVox’s 2012 Lump of Coal Awards

TaxVox's 2012 Lump of Coal Awards

TaxVox proudly presents its 2012 Lump of Coal awards, Thelma and Louise edition, for the worst fiscal policy ideas of the year. The winners are:

10. California. The Golden State probably deserves a lifetime achievement Lump of Coal Award for its inability to balance its budgets, its government-by-initiative, and its endless bouts of fiscal wishful thinking. What, that bump in capital gains tax revenue won't go on forever?

9. President Obama for proposing to pay for major corporate tax reform by eliminating a handful of minor tax preferences, including subsides for the purchase of corporate jets. Nothing wrong with corporate reform or with ditching the airplane subsidy. The problem is Obama had already pledged to use the same tax break to help reduce the deficit. Physics question: Can a jet flying at the speed of light pay for two things at once?

8. Congress' decades-long inability to require online retailers to collect sales taxes, just as their bricks-and-mortar competitors must. C'mon gang, even Amazon says it will start collecting sales taxes for online sales. Maybe lawmakers are waiting for free shipping.

7. The Tea Party. What do you call a political movement that flames out after one election cycle? Not only did many of their high-profile candidates lose in November, the loosely affiliated tea party groups have been remarkably silent on what should be their signature issue–the fiscal cliff and long-term deficit reduction. The tea party remains a force in some state legislatures, but its influence in Washington is rapidly fading.

6. The American public. We demand politicians "do something" about the budget deficit—without touching Medicare, Social Security, defense spending, or taxes (except those paid by people making more than us). Yes, we do get the government we deserve.

5. The House Republicans' Small Business Tax Cut Act. When sensible, the GOP says it favors permanent tax policy that keeps government out of the business of business. So why on earth did the House GOP back a bill that would let pass-through firms with fewer than 500 employees deduct 20 percent of their income from federal tax for one year?  Not only would the tax cut be temporary, but it encourages firms to game the system. And it favors one form of business organization (partnerships and other pass-throughs) over another (corporations).

4. President Obama for a campaign almost entirely devoid of serious tax proposals. When it came to fiscal policy, Obama's re-election could have been orchestrated by Jerry Seinfeld. It was about nothing.

3. Mitt Romney for his math. Sorry governor, but you really can't cut individual rates by 20 percent across the board, repeal the estate tax and the Alternative Minimum Tax, repeal the tax hikes in the 2010 health law, and keep the tax code as progressive as it is today—all without adding to the deficit.  Oh, and it would have been good if you could have named just one tax subsidy you'd eliminate.

2. Lawmakers of both parties who continue to insist they can pay for rate cuts and deficit reduction by "closing loopholes."  This is the tax equivalent of saying you can balance the budget by reducing waste, fraud, and abuse. The deductions for mortgage interest, charitable giving, and state and local taxes are intentional subsidies. They are not accidental loopholes.

1. And the winner (of course) is the fiscal cliff. Congress and Obama created an artificial crisis for themselves, spent 18 months arguing and, so far at least, have accomplished nothing at all. Increasingly, policymakers are like that aunt and uncle who regularly ruin holiday dinners with their bickering. At first, we wanted to reach out and help them. Now we just wish they'd go away.

Despite it all, best wishes for a happy holiday and a good new year.

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2013 May Be the Year of Perpetual Fiscal Crisis

2013 May Be the Year of Perpetual Fiscal Crisis

If 2012 was the year of modest economic recovery and surprising Democratic election success, 2013 may be the year of perpetual fiscal policy crisis.

After watching the still-unresolved partisan battle over the fiscal cliff, it is increasingly hard to imagine Congress and President Obama reaching anything like a big budget deal next year. Instead, it looks as if lawmakers will spend 2013 staggering from crisis to crisis, not unlike a bunch of nasty drunks weaving their way from barroom to barroom.

First, they will somehow have to avoid this year's cliff. Then, in late winter, they are likely to do fiscal battle all over again as the nation's borrowing authority reaches its limit and a temporary government funding bill expires. (Yesterday, Treasury said it would hit the debt ceiling on New Year's Eve, but it can delay the day of reckoning for a few months). At the very least, this will absorb nearly all of Washington's energy for the first quarter of 2013. And it will leave little time and enthusiasm for a Big Deal.

Then, Congress and Obama may get to do it all one more time next fall when they squabble over the 2014 budget.

Some of this mess could be avoided, of course, if Congress and Obama could agree quickly to a series of budget goals and timetables aimed at least stabilizing the national debt. That was the hope going into the fiscal cliff talks. But chances for such a deal are slipping away.

Part of the problem is the reluctance of Democrats to accept cuts in promised Social Security or Medicare benefits. When news leaked that Obama might be willing to change the way the government measures inflation (an adjustment that would gradually slow the growth of Social Security benefits), the Democratic base went nuts.

But this is not a symmetrical challenge: In the end, Obama could force Democrats to swallow such spending cuts if Republicans agree to additional tax increases. But many Hill Republicans appear absolutely unwilling to do that.

They may accept the imminent demise of the 2001-2003-2010 tax cuts for high-income households. After all, there isn't much they can do to save them at this point. But they will draw the line there, while Democrats are almost certain to look for additional revenue as part of any grand bargain. And that makes any broad-based tax reform in 2013 very difficult.

As I have written previously, it is not possible to reform taxes unless the reformers first agree on how much the new revenue code is supposed to collect. And the parties don't seem anywhere near such a consensus.

Lawmakers seem to be on a similar track to nowhere when it comes to Medicare. Both Obama and the GOP recognize that any long-term deficit deal must include big changes in the huge retiree health program. Yet, neither wants to take a first step down that politically fraught road. Remember, Republicans had great political success in 2010 accusing Democrats of cutting Medicare and Obama did well in 2012 by attacking Mitt Romney for his proposals to slow Medicare spending.

In such an environment, neither party is willing to step up, severely constraining any serious efforts to cut planned government spending.

The result: A year where one short-term political crisis follows the next, and one in which big fiscal issues such as tax and Medicare reform are put off for another day. Or perhaps another year.

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End-of-Year Charity Giving Tips from the IRS

End-of-Year Charity Giving Tips from the IRS

Individuals and businesses making contributions to charity should keep in mind some key tax provisions that have taken effect in recent years, especially those affecting donations of clothing and household items and monetary donations.

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Two CPAs to Join Record Number Already Serving in Congress; More than 50 CPAs Elected as Lawmakers in their States

Two CPAs to Join Record Number Already Serving in Congress; More than 50 CPAs Elected as Lawmakers in their States 

Published December 20, 2012

In January, two more CPAs will be sworn into the House of Representatives than are currently serving.  Congressmen-elect Patrick Murphy of Florida and Tom Rice of South Carolina, both alums of Deloitte & Touche, will join eight of their colleagues, increasing the record number of CPAs currently serving in Congress to ten. 

In Florida, Patrick Murphy ran on the Democratic ticket against incumbent Alan West in a highly competitive race.  Murphy attended the University of Miami where he studied accounting and finance.  Following his graduation, he joined Deloitte & Touche where he served as an external auditor of large companies.  Congressman-elect Murphy will be one of the youngest members of the new Congress.

