REPOST: New IRS data: Rich got richer, but paid lower tax rate as stocks gained

The groundbreaking study from the Internal Revenue Service shows that the richest Americans pay lower taxes despite their high income. Find out the reason why in this Forbes.com article.

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The Internal Revenue Service today released a new report showing that in 2010, as the nation’s stock markets recovered, the richest Americans saw their share of all national income rise and their effective federal income tax rate fall.

In 2008 and 2009, the wealthy saw their share of national income decline and their tax rates rise, in large part because their more lightly taxed capital gains fell. But in 2010, the top 1% (the 1.35 million families with adjusted gross income above $369,691), reported 18.87% of all AGI, up from 17.21% in 2009. Meanwhile their average tax bill (as a percentage of AGI) fell to 23.39% in 2010, from 24.05% in 2009. The trends were even more favorable for the top 0.1% (the 135,000 households with income above $1.6 million), who captured the lion’s share of the 1%’s income gains, garnering 9.24% of all AGI, up from 7.94% in 2009. The tax rate paid by the top 0.1% fell to 22.84% in 2010 from 24.28% in 2009, meaning they paid a lower rate than their less rich fellow 1 per-centers. As a result, while the share of all income taxes paid by the top 0.1% also rose—to 17.88%, from 16.91% in 2010—it rose by less than the increase in their share of total national income.

The IRS report also shows that in 2010, 10,666 families reporting AGI of more than $10 million realized 5.5% of the nation’s taxable income, but a stunning 41% of all long term capital gains and corporate dividends taxed at the special low 15% rate; that 41% share equals $152.4 billion in such income, almost double the $77.9 billion in such long term gains and dividends reported by families with AGI above $10 million in 2009. The IRS hasn’t yet released its analysis of how the richest 400 fared in 2010, but it seems likely that their income share rose and their tax rate fell, since they’re even more dependent on lightly taxed capital gains. (In 2009, the richest 400 saw their income fall 25%, while their tax rate rose to 19.9%.)

Even more than a recovering economy, a surging stock market pads the reported incomes of the rich. After falling 38.5% in 2008, the S&P 500 rose 23.5% in 2009 and another 12.8% in 2010—meaning more investors finally had gains to realize. The S&P was flat in 2011 and up 13.4% in 2012, which was likely a huge year for capital gains realizations by the rich, as they took gains in advance of an expected increase in the tax rate for 2013. As part of the fiscal cliff tax deal, the capital gains rate was raised from 15% to 20% on taxable income above $400,000 for a single or $450,000 for a couple. In addition, as part of ObamaCare, a new 3.8% Medicare surtax applies to capital gains and investment income, to the extent a single filer has AGI above $200,000, or a couple has AGI above $250,000.

The IRS’ Statistics of Income division also published today preliminary estimates for 2011, which are less detailed by income level and don’t include tax returns filed after September 30th 2012, even though rich folks with the sort of extensive investments and partnership interests Mitt Romney has (a preliminary version of his 2011 return was 379 pages), often apply for extensions which allow them to delay filing until October 15th. Still, the IRS’ preliminary 2011 numbers—when compared directly with the IRS’ 2010 preliminary release—suggest the better off may have continued to increase their share of the national pie during 2011 too. While capital gains were down a tad, 23.4% of income in the 2011 preliminary numbers was reported by those with AGI above $250,000, up from 22.9% in 2010.

The 2011 preliminary report shows AGI on all tax returns (a total of 145.6 million were filed) increased by 3.1% to $8.3 trillion, with wages and pensions and annuities both rising 4% and corporate dividends rising 9%. But with the Federal Reserve keeping interest rates low, taxable interest fell 17%, a big hit to retirees who rely on interest from bank CDs or taxable bonds. Meanwhile, taxable distributions from IRAs rose 12%. The number of tax returns reporting taxable unemployment compensation declined 12%, while the amount of taxable unemployment benefits reported fell 23%.

