President Obama and his administration are seeking almost a $1 trillion tax increase over the next decade on US taxpayers earning more than $200,000. He also wants to take an additional $400 billion from businesses even as it retools a proposed crackdown on international tax-avoidance techniques; according to a Feb 2, 2010 Business Week article.

Believe it or not, the Obama income tax proposal would actually reinstate income tax rates enacted by former President Bush 10 years ago. The income tax rates for single Americans making over $200,000 or joint filers earning more than $250,000 would increase to 36% and 39.6% respectfully. The plan also calls for eliminating preferences for oil and gas companies, life-insurance products, executives of investment partnerships and U.S.-based companies that operate overseas.

“This set of tax reforms strikes a balance between targeted tax cuts to spur investments in job growth and innovation here at home, middle-class tax relief to make our tax system more fair, measures to crack down on abuses that send jobs overseas, and long-term fiscal discipline,” Treasury Secretary Timothy F. Geithner said in a statement.

Obama’s proposed $143.4 billion in new tax cuts for individuals who earn under $200,000. While the budget sets out $93.5 billion in gross tax reductions for businesses, overall they would face a net tax increase.

“The proposed budget’s $300 billion in tax relief over the next 10 years for individuals, families, and businesses is mostly targeted and limited, often to people who don’t have to pay any taxes,” said Senator Charles Grassley of Iowa, the ranking Republican on the tax-writing Senate Finance Committee. “The tax increases in the budget dwarf the tax relief.”

President Obama asked Congress to extend all of Bush’s tax cuts that apply to Americans earning under $250,000. He also proposes almost doubling a tax credit that helps Americans pay for child care and increasing federal subsidies for Individual Retirement Accounts.

The budget assumes the federal estate tax, which expired Jan. 1 and was replaced with a capital-gains tax, will be reinstated retroactively with a 45 percent rate applied when married couples’ estates exceed $7 million. If Congress doesn’t act, the estate tax in 2011 will be reinstated to a 55 percent rate applied to estates valued at more than $1 million.

Obama’s budget also assumes Congress will continue to index the alternative minimum tax for inflation. The minimum tax can impose higher rates on families earning between $75,000 and $500,000 when their deductions are too high relative to their income. It was originally intended to affect only millionaires and is now ensnaring people with lower incomes because it was never indexed for inflation.

The Obama tax budget proposal will most certainly face opposition from Congress.  This proposal will also be opposed by the influential and wealthy US taxpayers.  Is Obama’s tax proposal political hari-kari?

source: businessweek.com

There are various options for payment of an outstanding federal income tax liability. Because your balance is subject to interest and a monthly late payment penalty, it is in your best interest to pay in full as soon as you can to minimize the additional charges. Penalties are also assessed for failure to file a tax return so you must file immediately even if you cannot pay your balance in full.

IRS Tax payment options allow you to pay your tax liability by sending a check or money order, made out to “United States Treasury.” You may pay by transferring money electronically from your bank account. You can even pay your federal income tax liability by credit card or debit card. Be advised that a service provider, not the IRS, may charge a convenience fee for electronic payments from your bank account or for a payment by credit card. If you cannot pay in full you should pay as much as possible to reduce the accrual of interest on your account.

You should consider financing the full payment of your income tax liability through loans, such as a home equity loan from a financial institution or a credit card cash advance. The interest rate and any applicable fees charged by a bank or credit card are usually lower than the combination of interest and penalties imposed by the Internal Revenue Code. If you cannot pay in full immediately, the IRS offers a short amount of additional time, up to 120 days, to pay in full. No fee will be charged for entering this type of payment arrangement.

Another IRS tax payment option is by installments. Tax payment installment agreement allow you to make a series of monthly payments over time. The IRS offers various options for making monthly payments such as:

1. Direct Debit from your bank account
2. Payroll Deduction from your employer
3. Payment via check or money order
4. Electronic Federal Tax Payment System (EFTPS)
5. Payment by credit card via phone or Internet, or
6. Online Payment Agreement (OPA)

A one-time installment agreement fee of $105.00 will be charged when you enter into an installment agreement unless you choose to pay through a Direct Debit from your bank account, in which case the fee is $52.00. Taxpayers with income at or below 250% of the Department of Health and Human Services poverty guidelines can apply to pay a reduced user fee of $43.00.

If you can pay your IRS tax payment in a shorter period of time, you can request a short amount of additional time, up to 120 days, to pay in full. This payment arrangement does not carry a fee.

If you decide on entering into an installment agreement, your monthly payment should be based on your ability to pay and should be an amount that can be paid each month to avoid defaulting.

If you are not able to provide full payment when you file your tax return, you can request a pre-assessment installment agreement on current tax liabilities by using the Online Payment Agreement (OPA) application on the IRS.gov website.

If you are not able to provide full payment after you have filed your tax return and received a bill from the IRS (a balance due notice), you can request an installment agreement using the Online Payment Agreement (OPA) application on the IRS.gov website.

You may also request an installment agreement by calling the toll-free number on the bill.

You will need to specify the amount you can pay and the day (1st-28th) you wish to make your payment each month. The IRS will expect to receive the payment ON the day you indicate so be sure to figure mailing time into the date you select. The IRS will respond to your request, usually within 30 days, to advise you as to whether your request has been approved, denied or more information is needed.

Direct debit or payroll deduction installment agreements provide an opportunity to make timely payments automatically and reduce the possibility of default. For a direct debit installment agreement you will need to provide your checking account number and your bank routing number to initiate the automated withdrawal of the payment.