In South Carolina, Tom Rice, a Republican, won in a newly-created seat in South Carolina.  He attended the University of South Carolina studying accounting and later obtained a law degree.  While at Deloitte & Touche, Rice earned his CPA.  In 1997, he created his own law practice.

AICPA President and CEO Barry Melancon, CPA, CGMA said, "As the next Congress takes on the challenging and complex issues facing our nation, it is an opportune time to have CPAs in Congress.  CPAs like Patrick Murphy and Tom Rice are in tune with the overall realities of business and will bring with them to Washington, D.C. their unique skills in translating complex information solutions."

Murphy and Rice will serve in the House with the other CPA lawmakers: Representatives Brad Sherman (D-CA), Mike Conaway (R-TX), John Campbell (R-CA), Lynn Jenkins (R-KS), Collin Peterson (D-MN), Steven Palazzo (R-MS), James Renacci (R-OH) and Bill Flores (R-TX). 

The CPAs in the House are joined by Senator Mike Enzi (R-WY) and Senator Ron Johnson (R-WI) in the Senate who are accountants. 

CPAs Elected to State Legislatures

More than 50 CPAs were elected to state legislatures across the nation in the November elections.  Their election means that CPAs will continue to have a voice in their states' discussion about budget and other important issues in 2013. 

Watch a video of four state legislators explaining how their experience and background prepared them to serve as lawmakers.

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Sunday, December 23, 2012

70% of Small Business Owners are Very Concerned About the Fiscal Cliff

Uncertainty over looming fiscal cliff has small business owners fearing doom and gloom for 2013.

With the Fiscal Cliff Looming, Small Business Owners are Concerned, Very Concerned

Recent survey results show that small business owners are aware of the impending fiscal cliff, and they are concerned. A recent Sage North America survey found 70% of SMB owners are very concerned over the outcome of fiscal cliff negotiations and according to the November 2012 SurePayroll Small Business Scorecard, 61% of small business owners surveyed said in spite of the election being settled, they are still uncertain about the government's ability to avoid the fiscal cliff. In fact, the election did not have a very positive impact on small business owners' overall outlook – according to the Sage survey 48% responded that their outlook for 2013 is now worse than it was before the election. And that's not all, additional survey results show that not only are small business owners not optimistic, they are the most pessimistic they have been since the third quarter of 2010, according to the latest Wells Fargo/Gallup Small Business Index.

Despite Pessimism about Economic Outlook, Business Owners are Finding Ways to Remain Optimistic

Despite a lack of optimism, and even downright pessimism over the U.S. economy, small business owners were positive about their own businesses in 2012 and about finding opportunity in the face of difficulty. The Hartford's Small Business Success study found that in spite of an overall pessimistic view by small business owners, they are making the most of a slowed economy by taking lemons and making lemonade, so to speak. The report found that in response to difficult economic times 90% of those small business owners that responded to the survey are finding ways to cut costs, 76% are strengthening existing client relationships, 69% are prospecting for new clients, and 65% are refining their business strategy. Moreover, regardless of the difficulty they are facing, 85% of small business owners who responded to the Sage survey said that in 2012 their businesses performed either fair, good or very good. Inherent optimism – a required trait for entrepreneurs and small business owners.

Friday, December 21, 2012

Fitch warns #fiscal cliff could cost U.S. its AAA rating

By Marc Jones

LONDON | Wed Dec 19, 2012 6:56am EST

(Reuters) - Ratings firm Fitch said on Wednesday it is more likely to strip the United States of its triple-A status if a political deal is not reached to halt $600 billion of spending cuts and tax hikes set for early next year.

"Failure to avoid the fiscal cliff ... would exacerbate rather than diminish the uncertainty over fiscal policy, and tip the U.S. into an avoidable and unnecessary recession," Fitch said in its 2013 global outlook, published on Wednesday.

"That could erode medium-term growth potential and financial stability. In such a scenario, there would be an increased likelihood that the U.S. would lose its AAA status."

Fitch currently assigns the United States its highest rating but with a negative outlook. Peer Standard & Poor's has already downgraded the world's biggest economy, lowering the United States to AA+ in August 2011 - a move which appears to have done little to dull the attraction of U.S. bonds for investors.

Fitch added that an agreement on a multi-year deficit reduction plan to stabilize U.S. debt and public finances was likely to see the country keep its triple-A rating.

However, it went on to say that: "failure to put in place a credible fiscal consolidation strategy during 2013 would be likely to result in the U.S. losing its AAA status."

(for links click here and here)

(Reporting by Marc Jones; Editing by Catherine Evans)

How Eisenhower and Congressional Democrats Balanced a Budget

How Eisenhower and Congressional Democrats Balanced a Budget

The election results did not change the political status quo, and the status quo has not been conducive to solving the nation's festering fiscal problems.  In his victory speech President Obama pledged to seek bipartisan cooperation in solving problems, though  it is not going so well so far.  But we better hope that in the end he succeeds. That is the only way to avoid the fiscal cliff and cure the long-run fiscal imbalances that threaten our economic wellbeing.

Given the challenges faced by the president and Congress, it is instructive to look back almost 60 years to a time when divided government did not mean gridlock and intense ideological battles did not lead to paralysis. Unlike most presidents who followed him, Dwight Eisenhower truly believed that budgets should be balanced. Consequently, he was embarrassed when by early 1959 the budget deficit was heading toward $13 billion.

Today, that seems very small but it was the largest deficit since the aftermath of World War II. Eisenhower was determined to attain balance, and his 1960 budget incorporated severe spending restraint and only minor tax increases.

But budget balancing would not be easy. Democrats had won a landslide victory in the 1958 midterm elections and held large majorities in both the House and the Senate.

The composition of  the political parties and the budget were very different in 1959 than today. The Democratic Party contained extreme conservatives from the South like Richard Russell and John Stennis and liberals like Hubert Humphrey and William Proxmire. Republicans ranged from "Mr. Conservative" Barry Goldwater to Jacob Javits, who might now be considered a liberal Democrat.

Defense constituted about half of federal spending, compared with 18 percent in 2012. Social Security amounted to only 11 percent, compared with 22 percent today. Medicare and Medicaid, which have been growing very rapidly for decades, did not exist.

Foreshadowing his farewell warning about the military-industrial complex, Eisenhower had been hard on defense throughout his presidency. He was especially tough  on the Army, believing that large armies created a temptation to get into ground wars.

Yet, the Cold War was raging, the Soviet Union's Nikita Khrushchev was bellicose, and there was much discussion of a missile gap. Early in 1959 it appeared as though Congress, prodded mainly by conservative Southern Democrats, would significantly exceed Eisenhower's defense request. But  the president held firm and Congress agreed to an aggregate figure almost equal to  his request.

The most interesting budget battle of the year involved a major housing bill. First,  Congress passed a version that greatly exceeded  the president's request. But Democrats were very sensitive to being labeled "big spenders," so they pared the bill back. Eisenhower vetoed it anyway, arguing it would add to spending in future years. Lawmakers upheld his  veto.

