The state of Illinois will be offering a tax amnesty program through November 8, 2010. This particular program (IL Senate Bill 377) had been languishing on the Governor's for two months until it was finally signed into law on August 16th. Tax debts arising from the period of June 30, 2002 to July 1, 2009, are eligible for penalty and interest waivers if paid in full before November 8th. The law also doubles penalties and interest for taxpayers who don't participate in this amnesty.

Tax Amnesty in Illinois Signed into Law originally appeared on About.com Tax Planning: U.S. on Tuesday, August 31st, 2010 at 01:01:19.

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The President's Economic Recovery Advisory Board released their report examining various opportunities for reforming the tax system in the United States of America. PERAB held a conference call today to release their report, to summarize their concerns, and then voted to send the report to President Obama for review. The tax reform report is available for download from the Whitehouse Web site (126 pages in pdf format).

Paul Volcker, chairman of PERAB, said that the United States has  a "very complicated tax system." The board looked at a number of alternatives for making taxation simpler, making it easier for taxpayers to follow the tax rules, and for reforming taxation for individuals and businesses. Board member Martin Feldstein emphasized that the report is about "discussing a series of options" that could be available for legislators to implement in an effort to help alleviate the "enormous complexity of the tax law for the typical taxpayer."

The PERAB report analyzes recommendations in four major areas: changes to simplify the taxation for individuals, governmental recommendations for ensuring that taxpayers are complying with the tax rules and paying an accurate amount of tax, reforming the tax rules for corporations, and recommendations for changing how the United States deals with the international aspect of corporate finances.

On the individual side, "the report analyzes an array of options for making tax time simpler for ordinary families by merging tax credits for children, child care, education and other family expenses, or at least harmonizing eligibility requirements," reports the Washington Post.

The last time we had any serious consideration for tax reform was in 2005 when President Bush appointed a panel of advisors to come up with simplified tax systems. The final reports from the 2005 tax reform panel are archived at the University of North Texas library and on Professor Paul Caron's TaxProf Blog. The 2005 panel outlined two possibilities for dramatically simplifying the taxation of individuals. Those recommendations were never implemented, which hearkens back to what seems to be a revealing comment made by the panel. In a letter to the Treasury Secretary outlining the panel's recommendations the committee said, "The effort to reform the tax code is noble in its purpose, but it requires political willpower."

The same comment can be repeated here in 2010. There is a strong suspicion that recommendations from Volcker's tax reform panel might not fare any better.

"This report is a huge missed opportunity," writes Howard Gleckman, a senior research associate at the Tax Policy Center. "Obama might have used this exercise to jump-start a debate over fundamental tax reform. Instead, the report does nothing to fill the policy vacuum that is being filled by an argument over what to do about the decade-old Bush tax cuts." (TaxVox) Political commentators have been quick to note the limitations placed upon the PERAB tax panel (National Journal, TaxVox ). Still, having a limited mandate doesn't excuse us for taking the issues raised by PERAB lightly.

More about:

• Profile of former Federal Reserve Chairman Paul Volcker
• Who's part of Obama's Economic Advisory Panel
• Obama tax reform panel report released from Don't Mess With Taxes
• Coverage of the tax reform report from TaxProf Blog

Obama's Economic Advisors Analyze Opportunities for Tax Reform originally appeared on About.com Tax Planning: U.S. on Friday, August 27th, 2010 at 16:27:49.

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Students going back to school can utilize a variety of tax-favored ways to pay for college tuition, books, supplies, and computers. Here's six ideas for paying for school expenses that have varying degrees of tax efficiency:

1. Take cash out of a 529 College Savings Plan. Distributions from a 529 plan are tax-free as long as the funds are used to pay for tuition, room and board, books, supplies, and computer equipment and software.

2. Take cash out of an IRA. Distributions from a traditional IRA are penalty-free if used to pay college tuition for yourself or a dependent. Roth IRA distributions fare even better: funds withdrawn to pay for tuition expenses are both tax-free and penalty-free. The downside is that distributions permanently remove funds from an IRA, unless you re-deposit the same amount of cash within 60 days.

3. Take cash from a Coverdell Education Savings Account. Unlike IRAs or 529 plans, Coverdell ESA plans permit tax-free withdrawals for primary, secondary and college educational expenses.

