Posts Tagged ‘Taxes’

Obama Threatens Veto of Emerging Tax-Break Agreement in Congress

Tuesday, November 25th, 2014

Originally Published in ACCOUNTINGTODAY.COM

(Bloomberg) President Barack Obama would veto a tax-break agreement being negotiated in Congress by Senate Democrats and House Republicans.

“The president would veto the proposed deal because it would provide permanent tax breaks to help well-connected corporations while neglecting working families,” Jen Friedman, a White House spokeswoman, said in an e-mail today.

Lawmakers are nearing an agreement on extending U.S. tax breaks that lapsed at the end of 2013 and making others permanent. The proposal would add about $450 billion to the budget deficit over the next decade, said a Democratic aide.

A veto would require an override by two-thirds of lawmakers in the House and Senate, a high barrier for a deal that could draw opposition from some Democrats.

The biggest beneficiaries of the breaks would include corporations that conduct research, residents of states such as Washington and Texas that lack an income tax, and wind-energy producers concerned that their tax benefit would end all at once instead of being phased out. Tax breaks for low-income families that lapse at the end of 2017 wouldn’t be extended.

The tax break for corporate research, which would be expanded and made permanent, benefits companies including Intel Corp. and Johnson & Johnson. A benefit for small-business investments also would be locked in.

The plan would make permanent a provision allowing individuals to deduct state sales taxes, an issue important to Senate Democratic Leader Harry Reid of Nevada. In that state 22 percent of tax filers take advantage of the break, the second- highest percentage in the U.S., according to the Pew Charitable Trusts.

Wind Energy
The production tax credit for wind energy would be phased out over several years, said the aide, who spoke on condition of anonymity because the package wasn’t yet public.

A tax break for mass-transit commuters would be permanently extended as would a tax credit for college tuition, the aide said. Those are items championed by Senator Charles Schumer of New York, the third-ranking Senate Democrat.

Other breaks that may be made permanent include incentives for landowners to donate conservation easements and for individuals to make charitable donations directly from tax- advantaged retirement accounts.

Dozens of other tax breaks that expired at the end of 2013 would be continued through 2015. Among those that have lapsed are a provision that lets home sellers exclude from income the forgiven debt from short sales, as well as accelerated depreciation for motorsports tracks.

Child Credit
After reports of an emerging agreement yesterday, the Obama administration issued a statement signaling that it opposed a package that doesn’t extend expansions of the child tax credit and earned income tax credit that lapse at the end of 2017.

“An extender package that makes permanent expiring business provisions without addressing tax credits for working families is the wrong approach, at the expense of middle-class families,” Treasury Secretary Jacob J. Lew said yesterday. “Any deal on tax extenders must ensure that the economic benefits are broadly shared.”

Congress returns on Dec. 1 to finish its post-election session, and lawmakers want to leave Washington by Dec. 11.

That time frame might make it difficult for Obama to veto any plan, especially because the Internal Revenue Service has warned that waiting could delay tax refunds next year.

If this proposal falls apart, House Republicans’ fallback plan is to extend the lapsed breaks through Dec. 31, 2014, Ways and Means Committee Chairman Dave Camp said yesterday.

That approach would require lawmakers to return to the issue next year, when Republicans will control the House and the Senate.

IRS Offers Rules on Hardship Exemptions from ACA Individual Mandate

Tuesday, November 25th, 2014

Originally Published in ACCOUNTINGTODAY.COM

The Internal Revenue Service has issued a notice, regulations and other guidance related to the Affordable Care Act, including information on getting a hardship exemption from the individual mandate for health insurance coverage.

Notice 2014-76 provides a list of the hardship exemptions that taxpayers can claim on a federal income tax return without obtaining a hardship exemption certification from the health insurance marketplace.

Under the Affordable Care Act, for each month beginning after Dec. 31, 2013, Section 5000A of the Tax Code requires individuals to either have minimum essential health coverage for themselves and any nonexempt family member whom the taxpayer can claim as a dependent, qualify for an exemption, or include an individual shared responsibility payment with their federal income tax return.

An individual is exempt from the requirements for a month if he or she has a hardship exemption certification issued by the health insurance marketplace certifying that the person has suffered a hardship affecting their ability to obtain minimum essential coverage that month.

