Debra Thompson

Millions of Americans forgo critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for individuals who work but do not earn high incomes. Taxpayers who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund. Read More

Debra Thompson

Millions of Americans forgo critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for individuals who work but do not earn high incomes. Taxpayers who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund.

Last year, an estimated 21 million taxpayers received approximately $37.5 billion in EITC. However, the IRS estimates Read More

A nonrefundable tax credit is a credit that can reduce the amount of an individual’s tax liability to zero, but cannot exceed the total amount of income taxes owed. In other words, you would not receive a tax refund if the credit exceeds the amount of your tax liability. For example, if you have a nonrefundable tax credit of $5,000 and a tax liability of $3,000, the credit will eliminate the tax liability, that is, reduce it to zero. The remaining $2,000 of the credit, however, will be lost, because the IRS will not send you a refund for this amount.

Nonrefundable credits for tax year 2014 include the following:

• Credit for child and dependent care expenses.
• Child tax credit. Read More

With my family snugly content amidst a long holiday season I felt compelled to pen some thoughts regarding the ubiquitous United States Tax Code and all its myriad of seemingly scary changes looming around the proverbial corner. This post lists ten tax matters to be aware of in the new year that have come up in conversations with clients. It also offers four recommendations to minimize tax obligations that I’ve found myself repeatedly trumpeting whenever asked. And finishes with some quick reference tax facts.

Be Aware:

1. For 2013 the self-employment tax has reverted back to its normal 15.3% rate, and the limit for the Social Security portion of the tax has increased to $113,700. Read More

The New York Times Editorial Board has written an editorial condemning tax breaks, which is justified, in part. They point out:

Tax breaks work like spending. Giving a deduction for certain activities, like homeownership or retirement savings, is the same as writing a government check to subsidize those activities. Functionally, they mimic entitlements. Like Medicare, Medicaid and Social Security, they are available, year in and year out, in full, to all who qualify. Yet in budget talks, Republicans ignore tax entitlements, which flow mostly to high-income taxpayers, while pushing to cut Medicare, Medicaid and Social Security.

While they point out that the deduction for homeownership is the same as writing a government check they go on and only point out the special deductions/entitlements they feel are the ones the rich take advantage of:

CARRIED INTEREST.   This loophole lets private equity partners pay tax on most of their income at a top rate of 20 percent, versus a top rate of 39.6 percent for other high-income professionals. It drains the Treasury of $13.4 billion a decade, and should be closed, along with a shelter recently enacted in Puerto Rico that would help shield the income of individuals whose taxes would rise if the carried-interest tax break was eliminated.

NINE-FIGURE I.R.A.’S.   Remember Mitt Romney’s $100 million I.R.A? Private equity partners apparently build up vast tax-deferred accounts by claiming that the equity interests transferred to such accounts from, say, their firms’ buyout targets are not worth much. No one knows how much tax is avoided this way. What is known is that I.R.A.’s are meant to help build retirement nest eggs, not to help amass huge estates to pass on to heirs.

‘LIKE KIND’ EXCHANGES.   As reported in The Times by David Kocieniewski, this tax break was enacted some 90 years ago to help farmers sell land and horses without owing tax, as long as they used the proceeds to buy new farm assets. Today, it is used by wealthy individuals and big companies to avoid tax on the sale of art, vacation homes, rental properties, oil wells, commercial real estate and thoroughbred horses, among other transactions. Government estimates say this costs about $3 billion a year, but industry data suggest the amount could be far higher.

While these entitlements, which can be abused egregiously,  they are not the only ones. What Congress really needs to do is discard the entire tax code except for §61 which defines income as:

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived …

Starting with that clean slate they should only allow exceptions for those exceptions which are willfully, intelligently and fully understood when put in place. No passing them so we can read the bill later.

These exceptions to income should be subject to hard and fast sunset provisions with the continuing of the exceptions only after detailed review and assessment that the purpose for which it was provided still is valid.

The tax code should not be used for social policy reasons. Examples are numerous but some of them are:

1.  Education Credits – to promote higher education for a certain group of citizens … discrimination to “fix” discrimination.

2.  Earned Income Credit – the largest area of fraudulent returns.

3.  Child tax credits … paying people who cannot afford to have children to have children.

4.  Mortgage Interest Deduction … started with the tax code of 1952 to help enable the returning veterans buy homes … something Congress deemed a good social goal.

5.  Child Care Credit … to allow single mothers the ability to work … a worthy cause I am sure but one that does little to discourage out of wedlock children, single parent homes, latch-key children, the cycle of children who are brought up thinking this sort of life style is appropriate.

Some will think I am harsh by the entitlements that I point out. I am not trying to say that none of them are valid I am just arguing that there should be no sacred cows. No matter which section of the tax code you try to eliminate someone’s ox is being gored. It is time to start over with the clean slate.