Congress then  sent the bill back to the Oval Office with several changes aimed at satisfying the president. Surprisingly, Eisenhower  vetoed it again, and yet again Congress upheld his  veto. Congress revised the bill a third time, and finally the president signed it, although it still contained some items he opposed.

What explains Eisenhower's great success contending with a Congress controlled by the opposing party,  especially given  recent history of presidential budgets being  labeled "dead on arrival"?

There are two reasons. First, Eisenhower was amazingly popular. Over the eight years of his presidency, his approval rating averaged 64 percent. No subsequent president has come close to that. Congress took him on at its peril. Second, Eisenhower's  budgets were serious documents, and he was  willing to strongly defend them in speeches and  frequent news conferences, and by wielding the veto pen if necessary.

Recent budgets are often forgotten by the presidents who present them. Eisenhower issued 181 regular and pocket vetoes over his eight years to back his budget and other policies. George W. Bush issued 12, and until now Barack Obama has issued 2.

Even  Eisenhower did not always succeed. He twice vetoed a public works bill that he thought started too many projects. His  second veto was overridden—the only  veto battle he lost in the first 6-1/2 years of his presidency—proving that even a popular president better not come between a politician and pork.

Nevertheless, the final 1960 budget was  balanced. Admittedly, it was aided by a bit of luck and one big gimmick. The good fortune: The recovery from the 1958 recession turned out to be more vigorous than expected. The  gimmick: A large contribution to the International Monetary Fund was artificially moved forward into 1959 so it would not count against the 1960 budget.

But none of that detracts from Eisenhower's enormous success  working with a heavily Democratic Congress. Lyndon Johnson, the majority leader of the Senate, and Sam Rayburn, the speaker of the House, deserve some credit as well. They knew when to fight and when to give in. Are there lessons that might help to resolve today's fiscal gridlock?  I'll explore that question in tomorrow's blog.

Rudolph G. Penner is an Institute Fellow at the Urban Institute.  He was director of the Congressional Budget Office from 1983 to 1987.

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Fiscal Cliff Estimator Now Available

Fiscal Cliff Estimator Now Available

As Washington continues the debate surrounding the fiscal cliff and expiring tax provisions, CCH has launched a valuable tool that estimates how the different congressional proposals will affect you or your clients in 2013. The 2013 CCH Fiscal Cliff Estimator compares the current 2012 tax scheme against three major plans being debated—the full extension of the Bush-era tax cuts, the president's and Senate Democrats' proposal, and the expiration of the Bush-era tax cuts. The Estimator allows you to enter taxable income, capital gains, and dividend income, and then select one or more of the three major plans to compare against the current 2012 tax scheme.

Backed by CCH projections and estimates, you can see the estimated income tax with extensive details of each plan. To aid your research, each projection is also linked to CCH Tax Briefings that outline the tax policies and allow you to see further impacts, comments, and suggestions on how to strategize, depending on the final outcome of the negotiations.

The Estimator can be found on the IntelliConnect browse tree under "Federal Tax," "Federal Tax Legislation," "2013 Fiscal Cliff Tax Calculator."

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December 21, 2012 - End of the World?

Well, here we are at December 21, 2012.  Is it the beginning of the Golden Age or the end of the world?  I feel fine.  Do you feel fine?


Thursday, December 20, 2012

New CCH Fiscal Cliff Estimator Now Available on IntelliConnect, CCH Mobile: Know the Impact of Potential Tax Decisions Before They Happen

New CCH Fiscal Cliff Estimator Now Available on IntelliConnect, CCH Mobile: Know the Impact of Potential Tax Decisions Before They Happen

(RIVERWOODS, ILL., December 18, 2012) – CCH has introduced a powerful new tool helping taxpayers and their advisors stay a step ahead of fiscal cliff negotiations in Congress:  the CCH 2013 Fiscal Cliff Estimator. The tool provides a distinct tax planning advantage by comparing a taxpayer's 2012 tax liability against various pending tax packages currently being debated – including the latest tax proposals from the White House and Congress, the potential full extension of the Bush-era tax cuts, as well as their possible expiration at the end of the year. The tool is available via the CCH IntelliConnect® research platform as well as CCH MobileTM.

"While everyone waits for news on fiscal cliff negotiations, CCH's new Fiscal Cliff Estimator tool helps cut through all the uncertainty to paint a clearer picture of how certain scenarios may affect their tax returns," said Cindy Kaplan, CCH Product Marketing Manager. "The Estimator is fully integrated with CCH's latest projection and estimate data. It enables professionals to provide a tax planning advantage for their clients and also empowers individual taxpayers with an upper hand on research for planning ahead."

How it Works

The Estimator comparison tool allows users to enter taxable income, capital gains, and dividend income figures, and then select one or more of the three major plans to compare against the current 2012 tax scheme. It then provides estimated income tax figures with extensive details of each plan based on personalized inputs. The tool also organizes all the major tax topics currently on the negotiation table in a simple, easy-to-use layout.

Each tax scenario projection is also linked to CCH Tax Briefings that outline tax policies and tax planning considerations. CCH Tax Briefings explain and analyze potential tax policy impacts as well as provide summaries and comments on tax planning strategies – depending on the final outcome of fiscal cliff negotiations. Seamless content integration offers a convenient way to consolidate various scenarios – providing quick insight on tax strategies for practitioners and taxpayers who prefer to prepare their own returns.

For More Information

To learn more about CCH IntelliConnect, please visit and more information on CCH Mobile can be found by clicking here.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business ( is a leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading solutions are The ProSystem fx® Suite, CorpSystem®, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Follow us now on Twitter @CCHMediaHelp. Wolters Kluwer ( is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

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Toppling Over the Fiscal Cliff Could Cost low-Income Families $1,000 in Reduced Tax Credits

Toppling Over the Fiscal Cliff Could Cost low-Income Families $1,000 in Reduced Tax Credits

The 2001-10 tax cuts placed substantial emphasis on "pro-family" tax reform. The more prominent features favoring families with children included a doubling of the Child Tax Credit (CTC) to $1,000 per child and making it broadly refundable, increasing the Earned Income Tax Credit (EITC) for families with at least 3 children, increasing the point at which the EITC starts to phase out for married couples, increasing the credit rate of the Child and Dependent Care Tax Credit (CDCTC) for some families, and increasing the expenses eligible for a CDCTC for all families.

If left in place, in 2013 families with children would see over $43 billion in benefits from these provisions. But  absent Congressional action, these expanded benefits will disappear over the cliff. Should the EITC, CTC, and CDCTC revert to their pre-2001 form, the Tax Policy Center estimates nearly three-quarters of all families with children will see their taxes rise or net rebates decline by an average of almost $1,200, compared with what they would pay if the provisions were extended. Keep in mind  those changes would be in addition to  the broad tax hikes that would  affect nearly all working families such as  the expiration of the payroll tax cut  and any increase in marginal tax rates for all families with income above the tax entry thresholds.

Most low income and middle income families with children will see their taxes rise (almost 72 percent of families in the lowest 20 percent of incomes  and 89 percent of families in the second income quintile), in many cases by a substantial share of their income. Among families whose taxes go up, the average increase will exceed $1,400 for families in the lowest quintile and $1,600 for families in the second quintile (see chart). Most of this increase comes from the reduction in the CTC to pre-2001 levels. Although the child credit phases out and the EIC is unavailable at higher incomes, even families in the top quintile are not immune to tax increases stemming from these three provisions. Just over one-third of families with children in the highest income quintile will see their taxes rise in 2013 by an average of about $600.


