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I just got word that Cuno v. DaimlerChrysler was decided for DC because…drumroll….. the plaintiffs lacked standing to bring the suit. As I noted last Friday, this was the most likely result of the case and does nothing to actually answer the question at hand.

For more info, see the Bloomberg story on the decision.

Technorati Tags: Cuno v. DaimlerChrysler

I meant to write about this on Wednesday, but other things got in the way. A judge in North Carolina threw out the suit in which taxpayers were claiming that local incentives given to Dell Computer to locate a facility in North Carolina were unconsitutional. This case was a sister case to Cuno v DaimlerChrysler, an Ohio case that was argued before the Supreme Court earlier in the term.

The basics of each case is that the plaintiffs are local residents and businesses that disagree with the incentives given to companies in the form of income, employment, and property tax rebates. The 6th Circuit ruled in Cuno that the rebates given were unconsitutional because the incentives were discriminatory. They were discriminatory because two identical businesses would have different tax liabilities if one received these rebates and the other did not. This ruling sent a shiver through state and local governments because it was wide ranging and could eliminate a number of different incentives that states and localities have relied upon in the unending race to the bottom in order to “lure” companies to relocate.

The Supreme Court arguments in Cuno were largely centered on the right of standing of the plaintiffs. The Dell case in North Carolina hinged on the same facts. The North Carolina case ruled that the plaintiffs did not have standing because they were not “injured” by the incentives (one of the arguments in Cuno is that everyone pays higher taxes because of these incentives).

My guess is that Cuno will be decided in a similar fashion by the Supreme Court and we’ll have another round of lawsuits that take years to get through the courts in order to settle this issue. All I’ll say is that these tax incentives are terrible tax policy and only add to the layer upon layer complexity of the US tax system. People tend to focus on Federal complexity, but any business that does business in more than one state knows that states are just as at fault as the Feds.

Technorati Tags: Supreme Court, Cuno, Dell, tax policy

The Senate Finance Committee is continuing it’s review of the Tax Preparation Industry but asking for various information on business models, products and services, training of preparers, compensation methods, quality control, and how they disclose taxpayer information.

This, of course, is on the heels of the GAO report that said that out of 19 returns it sent out to be prepared at these firms, not a single one was done correctly (PDF link). The TaxProf blog has links to the letter sent to the various firms.

I believe that tax prep firms should be licensed like CPAs and IRS Enrolled Agents. The advice that they are giving could be very harmful to taxpayers if they are audited. Taxpayers rely on these firms like they would their licensed counterparts. Dog groomers have to be licensed, so why not tax preparers? The industry has had time to get its act together but simply hasn’t. As more people rely on these firms as the tax system gets ever more complex, the problems will only multiply.

A lot of taxpayers would be surprised that they are hung out to dry if the IRS audits their returns and they find problems. Most tax prep firms that do not license will not represent you with the IRS to explain the positions they take (and can’t because they are not licensed). That’s why it’s important to find someone with a current CPA license or IRS Enrolled Agent designation to do your return. They can (and will) represent you with the IRS and you can rely on their advice.

Technorati Tags: Tax Preparation Industry, CPAs, IRS, IRS audits

Roth and Co. has an excellent roundup of the key provisions in the new tax extenders bill (HR 4297). For most people, the most important item is that the AMT “fix” has been extended for one year and indexed for inflation. Also, the capital gains and dividend cuts have been extended for two years (until 2010).

The games that the government plays with numbers are astounding to me. Quoting Roth and Co.

Corporate estimated tax games. They couldn’t possibly have done this one with a straight face. C corporations with $1 billion or more in assets will deal with bizarre estimated tax requirements in 2006, 2012 and 2013:

- The 2006 estimated tax payment installments due in July, August or September (third quarter, for calendar year taxpayers) will be 105% of the amount otherwise due for the quarter. The same installment in 2012 will be 106.25% of the amount otherwise due; in 2013, the magic number will be 100.75% of the amount otherwise due.

-In 2010, 20.5% of the third quarter installment due September 15 will be payable October 1; in 2011, 27.5% of the third quarter installment is payable in October.

The government has a September 30 fiscal year, and these rules obviously shuffle income among the fiscal years to meet some arcane budget rule, at least on paper and in a laughably phony manner.

Yeah, that’s not a nightmare at all for people trying to calculate how much to pay in estimates (and the resulting penalty calculation for underpayment). I can hear Mark Everson screaming from here. Congress did raise revenues in at least one good way. They scrapped the grandfathering of an illegal subsidy so that the EU won’t impose trade sanctions again. One might argue the obviously illegal trade subsidies should never have been in place. But it is Congress.

Other provisions that may affect you is an extension of the $100,000 small business write-off for equipment and an elimination of the income cap for conversions of IRAs to Roth IRAs.

All in all, another bill that makes January 1, 2011 D-Day for the tax code. The Tax Policy Blog lists all of the tax changes that will happen on that day.

• Individual income tax rates go from 10%, 15%, 25%, 28%, 33%, and 35% to 15%, 28%, 31%, 36%, and 39.6%.

• Child credit falls from $1,000 per child to $500 per child.

• Capital gains tax rates would revert back to 10% and 20% (depending on AGI), while they are currently at 5% and 15%.

• Dividends would once again be taxed at the ordinary income rates (see above), while today they are currently at 5% and 15%.

• After being fully phased out for tax year 2010, the estate tax would be fully reinstated with a top rate of 60 percent and a $1 million exemption.

Wow. Whomever takes over for President Bush is going to have a mess on his (or her) hands. Coming from proponents of Starve the Beast (where taxes are cut to the point Congress has to restrain spending in a reckless game of fiscal chicken) I’m sure it’s intentional that the IRC is so messed up and that there is a ticking time bomb left for a future Congress to deal with.