You may contact the IRS by phone or in person, or you may submit Form 9465 (PDF), Installment Agreement Request, through the mail. The form has space for you to write in your checking account number and your bank routing number, or you may staple a voided check to the form.

To initiate a payroll deduction installment agreement, submit Form 2159, Payroll Deduction Agreement. Form 2159 must be completed by your employer. The IRS will set up a regular installment agreement for you and convert it to a payroll deduction agreement upon receipt of the completed form from your employer.

It is important not to ignore an IRS notice. If you do not pay your tax liability in full or make an alternative payment arrangement, the IRS is entitled to take collection action.

If you are unable to make any payment at this time, have your financial information available (e.g., pay stubs, lease or rental agreement, mortgage statements, car lease/loan, utilities) and call the appropriate number below to receive assistance:

Individual taxpayers: 800-829-1040
Business taxpayers: 800-829-4933

You have rights and protections throughout the collection process. If you would like information on making arrangements regarding any of the IRS tax payment options refer to Publication 594 The IRS Collection Process

source: irs.gov

Many taxpayers had difficult financial times in 2009. If you are one of the millions of Americans who lost your job, received unemployment compensation, received less income, searched for a job, closed your own business, withdrew money from your IRA or had a drop in value in your 401(k), they may be a tax impact on your federal income tax filing.

Here is a quick summary of “What If” scenarios and the possible tax impact on your federal income tax filing:

What if I lose my job?
The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-related tax issues.
Publication 4128, Tax Impact of Job Loss.

What if I receive unemployment compensation?
Unemployment compensation you received under the unemployment compensation laws of the United States or of a state must be included in your income. It is taxable income. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld.
See Publication 525, Taxable and Nontaxable Income.

Note: The American Recovery and Reinvestment Act temporarily will change the taxation of unemployment benefits for the 2009 tax year only. Under the new economic stimulus law, the first $2,400 of unemployment benefits received in 2009 will not be subject to federal taxes. The exemption will be reflected on those tax returns filed in 2010.

What If Your Income Declines?
There are many tax credits that are subject to income limitations. If you had a reduction in income this year you may be eligible for some credits or deductions. For example, the Earned Income Tax Credit is available for working families and individuals. Eligibility is determined by income and family size. You must file an income tax return in order to claim EITC.
Here is more info on the EITC.

What if I am searching for a job?
You may be able to deduct certain expenses you incur while looking for a new job, even if you do not get a new job. Expenses may include travel, resume and outplacement agency fees. For more information, see Publication 529, Miscellaneous Deductions . Moving costs for a new job at least 50 miles away from your home may also be deductible.

What if my employer goes out of business or in bankruptcy?
Your employer must provide you with a Form W-2 showing your wages and withholdings for the year by Jan. 31 of the following year. For example, if you were employed during 2009, your employer should provide you with a W-2 for 2009 by Jan. 31, 2010. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fails to provide you with a Form W-2, contact the IRS and we can help by providing you with a substitute Form W-2. If your employer is liquidating your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA. For more information, see Starting, Operating or Closing a Business.

What if I withdraw money from my IRA?
Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss. For more information, see Publication 590, Individual Retirement Accounts.

What if my 401(k) drops in value?
Generally, you can not claim a capital gains loss on your retirement accounts that already are receiving favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed. For more information, see Publication 575, Pension and Annuity Income.

If you believe you may have trouble paying your tax bill contact the IRS immediately. There are steps you can take to help ease the burden. You also should file a tax return even if you are unable to pay so you can avoid additional penalties.

source: irs.gov

The new decade is in full swing and before you know it you’ll be filing your federal income taxes. The tax filing deadline for the tax year 2009 is April 15, 2010. The tax changes for 2009 effect Social Security, standard deductions, mileage rate deductions, exemptions and earned income credit.

Lets start out with the Social Security and Medicare tax changes for 2009. The Medicare tax will remain at 1.45% while Social Security remains at 6.2%. The wage limit, or Social Security maximum, has been raised to $106,800 - an increase of $4,800 over last year’s maximum. The rate of increase continues to outpace inflation, or the cost of living increase in wage you might expect from your employer. The maximum Social Security benefit was increased to $2,399 per month in 2009, and the Cost of Living Adjustment (COLA) was 5.8%.

Next are the standard deduction tax changes for 2009. According to the IRS, around two out of every three taxpayers claim the standard deduction on their income tax returns. Once again, the rates that apply to 2009 have increased from their 2008 levels. The standard deductions that apply in 2009 include:

* Single - $5,700
* Married filing separately - $5,700
* Head of household - $8,350
* Married taxpayers filing jointly / qualifying widow(er)s - $11,400
* Married taxpayers filing separately - $5,700

Here are the tax changes for exemptions. The amount you can deduct for each exemption you can claim on your federal income taxes has increased again in 2009. The 2008 value of $3,500 has increased to $3,650 in 2009. That’s a total increase of $250 over the last two years.

The Mileage Deduction Rates have changed for the 2009 tax year 2009. Business miles have been increased to $.55 per mile. Charitable Services will be $.14 per mile and Medical Travel goes up to $.24 per mile.

The maximum earned income credit for low and middle-income workers and working families with two or more children is $5,028 in 2009, up from $4,824 in 2008. The qualifying income limit for the credit for joint return filers with two or more children is $43,415 in 2009, up from $41,646.

This is just an outline of the tax changes for 2009. For complete details visit the irs website. And remember, if you still haven’t filed or paid the tax for previous year(s) federal income tax, consult with a trusted tax attorney or tax lawyer.

source: money-zine.com