tax news in plain english

RECENTLY IN THE NEWS

The Political Polarization Index

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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:

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.

What is the Mexico Obesity Tax?

The Wall Street Journal headlines indicate that Mexico will be taxing obesity.  Actually, it is a proposed tax on high calorie foods, similar to the Mayor Bloomberg effort to curb sales of large sugary drinks in NYC.

“The Finance Committee of Mexico’s lower house passed the proposed measure to charge a 5% tax on packaged food that contains 275 calories or more per 100 grams, saying that such high-calorie items typically contain large amounts of salt and sugar and few essential nutrients” (WSJ – 10/18/13).

Mexico has one of the highest percentage of obesity and diabetes.

This is an interesting example of using taxes as disincentive for unwanted behavior, similar to taxes on cigarettes and booze.