If Congress and  President Obama can reach a deal (either before or after January 1), it's likely to include an extension of the doubled CTC, higher income cut-offs for married couples claiming the EITC, and the increases to the CDCTC.  This would preserve these benefits for most families.  But  the fate of other provisions, such as the reduced refundability thresholds for the CTC and the increased EITC for families with at least 3 children, are much less clear. For instance, neither is included in the  House Republican Budget Plan. Those provisions deliver the lion's share of benefits to those in the lowest income households.  

Today, we still don't know how the ongoing budget debate will end.  But the debate thus far leaves the most vulnerable families quite close to the edge.

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Wednesday, December 19, 2012

Everything you need to know about Chained CPI in one post #fiscal cliff

Here is a sentence you won't hear politicians or policy wonks saying in the next few weeks: "We should pay Social Security beneficiaries less in the future and push a lot of people into higher tax brackets." Here is a sentence you almost certainly will hear: "Let's adopt chained CPI."

Welcome to the dark art of obscurantist deficit reduction. Of course, the only ways to cut the deficit are by increasing tax revenue (either through higher rates, fewer deductions, or faster growth) or cutting spending. But both of those methods are unpopular. So, to get any support for their plans, politicians who insist on cutting the deficit have to find ways to cut spending or raise taxes that don't look like they're doing just that. Perhaps the most popular option along these lines is adopting "chained CPI."

Here's how it works: Numerous government programs, most notably Social Security benefits and the income thresholds for tax brackets, are indexed for inflation. But inflation can be measured in a number of ways. The tax code, for instance, uses CPI-U (Consumer Price Index – Urban), which measures prices for consumers in urban areas, to adjust the income cutoffs for different tax brackets. Social Security uses CPI-W, which is like CPI-U but only counts prices paid by urban wage-earners, not all consumers.

Various deficit-reduction frameworks, including Bowles-Simpson, Domenici-Rivlin and the Gang of Six plan, would convert all programs using CPI-U or CPI-W to a third measure — called C-CPI-U, or chained CPI. Most inflation measures, including CPI-U and CPI-W, track the price of a certain basket of goods. That basket could include, say, a year's supply of propane. When propane costs go up, CPI-U and CPI-W include that as an increase in the cost of living.

But some people would just stop using propane if its price went up. They'd switch to electric heating, or a geothermal system, or a wood stove. So their actual heating costs wouldn't go up as much as CPI-U and CPI-W would suggest. Chained CPI attempts to take "substitution effects" like this into account. Thus, its number generally rises more slowly than other metrics.

That adds up to a big cut in Social Security benefits. Imagine, for example, a person born in 1935 who retired to full benefits at age 65 in 2000. According to the Social Security Administration, people in that position had an average initial monthly benefit of $1,435, or $17,220 a year. Under the cost-of-living-adjustment formula and 2012 inflation, that benefit be up to $1,986 a month in 2013, or $23,832 a year. But under chained CPI, the sum would be around $1,880 a month, or $22,560 a year. That's a cut of over 5 percent, and more as you go further and further into the future:

The results by using chained CPI for taxes are also striking. The Tax Policy Center calculated the income tax increases that would be caused by a switch to chained CPI. They're not big — a little more than $100 a year for most families — but they're oddly regressive:

The group getting the biggest tax hike is families making between $30,000 and $40,000 a year. Their increase is almost six times that faced by millionaires. That's because millionaires are already in the top bracket, so they're not being pushed into higher marginal rates because of changing bracket thresholds. While a different inflation measure might mean that the cutoff between the 15 percent and 25 percent goes from $35,000 to $30,000, the threshold for the top 35 percent bracket is already low enough that all millionaires are paying it. Some of their income is taxed at higher rates because of lower thresholds down the line, but as a percentage of income that doesn't amount to a whole lot.

All told, chained CPI raises average taxes by about 0.19 percent of income. So, taken all together, it's basically a big (5 percent over 12 years; more, if you take a longer view) across-the-board cut in Social Security benefits paired with a 0.19 percent income surtax. You don't hear a lot of politicians calling for the drastic slashing of Social Security benefits and an across-the-board tax increase that disproportionately hits low earners. But that's what they're sneakily doing when they talk about chained CPI.

That's why watchdog groups like the Center for Budget and Policy Priorities argue that the only fair way to do chained CPI would be to pair it with an increase in Social Security benefits, and to exempt Supplemental Security Income, which provides support for impoverished elderly, disabled and blind people. Otherwise, it's just a typical "raise taxes, cut benefits" plan, and an arguably regressive one at that.

Tuesday, December 18, 2012

ProAdvisor Profile o

via Parrott CPA

How to Control Entitlements: A Challenge Ike Did Not Face

How to Control Entitlements: A Challenge Ike Did Not Face

Yesterday, I described President Eisenhower's remarkable success in turning  a large deficit in fiscal 1959 into a balanced budget in 1960.  It was one of the biggest fiscal consolidations since World War II. 

Although it was a very different time, there are lessons relevant to today's fiscal challenges.  One is that a president need not lose popularity just because he fights hard to impose a responsible, austere budget. Another is that Congress and the president  can have intense ideological battles without  paralyzing  government.

Admittedly, this was easier when both Democrats and Republicans were more diverse ideologically and some of the most intense philosophical battles raged within the parties, not between them.

But the biggest difference may be in the nature of government spending. In 1959, Medicare and Medicaid did not exist. Today, nearly half of noninterest spending is in just two areas: Social Security and health. Almost all this spending is on entitlements.

Entitlement programs are not subjected to a budget in the same way  discretionary programs face spending limits  imposed  annual appropriations. Entitlements define an eligible population and describe the benefits to which they are entitled. Then we pay for anyone who shows up to make claims. The spending is on automatic pilot.

Somehow we must find ways to gain control over what are often called "uncontrollables." If and when we can, the budget will look more like that of 1960 when the bulk of spending was under the direct control of annual congressional appropriations. It may seem impossible, but it can be done.

Countries like Canada and the United Kingdom subject their national health programs to a budget, and the system must live within it. A Medicare budget would be imposed by the "premium support" plans advocated by the Domenici-Rivlin debt reduction commission,  and House Budget Committee Chairman Paul Ryan (R-WI) and Senator Ron Wyden (D-OR).

 Under such a system, Congress would allocate a fixed  amount of money each year to finance income-related subsidies that enable Medicare enrollees  to buy health insurance.  The hospital and physician insurance parts of Medicare would look very much like Medicare's prescription drug program and the new health insurance exchanges created by the recent health reform, but with stricter controls over the amounts budgeted.

An alternative approach would subject programs to triggers that would be pulled if the programs become financially unsustainable. For example, a Social Security trigger might gradually and automatically raise the normal retirement age and raise payroll tax revenues whenever the program faces financial problems.