The IRS simultaneously released Revenue Procedure 2014-62, which announces the indexed applicable percentage table for calculating an individual’s premium tax credit for taxable years beginning after 2015. The document also announces the indexed required contribution percentage for determining whether an individual is eligible for affordable employer-sponsored minimum essential coverage for plan years beginning after 2015.

The same Revenue Procedure cross-references the required contribution percentage, as determined under guidance issued by the Department of Health and Human Services, for determining whether an individual is eligible for an exemption from the individual shared responsibility payment because of a lack of affordable minimum essential coverage, beginning after 2015.

In addition, the IRS issued TD 9705, finalizing its regulations for minimum essential coverage and other rules regarding the individual shared responsibility payment, also known as the individual mandate.

Budget Cuts Hit IRS’s Ability to Collect Delinquent Taxes

Thursday, November 6th, 2014

Originally Published in ACCOUNTINGTODAY.COM

Years of budget cuts are having a negative impact on the ability of the Internal Revenue Service to collect delinquent taxes, according to a new government report.

The IRS’s Automated Collection System is responsible for answering incoming taxpayer calls and working the inventory of taxpayer delinquent accounts, the report from the Treasury Inspector General for Tax Administration noted. Since fiscal year 2010, the ACS workforce has declined by 39 percent due to attrition or reassignment, TIGTA found. Because those resources are needed to answer telephone calls, fewer resources are available to work on the inventory of past-due taxes.

This has contributed to unfavorable trends in several ACS business results, the report noted, including the amount of new inventory of cases of uncollected taxes outpacing closures of such cases; the inventory of delinquent tax cases taking longer to close; more cases being closed as uncollectible; fewer enforcement actions being taken; and more aged cases being transferred to a holding file queue that the IRS maintains of uncollected taxes.

In addition, the IRS has not established performance metrics to measure the effect that answering incoming calls has had on compliance business results, TIGTA pointed out. Capturing such data would allow ACS management to assess the impact of prioritizing call handling.

“IRS management should take steps to ensure that inventory routing and ACS resource capabilities are aligned with overall IRS tax administration priorities and their vision for the role of the ACS in the Collection enforcement strategy,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA recommended that the IRS re-examine the ACS’s role in the collection workflow process, including inventory delivery to the ACS as well as case retention criteria, and align ACS resources accordingly. The IRS should also request a study to determine the impact of the policy change to not require Notice of Federal Tax Lien determinations on certain unpaid balances, according to TIGTA. The IRS should also establish performance metrics for ACS call handling data to measure the impact that answering taxpayer calls has on compliance business results, the report suggested.

IRS officials agreed with the recommendations and plan to take corrective actions. “We recognize the critical role ACS plays in our Collection program and, while it is our intent that ACS’s role not be diminished going forward, the current budget environment requires us to continually evaluate our programs and priorities in light of declining resources,” wrote Karen Schiller, commissioner of the IRS’s Wage & Investment Division, in response to the report. “To that end, the Wage & Investment and Small Business/Self-Employed Divisions are currently realigning our compliance programs. As part of this effort, we are creating a single Collection organization within the Small Business/Self-Employed Division. The executive lead of this new Collection organization will have end-to-end accountability for the Collection program and will be responsible for reducing redundancies in our Collection processes and improving taxpayer services while identifying emerging Collection issues. While we are continuing to develop the structure and the concept of operations for this new Collection organization, ACS will be a key component. And, as part of our work on the concept of operations for the new Collection organization, we will be reviewing our ACS program to determine whether the Collection responsibilities and authorities currently assigned to our ACS employees need to be enhanced. We are proud of ACS’s contributions to our Collection program and it is our intent that ACS’s role be enhanced going forward.”

In further response to the report, the IRS pointed out that budget cuts are havin g an impact on its ability to collect revenue and taxes. “This report dramatically illustrates the bottom-line impact that IRS budget reductions have on revenue collection and unpaid taxes,” the IRS said in a statement emailed to Accounting Today. “With the IRS funding down by $850 million since Fiscal 2010 and priority programs such as identity theft requiring more resources, staffing for Automated Collection System fell from 2,824 in 2010 to 1,730 in 2013. At the same time, the report notes that tax collection in this program fell by $400 million. This is a clear example that deep cuts to the IRS budget hurts tax collection and threatens the nation’s revenue collection.”

