It seems out of nowhere, President Obama has made a significant change in his tax plan proposal.  Obama’s 2013 budget year now calls for more taxes on the wealthy, specifically a higher tax on dividends.

His new tax plan calls for an increase of the dividend tax to a maximum of 40% for households earning $250,000 a year.  Coincidentally, that is equal to the higher maximum income tax rate set to go into effect in 2013.

According to the Obama administration, the increase in the dividend tax rate is needed to pay down the federal deficit and to make the tax code more progressive.

“Choices had to be made,” a senior Obama administration told reporters, explaining the bid to raise more than $200 billion over a decade with the steeper dividend taxes on the wealthy.

In addition to an increase in the dividend tax rate, the Obama administration is proposing to raise the current 15% long-term capital gains tax to 20% for the wealthiest Americans.

If you look closely, the Obama tax plan to tax the rich seems like an election year campaign ploy to win the lower and middle class vote.  Fortunately for the wealthy and big corporations, it is extremely unlikely that Obama’s tax provisions will be become law, including his dividend tax increase.

“This is a reversal of what was a very specific policy feature of the first three budgets to keep dividends and capital gains taxed at the same rate,” said Michael Mundaca, a former top Treasury tax official under Obama, now at the accounting firm Ernst & Young.

“Companies may be more likely to retain earnings or seek alternatives ways to distribute their earnings such as by buying back stock,” Mundaca said.

Tax experts believe that big corporations may accelerate 2013 dividend payments into 2012 to dodge tax hikes.

“I wouldn’t be surprised if we see moving all their 2013 dividends into 2012,” Kies said. “A lot of U.S. companies are sitting on cash.”

source: reuters.com

President Obama has proposed creating a tax incentive for small businesses that hire new employees even as Congress tries to figure out how such a deal would work.

There is no question that creating a tax incentive for small businesses that hire workers or increase payroll would help the economy.

Lawmakers on Capitol Hill have been working for months on ways to develop small business tax incentives and give small businesses tax help in a way that it won’t be abused.

Obama and Congress have both been vague on how the tax break would work and how it would be administered.

“I believe it’s worthwhile to create a tax incentive to encourage small businesses to add and keep employees and I’m going to work with Congress to pass one,” Obama said.

With the 2009 year ending, Congress is running out of time to pass a jobs package this year, and the process will be even more complicated if the administration doesn’t come up with details. Moreover, the Senate is preoccupied with the health care debate, making any action less likely.

The Obama administration is expected to propose extensions and enhancements tax credits and tax breaks that were part of the federal economic stimulus package passed in early 2008.

Obama also proposed eliminating capital gains taxes on small business stock, if it is purchased in 2010 and held for at least five years, expanding a tax break enacted in the stimulus package.

While Obama and the Democrats focus on health care reform, Republicans believe the focus should be on getting Americans back to work. Unemployment rates currently stand at 10 percent.

Tax experts ponder how a small business tax break for hiring working would work. Do you give a tax break just for hiring more employees, or do companies have to simply increase payroll? How long do the companies keep the workers? How do you enforce the requirements?

“You’re trying to subsidize people for doing things they wouldn’t otherwise do, but we don’t know what they would otherwise do,” said Eugene Steuerle, a Treasury Department official in the Reagan administration who is now co-director of the Tax Policy Center, a Washington think tank.

John H. Bishop, an economist and a professor at Cornell University, has a proposal for extend tax credits to companies that increase payroll subject to Social Security taxes. Since only the first $108,600 of a worker’s pay is subject to Social Security taxes, executives couldn’t get the credit by giving themselves big bonuses, he said.

Bishop’s small business tax credit proposal would help the economy if companies either raise the pay of existing workers or hire new workers. Bishop’s proposal, modeled after a similar tax credit enacted in the 1970s, has been circulating on Capitol Hill for several months.

“It does exactly what we want,” Bishop said. “It focuses on hiring Americans to work now.”

source: The Associated Press 2009

One of the most common income tax questions is what will happen if I fail to file a federal income tax return.

First of all federal income taxes are based on the amount of tax due. So if you don’t owe any taxes, no penalties are due.

However, there is a civil penalty for failure to file a timely return. According to one income tax attorney, the civil penalty is generally between 5.0% and 25% of the amount of tax required to be shown on the federal tax return per month. In addition, there is an additional civil penalty for failure to pay the tax actually shown on the federal tax return. This is between .05% and 25% of the tax amount due each month. Income tax lawyers state the two penalties are computed together in a complex algorithm that makes estimating the actual penalties a challenge.

According to some estimates approximately three percent of taxpayers avoid the process of income tax preparation and do not file an income tax return at all.

In cases where a taxpayer does not have enough money to pay the entire tax bill, the Internal Revenue Service can work out a payment plan. Tax experts recommend that people in this position should at least consult with an income tax attorney to explore their legal options regarding the overdue tax debt.

There is no statute of limitations on civil actions by the IRS for years for which no return has been filed.

For each year a taxpayer willfully fails to timely file an income tax return, the taxpayer can be sentenced to one year in prison.

Taxpayers who have not filed income tax returns are recommended to meet with their accountant or an income tax attorney.

source: wikipedia.com