Such triggers have not been very effective in the United States, but more appealing designs in Sweden, Canada, and Germany are worth studying. It is not exactly like imposing a strict budget, but it imposes some discipline where there is now very little.

We cannot exactly emulate the past, and there is no doubt that budgeting used to be easier. But it is also true that the will to govern was much stronger in the past. That will must be renewed.  The stakes are high and time is running out.

Rudolph G. Penner, an Institute fellow at the Urban Institute, directed the Congressional Budget Office from 1983 to 1987.

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American Businesses Enter Major Phase of Economic Census - Economic Census - Newsroom - U.S. Census Bureau


American Businesses Enter Major Phase of Economic Census

The U.S. Census Bureau is mailing nearly 4 million forms to American businesses, as the official twice-a-decade measure of the economy continues rolling out. Economic census forms began being mailed in October. The majority of the forms will be mailed beginning today. Most U.S. businesses with paid employees will receive a form in the coming weeks. The Census Bureau will collect responses until the Feb. 12 deadline, unless an extension is filed.
"The economic census provides accurate benchmark statistics that are fundamental building blocks of economic indicators, such as the gross domestic product, monthly retail sales and the producer price index," said Thomas Mesenbourg, acting director of the Census Bureau. "Information about the economy available only from the economic census helps businesses plan and grow, and helps guide government policies."
The 2012 Economic Census covers more than 1,000 industries in all sectors of the private, nonfarm economy. To create a snapshot of the American economy, the census asks businesses to provide basic information on revenue, employment and payroll, and industry-specific topics such as the products and services they provide.
Every five years — in years ending in "2" and "7" — the economic census collects reliable business statistics that are essential to understanding the American economy. The economic census is the only source providing information on industry revenues and other measures of American business performance that are consistent, comparable and comprehensive across industries and geographic areas.

Operational Details

The 2012 Economic Census results will be the earliest ever. Major innovations, such as enhanced electronic reporting software and a Web-based reporting option for smaller businesses, will make reporting easier. These innovations also will shorten the processing time, which in turn will allow the Census Bureau to release statistics in a timelier manner.
"For the first time, we intend to release preliminary results from the economic census within a year of the collection," said William Bostic, associate director for economic programs at the Census Bureau. "Along with our monthly and quarterly economic indicators, the economic census will provide timely and relevant statistics that will give a good picture of American businesses."
The Census Bureau will continue publishing the economic census results, with more detailed industry and geographic-level reports, through 2016. Complete information on the operational schedule of the economic census can be found at
The Census Bureau has set up a help site to answer respondents' questions about the economic census.

For More Information

Earlier this year, the Census Bureau launched a new website,, dedicated to informing the public about the economic census. The website features testimonials from business owners, government officials and other key individuals. The website also provides examples on how economic census statistics are used, including products such as business snapshots that provide quick overviews of numerous business statistics by industry and state.
Want to know more about the U.S. economy? America's Economy is the first mobile app from the Census Bureau that provides smartphone and tablet users with the real-time government statistics that drive business hiring, sales and production decisions and assist economists, researchers, planners and policymakers. The economic indicators track monthly and quarterly trends in industries, such as employment, housing construction, international trade, personal income, retail sales and manufacturing.

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#Fiscal Cliff, Like Watergate, Creeps Into Lexicon - ParrottCPA says, "MERRY CLIFFMAS!!"

"Over weeks of congressional wrangling, fiscal-cliff references have leached into the nation's consciousness like lead into the groundwater. In Washington, where the cliff debate has dominated the news, it has spawned papier-mâché Halloween costumes, gift ideas, puns and a 25%-off promotion at a mountaineering outfitter.

This month, the debate inspired an award-winning "Cliffmas" cookie. Sequestration Snacks, a pastry named for the mandatory cuts in federal programs, won the Pentagon's annual holiday bake-off. The recipe, like many details of the fiscal-cliff talks, remains a secret.

At Napa-based Cliffside Winery, the impasse on the opposite coast has increased sales. Orders from Washington, D.C., Maryland and Virginia have climbed 15% since the cliff debate resumed in earnest last month. Customers often reference the fiscal cliff when placing orders, bringing small-town call center operators into the know, said company spokeswoman Hilarie Spater."

Hopes rise for #fiscal cliff# deal as Obama, Boehner meet

"In its most dramatic change in position yet, the White House proposed leaving lower tax rates in place for everyone except those earning $400,000 and above, the source said on condition of anonymity. That's up from the $250,000 threshold the president has been demanding for months, but still far from Boehner's preference of $1 million.

Obama also moved closer to Boehner on the proportion of a ten-year deficit reduction package that should come from increased revenue, as opposed to cuts in government spending. Obama is now willing to accept a revenue figure of $1.2 trillion, down from his previous $1.4 trillion proposal."

Monday, December 17, 2012

IRS delays rules distinguishing tips from service charges

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Tax News 2012 Year-End Tax Planning Strategies

2012 Year-End Tax Planning Strategies

Philadelphia (December 12, 2012)
By Steven J. Fromm
With less than 30 days left in 2012, there is still time to do some year-end tax planning. This 2012 tax year is more difficult in that no one knows how the tax laws may change before the end of the year.

With certain tax deductions and credits due to expire at the end of 2012 (sunset provisions) and new higher tax brackets kicking in next year (the end of the Bush-era tax cuts), year-end tax planning is harder than ever.

However, income tax planning must go on, even in this uncertain tax environment. As a result, it is essential to know the customary year-end planning techniques that cut income taxes.

It all starts with a tax projection of whether the taxpayer will be in a higher or lower tax bracket next year. Once their tax brackets for 2012 and 2013 are known, there are two basic income tax considerations.

• Should income be accelerated or deferred?

• Should deductions and credits be accelerated or deferred?

Example: For income taxed at a higher tax bracket next year, accelerating such income to 2012 results in less taxes being paid. At the same time, deductions and tax credits deferred into next year will become more valuable as they offset income taxed at a higher bracket.

However, life is never that simple. Tax law uncertainty, especially this year, makes for some real guesswork. As discussed below, when it comes to certain deductions that have tax threshold limitations, bunching of deductions to one year may force the timing into a tax year where the tax bracket is lower than the other tax year in question. Year-end tax projections must take into account the maddening Alternative Minimum Tax.

In any event, the following lays out the basic ideas for income acceleration and deduction/credit deferral in a rising income tax bracket environment.

Income Acceleration 

For taxpayers who think that they will be in a higher tax bracket, here are some targeted forms of income to consider accelerating into 2012.

• Receive bonuses before January 1, 2013. If your employer allows you the choice, this may create some significant income tax savings. Also, be aware that certain high-income earners will pay an extra 0.9 percent in Social Security taxes on earned income above certain thresholds starting in 2013.

• Sell appreciated assets. With capital gains being taxed at a higher rate in 2013, it may make sense to sell such assets before the end of the year.

Example: Mr. Appreciation has low basis stock that has appreciated by $200,000 as of December 2012. He thinks he will need to liquidate his positions either this year or next. His $200,000 gain will generate $30,000 in federal taxes in 2012 (15 percent tax). If Mr. Appreciation waits until 2013, the tax rate may be 25 percent (or more due to the 2013 higher capital gain rate and 3.8 percent surcharge and itemized deduction limitations) with a tax of $50,000 in 2013. As a result, a sale in 2012 may save $20,000.