Senators Introduce Bill to Prevent Tax Refund Theft

Wednesday, August 6th, 2014

Originally Published in ACCOUNTINGTODAY.COM

Leaders of the Senate Finance Committee have introduced bipartisan legislation to improve protection for taxpayers against fraudulent tax refund claims made with stolen identities.

Sen. Orrin Hatch, R-Utah, ranking member of the Senate Finance Committee, and Ron Wyden, D-Ore., who chairs the Senate Finance Committee, introduced theTax Refund Theft Prevention Act of 2014, S. 2736, on Thursday.

The bill includes new assistance for taxpayers who have been victims of identity theft and requires the Internal Revenue Service to establish a new security feature that individuals can use to protect their tax return filings.

“Tax refund fraud is a one-two punch for taxpaying individuals,” Hatch said in a statement. “Millions of taxpayers’ identities are compromised, and all taxpayers have their tax dollars wasted. Our bill aims to address such fraud by enhancing the IRS’s capabilities in detecting fraud and by giving victims the assistance and safeguards they need to repair the damage done by tax theft criminals. In order to further deter this crime, we make tax refund fraud a specific category of a felony offense and enhance security features for filers. Hard-working American families deserve a government that protects both their tax dollars and their sensitive taxpayer information. I am pleased Chairman Wyden has joined me in this advancing this effort.”

“We have to better protect lawful taxpayers from this nightmare issue,” Wyden said. “Earlier this year, I made it clear that taxpayer consumer protection must be at the heart of improving the American tax system. This bill offers a comprehensive, commonsense solution to a growing problem that will help prevent fraud and also provide assistance to those who have been victimized. Senator Hatch and I remain committed to protecting the integrity of our tax system.”

Under the bill, businesses would be required to report both employee compensation and certain non-employee compensation to the government earlier in tax season. The change would improve the IRS’s ability to identify and prevent fraudulent refund claims.“We have to better protect lawful taxpayers from this nightmare issue,” Wyden said. “Earlier this year, I made it clear that taxpayer consumer protection must be at the heart of improving the American tax system. This bill offers a comprehensive, commonsense solution to a growing problem that will help prevent fraud and also provide assistance to those who have been victimized. Senator Hatch and I remain committed to protecting the integrity of our tax system.”

Paid tax preparers would be required to file individual income tax returns and most information returns electronically under the proposed legislation. In addition, the electronic filing requirement for preparers who file over 250 tax returns would be scaled back to 20 returns, over a three-year period, to improve the IRS’s ability to identify and prevent fraudulent refund claims.

The existing access that the Treasury Department has to the National Directory of New Hires database would be expanded for the purpose of identifying and preventing fraudulent tax filings and refund claims.

Victims of tax refund theft would be assigned a single contact person within the IRS for help with correcting their tax records and receiving their tax refunds.

Under the bill, the list of aggravated identity theft crimes that are classified as felonies would be expanded to include tax refund theft. Tax preparers would also face significant new penalties if they inappropriately disclosed taxpayer information in connection with an identity theft crime.Victims of tax refund theft would be assigned a single contact person within the IRS for help with correcting their tax records and receiving their tax refunds.

Individual taxpayers would be able to add password security to their tax filings under the legislation. If a tax return filer elected to add this security measure, then a valid tax return could not be filed without also using the correct password.

Under the bill, due diligence requirements imposed on tax preparers with respect to the Earned Income Tax Credit would be expanded to include a requirement that the preparer verify the tax filer’s identity. The senators’ office noted that many fraudulent returns falsely claim the EITC in order to generate a tax refund.

Under the proposed legislation, he IRS would be prohibited, with limited exceptions, from issuing multiple tax refunds to the same account or address. Annual tax statements received by employees for wages earned would be required to use a truncated Social Security number in order to protect the number from identity theft.

New 1023-EZ Form Makes Applying for 501(c)(3) Tax-Exempt Status Easier; Most Charities Qualify

Wednesday, July 2nd, 2014

From IRS Newswire, an IRS e-mail service

WASHINGTON — The Internal Revenue Service today introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

“This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well,” said IRS Commissioner John Koskinen. “The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.”

The new Form 1023-EZ, available today on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

“Previously, all of these groups went through the same lengthy application process — regardless of size,” Koskinen said. “It didn’t matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS.”