Just 31.8% of the nation’s taxpayers claimed itemized deductions in 2011, down from the 32.6% of taxpayers who itemized in 2010. The falling share who itemize could be a factor as Congress considers whether to limit itemized tax deductions as part of a tax reform.

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Legal duty: How to avoid tax fraud

The word ‘fraud’ has an objectionable appeal to anybody who hears it. Put ‘tax’ in front of it, and it becomes especially bad. Tax fraud is a violation of one’s legal duty to voluntarily file income returns or pay the supposedly correct amount of income, employment, and other taxes one owes the state. The IRS alerts anyone who gets involved in any illegal strategies to avoid paying taxes as he may be obliged to pay fines with interests or be imprisoned for a period of time.

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Misrepresenting income or falsifying numbers are two of the most common methods of committing tax fraud. However, the government discusses other ways of breaking tax laws. Here are a couple of them:

• Unscrupulous tax return preparing. When a taxpayer needs the service of a tax preparer, the client has to make sure of the honesty and capacity of the preparer to do his job within the confines of the law and avoid fraudulent tax returns.

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• Non-filing of returns. Many citizens reason out that taxes are voluntary or illegal. Most of the time, the US courts see these arguments as frivolous, and they have imposed penalties to those who repeatedly believe these arguments as true.

To avoid tax frauds, financial penalties, or imprisonment, the government has routinely emphasized the power of education. The IRS, for one, has an abundant supply of resources to educate individuals and other entities about the adverse effects of tax scams and frauds.

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Isidor Hefter, CPA, specializes in tax planning for companies and high net worth individuals. This Facebook page contains more helpful tips on how to avoid tax payment pitfalls.

REPOST: US personal incomes jump ahead of New Year tax rise

This BBC.com article talks about the efforts of high earning US citizens to beat the New Year tax rise.

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 US personal incomes jumped 2.6% in December, the biggest monthly increase since 2004, as high earners sought to beat a New Year tax rise.

The month was marked by accelerated bonus and dividend payments, the US Commerce Department said.

Income tax cuts dating back to George W Bush's presidency were due to expire in the New Year as part of the "fiscal cliff" of tax rises and spending cuts

Despite the boost to incomes, consumer spending rose only 0.2% in the month.

"Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates," the Commerce Department's Bureau of Economic Analysis said.

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In the event, the tax rises went ahead only for individuals earning more than $400,000 (£250,000), as part of a last-minute deal negotiated between Republicans and Democrats in Congress to avert the fiscal cliff, with the top tax rate rising from 35% to just under 40%.

Capital gains tax also rose on 1 January. Special factors

The 2.6% increase in incomes in December came on top of an unusually high 1% rise the month before.

Other factors also exaggerated the income increases in the two months, including lump-sum benefit payments handed out in December, and the loss of income for many in the New York area during October because of disruption from Storm Sandy.

Excluding all of these special factors, incomes rose 0.6% in November and just 0.4% in December - in line with the trend increase during the rest of the year.

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 Most of the windfall income was not spent, with the US personal savings rate increasing from 4.1% of income in November to 6.5% in December. 

Indeed, the seasonally-adjusted growth in spending slowed noticeably in the run-up to Christmas, from 0.6% in November to 0.2% in December.

"Consumers finally realised about the tax increase so they pulled back a bit on their spending during the holiday season," said Sam Bullard, senior economist at Wells Fargo.

Consumer spending is expected to remain weak in the New Year, owing to the impact of a rise in payroll taxes, also agreed as part of the fiscal cliff deal.

Personal incomes are also likely to experience a drag in January and over the coming months, reflecting the fact that most of the increase recorded in December was merely income that had been brought forwards.

Isidor Hefter is an expert in tax planning and estate planning. This Facebook page contains the latest financial news.

