Action Tax Service

THE TAX ATTIC with Jerry Coon

December 8, 2011 // 0 Comments

Repercussions of deficit reduction failure  We seem to be encountering strange occurrences today in increasing numbers. For example, in the last two years, the Rockford area has encountered epic rainfalls affecting the 100-year flood plain. The Gaylord Street neighborhood people can vouch for the amount of rain, since some of it ended up in their basements. I know that we are going through a climate change, but 100-year rains two years in a row? Climate change would also explain why we made it through all of November without having any appreciable snowfall. We will probably pay for that one later. Another example is the percentage of people, less than 10%, who are satisfied with the job that our current president and congress are doing. Their approval ratings have fallen into uncharted territory. Shame on them, but shame on us, too. After all, we elected them. Next year we get the chance to elect the president, the entire house of representatives, and a third of the senators. Perhaps there is something wrong with us if we don’t try a whole new batch of people or at least some new people. I’m hoping there are enough good people to choose from. Perhaps it’s time for a new political party as well. The current two-party system makes it almost impossible for a third party to do well, but the current two-party system just doesn’t seem to be getting the job done. Let’s call the new party the Common Sense Party. The only pledge you have to make is you will use your God-given gift of common sense to make decisions. Among the national elected officials crowd, using that gift seems to be in pretty short supply today. I know that sounds a little like a fairy tale, but I wonder if it wouldn’t work. If it’s true that about 15% of the population is hard-line Democratic and about 15% is hard-line Republican, then that leaves about 70% who might be interested in trying something else. If you believe the polls, that figure could be as high as 90%. I bet Roger Allen would be one of the first to sign up. Anyone like Roger, who has been writing a column every week for about a hundred years, just […]

THE TAX ATTIC with Jerry Coon

December 1, 2011 // 0 Comments

Supreme Court rules pensions taxable The Michigan Supreme Court on Friday, Nov. 18, upheld the constitutionality of the controversial Michigan pension tax changes made by our legislature last spring. Public Act 38, as signed by Governor Snyder, proposed taxing public pensions beginning on January 1, 2012. Private pensions have always been taxed, but public pensions paid to retired school, federal and state workers have not previously been taxed. The Act placed public and private pensions in the same pot and proposed taxing all of them at the same rate. However, there was some question as to whether the legislature had the power to levy a tax on those public pensions. Hence, the Michigan Supreme Court became involved in this sticky matter. It was asked to decide five issues. 1. Does or does not taxing public pensions “impair accrued financial benefits of a pension plan retirement system of the state…”? The pension recipients were promised a certain level of financial benefit upon retirement. Does taxing those pensions now reduce or impair that financial benefit? 2. Does or does not taxing public pensions “impair a contractual obligation in violation of the Michigan Constitution…”? Did the state have a Constitutional contract with the pension recipients to provide a promised level of pension benefit that would be reduced by the amount of tax incurred? 3. Does or does not taxing all pensions differently based on the date of birth “violate the equal protection of the law under the Constitution…”? People born before 1946 would pay no additional tax, so they were held harmless by the Legislature. People born between 1946 and 1952 would be impacted somewhat, while those born after 1952 would be extremely impacted by the bill. Is this legal? 4. Does or does not taxing all pensions differently based on the taxpayer’s total household resources “create a graduated income tax in violation of the Constitution…”? Michigan is a flat-tax state. Everyone pays at the same tax rate on their Michigan taxable income. The proposed law said taxpayers with total household resources in excess of $75,000 single and $150,000 joint were not entitled to a $20,000 single or $40,000 joint pension income exemption. Was this legal? 5. If the Supreme Court holds any part of the act as […]