The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months.

Following feedback this spring from the tax community and those working with charitable groups, the IRS refined the 1023-EZ proposal for today’s announcement, including revising the $50,000 gross receipts threshold down from an earlier figure of $200,000.

“We believe that many small organizations will be able to complete this form without creating major compliance risks,” Koskinen said. “Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do.”

The new EZ form must be filed online. The instructions include an eligibility checklist that organizations must complete before filing the form.

The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40, posted today on IRS.gov.

There are more than a million 501(c)(3) organizations recognized by the IRS.

IRS Doing More Audits of Large Partnerships

Tuesday, April 22nd, 2014

Originally Published in ACCOUNTINGTODAY.COM

As the number of large partnerships involving 100 or more direct partners continues to grow, the Internal Revenue Service is taking a closer look at them, according to a new government report.

The report, from the Government Accountability Office, acknowledged that there is no statutory, IRS or industry-accepted definition of a “large partnership.” However, the GAO used a combination of criteria for partner size and asset size used by IRS to define large partnerships as those that reported having 100 or more direct partners and $100 million or more in assets. Due to the growth of large partnerships and the limited publicly-available data on them, the GAO was asked to provide information on the number and characteristics of large partnerships and on those large partnership returns that have been subject to an IRS audit.

The GAO report found that the number of large partnerships increased from 720 in tax year 2002 to 2,226 in tax year 2011. Large partnerships also increased in terms of the average number of direct partners and average asset size.

The IRS had data on two categories of large partnership return audits. First, the number of completed field audits of large partnership returns increased from 11 in fiscal year 2007 to 31 in fiscal year 2013. Second, IRS counted audits closed through its campus function, which increased from 42 to 143 over the same period. “Unlike field audits, campus function audits generally do not entail a review of the books and records of the large partnership return but rather were opened to pass through large partnership return audit adjustments to the related partners’ returns,” the GAO noted.

The percentage of IRS audits that resulted in no change to the taxpayer’s return varied from fiscal year 2007 to 2013 but was 52 percent for campus function audits and 45 percent for field audits in fiscal year 2013, according to the GAO.

Senate Finance Committee Chairman Ron Wyden, D-Ore., took note of the findings in the report and said it could play a role in the tax reform efforts. “This is a real problem and serves as yet another example of why Congress needs to get serious about comprehensive, bipartisan tax reform,” he said in a statement. “This includes looking at the growth of large partnerships and working with the proper parties—including the IRS—to put in place a smart framework for auditing and governance. By rebuilding our tax fundamentals, rather than jumping from one fire drill to the next, Congress can better ensure that we have a fair code and enforcement system in place.”

However, the IRS may be constrained in its audit efforts by budget constraints. IRS commissioner John Koskinen said recently that the audit rate for individual tax returns last year was at its lowest rate since 2005, due to budget cuts in recent years, and he expects it to decline further this year (see IRS Audit Rate Hits New Low).

Wyden, along with Senators Carl Levin, D-Mich., and John McCain, R-Ariz., pointed out that the GAO’s preliminary report shows that the IRS is failing to audit 99 percent of the tax returns filed by large partnerships with assets exceeding $100 million.

“The GAO report shines a needed spotlight on how the IRS is auditing large partnerships, and the news isn’t good,” said Levin, chairman of the Senate Permanent Subcommittee on Investigations. “The GAO report shows that while the number of these massive partnerships with massive assets has exploded, IRS audits haven’t kept pace.”

According to GAO, “[b]etween tax years 2002 and 2011, the number of businesses organized as partnerships (with 100 or more partners and $100 million or more in assets) increased more than 200 percent, accounting for $2.3 trillion in assets and $68.9 billion in total net income by 2011.”

Yet in 2012, for example, IRS field audits reviewed the books and records of only 0.8 percent of large partnership returns, according to the preliminary report.

“Auditing less than 1 percent of large partnership tax returns means the IRS is failing to audit the big money,” said Levin in a statement. “It means over 99 percent of the hedge funds, private equity funds, master limited partnerships and publicly traded partnerships in this country, some of which earn tens of billions each year, are audit-free. It is obvious something is wrong with the IRS audit program for large partnerships. We literally cannot afford to allow these entities to go unaudited.”