Business valuation: Evaluating value

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 Investopedia defines business valuation as the process of determining the economic value of a business or a company for the purposes of establishing partner ownership and determining sale value. It uses tools and methods that can vary between valuators, businesses, and industries. Among the common approaches to business valuation include earning-value approach, market approach, and asset valuation.

In the earning-value approach, the premise is that the true value of a business lies in its ability to produce wealth in the future. This approach includes cash flow and discounted future earnings. Cash flow is the movement of cash that represents the operating activities of a company, such as expenses and investments. Meanwhile, discounted future earnings estimate the average trend of predicted future earnings by discounting these future earnings by the capitalization rate.

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 Market approach is also a good determinant of a company’s worth as it evaluates the industry’s earning potential based on a theoretical demand in the market. It examines the growth and size of a company’s addressable market, including the barriers the company faces in entering the market. It also evaluates the situation of the competition and how business competitors have fared.

Asset valuation, meanwhile, is the process of determining the value of capital or fixed assets. Of all valuation approaches, Forbes notes that this is the most concrete as it gives a real picture of the assets and liabilities of a company. Assets include possessions, such as machinery, office furniture, inventory, and prototypes, and human resources. Intellectual assets, such as patents, trademarks, and intellectual properties, also count in.

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Isidor Hefter, a certified public accountant, specializes in tax planning and research for high net worth individuals. Visit this Facebook page to be informed about other related topics.

Do-it-yourself or hire an accountant? The crucial choice in tax returns preparation

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In taking on a Herculean task of tax returns preparation, hiring the services of tax experts, such as Maryann Schugmann and Isidor Hefter, proves to be most convenient. Even though it might be daunting in itself due to the prospect of professional fees, nothing can pay the price for the peace of mind brought about by having a trained professional look at one’s overall tax situation. Having a professional prepare one’s taxes eases the problem of looking over the returns, making the necessary corrections, and finalizing the tax returns. Moreover, tax analysts may also provide valuable proposals, such as ways on how taxpayers may reduce their taxes.

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Meanwhile, the do-it-yourself way of tax returns preparation also presents its own unique set of perks. First off, it enables individuals to have full control over their tax returns and lets them decide on the pace by which the process will take place. By employing this method, individuals can also get to see firsthand how the different parts of one’s financial situation can come to affect the overall status of taxes. Though this approach has been made easier and more practicable by technology in recent years, it may still take a lot of practice before one can gather enough experience to truly master this skill.

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Isidor Hefter, CPA, specializes in tax planning and research for corporate and high net worth individuals. Learn more tips on tax planning by following this Twitter account.

Surviving the US tax cliffhanger: The importance of stock redemption in year-end tax planning

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This year may prove to be a difficult time for many large US corporations. Many tax provisions will already expire by the end of the year, and the Congress is still ambivalent on what to do with regard to the proposed changes. As pointed out by Thomson Reuters, a majority of these susceptible rules are important. For example, provisions like business research credit, bonus depreciation allowance, and Bush-era tax cuts may either be extended or vetoed should the Congress decide to. This lack of certainty makes year-end tax planning all the more crucial and challenging at this point. 

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In light of this impending dilemma, Marian Rosenberg, a senior tax analyst at Thomson Reuters cites “stock redemption” as a way by which US corporations could “lock in low tax rates for shareholders, avail themselves of the work opportunity tax credit, and secure generous depreciation and expense deductions.”

According to Rosenberg, corporations could actually qualify for a 15 percent tax rate on the distribution if they consider taking money out of the business through stock redemption before 2012 ends. If the provisions on Bush-era tax cuts expire at the end of 2012, profits will be threatened as “long-term gains will be taxed at a 20 percent rate and dividends will be taxed as ordinary income at a rate of up to 39.6 percent.” 

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As with all other cases, careful planning may save business entities from any imminent sources of loss. However, it is still important for corporations to consult with qualified tax advisors such as Hilton Sokol, Isidor Hefter, or Maryann Schugmann before enacting any major strategies to ensure higher success rates.