Technorati Tags: AMT, capital gains, dividend, small business, IRA, Roth IRA

Last week, I wrote about the free money you could be getting back from cash rebate credit cards. One thing that never occured to me is that this could be taxable income. The WSJ has a Q&A item on how the IRS will treat the free money.

The IRS hasn’t issued any specific public guidance on whether cash-back card rebates are subject to income tax, says an agency spokesman. But the IRS did issue a private-letter ruling in 2002 that said certain card rebates aren’t included in a taxpayer’s gross income. Although a private-letter ruling applies only to the taxpayer that applied for it, such rulings are considered to be a gauge of the agency’s thinking on a particular issue. Tax advisers say rebates are generally considered to be a reduction in purchase price, and not likely to be taxed. Rebates on purchases made for business or investment may have more complex treatment, so consult a tax adviser.

Makes sense, but now that I think about it rebates probably should be taxable income since they are not coming from the retailer or manufacturer of the item purchased. Mail in rebates would almost definitely be considered a reduction in price paid because it is a sales technique used by retailers and manufacturers to lower prices to consumers (except for the 1/3 that don’t bother to redeem them). However, rebate cards are not used as a pricing technique but as an inducement to use their card, much like the proverbial toaster from a bank for opening an account.

I highly doubt the IRS will starting coming after me for my $450 in taxable income. But if they decided to, they would likely have a good leg to stand on (legally but not politically).

Hat tip: TaxProf

Technorati Tags: free money, IRS, rebate card

That’s sad. We could have used *that* as the torture du jour. Though, Roth CPA mentions a techno version of §5. I’m going to have to check that out.

One of my favorite whipping posts is H&R Block (see here, here, here, and here). A couple of months ago, I wrote on a lawsuit brought against H&R Block by Eliot Spitzer for managing to find a way to get customer’s refunds (albeit slowly). Now,Mr. Spitzer is amending the lawsuit claiming that H&R Block actively punished employees that had morals refused to sell the “IRAs”. Management refused to listen to concerns of employees because, well, they were making a lot of money off of things.

As I’ve said before, friends don’t let friends use H&R Block. They sell your tax return data, underreport your income, try to force you to take loans at usurious rates, and steer you towards retirement products that only benefit themselves. They do this with people they know are not financially literate and cannot refute what the “expert” is telling them. That breach of fiduciary duty is what makes me the most angry. It gives the entire industry another black eye that it doesn’t need.

JLP over at AllFinancialMatters tends to disagree. His argument is that it’s all grandstanding by Eliot Spitzer gearing up for a Gubernatorial run. I believe this specific lawsuit could be borderline. It’s part Spitzer grandstanding and part truth. H&R Block knew what it was doing and had to have known what it was doing was wrong. It’s taking advantage of those that can’t help themselves, and that’s what I can’t stand. If Mr. Spitzer was the only one on this bandwagon it might be different. But he is far from the only AG suing H&R Block over its business practices.

I know that the Google Search box doesn’t work correctly. I’ve created a Google Sitemap to alleviate that problem. Hopefully, Google will see my site within a few hours so that the Google search will actually work.

If it doesn’t, I’ll keep trying.

I’m also trying to find a “subscribe by e-mail” plugin. If anybody knows one that works for Wordpress, leave a comment here.

I don’t have a whole lot to say on this article, but I am printing it out for future reference. I shudder when thinking about the mistakes I made on our first house without even knowing it. As someone with a fidicuary duty, I’m really not happy with the fact that brokers so routinely violate theirs. It could be a situation like tax preparers (some bad apples ruin the whole bunch) but just from personal experience, I count 4 things we did wrong and we only purchased a house. I don’t want to know how many would have happened if we sold a house as well.

Smart Money’s 10 Things Your Real Estate Broker Won’t Tell You

Beginning in 2006, employers can offer their employees a choice in their 401(k) plan. Contributions by employees can either be made to a traditional 401(k) or to a new version, the Roth 401(k). The two types of plans are identical save one catch. With a traditional 401(k), the IRS doesn’t tax your contributions but any income you later take out is fully taxable. With a Roth 401(k), you don’t get the current tax break but all earnings are taken out tax-free. 

Why would you want to switch? If you pay a relatively low Federal tax rate currently and expect to pay more in the future, you would want tax-free earnings later when your taxes are higher. For instance, my effective tax rate last year was 8% after taking out child credits and itemized deductions. It’s unlikely that I would pay less than 8% tax in retirement, so a Roth 401(k) would be a good idea for me. 

Many employers did not offer Roth 401(k)s in the first year of eligibility (2006). There were several reasons, with a lack of IRS regulations on the workings of the new accounts being at the top of the list. With IRS regulations promulgated, more employers may offer the accounts in the next few years. It will still be more record keeping and more expense for the employer so I don’t expect Roths to catch on like traditional 401(k)s did, but there will be more than a few employers offering the accounts. 

One of the caveats with a Roth account is how investments will be taxed in the future. Unless Congress plans ahead [pauses for laughter] [no, really it could happen] [okay, better now?] you could be paying taxes to put money in a Roth and getting a tax break when earnings from investments are no longer taxed. That would effectively nullify the tax advantages of a Roth and would actually put Roths at a disadvantage to traditional 401(k)s. Now, I don’t really believe that earnings from investments will actually ever get to be tax free, but if it is something you think may happen in the future, you may want to hedge your bets and just use a traditional 401(k).

If you are an employee that does have a choice, The Tax Guide for Investors website has a great guide to Roth 401(k) accounts. It explains how the accounts work and how they differ from traditional 401(k)s and other types of retirement accounts. It’s definitely worth checking out for someone that is confused as to how they should allocate their contributions.