The final GAO report is expected to provide additional qualitative analysis of why the IRS has performed so few audits of large partnerships. It is expected to focus in part on the unified partnership audit procedures in the Tax Equity and Fiscal Responsibility Act (TEFRA), which some view as responsible for making large partnership audits time-consuming and expensive.

“If Congressionally-imposed red tape or budget cuts are partly responsible for the poor audit numbers, we need to find that out and change it,” Levin added.

The IRS told the Associated Press that budget cuts in recent years have led to reductions in its enforcement staff.

“Since Fiscal 2010, the IRS budget has been reduced by nearly $900 million,” the IRS said in a statement. “The IRS has about 10,000 fewer employees than in 2010, affecting our work across our taxpayer service and enforcement categories. Last year, we had 3,100 fewer people in our key enforcement positions than in 2010.”

IRS Reiterates Warning of Pervasive Telephone Scam

Tuesday, April 15th, 2014

Sent In the IRS Newswire

WASHINGTON – As the 2014 filing season nears an end, the Internal Revenue Service today issued another strong warning for consumers to guard against sophisticated and aggressive phone scams targeting taxpayers, including recent immigrants, as reported incidents of this crime continue to rise nationwide. These scams won’t likely end with the filing season so the IRS urges everyone to remain on guard.

The IRS will always send taxpayers a written notification of any tax due via the U.S. mail. The IRS never asks for credit card, debit card or prepaid card information over the telephone. For more information or to report a scam, go to www.irs.gov and type “scam” in the search box.

People have reported a particularly aggressive phone scam in the last several months. Immigrants are frequently targeted. Potential victims are threatened with deportation, arrest, having their utilities shut off, or having their driver’s licenses revoked. Callers are frequently insulting or hostile – apparently to scare their potential victims.

Potential victims may be told they are entitled to big refunds, or that they owe money that must be paid immediately to the IRS. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.

Other characteristics of this scam include:

• Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.

• Scammers may be able to recite the last four digits of a victim’s Social Security number.

• Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.

• Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.

• Victims hear background noise of other calls being conducted to mimic a call site.

• After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

• If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.

• If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.

• If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts. Recipients should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to phishing@irs.gov.

More information on how to report phishing scams involving the IRS is available on the genuine IRS website, IRS.gov.

You can reblog the IRS tax scam alert via Tumblr.

Taxpayers Plan to Use Tax Refunds for Necessary Expenses

Thursday, February 27th, 2014

Originally Published in Accounting Today

About 52 percent of Americans intend to spend their annual tax refund on necessary expenses such as loans, credit cards and other household expenses, while another 30 percent plan to put the money into savings and only 8 percent plan to invest the tax refund money, according to a new survey.

The survey, released Tuesday by the financial services firm Edward Jones, contrasts with a similar survey released Monday by TD Ameritrade, which found greater interest in investing tax refunds, at least among the investors who were polled (see Many Plan to Invest Their Tax Refunds).

The Edward Jones survey polled over 1,000 taxpayers in general. It found that the respondents between the ages of 55 and 64 are most likely to save their refund (43 percent). Respondents who are just a few years younger had a much different opinion, with only 25 percent of those between 45 and 54 years of age planning to save their tax refunds. The survey’s youngest respondents, those between the ages of 18 and 34, are most likely to spend their refund checks on “fun” things such as clothes, entertainment and restaurants (12 percent). This compares to just 5 percent of those 65 and older who would do the same.

Household income has the most influence on the decision to save, spend or invest a tax refund in 2014. Survey respondents with the lowest household income (those making less than $35,000 a year) are the most likely to spend their tax refund on necessary expenses (61 percent). This compares to just over one-third (37 percent) of those with the highest household income ($100,000 or more). The wealthiest respondents are not the most likely to invest their refunds, the survey found. Instead, those with household incomes between $50,000 and $75,000 were the most likely to invest the tax refund money.

In general, households with children are the most likely to spend their tax refunds on everyday expenses, and those with older children are even more likely. Following that point, Americans with no children are the most likely (10 percent) to spend their tax refund on something “fun,” whereas only 1 percent of those with children ages 13 to 17 are willing to splurge.

Americans living in the Northeast are the most likely to invest their tax refunds (11 percent). Those who live in the West are the most likely simply to save their tax refunds (35 percent).

