Taxes, especially within the context of our deficit, have become a popular subject these days. The latest person to weigh in was Former Minnesota Governor Tim Pawlenty when he proposed a new tax structure along with his announcement that he’d be seeking the Republican presidential nomination. The plan is simple:

• Reduce corporate taxes from 35% to 15%;
• Tax the first $50,000 of personal income at 10% ($100,000 for married couples), and 25% for the rest;
• No taxes on capital gains, dividends, interest income, and inheritance.

Assuming all other tax deductions and credits were held the same, this would reduce tax revenue generated from individuals and families. The existing tax brackets tax at higher rates for personal income and there really are no “losers” if the tax structure were to go in this direction. Where I believe the proposal is the trickiest has to do with the corporate tax rate – where companies now have a greater incentive, because of lower tax rates, to recognize income they would otherwise keep abroad. We could generate more revenue because the tax rate is lower. Whatever actually happen is irrelevant, the interesting part of the discussion is what he said in conjunction with this proposal – The Google Test:

“If you can find a good or service on the Internet, then the federal government probably doesn’t need to be doing it,” Mr. Pawlenty says. “The post office, the government printing office, Amtrak, Fannie [Mae] and Freddie [Mac], were all built in a time in our country when the private sector did not adequately provide those products. That’s no longer the case.”

I think the test may be too simplistic but the idea merits discussion. The USPS’s insolvency was a topic of discussion here just recently (and I agree with the commenters that said a comparison to UPS/Fedex is unfair because they can cherry pick where they compete – i.e. not on first class letter delivery) but I think we need the same for every service. Do we need Freddie Mac and Fannie Mae to gobble up home loans? Perhaps, but it should be up for debate.

Thoughts?

I’m a big fan of Bloomberg Businessweek, especially their iPad app where you can download your subscription and take it anywhere, and recently they had a really interesting special report called How to Pay No Taxes – very good reading. It held a lot of insights into how the wealthy are able to avoid taxes in entirely legal, and very clever, ways. They’re all strategies that make sense when you’re moving millions of dollars around because the costs of paying accountants, lawyers, and the like are likely in the tens and hundreds of thousands of dollars. It makes less sense if you’re just moving several thousand around.

As I read the article, I was about to get annoyed at all the sheltering and dodging until I realized it’s just part of the game. Our tax structure has gotten so complicated, it’s basically a game. Consider this – the United States has one of the highest corporate income tax rates at 35%. Yet, after all the loopholes and credits and other tax breaks, corporations, in aggregate, pay about average. The difference is that certain industries pay a lot less and others pay more.

It’s like playing a game and finding out that one of the other players has discovered the optimal strategy before you do. They’re beating your pants off because they’re smarter than you. Can you really get that upset because they figured it out? I suppose you can get upset at anything but the reality is that you have to change the rules… right?

Check out the list of 11 moves and tell me what you feel!

(Photo: aidanmorgan)

No likes the idea of going through a tax audit. Indeed, many of us get downright nervous about being audited. There is no way to completely avoid an audit; some IRS audits are performed randomly. You never when your number will come up. Most audits, though, are performed because of some red flag the IRS sees when looking at your tax return.

If you want to reduce the chances that you will be audited for something that is in your tax return, you will need to be careful about you fill out the forms. For the most part, avoiding IRS red flags is fairly simple: Only take the deductions and credits you are actually entitled to, and double check your return for mistakes.

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You may have seen an increase in the number of bank deals listed on Bargaineering lately. The reason for the uptick has to do with the economy. As the economy recovers and banks start offering more incentives and promotions to attract new customers, the number and size of these bonuses has been increasing. Two years ago, the bank offers were paltry, if not extinct. If you got more than a toaster out of a new account, you were doing well.

With the return of $100 and $150 cash offers for new accounts, you might be wondering whether or not you have to pay tax on the promotions.
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I had the opportunity get a demonstration of the new TurboTax 2011 online tax preparation package and I came away very impressed with the level of automation they included. Last year, the most impressive new additions was the ability to flag certain parts (which would’ve prevented me from having to file an amended return after I put in a placeholder value) and their audit scanning feature (looks for red flag mistakes like mismatching numbers).

This review of TurboTax applies to the software used to handle Tax Year 2010 returns.

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With every new year comes a little tweaking of income taxes and this year is no different. Three weeks ago, we didn’t what was going to happen to our tax rates since Congress had yet to act on the expiring Bush era tax cuts. With the clock winding down, they opted to extend them by two years and so the only change you’ll see is an adjustment for inflation.

This year we’ll be presenting them a little differently. Some readers are here just to find out their marginal tax rate and others want to find out how much in taxes they’ll be paying. So this year you’ll see a listing of all the marginal tax rates first, followed by a breakdown of taxes due (without accounting for deductions and other adjustments).

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A lot of the political rhetoric during the mid-term elections focused on reducing government spending and reducing the deficit (I found it a little hypocritical considering the average household credit card debt was in the thousands of dollars). That likely prompted the New York Times to put together a little “game” in which you get to fix the budget.

Today, you’re in charge of the nation’s finances. Some of your options have more short-term savings and some have more long-term savings. When you have closed the budget gaps for both 2015 and 2030, you are done. Make your own plan, then share it online.

You get a list of programs with estimated savings to the deficit (out to 2015 and 2030), and you’re charged with saving $418 billion by 2015 and $1,355 billion by 2030. The sources of those estimates come from a litany of organizations, many of which you’ve probably seen referred to in other articles, and I’m inclined to take their savings estimates at face value. By playing this game, you start to appreciate how difficult it is to cut the deficit (despite out easy it is to put “fiscal responsibility” on political “to do” list) especially after the reaction to the draft Bowles-Simpson Plan.

With the Bush tax cuts expiring, there have been several proposals out there suggesting what we do. We’ve looked at the three major solutions to the expiring Bush tax cuts as well as one less well known alternative, but there’s a new one on the table that seems to make a lot of common sense (just not political sense).

Representative Bill Pascrell (D-NJ) and Representative Michael Capuano (D-MA) suggest the introduction of a new tax bracket starting at $500,000, an idea (known as the Pascrell Compromise) they floated before the mid-term elections. It also includes a five year extension on current middle class tax rates (individuals < $200,000 and families < $250,000) and long term capital gains and qualified dividends. It also includes a one year extension on tax rates for filers making under $500,000 annually (effectively creating a $500,000 tax bracket).

This effective “decouples” the tax brackets at the $500,000 income level and political experts are claiming that this will not get Republican support. Once you decouple the higher tax brackets, it’d be political suicide to vote against continuing the middle class (income under $200,000 and $250,000) tax cuts. The interesting part will be to see if all the voters to voiced their opinion about the national deficit and debt will do the same about continuing huge tax cuts for everyone, including themselves.

In case you were wondering, Bargaineering readers weighed in on the subject just recently.