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Tax Planning Basics: 3 Ways to Reduce Taxes

Still new to tax planning? This article from Taxes.About.com provides three invaluable ways by which you can cut back on your taxes.

The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. There are three basic ways to reduce your taxes, and each basic method might have several variations. You can reduce your income, increase your deductions, and take advantage of tax credits. 

Reducing Income

Adjusted Gross Income (AGI) is a key element in determining your taxes. Lots of other things depend on your AGI (or modifications to your AGI)-- such as your tax rate and various tax credits. AGI even impacts your financial life outside of taxes: banks, mortgage lenders, and college financial aid programs all routinely ask for your adjusted gross income. This is a key measure of your finances.

Because your adjusted gross income is so important, you may want to begin your tax planning here. What goes into your adjusted gross income? AGI is your income from all sources minus any adjustments to your income. The higher your total income, the higher your adjusted gross income. As you can guess, the more money you make, the more taxes you will pay. Conversely, the less money you make, the less taxes you will pay. The number one way to reduce taxes is to reduce your income. And the best way to reduce your income is to contribute money to a 401(k) or similar retirement plan at work. Your contribution reduces your wages, and lowers your tax bill.

You can also reduce your Adjusted Gross Income through various adjustments to income. Adjustments are deductions, but you don't have to itemize them on the Schedule A. Instead, you take them on page 1 of your 1040 and they reduce your Adjusted Gross Income. Adjustments include contributions to a traditional IRA, student loan interest paid, alimony paid, and classroom related expenses. A full list of adjustments are found on Form 1040, page 1, lines 23 through 34. The best way to boost your adjustments is to contribute to a traditional IRA.

As you can see, two of the best ways to reduce your taxes is to save for retirement, either through a 401(k) at work or through a traditional IRA plan. Contributions to these retirement plans will lower your taxable income, and lower your taxes.

Increase Your Tax Deductions

Taxable income is another key element in your overall tax situation. Taxable income is what's left over after you have reduced your AGI by your deductions and exemptions. Almost everyone can take a standard deduction, and some people are able to itemize their deductions. Itemized deductions include expenses for health care, state and local taxes, personal property taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses. One key tax planning strategy is to keep track of your itemized expenses throughout the year using a spreadsheet or personal finance program. You can then quickly compare your itemized expenses with your standard deduction. You should always take the higher of your standard deduction or your itemized deduction.

Your standard deduction and personal exemptions depends on your filing status and how many dependents you have. You can increase your standard deduction and personal exemptions by getting married or having more dependents.

The best strategies for reducing your taxable income is to itemize your deductions, and the three biggest deductions are mortgage interest, state taxes, and gifts to charity.

Take Advantage of Tax Credits

Once we've tweaked our taxable income, we are ready to focus our attention on various tax credits. Tax credits reduce your tax. There are tax credits for college expenses, for saving for retirement, and for adopting children. The best tax credits are for adoption and college expenses. Not everyone is in a position to adopt a child, but everyone could take some college classes. There are two education-related tax credits. The Hope Credit is for students in their first two years of college. The Lifetime Learning Credit is for anyone taking college classes. The classes do not have to be related to your career.

You may also want to avoid additional taxes. If at all possible, avoid early withdrawals from an IRA or 401(k) retirement plan. The amount you withdraw will become part of your taxable income, and on top of that there will be additional taxes to pay on the early withdrawal.

One of the best, and most abused, tax credit is the Earned Income Credit (EIC). Unlike other tax credits, the EIC is credited to your account as a payment. And that means the EIC often results in a tax refund even if the total tax has been reduced to zero. You may be eligible to claim the earned income credit if you earn less than a certain amount.

Increase Your Withholding

You can avoid owing at the end of the year by increasing your withholding. More money will be taken out of your paycheck throughout the year, but you will get bigger refund when you file your taxes.  

Source: http://taxes.about.com/od/taxplanning/a/taxplanning.htm