How We Pay Taxes: 21 Charts

During these difficult economic times when our leaders are engaging in class warfare and attacking the top “1 percent” all Americans should be informed about federal taxes.  A good start is the information show in the 21 charts depicted on the two articles linked to below.

The Atlantic:  “If you care about national values, or the relationship of citizens to their government, or the way we choose to award and discourage behavior, there is nowhere better to start than the gnarled and fascinating world of levies and tax breaks. Tax week gives American families a reason to consider moving to Bermuda, but it also gives me an excuse to spend the day finding my favorite, most controversial, and most illuminating graphs about taxes. Here they are.”

See also “Top Ten Federal Tax Charts.”

Federal Court Tosses Colorado’s Amazon Tax

Denver Post:  “A federal court has thrown out a 2010 Colorado law meant to spur online retailers like Amazon to collect state sales tax. . .  . ‘I conclude that the veil provided by the words of the act and the regulations is too thin to support the conclusion that the act and the regulations regulate in-state and out-of-state retailers even-handedly,’ [Judge] Blackburn wrote in his opinion.  The law and the rules to carry it out ‘impose an undue burden on interstate commerce’ and are unconstitutional, the judge wrote.”

How to Handle the Coming Dividend Tax Hike

Smart Money:  “Unless Congress takes action, the top tax rate for the highest earners on most dividends, currently 15%, is set to jump to a whopping 43.4% next year. That is a maximum income-tax rate of 39.6% — since dividends ll once again be taxed as regular income — plus a 3.8% tax on investment income as part of the health-care overhaul passed in 2009.”

New Federal Law to Find Tax Evaders Denounced

New York Times:  “Legislation meant to help the United States government locate overseas assets of American tax cheats created little stir when it was quietly slipped into a jobs bill last year  But the Foreign Account Tax Compliance Act, or Fatca, as it is known, is now causing alarm among businesses outside the United States that fear they will have to spend billions of dollars a year to meet the greatly increased reporting burdens, starting in 2013. American expatriates also say the new filing demands are daunting and overblown. . . . ‘The Fatca story is really kind of insane.’ . . .

The law is meant to ensure Americans cannot use hidden trusts overseas to evade taxes, a goal that is widely applauded. But critics say that it amounts to gross legislative overreach, and that the $8 billion the Treasury expects to reap in taxes owed over 10 years pales next to the costs it will impose on foreign institutions. Those entities are being asked, in effect, to pay for the cost of tracking down American tax evaders.

The law demands that virtually every financial firm outside the United States and any foreign company in which Americans are beneficial owners must register with the Internal Revenue Service, check existing accounts in search of Americans and annually declare their compliance.”

Summary of Key FATCA Provisions

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Reporting by U.S. Taxpayers Holding Foreign Financial Assets

FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return. Reporting applies for assets held in taxable years beginning after March 18, 2010. For most taxpayers this will be the 2011 tax return they file during the 2012 tax filing season. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

Reporting by Foreign Financial Institutions

FATCA will also require foreign financial institutions (“FFIs”) to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS by June 30, 2013. Under this agreement a “participating” FFI will be obligated to:

(1) undertake certain identification and due diligence procedures with respect to its accountholders;

(2) report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership; and

(3) withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.

Notice 2011-53 provides the phased-in timeline of key FATCA implementation dates for FFIs. It is important to note that many details of the new reporting and withholding requirements pertaining to FFIs must be developed through Treasury regulations that are expected to be proposed by December 31, 2011. Published IRS Notices accessible from this FATCA internet site provide currently available information and guidance.

To learn more about this nighmarish law go to the IRS page called “Foreign Account Tax Compliance Act (FATCA).”

How Your Tax Bill Can Benefit From Low Rates

Wall Street Journal: Here is one surprise benefit of low interest rates: They can help reduce taxes.

Every month, the Internal Revenue Service resets the interest rates it allows for private loans and various estate-planning transactions carried out that month. The rates for October, issued Sept. 19, are the lowest on record.

The new short-term rate (less than three years) is 0.16%, down from 0.26% in September. The midterm rate (three to nine years) is 1.19%, down from 1.63%, while the long-term rate is 2.95%, down from 3.57%. A blended rate that applies to some estate-planning techniques is 1.4%, down from 2%.

The resets can be a boon to taxpayers looking to make lemonade out of the current low-rate environment. “The opportunity is tremendous for wealth transfer, especially with asset values low,” says Richard Behrendt, a former IRS estate-tax specialist now with Robert W. Baird & Co. in Milwaukee.

For example, low interest rates make intrafamily loans especially attractive. “It’s a wonderful time to lend to a child, say, to buy a house,” says Carol Harrington, an attorney at McDermott, Will & Emery in Chicago.

Tax Issues for Same Sex Couples

Wall Street Journal: Same-sex couples can get married in five states and the District of Columbia—and in New York starting July 25. But the happily-ever-after part doesn’t necessarily extend to their personal finances.

Such couples still can’t file a joint federal tax return, share retirement benefits, shield each other’s assets from estate taxes or benefit from many other tax breaks provided through federal law.

As a result, same-sex couples who marry have to stay on guard, doing even more financial and legal planning, in some cases, than those who don’t choose to tie the knot.

No Right to Pay Taxes

Tax Prof Blog:  Guess?, Inc. co-founder Georges Marciano has lost his bid in Washington federal court for an order forcing the IRS to investigate his tax returns and liabilities.

Marciano had argued that the audit could reveal money owed to the government that he believes former employees mishandled. In dismissing the suit on Friday, U.S. District Court Judge Henry Kennedy Jr. noted that the property rights protected under the Fifth Amendment don’t guarantee anyone’s right to pay taxes.

Tax Friendly States for Retirement

Yahoo! Finance:  Where’s the best state for you to retire? Here’s a good place to start your search: These five impose the lowest taxes on retirees in the contiguous U.S., according to our research. All these retiree tax heavens exempt Social Security benefits from state income taxes. Many of them exclude government and military pensions from income taxes, too, or offer blanket exclusions up to a specific dollar amount for a wide variety of retirement income.

Freedom or Independence?

Mauled Again:  Today is Independence Day, though most people refer to it as “the Fourth of July holiday.” Late last week, while reading a news report about the rather inept manner in which the State of New York has tried to apply its mandatory e-filing requirement to Amish sects that don’t use electricity, let alone computers and the internet, I noticed that one of the individuals remarked that “it’s a free country.” That phrase, and ones like it, have been tossed about so cavalierly that too many people fail to realize that it’s not true. The United States is not a free country.