4. Get your employer to pay for school. Some businesses offer Educational Assistance Programs, which provide up to $5,250 of tax-free reimbursement for college tuition and books. The nice thing about these employer programs, the tax-free money never shows up on your W-2, so you won't have extra forms to fill out at tax-time.

5. Cash in savings bonds. The interest on savings bonds may be tax-free as long as the funds are used to pay college tuition expenses for yourself or a dependent.

6. Consider paying at least $4,000 without using funds from a tax-sheltered account. Granted, this doesn't provide ready money right now for school expenses, but it can provide significant savings at tax-time. Students (or their parents) can utilize the American Opportunity Credit to receive a tax credit of up to $2,500, of which up to 40% is a refundable credit. Expenses that qualify for this tax credit include tuition, books, lab supplies, software and other class materials. And as a reminder: expenses paid out of student loan proceeds will qualify for this tax credit. Also, the American Opportunity Credit is scheduled to expire at the end of 2010, so this may be the last year to take advantage of this credit.

Six Tax-Efficient Ways to Pay for Back to School Items originally appeared on About.com Tax Planning: U.S. on Tuesday, August 24th, 2010 at 03:00:40.

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2010 will be the last year for the advance earned income credit. This program, first enacted in 1978, enables lower-income taxpayers to receive a portion of their expected earned income credit in advance as an additional amount in their normal paycheck. The program will remain in effect through December 31, 2010. After that, taxpayers will no longer be able to receive advances of their earned income credit.

In 2008 (the last year for which data is presently available) 140,253 taxpayers reported receiving advanced earned income credit payments totalling $78,248,000. (IRS Statistics of Income, 2008 Individual Complete Report, section 1, table A, page 5, PDF.)

Elimination of the advanced earned income credit is part of HR 1586. This legislation provides funding to states to assist in hiring school teachers and to fund state Medicaid programs. To pay for those programs, Congress eliminated the advanced Earned Income Credit and tightened the rules regarding foreign tax credits.

The foreign tax credit is designed to help people and businesses avoid paying US tax on the same items of income that are also taxed in a foreign country. Some taxpayers, however, utilized a splitting strategy to defer reporting foreign income while at the same time taking a foreign tax credit in the US against this deferred income. HR 1586 tightens rules relating to the accounting of foreign income, foreign subsidiaries and the use of tax treaties to prevent the misuse of the foreign tax credit.

Additional resources: HR 1586 (at the Library of Congress), President Signs Foreign Tax Reforms to Fund Education / Medicaid (from publisher CCH)

Saying Farewell to the Advance Earned Income Credit originally appeared on About.com Tax Planning: U.S. on Monday, August 16th, 2010 at 21:41:58.

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California's Franchise Tax Board began mailing out some 135,000 notices to Californians who claimed the head of household filing status on their 2009 California return. The letters simply ask that the taxpayer answer a few questions to confirm that they are eligible to utilize the head of household status. Taxpayers can respond by mailing the audit questionnaire back to the state, by faxing in their answers, or by using California's Audit Letter Web Response application.

Here's some tips to keep in mind.

• California's eligibility criteria for head of household status are the same as the federal criteria. That means, if it turns out you are not eligible for head of household, you should submit an amended federal return to correct your filing status.
• One difference between California tax law and federal tax law is how registered domestic partners are treated for tax purposes. Generally speaking, couples who are domestic partners or legally married under California law probably might not qualify for head of household status in California even if they might qualify for that status on their federal return.
• If the state receives conflicting information regarding a dependent (for example if two or more taxpayers claim the same dependent), the Franchise Tax Board will audit both taxpayers in an attempt to figure out which one is eligible to claim the dependent and to file as head of household.

For future reference, taxpayers can attach an electronic version of the head of household audit questionnaire to their California return. In your tax software, be sure to add the FTB Form 4803E before e-filing the return with California. In this way you will have pre-answered the state's audit questions and they won't mail you a paper questionnaire to fill out later.

More about: California's personal income taxes, Franchise Tax Board, California Head of Household information

California Sending out Head of Household Audit Letters originally appeared on About.com Tax Planning: U.S. on Monday, August 2nd, 2010 at 22:51:16.

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Tax-Free Shopping for Back to School originally appeared on About.com Tax Planning: U.S. on Monday, August 2nd, 2010 at 21:58:12.

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Property owners in the state of Florida will be able to request new assessments from their county to help document the decline in property value from damage caused by the Gulf oil spill for the purpose of submitting a claim to British Petroleum. Appraisals will not be used, however, to re-assess property taxes.

