All posts by infosite
The Political Polarization Index
The Philadelphia Fed recently released a report that illustrates the “political polarization index”. The report is a working paper presented by Marina Azzimonti and the index is intended to quantify the divide between the Republican and Democratic parties at different points in time from 1981 to 2013.
This is a startling chart that tells the whole story and should be viewed by every US taxpayer. A high reading indicates maximum polarization. We would expect that this phenomenon would naturally occur during election season and may even be considered a healthy process. Not so, when our leaders are charged with working with one another to solve critical problems. This graph confirms the dysfunction but also highlights the constant upward trend of this divide – literally off the page.
Conversely, look at the drop in polarization (inflection points) at crises times: 9/11, the Iraq invasion and during the financial upheaval between 2007 – 2009.
A picture tells a thousand words.
IRS Delays 2014 Tax Season
Today (October 22, 2013) the Internal Revenue Service announced a delay of approximately one to two weeks to the start of the 2014 filing season. They attributed this, in part, to the 2 week government closure and also stated that they needed more time to allow program and test tax processing systems.
They mentioned the possibility of shortening this delay, however, that seems unlikely given the track record of delays and considering the effect of the shutdown.
The original start date of the 2014 filing season was Jan. 21, and with a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4.
The IRS provided this further explanation:
“The government closure came during the peak period for preparing IRS systems for the 2014 filing season. Programming, testing and deployment of more than 50 IRS systems is needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.
About 90 percent of IRS operations were closed during the shutdown, with some major workstreams closed entirely during this period, putting the IRS nearly three weeks behind its tight timetable for being ready to start the 2014 filing season. There are additional training, programming and testing demands on IRS systems this year in order to provide additional refund fraud and identity theft detection and prevention.
“Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right,” Werfel said. “The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation’s taxpayers. We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season.”
The IRS will not process paper tax returns before the start date, which will be announced in December. The April 15 tax deadline is set by statute and will remain in place.
During the closure, the IRS received 400,000 pieces of correspondence, on top of the 1 million items already being processed before the shutdown”.
Is this a Business or a Hobby?
Is My Money Losing Activity Really a Hobby?
Many taxpayers try to claim a loss for a personal business, year after year. They need to address basic question about this “losing” activity –is this really a business (job) or a hobby? Here are some basic clues:
Profit? Or loss?
If you make a profit for three out of the last five years, the IRS assumes you’re engaged in an activity to make a profit. If so, you can deduct losses from the activity. However, if an activity isn’t for profit, you can only deduct expenses up to the amount of your hobby income. Expenses more than the income are nondeductible losses.
The 3 out of 5 year rule is a rule of thumb. Here are some other factors:
The IRS considers these factors when deciding if your activity is a business or a hobby:
• Manner that you conduct the activity
• Expertise of you and your advisor
• Time and effort you used to conduct the activity
• Expectation that assets used in the activity might appreciate in value
• Your success in conducting other similar or dissimilar activities
• Your history of income or losses in regard to the activity
• Amount of occasional profits you earned
• Your financial status
• If the activity has elements of personal pleasure or recreation
To learn more about business income and losses, see Publication 334: Tax Guide for Small Business at www.irs.gov.
Get Ready for: Marketplace Fairness Act of 2013
Most states impose a sales tax on certain goods and services. For example, if you live in a state that has a 6% sales tax on clothing, you would expect that the price charged would increase by 6% at the register, when you pay for clothing purchases. Sounds simple and straightforward.
A state can only charge tax to purchases within that state’s borders and ONLY require businesses to collect the tax if that business maintains as physical presence in that state (commonly referred to as “nexus”). A typical scenario is that of a retail store based in the state that charges sales tax to anyone who comes into the store to make a purchase. Okay, still simple.
The complication arises when a consumer makes a purchase in a state that does not charge sales tax OR places an order online from a business that does not maintain a physical presence in the state. The business does not charge sales tax so it sells the items at a “discount”.
The state then requires the purchaser (who lives within its borders) to pay the sales tax to the state, directly – only it is then referred to as “use tax”. So if you live in a state that charges sales tax, but you are not charged the tax, you are required to remit it directly to the state (say $6 on $100 of clothes purchases, in the example).
The upshot is that online retailers are not obligated to collect and remit the sales tax in most states and consumers rarely remit the use tax. States are losing a lot of revenue. Worse, the consumer has every incentive to order online at a cheaper price, if they do not intend to remit the use tax consequently, the “mom and pop” shops are at a pricing disadvantage.
Thus the need for the Marketplace Fairness Act of 2013, which seeks to put the online retailers on equal footing with “bricks and mortar” shops. The basic provisions of the law is that the online/catalog retailers must participate in a “simplified” sales tax reporting, collection and remittance system.
The appeal of this tax is clear to anyone who wants to protect the smaller shops in their local town. Typically, an older taxpayer can appreciate this. However, overwhelmingly, younger consumers (under age 50) reject this tax, as it “feels” like a tax increase. In fact, the tax was there all along and if sales tax is not paid at the time of sale, the consumer has always been required to remit the use tax to the state – on the honor system. Most states even have a line for you to claim the unpaid tax on your income tax return. To omit this is could subject the taxpayer to the tax, penalties and interest.
Stay tuned for the inevitable debate on this. Perhaps the Republicans, traditionally against high taxes, will score a “win” with younger voters by fighting this bill. Ironically, this legislation started out with great popularity, in the quest for “marketplace fairness”. Now, many taxpayers see “fairness” in a different light.