Note, however, that for an older taxpayer or one in ill health, this strategy may not make sense, since there would be no capital gains (because of the step up in basis rules) if the assets passed through his or her estate.

Planning note: The wash sale rules do not apply when selling at a gain, so taxpayers can cash out their gains and then repurchase the securities immediately afterwards.

• Redeem U.S. savings bonds. Be aware that starting in 2013, a new 3.8 percent Medicare tax on unearned income, including interest, dividends and capital gains, will take effect. So cashing in these bonds may make sense in the proper situation.

• Complete Roth conversions. Taking into income the monies in IRA accounts in a year before your tax bracket is due to rise may make for some significant tax savings.

• Accelerate debt forgiveness income with your lender.

• Maximize retirement distributions. Remember the minimum required distributions are the amounts distributed each year to avoid the draconian 50 percent MRD penalty. However, taxpayers with IRAs can choose to take larger distributions this year to have such income taxed at a lower income tax rate than in 2013.

• Electing out or selling outstanding installment contracts. Disposing of your installment agreement may bring the deferred income into 2012 at a lower tax rate than anticipated in future years. It may be helpful to pay tax on the entire gain from an installment sale in 2012 by electing out of installment-sale treatment under Section 453(d) of the Internal Revenue Code, rather than deferring tax on the gain to later years. Conversely, in certain situations, installment-sale treatment may be a better option, since it allows for spreading of income over multiple years, which may keep taxpayers below the modified adjusted gross income threshold.

• Accelerate billing and collections. If you report income on a cash basis method of accounting, immediately sending out bills to increase collections before the end of the year may result in significant tax savings.

• Take corporate liquidation distributions in 2012. Senior or retiring stockholders contemplating the redemption or sale of their shares of stock in their corporation can save considerable taxes by selling their shares in 2012.

Deductions and Tax Credit Deferrals

• Bunch itemized deductions into 2013 and take the standard deduction into 2012. Note, however, that the AGI limitation rises to 10 percent in 2013 from the current 7.5 percent (except for those over age 65), so this limitation may dictate the opposite strategy in certain taxpayer situations.

• Postpone paying certain tax-deductible bills until 2013.

• Pay the last state estimated tax installment in 2013.

• Postpone economic performance until 2013 if you are an accrual basis taxpayer.

• Watch adjusted gross income ("AGI") limitations on deductions/credits. For certain expenses such as elective surgery, dental work, and eye exams, it would be better to have it done in the year that you are already above the applicable AGI threshold. However, it may be better to incur these expenses in 2012 where the applicable AGI limit (7.5 percent) is lower than the 2013 limit (10 percent for those under 65). It all depends on the particular tax situation of each taxpayer.

• As mentioned above, watch the AMT. Missing the impact of the AMT can make certain year-end strategies counterproductive. For example, aligning certain income and deductions to cut regular tax liability may, in fact, increase AMT liability. It is very easy to have your tax planning backfire by missing the difference between the regular tax and AMT tax rules.

Example: Do not prepay state and local income taxes or property taxes if subject to the AMT. It will generate no income tax benefit.

• Watch net investment interest restrictions.

• Match passive activity income and losses.

• Purchase machinery and equipment before the end of 2012. The very generous current Section 179 deductions decline in 2013 to $25,000 and there is no 50 percent bonus depreciation in 2013.

Final Thoughts and Warnings

Remember that these are some of the customary year-end income tax strategies and are not all-encompassing. Taxpayers must take into account slated tax law changes for next year and last-minute tax laws enacted before year-end. Accelerating tax payments must take into account the impact on cash flow and the present value of money. This is why it is essential to "run the numbers" to find the best steps to reduce the impact of these new tax laws.

Also keep in mind that recent tax law changes, like the 3.8 Medicare tax that applies to 2013, bear heavily on income tax planning.

Most important, remember that income tax strategies depend on the specific income or expenses of each taxpayer and their overall income, gift and estate tax setting. This discussion offers some but not all tax strategies.

As always, it is quite beneficial for a taxpayer to have a tax professional look at the details of their particular income tax situation to carve out specific tax strategies to cut taxes owed.

Steven J. Fromm, LL.M., is an estate planning, tax and probate attorney and blogger in Philadelphia. You can find more information on this topic and others on his blog.

Controlling Debt Should Drive Fiscal Talks Says CRFB

Controlling Debt Should Drive Fiscal Talks Says CRFB

President Obama and House Speaker John Boehner, R-Ohio, should put together a broad framework of a deficit-reduction plan that puts the debt on a clear downward path relative to the economy as a whole as part of their fiscal cliff negotiations, according to the Committee for a Responsible Federal Budget (CRFB), a well-respected Washington-based think-tank that employs Alan Simpson and Erskine Bowles.

The report, entitled "What We Hope to See from the Fiscal Cliff Negotiations," reflects the CRFB's concern that, as policymakers publicly state their intentions to hold firm on partisan policy differences, time is running out to address the real problem—stagnant economic growth. In a brief December 11 appearance on the House floor, Boehner called on Obama to "get serious" about spending cuts. "The longer the White House slow-walks this process, the closer our economy gets to the fiscal cliff," said Boehner. His short speech indicating a new Republican focus on addressing spending cuts still misses the point of the CRFB.

The CRFB report recommends that policymakers address the short- and long-term obstacles posed by the fiscal cliff and rising federal debt by pursuing a gradual and pro-growth deficit-reduction package. Obama, for his part, held no public events on December 11, and expectations now turn to the likelihood of a quick deal hashed out in private by the president and Boehner, likely by week's end. The agreement would likely allow rates to rise on the wealthy and some specific cuts to entitlement programs in order to avoid going over the fiscal cliff, with the real work to come in 2013.

White House spokesman Jay Carney said that the president believes an agreement is possible prior to the holiday recess. "There is a deal out there that's possible, and we do believe that the parameters of a compromise are pretty clear. What is required is agreement by Republicans to some specific revenues, including raising rates on the highest earners, and some decisions in the two-stage process that we've put forward and I think the Republicans agree on, on how we move forward on spending cuts and broader entitlement and tax reform," said Carney. "The fact that there could be theoretical ways of reaching that goal that are different from the one proposed by the president may be true, but we have yet to see anything along those lines from our negotiating partners, any specificity at all, or any acknowledgment in any concrete way from Republican leaders even that rates have to be part of this," he said.

Along with an agreement on a larger debt reduction framework, the CRFB believes lawmakers should address the elements of the fiscal cliff by extending some or all of the expiring policies and repealing or delaying the sequester. The changes could be temporary in order to help enforce further debt reduction, or permanent if a new enforcement mechanism is put in place.

Time constraints make full design and implementation of the report's recommendations impossible before the end of 2012; to that end, the CRFB is also urging lawmakers to specify a process and timeline through which they will achieve all the agreed-upon savings. And they say a special process must be backed up with an enforcement mechanism to incentivize action and ensure the deficit reduction occurs even if Congress does not act.