Cities with highest (and lowest) taxes

Monday, February 24th, 2014

Originally Published on Yahoo!

Although a little late this year, due largely to the federal government’s 17-day shutdown in 2013, tax season is here. And, according to a new report, what you owe in taxes could be largely determined by where you live.

The report, released by the Office of Revenue Analysis of the government of the District of Columbia, reviewed the estimated property, sales, auto and income taxes for a hypothetical family at various income levels in 2012 in the largest city within each state. City tax burdens vary widely. A family of three earning $75,000 in Cheyenne, Wyoming, paid just $3,475, or 4.6% of its income, in state and local taxes. In Bridgeport, Connecticut, a family of three earning $75,000 paid $16,333, or 21.8% of its income — a total that does not even include federal taxes.

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Not surprisingly, tax rates influence overall tax burdens significantly. This is especially true for property taxes. Seven of the cities with the highest tax burdens also had among the 10-highest property tax rates, according to the Office of Revenue Analysis. Homeowners in Columbus, Ohio, which had the fifth-highest tax burden in the nation, paid an effective rate of $3.57 for every $100 in home value, the highest such rate in the U.S.

Lori Metcalf, fiscal analyst at the Office of Revenue Analysis, noted in an interview with 24/7 Wall St. that property taxes tended to comprise a higher share of state and local tax burdens. Because of this, “the trend that you see in the property tax should be reflected in the overall burden.”

Another tax that is often important in determining overall tax burden is the income tax. This is especially true for cities with the lowest tax burdens, seven of which are located in states that do not have an income tax. Only one of the five cities with the lowest tax burdens, Billings, Montana, is not located in a state that has no income tax.

Yet the relationship between income taxes and higher tax burdens is not as straightforward. To highlight this, Metcalf noted that higher incomes families usually live in higher-value homes. “This means that when you pay income taxes you’ll have a larger deduction because you’ll have a larger property tax based on a more expensive home and a larger mortgage interest deduction,” Metcalf explained. As a result of this deduction, homeowners’ income tax burdens are often reduced, obscuring the relationship between income taxes and overall tax burdens.

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Several factors not reviewed by the Office of Revenue Analysis, whose study focused primarily on the characteristics of tax systems, may play a role in determining tax burdens. One such potential factor is unemployment. In many cities with low tax burdens, the unemployment rate was also very low. Sioux Falls, South Dakota, and Billings, Montana, had among the lowest unemployment rates in the nation in 2012. At the other end of the spectrum, Detroit, Michigan and Providence, Rhode Island had both hefty tax burdens and high unemployment.

A number of the cities with the lowest tax burdens were located in states that are considerably less densely populated, such as Alaska, Wyoming, and South Dakota. Even some of the cities themselves are in less densely populated metro areas. Birmingham, Alabama, had one of the lowest tax burdens in the U.S. and was located in the the least densely populated metro area of any reviewed. By comparison, many of the cities with high tax burdens are located in more densely populated parts of the country, such as the Northeast.

While this falls outside the scope of the report, it is possible that the reason areas with low population density have lower tax burdens is because the cost of running these cities is less. Local governments with fewer residents can spend less on government services. As a result, the government does not have to make as much in taxes.

Several low tax burden cities were also located in states that had a relative abundance of fossil fuels, including oil, natural gas, and coal. Houston, Texas, is located in the nation’s top state for oil and natural gas production. Cheyenne is the largest city in Wyoming, which accounts for a large portion of the nation’s coal output. A 2012 study by the National Conference of State Legislators found that Alaska, Montana, and Wyoming, all of which have cities with low tax burdens, relied on taxing oil and gas activity for much of their revenue.

Based on the Office of Revenue Analysis’ report: “Tax Rates and Tax Burdens in the District of Columbia — A Nationwide Comparison,” 24/7 Wall St. reviewed the cities where a hypothetical family of three in different income brackets had the highest and the lowest combined tax burdens. To calculate tax burden, the report identified four different types of taxes: income, property, automobile, and sales. The report examined tax systems in the largest city in each state, as well as in Washington, D.C. All estimates are for the 2012 fiscal year. Median housing value and median income data used by the report to determine property value are for metro areas. When two cities were located within the same metro area, county level data was used. 24/7 Wall St. also reviewed income figures for these areas from the U.S. Census Bureau, as well as area unemployment rates as of 2012 from the Bureau of Labor Statistics.