THE TAX ATTIC with Jerry Coon

November 24, 2011 // 0 Comments

Brain freezes and monopolies I had to feel sorry for Rick Perry at that recent Republican debate. He had a “brain-freeze moment” in not being able to remember the name of that third federal government department, Energy, he was going to eliminate as soon as he is elected. There are only a few hundred departments that are worthy of being eliminated, so I’m willing to cut him some slack. I’m also thinking the people who gave him the most grief have never been hunting and encountered what is called “buck fever.” When a big 12-point buck walks through your field of vision, for a few seconds most of us would be hard-pressed to remember our own name. You operate on mechanics and doing things that you have done over and over. Line up the buck in the scope, take off the safety, double check the field of fire for safety purposes, take a breath, exhale and shoot. As little thinking as possible goes into the transaction because, like Mr. Perry found out, your brain can freeze at the most inopportune time. For instance, I once heard of a guy not getting the safety off in time to shoot because he couldn’t remember where the darned safety was located. I can see that happening. I personally use three different guns—depending upon when and where I am hunting—that place the safety in three different locations. To remember where the safety is, the shooter first has to remember which gun he is using at the same time he is seeing the biggest buck he has ever seen in his life right in front of him. That’s almost too much thinking under the pressure of staring at that 12-point buck. The harder you try to remember what you can’t remember, the harder it freezes. Brain freeze also seems to happen to coaches, managers, referees and umpires in sports. They are trying to make judgment calls at the exact time that their brain is freezing. The bigger the game, the more important the call, the more potential there is for a brain freeze. How else can you explain some of the blatantly wrong calls that referees/umpires make during games? What other explanation can there possibly be for some of the […]

THE TAX ATTIC with Jerry Coon

November 17, 2011 // 0 Comments

Follow-up on EITC, Form 8867 Here is a follow-up on last week’s article concerning the Earned Income Tax Credit (EITC) and the Form 8867, Paid Preparers Earned Income Due Diligence Checklist. The object of the form is to require tax preparers to go over all of the rules concerning the EITC with their clients (i.e. perform good due diligence). This is an attempt to cut down on the number of mistakes and outright fraud that occurs in the EITC program. The Internal Revenue Service (IRS) has found that there are a significant number of mistakes being made by paid tax preparers and by all indications there is a significant amount of fraud accompanying those errors. I noted that the IRS requires that Form 8867 be signed by both the preparer and the taxpayers. In addition, the form will have to be submitted with the return as part of the return package. Previously, preparers were required to keep the form in their file. Now, it has to go in with the return and a copy still has to remain in the file. The penalty for noncompliance was increased. The penalty for not sending the form in, for not having a copy in the file, or simply for not performing good due diligence has been increased from $100 per incident up to $500 per incident. The IRS will be authorized to penalize: 1. the return preparer; 2. the firm that employs the return preparer, or 3. a non-signing preparer who is supervised by a return preparer. The IRS reserves the right to penalize any or all three of the parties involved. They are serious about penalizing those who do not comply with the due diligence rules when preparing EITC returns. All of us want to see taxpayers who legitimately qualify for the EITC receive the right amount of credit. However, none of us want to see taxpayers who do not qualify still receive the credit because a preparer doesn’t know the rules or intentionally bends the rules. Another area where there seems to be a large amount of fraud is in the area of Michigan unemployment. Some of it comes from people drawing unemployment benefits when they aren’t entitled to the benefits and some of it comes […]

THE TAX ATTIC with Jerry Coon

November 3, 2011 // 0 Comments

How to deal with Form 1099-C A hot topic on the seminar circuit this year concerns how to deal with taxpayers who receive a Form 1099-C, Cancellation of Debt. Taxpayers will receive this form when they have $600 or more of debt forgiven by a financial institution. Debt forgiveness, if it is taxable, results in ordinary income to the taxpayers. The most common debt we see forgiven is credit card debt, when taxpayers negotiate a set amount to pay off their credit card debt. For example, taxpayers have $20,000 in credit card debt. The financial institution agrees to take $8,000 today to settle the debt in its entirety. They write off the $12,000 and also send the taxpayers and, most importantly, the Internal Revenue Service a Cancellation of Debt, 1099-C, for the $12,000. Usually, this $12,000 is taxable. The second most common debt forgiven is home related, when taxpayers have a home that goes through foreclosure. The taxpayers owe $150,000 on their mortgage. The home has a fair market value of $100,000 so the taxpayers quit paying the mortgage. The bank forecloses on the home and eventually it sells the home for $100,000. The bank writes off the remaining $50,000 of debt, so it issues a 1099-C for $50,000. This $50,000 could be taxable. I would say the third most common reason for getting a 1099-C is for debt forgiven in connection with the foreclosure of a residential rental property. When the bank eventually sells the rental property, the 1099-C is issued for debt forgiveness to the extent that the debt outstanding exceeds the fair market value of the property. It can be a little tricky to determine how much is taxable, because fair market value can be a moving target, especially when dealing with rentals, but the difference can result in taxable income. Every time a 1099-C is received, it has tax implications and must be dealt with on the tax return for the year in which it was issued. This is important to note, because sometimes a credit card debt might have been settled in a prior year or a home or rental property was foreclosed upon in a previous year. The financial institution, however, is now processing and sending out the paperwork […]

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