Extending the expiring provisions and waiving the sequester would avert a recession, but at the cost of ever-rising debt with serious medium- and long-term repercussions, according to the CRFB. Both Moody's and Fitch have made it clear that failing to address the federal debt would likely lead to a downgrade of U.S. debt in 2013.

The report can be found on the CRFB's website at: .

By Jeff Carlson, CCH News Staff

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Benefits Council Warns that Taxing 401(k) Contributions Would Lead to Fewer Plans

Benefits Council Warns that Taxing 401(k) Contributions Would Lead to Fewer Plans

Curtailing the current tax treatment of contributions that workers and their employers make to 401(k) retirement savings plans would significantly reduce employers' willingness to sponsor plans and employees' ability to save, according to a survey of over 500 companies by the American Benefits Institute (ABI).

The survey found that 91 percent of employers believe the exclusion of 401(k) contributions from current income taxation is important to their workers' decision to contribute to the plan and seven in ten employers (72 percent) think their workers contribute more than they otherwise would as a result of the exclusion. "Between one-third and one-half of employers think these proposals would cause them to drop or consider dropping their 401(k) plan," said Council President James A. Klein. "Quite remarkably, the likelihood an employer would drop or consider dropping its plan, or eliminate or reduce features like matching contributions or auto-escalation of contributions actually increases among larger employers."

Klein said the survey demonstrates that it would be "shortsighted and ill-advised" for Congress and the president to consider generating short-term federal revenue by changing the current tax-deferred treatment of 401(k) contributions as part of a deal to avoid the fiscal cliff, or in the context of broader deficit reduction in 2013. "Retirement plan contributions are not "tax breaks" or "loopholes." Retirees pay income tax on the benefits they receive," noted Klein.

The survey also solicited employer reactions to specific tax proposals: the "20-20″ proposal, in which total contributions would be limited to the lesser of $20,000 or 20 percent of compensation; the refundable tax credit proposal, in which total contributions would no longer be excluded from income tax, but employees would receive a tax credit equal to some percentage of their yearly contributions; and the 28 percent proposal, whereby the tax exclusion of plan contributions for workers in the 35-percent tax bracket would be limited to 28 percent—effectively imposing a 7-percent tax on employee and employer contributions.

By Jeff Carlson, CCH News Staff

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The Real #Fiscal-Cliff Story Is That the GOP Won

IRS Tax Watch IRS: 21-Day Refunds Likely Again in 2013

The IRS said that it issued more than nine out of 10 refunds to taxpayers in less than 21 days last year, and expects the same results in 2013.

On its Web page titled What to Expect For Refunds in 2013, the service reports that even though it issues most refunds in less than 21 days, "it's possible your tax return may require additional review and take longer."

The page also provides a link to the "Where's My Refund?" page, which has been updated this year to include a tracker that displays progress through the receipt of the return, its approval and when it was sent. In 2013, clients and preparers can start checking on the status of returns within 24 hours after the service receives an e-filed return, or four weeks after the mailing of a paper return.

Read more

The service had come under some criticism early last tax season for delays in issuing refunds, many of which were caused by new anti-fraud processes (see "IRS Fraud Detection System Leads to Refund Delays"), but had largely sorted those issues out by the end of last tax season.

Why the Senate’s Tax Bill is No Way Out of the Fiscal Impasse

Why the Senate's Tax Bill is No Way Out of the Fiscal Impasse

With fiscal cliff talks seemingly stalled (at least today) , there has been growing talk that House Republicans would call President Obama's bluff and simply pass the Middle-class Tax Cut Act approved by the Senate last summer. But for all the chatter, nobody has paid much attention to what is, and is not, in that bill.

They should, because a close look at the details suggests this option may not be quite so attractive to the GOP, or to anyone else who thinks seriously about tax policy. Granted, it may be politically tempting. In the words of fellow blogger Keith Hennessey (who has great connections with GOP insiders), such a step would be "terrible but not inconceivable."

The bill extends for one year several provisions of the 2001-2009 tax cuts. For instance, it temporarily continues the low 2001-2003 ordinary income rates for individuals making less than $200,000 or couples making less than $250,000, repeals the limits on itemized deductions and personal exemptions (aka Pease and PEP), and extends marriage penalty relief. It also temporarily extends relatively generous treatment of the child tax credit and the earned income tax credit.

The measure also raises the tax rate on capital gains and dividends to 20 percent for high income households, and retains a zero rate on investments for those with very low incomes.

However, the measure also allows the payroll tax to expire and does nothing to replace it, a step that would raise taxes on many low- and moderate-income workers. It patches the Alternative Minimum Tax, but for 2012 only. While this addresses the immediate problem for those who have to file their 2012 returns starting in a few weeks, it does nothing to patch the AMT for tax year 2013.

It also returns  the estate tax to its 2001 levels, where the exemption is only $1 million and the tax rate is 55 percent. This provision alone seems anathema to Republicans, who'd be turning their back on Obama's proposal to raise the exemption to $3.5 million and cut the rate to 45 percent. And it won't make many Democrats happy either.

Overall, the Tax Policy Center estimates that relative to current law (that is, where all the 2001-2010 tax cuts expire), the Senate Democrat's bill would cut taxes by an average of about $1,000 in 2013. Not surprisingly, nobody making less than $200,000 would pay more. Those making $75,000-$100,000 would pay about $1,400 less on average. Those making $1 million or more would enjoy a tax cut of about $26,000.

Relative to current policy, (where most of the 2001-2010 tax cuts are extended) the story looks very different, however. TPC figures the typical household would pay more. The average tax increase would be about $1,200 in 2013. But millionaires would pay substantially more—about $136,000 more than under today's tax rules.  Those making between $100,000 and $200,000 would pay about $2,500 more.

Keep in mind that TPC's policy baseline assumes the 2010 payroll tax cut expires and the rate returns to 2009 levels. Thus, it does not reflect higher payroll taxes that would be withheld from most paychecks  if the Congress adopts last summer's Senate bill. On average, this will cost a worker about $700 next year.

These consequences suggest this option may generate a lot less enthusiasm than some suggest in the ongoing game of political chicken.

But the real reason the bill is so problematic is that it serves as nothing more than a can to be kicked down the proverbial road. It makes no effort to set permanent tax policy, and will leave taxpayers in exactly the same situation a year from now as today, except with somewhat lighter pockets.

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How to Control the Costs of Kids' Extracurricular Activities

How to Control the Costs of Kids' Extracurricular Activities

Clare Levison, a member of AICPA's National Financial Literacy Commission, provided Fox Business with some tips on how parents can stay within budget while making sure their kids schedule's stay packed with fun activities.