Cities Paying the Highest Taxes:

5. Columbus, Ohio Taxes for family earning $25,000: $2,953 (17th lowest) Taxes for family earning $150,000: $22,333 (6th highest) Unemployment rate: 6.1%

A family of three earning $25,000 a year in Columbus faced only an 11.8% tax burden, lower than more than half of all cities reviewed. However, tax burdens for families with higher earnings were among the highest in the nation. This is due in large part to the city’s real estate taxes. Although the housing values in the city were not especially high, lower than the average for cities reviewed, residents faced especially high property taxes. At 3.57%, Columbus had the highest effective property tax rate of any city.

4. Baltimore, Md. Taxes for family earning $25,000: $2,950 (16th lowest) Taxes for family earning $150,000: $24,747 (4th highest) Unemployment rate: 7.2%

Baltimore area residents are fairly well-off compared with most of the country — median household income was nearly $67,000 in 2012, among the nation’s highest. Baltimore’s property tax burden is especially high. Families of three earning $150,000 paid $13,772 in property taxes in 2012. Families earning $25,000 had no income tax burden, but those earning $150,000 paid more than 5% of their income in state and local income taxes alone, the sixth-highest percentage of any city reviewed.

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3. Milwaukee, Wisc. Taxes for family earning $25,000: $3,245 (26th highest) Taxes for family earning $150,000: $26,296 (2nd highest) Unemployment rate: 7.4%

Like a number of other cities with high tax load, Milwaukee residents faced especially high property tax burdens. The effective property tax rate in the city was 3%, higher than all but a few regions reviewed. Also driving up taxes were the especially high income tax burdens in the city. The state used a graduated income tax system, meaning tax rates are higher for families that earn more, although Milwaukee had no local income taxes.In 2013, the state reformed its tax code, lowering the highest rate as well as the number of overall tax brackets. Wisconsin Governor Scott Walker recently pushed the state assembly to cut both property taxes and and the income tax rate for the state’s lowest tax bracket.

2. Philadelphia, Pa. Taxes for family earning $25,000: $3,794 (7th highest) Taxes for family earning $150,000: $25,317 (3rd highest) Unemployment rate: 8.6%

Philadelphia’s poorer families were subject to a much higher tax burden than those in most other large cities. A family of three earning $25,000 in 2012 paid $788 in income taxes that year, more than all but one other large city. The city’s property tax burden was also considerably high for most income levels that year. A family whose earnings fell into the $100,000 tax bracket, for example, paid more than $11,806 in property taxes in 2012, second-most among large cities. After a new property tax valuation system was implemented and some residents’ tax assessments more than tripled, the city introduced a “gentrification relief program” at the end of 2013. Fuel was also heavily taxed in 2012, with gasoline costing an additional 31 cents per gallon due to state taxes, which were among the highest in the U.S.

1. Bridgeport, Conn. Taxes for family earning $25,000: $4,001 (4th highest) Taxes for family earning $150,000: $33,208 (the highest) Unemployment rate: 7.8%

No large U.S. city had a higher tax burden than Bridgeport, where a family of three earning $150,000 a year paid more than 22% of its income in state and local taxes. However, the metro area, which includes affluent Fairfield county, is wealthier than much of the U.S. and was used to calculate home values and property burdens by the Office of Revenue Analysis. More than 20% of households had an annual income of at least $200,000, more than any other metro area reviewed. The city’s high tax burden was due in large part to property taxes, as the area had both high home values and high effective property tax rates. Also propelling the city to the top of the list were Connecticut’s relatively high income tax burden of 5.2% on families earning $150,000 per year as well a high tax burden for car owners.

Click here for the full list of cities paying the highest taxes.

Cities Paying the Least in Taxes:

5. Sioux Falls, S.D. Taxes for family earning $25,000: $2,772 (10th lowest) Taxes for family earning $150,000: $9,425 (3rd lowest) Unemployment rate: 4.1%

The low tax burden in Sioux Falls is partly due to the absence of a state income tax. However, city also had low tax burdens in other categories measured. Families in the area with higher incomes had lower tax burdens than families with lower incomes. This was due to the state’s tax structure, which was criticized by the Institute on Taxation & Economic Policy, a think tank that supports a progressive tax code, for being too reliant on low-income residents. However, even Sioux Falls’ lowest income residents faced a relatively low tax burden.

