Wednesday, September 26, 2012


It seems I have a lot to say about what I have read in this BUZZ installment.

* See my article “How to Protect Charitable Donations From IRS Nitpicking” at THESTREET.COM.

* In his post “Effective Tax Rate Comparison” at START MAKING SENSE Professor Dan Shaviro says -

Say you were married with two children and had $60,000 of AGI in 2011, all of it wages.  You would thus have about $34,000 of taxable income after taking the standard deduction and personal exemptions. You’d pay about $4,250 of income tax. But you would also pay $4,590 of payroll taxes, at the 7.65 percent rate (counting the employee share only). So that would add up to about $8,840 of income plus payroll taxes on $60,000 of AGI, for an effective tax rate of about 14.7 percent.”

Actually the above taxpayers would have a taxable income of $33,600, and pay $2,194 in federal income tax, if we assume that their two children were under age 17 - and therefore each entitled to a $1,000 Child Tax Credit.

If one or more were over age 17 but in college they would probably pay even less, and possibly, if both were in college, actually make a profit by filing their 1040 (be one of the now famous “47%”).

And they would pay only $3,390 in payroll taxes on $60,000 of wages, if we assume the $60,000 AGI is all wages.  The employee share of Social Security is reduced by 2% for 2011.  So, using the professors numbers the combined effective tax rate is 12.73% and using my numbers assuming the children were under age 17 only 9.3%.

And if you look at the income tax only – the real issue - the couple pays an effective rate of 7.08% even using the professor’s numbers (3.66% using my numbers assuming the children were under age 17).

Romney’s effective income tax rate is 14%.  His effective combined income and payroll tax rate is 14.1%.  Mitt did pay payroll tax in the form of “self-employment tax” on his 2011 1040.  However the payroll tax was only on a small portion of his overall income.  The couple paid $3,390 in payroll taxes and Mitt paid $23,179 – almost 7 times as much.

Mitt paid a flat 15% on his long-term capital gains and qualified dividend income and, under the dreaded AMT, a flat 28% on his net Alternative Minimum Taxable income, after allowable deductions.

So what point is the professor trying to make?  In terms of the effective income tax rate, even using the prof’s probably incorrect tax numbers Mitt Romney paid almost twice as much as the married couple.

BTW – if the couple earning $60,000 also had also had an additional $30,000 in qualified dividends and long-term capital gains the additional tax on this $30,000 would have been $0 – because the tax rate on this income would have been 0%, unlike the 15% Mitt paid on similar income.

* An interesting “tweet” from the Taxpayer Advocate Office –

 Tax Fact: 46% of all correspondence exams in FY2011 covered the Earned Income Tax Credit.”

* Martin A. Sullivan adds to “My Dilemma” with his post “Will Obama Victory Kill Tax Reform?” at TAX.COM.

In this not unlikely scenario {which Martin discusses in the post – rdf}, tax reform would not be dead, but it no longer have all of Washington's deficit hawks behind it. We would be back to where we were about five years ago. Tax reform would have to gain favor on its own merits (i.e., fairness, growth, competitiveness, simplicity) and not as camouflage for a politically painful budget deal.”

* TAXGIRL Kelly Phillips Erb announces that “Congress Walks Out On The Country” at FORBES.COM.

Just like that, Congress took a walk this week. The House adjourned on Friday and the Senate took off this morning {Saturday 9/22 – rdf}. They apparently needed a vacation. You know, since they’ve been working so hard for all of two weeks. Yep, just two weeks after they came back from a five week summer vacation, they’ve taken another vacation (oops, I meant “recess”) – this one until mid-November. It seems that months of doing absolutely nothing makes a legislator tired.”

And Kelly points out quite correctly –

But let’s think about all they got accomplished before they went on vacation.

Give me a minute.

Give me another minute.

Nope, can’t think of anything.”

I am once again reminded of the lyric from 1776 that aptly describes Congress today as well –

Piddle, twiddle, and resolve.  Not one damn thing do we solve!

So, as expected, if the “tax extenders”, including the annual AMT patch, and any extension of the “Bush” tax cuts are to be passed it will not be one until December – once again inconveniencing the IRS and causing a delay in the processing of early filed returns.

Do we need any more reasons to call them idiots?

* Anne Tergesen raises an interesting question at WSJ.COM - “Should You Wait on IRA Donations?”.

One of the popular “extenders” that expired on 12/31/11 is the ability to transfer tax-free money from an IRA to a qualified charity and to apply the amount of the transfer to one’s Required Minimum Distribution (RMD).  There can be a tax savings, as the effectively permits the charitable deduction “above-the-line”, as the withdrawal from the IRA is not included in AGI.  

The item says –

Conrad Teitell, an attorney at Cummings & Lockwood in Stamford, Conn., says people age 70½ or older who itemize their deductions and wish to make a charitable gift from an IRA should go ahead. As long as they donate to a ‘public’ charity and instruct the IRA's custodian to transfer the money directly from the IRA to the charity, they will qualify for tax-free treatment if lawmakers enact the provision retroactively, he adds. (Public charities don't include donor-advised funds, supporting organizations and most private foundations.)

If Congress doesn't pass the measure, those IRA owners will still receive a tax break, in the form of an itemized deduction. (The amount of the deduction will depend on factors including the taxpayer's adjusted gross income.)

While if the amount of the transfer is equal to or less than the RMD, the individual can itemize, and the idiots in Congress do not extend the benefit it is a true wash – income on Page 1 and a deduction on Schedule A.  However, if the transfer is for more than the RMD and the idiots do not extend the taxpayer would unnecessarily increase his AGI.

I do expect that the idiots will extend this provision.  And, besides, many taxpayers wait until December to take their RMD so as to maximize the tax free accrual of earnings.  So I would suggest that you wait.

* Professor Annette Nellen adds to the discussion of “Capital Gains - What Should the Rate Be?” at 21st CENTURY TAXATION.

I tend to lean toward returning to the early days of my career when there was a 50% and then 60% “exclusion” of capital gains (50% or 60% of the capital gain just disappeared off the return – and the remaining 50% or 40% was taxed at regular rates), as Annette mentions as an option.    

* In light of Romney’s stupid decision not to claim all of his charitable contributions Trish McIntire explains on “Shorting Deductions” as they apply to business expenses at OUR TAXING TIMES.

If you spent the money on your business and have the documentation to prove it, you are required to take the expense off against your business income.”

Often self-employed individuals want to increase their net earnings from self-employment, usually to increase their Earned Income Credit.  But you cannot do so by omitting legitimate business expenses.

An afterthought on Romney’s decision – if he really wanted to pay more in taxes, like Buffet apparently does, instead of not deducting all of his legitimate contributions he could have just written a check to the Treasury.  But that would not have provided the desired result – a higher effective tax rate.

* If for some odd reason you cannot get enough BUZZ about Mitt’s 2011 tax return, Joe Kristan’s Monday “Tax Roundup: Mitt Files! And USA Bucks Trend of Lower Corporate Rates” includes links to the tax blogoshere’s reaction to the return.

* Daniel Stoica, a fellow “twit” who does me the honor of continually “retweeting” my TWTP posts, debunks some “Tax Myths That Can Cost You Money”.


An accounting joke I admit I had never heard before – courtesy of Peter J Reilly -

A business owner is interviewing potential accountants by asking them what two plus two is.  Most innocently answer four. 

One accountant leans back, strokes his chin and says ‘What number did you have in mind?’. 

Who do you think got hired?

I wonder if the accountant who asked the question was a CPA?


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