Florida Property Owners Get Help for BP Claims originally appeared on About.com Tax Planning: U.S. on Tuesday, July 27th, 2010 at 12:34:42.

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One of the most pressing tax planning questions is where are tax rates heading for the year 2011? Because at the end of 2010, all of the tax breaks implemented under President George W. Bush will expire. Among a host of changes, tax rates will revert to their pre-2001 levels, roughly as follows:

Absent any new tax legislation addressing the expiring tax breaks, the 10% tax bracket will be eliminated and collapsed into the 15% bracket;  the 25, 28, and 33 percent brackets will be bumped up three percentage points each, and the top 35% rate will rise to 39.6%. The tax rate on long-term capital gains would increase as well, from 15% currently to 20%.

President Obama has proposed to keep the 10% through 28% brackets and to allow the top two tax brackets to increase to 36% and 39.6%, respectively. There's a wide range of other expiring tax breaks, which are nicely summarized over at Forbes.

The question then becomes how much will these changes impact your particular tax situation? The Tax Foundation has published a Web-based calculator at MyTaxBurden.org that will estimate the potential tax impact of the expiring tax provisions. Like all tax calculators, this particular application contains a number of assumptions necessary to keep the calculator relatively simple to use. Most importantly, the Tax Foundation's calculator assumes that Congress will revise the alternative minimum tax exemption amounts to be in-line with 2009 exemption levels.

Personally I found the calculator to be easy to use, but not quite so easy to figure out what the main factors are. However by altering my inputs (for capital gains or deductions) I was able to see how changes to limitations on itemized deductions or capital gains tax rates might impact a tax scenario.

I encourage you to play around with the calculator. It's a very illuminating way to see exactly how policy decisions in Washington could affect your pocketbook.

Will Taxes Go Up in 2011? originally appeared on About.com Tax Planning: U.S. on Tuesday, July 27th, 2010 at 03:57:25.

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Can a person obtain a tax deduction for donating his house to a local fire department that will burn the house down as part of a training exercise? In a recent court case (summarized by the Tax Professor Paul Caron), the Court did not decide on this issue of whether the taxpayers were eligible for a charitable deduction. Rather, the Court ruled that the taxpayer failed to supply the required documents to substantiate the value of his donation.

When donating property to charity, the tax laws require that you provide proof of the value of the donated property. For property worth more $5,000, taxpayers also must provide a written appraisal and the charity must acknowledge receipt of the donated property. Apparently the taxpayer in court case omitted those crucial documents.

Joe Kristan, writing over at Roth CPA Tax Update, states "the issue is not settled" over whether donating a house to a fire department would be tax deductible, but rather that "the taxpayer blew any chance at a deduction by failing to properly document the donation on their tax return."

The bottom line: documenting charitable donations, especially large donations, is a necessary step to preventing the IRS from disallowing those deductions.

Donating Your House to the Fire Department for Training originally appeared on About.com Tax Planning: U.S. on Tuesday, July 27th, 2010 at 03:01:48.

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The IRS is encouraging small not-for-profits organizations to file any missing tax returns for the years 2007, 2008 and 2009. The underlying issue, apparently, is a change in how smaller charities report their income to the IRS. For 2006 and earlier years, non-profits with annual receipts of $25,000 or less were exempt from filing returns with the agency. Starting with 2007, charities are required to file regardless of the size of their income. Smaller charities may be eligible to file the so-called electronic postcard (Form 990-N) or the shorter Form 990-EZ. The IRS is providing a special grace period: as long as all returns are filed by October 15, 2010, non-profit organizations will be able to keep their tax-exempt status.

Also, in an unusual move, the IRS released the names of all charities at-risk of losing their exempt status.

Additional Resources:

• IRS Offers One-Time Special Filing Relief Program for Small Charities; Oct. 15 Due Date to Preserve Tax-Exempt Status
• List of Organizations At Risk of Automatic Revocation of Tax-Exempt Status
• IRS Resources for Charities and Nonprofits
• Things You Need to Know About Form 990 (About Nonprofits)
• What is Form 990-N? (About Nonprofits)

Small Non-Profits Could Lose Tax-Exempt Status, IRS says originally appeared on About.com Tax Planning: U.S. on Tuesday, July 27th, 2010 at 01:42:34.

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