4. Anchorage, Alaska Taxes for family earning $25,000: $2,366 (4th lowest) Taxes for family earning $150,000: $9,790 (4th lowest) Unemployment rate: 6.0%

Automobile tax burdens in Anchorage were consistently low across all levels of income. Like most American cities, Anchorage did not have a local gasoline tax in 2012, and the state’s gasoline tax of 8 cents per gallon that year was the lowest in the nation. The city also had no excise or personal property tax that it charged to car owners. Sales tax burdens were also considerably lower than in other large cities — families in every tax bracket paid less than $200 in sales taxes in 2012. The median income of city residents was more than $71,000 in 2012, one of the highest nationwide. Alaska, however, taxed none of this income because it is one of few states without any income tax.

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3. Billings, MT Taxes for family earning $25,000: $2,347 (3rd lowest) Taxes for family earning $150,000: $10,668 (7th lowest) Unemployment rate: 4.4%

Billings families faced some of the lowest sales and property tax burdens in the nation. Montana did not have a general sales tax in 2012. Helping to keep property taxes low, Billings levied real estate taxes on only a small portion of a home’s value, and residents also paid a relatively low effective property tax rate. Billings had one of the nation’s lowest jobless rates as of December as well. Just 4.4% of people in the workforce were unemployed in 2012, and the State has benefitted from the nearby Bakken Shale oil boom. Montana taxes oil and gas production, which can alleviate the tax loads residents face.

2. Las Vegas, Nev. Taxes for family earning $25,000: $3,260 (24th highest) Taxes for family earning $150,000: $8,314 (2nd lowest) Unemployment rate: 11.2%

Unlike most cities with low tax burdens, Las Vegas had an exceptionally high unemployment rate of 11.2% in 2012, nearly the worst compared with other large cities. The median income was also lower than $50,000 that year, less than median incomes in most urban areas. Overall, property taxes were low in 2012. A family earning $150,000 paid slightly more than $5,000 that year in property taxes, one of the lowest amounts nationwide.

1. Cheyenne, Wyo. Taxes for family earning $25,000: $2,476 (5th lowest) Taxes for family earning $150,000: $6,307 (the lowest) Unemployment rate: 6.1%

Cheyenne had the lowest tax burden of any state in the nation, and not only because Wyoming had no state income tax. The total sales tax rate of just 6.0% in Cheyenne, which was lower than in most comparable cities, contributed to the the low sales tax burden in the city. Wyoming residents also paid just 14 cents in state taxes per gallon on gas, one of the lowest rates in the U.S. and a major reason why tax burdens on car ownership were towards the low-end. Additionally, Cheyenne’s effective property tax rate of 0.67% was among the lowest in the nation. Low tax rates on families in the city and the state may be tied to Wyoming’s energy industry. The state is the nation’s largest producer of coal, as well as a sizable producer of oil and natural gas, and taxes from these industries help the state fill its coffers.

Click here for the full list of cities paying the least in taxes.

IRS Provides Safe Harbor for Taxpayers with Discharged Debts for Real Property

Monday, February 10th, 2014

Originally published in Accounting Today

The Internal Revenue Service has issued a revenue procedure to help taxpayers with so-called mezzanine financing in workouts and similar circumstances when they have debts that have been discharged in connection with real property.

Revenue Procedure 2014-20 provides a safe harbor under which the IRS will, under certain defined circumstances, treat indebtedness that is secured by 100 percent of the ownership interest in a disregarded entity that holds real property as indebtedness that is secured by real property for purposes of Section 108(c)(3)(A) of the Tax Code. The revenue procedure will assist taxpayers with mezzanine financing in workouts and similar circumstances.

The IRS noted that borrowers will often incur debt in connection with real property used in a trade or business. If the debt is later discharged, the income from the discharge of indebtedness may be excluded from gross income if certain requirements are met. In some cases, the real property is held by the borrower in an entity that is wholly owned by the borrower, and is, for federal tax purposes, disregarded as an entity separate from its owner. In these cases, the debt may be secured by the borrower’s ownership interest in the disregarded entity holding the real property.

Revenue Procedure 2014-20, will be included in Internal Revenue Bulletin 2014-09 on Feb. 24, 2014.