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Sunday, December 16, 2012

Give Now or Pay Later: The Ever-Changing Estate and Gift Tax

Give Now or Pay Later: The Ever-Changing Estate and Gift Tax

For over a decade, the federal estate and gift tax has been in constant flux with its exemption rising, its rates falling, and its near-death experience in 2010 followed by resurrection in a reduced state. Now Congress once again has to decide what to do about these levies, which affect relatively few taxpayers but get an inordinate amount of attention. Calling something the "death tax" will do that.
For a few more weeks, the estate and gift tax exempts $5 million of gifts or bequests and taxes any excess at 35 percent. In January, unless Congress acts, the tax will return to its old pre-2001 self with a $1 million exemption and a 55 percent top rate. That possibility means that the wealthy once again have to decide what to do with their assets.
Of course, Congress can prevent most of this mess. President Obama wants to revert to the 2009 parameters—a $3.5 million exemption and a 45 percent tax rate. Others want make this year's tax permanent. Some deficit hawks want to let the rate and exemption return to pre-2001 levels to collect needed revenue. And, of course, many people would like the taxes to go away altogether.
The Tax Policy Center, in newly updated tables, shows how different policies would affect the number of estates subject to tax and the amount of revenue the government would collect. If Congress extends this year's rules, an estimated 3,800 estates—representing less than 0.2 percent of all deaths—would owe taxes totaling just $12 billion in 2013. If the temporary tax cut expires, more than 47,000 estates would pay nearly $38 billion.
While the estate tax has gotten most attention, the gift tax also faces big changes. Since 2010, anyone could give away as much as $5 million worth of assets to other people without owing any gift taxes to Uncle Sam. Married couples could distribute twice that much. If you give away even more, you owe 35 percent in federal gift tax on the excess.
But if Congress doesn't act over the next few weeks, the exemption will plummet to just $1 million on January 1 and the tax rate will jump to 55 percent. That's a real incentive to be very generous before the end of the year. Give $5 million to your favorite niece this month and it costs you $5 million. Give her $5 million next month and, barring congressional action, you'll also have to give Uncle Sam more than $2 million in gift tax.
One advantage of this year's large gift tax exclusion and low tax rate is that they match the estate tax parameters—you don't have to die to take advantage of the bargain basement prices for passing on your wealth.
However, giving while you're still alive has one big disadvantage if you are gifting assets that have appreciated in value. Your gift to your niece comes with your basis—what you paid for the asset. When she sells the asset, she will owe tax on both your capital gain and any appreciation after the gift. If she inherits the asset, your niece will owe capital gains tax only on the gains that occur after your death.
Discussions of the looming fiscal cliff have paid scant attention to estate and gift taxes. But wealthy people might do well to consider being very generous this month and giving very large gifts at today's bargain tax prices.

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Tax Question May Determine Supreme Court’s Position on Same-Sex Marriage

Tax Question May Determine Supreme Court's Position on Same-Sex Marriage
Last week, the U.S. Supreme Court granted certiorari in two cases that may decide the constitutionality of same-sex marriage. One of the two cases, Windsor v. U.S., came to the Court by way of the tax code. In Windsor the high court will consider whether the decedant's same-sex spouse qualified for the unlimited marital deduction under IRC Section 2056(a). Whether, and how, the court ultimately rules remains to be seen but the tax code may once again be the basis for a far-reaching decision out of the Supreme Court.   

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Paying 2013 Dividends in 2012 May Save on Taxes but Not for Everyone

Paying 2013 Dividends in 2012 May Save on Taxes but Not for Everyone

Regardless of the outcome of the fiscal cliff negotiations, taxes on dividends will be higher in 2013 than in 2012. As a result, companies can save some shareholders plenty of taxes by paying some of next year's dividends this year.

But not every shareholder will benefit from this presumed largess. While the very wealthy will be winners, many middle-income investors could be worse off.

For instance, that extra dividend income could throw some shareholders onto the alternative minimum tax. Some retirees could see more of their Social Security benefits subject to income tax. Some families with children will pay more tax as their child credits phase out.

While some investors would be hurt by the accelerated dividend payouts, many low- and middle-income taxpayers could benefit. Taxpayers in the 15 percent bracket and below will owe no income tax on 2012 dividends but would pay their ordinary tax rate on 2013 dividends if Congress doesn't act. That includes many retirees who rely on dividend income to support themselves.

Two tax increases  are scheduled to hit dividends next year:

  • New taxes associated with Obamacare will kick in for high-income households. Dividends will be subject to a new 3.8 percent tax on investment income above a threshold—$250,000 for couples and $200,000 for singles.*
  • Tax rates for dividends revert to ordinary rates as high as 39.6 percent, up from the current top rate of 15 percent.

The first tax hike is certain. The second is tangled up in fiscal cliff negotiations and will occur if Congress and the president do not agree to extend current tax rates for dividends. Even a compromise could raise taxes on dividends for high-income taxpayers.

Some dividend-paying companies are doing their wealthier shareholders a big favor by paying some of their 2013 dividends in 2012. High-income taxpayers will pay a 2012 tax at a rate that is at least 3.8 percentage points lower, and possibly nearly 30 percentage points lower, than they would pay on 2013 dividends.

Some big companies have shifted their January dividend payments back to this month. For example, Wal-Mart, nearly half of which is still owned by members of the Walton family, moved its quarterly dividend from January 2 to December 27. Even if Congress extends all of the 2001-2010 tax cuts, Walton family shareholders alone stand to save at least $20 million in income tax because of the early payment.

Costco went its competitor one better, borrowing $3.5 billion at today's rock-bottom interest rates so it could pay its shareholders a $7-a-share special dividend. After federal income tax, that's worth more than $5.40 a share to even the highest-income recipients. If Costco paid that dividend next year and we go over the fiscal cliff, high-income shareholders would net about a quarter less.

We'll never really know why firms accelerated their dividend payments. The new Obamacare taxes alone might have been a big enough inducement. Or perhaps they were driven by the threat of going over the fiscal cliff. But the important thing to keep in mind is this is little more than the kind of timing change that often occurs when tax rates are adjusted. It may bump up federal revenues for tax year 2012, and knock them back a bit in tax year 2013. But five years from now, it will all be lost in the economic noise. The only people who will remember may be those unlucky investors who ended up paying more tax in 2012 than they expected.

* The 3.8 percent tax actually applies to the lesser of investment income and the amount by which adjusted gross income exceeds the $250,000 or $200,000 thresholds. Thus, a couple with $300,000 of earnings would pay the tax on all of their investment income, while a couple with $225, 000 of earnings and $100,000 of investment income would pay the tax on $75,000—the first $25,000 would be income below the cap.

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Saturday, December 15, 2012

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Thursday, December 13, 2012

Trade Deficit, #Fiscal Cliff Threaten Second Recession

Morici: Trade Deficit, Fiscal Cliff Threaten Second Recession

The $500 billion annual trade deficit is a major drag on domestic demand, and will likely worsen in the months ahead. Together with a deal to slash the federal budget deficit that raises taxes and cuts government spending by a combined $250 billion, the trade gap could thrust the economy into recession again.

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#Estate #Tax Is Also Sitting on the Edge of a #'Cliff'

Estate Tax Is Also Sitting on the Edge of a 'Cliff'

The fight over revenues from the wealthy has largely focused on income taxes. But there's another tax that's also becoming the source of a growing dispute in Washington: the estate tax.

Full Story: Article: Looking for Signs of a #'Fiscal Cliff' Deal

Looking for Signs of a 'Fiscal Cliff' Deal

Here are four indicators that we're still on track for a deal. As long as all these dynamics continue to play out, markets should bet that its unlikely we'll go over the fiscal cliff at the end of the year. But of course, things could change at any moment.

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