Impact of the Presidential Election on the 2012 Capital Gains Tax Rate

Posted on August 6, 2012 by Kursti Nakagawa

election impact on capital gains The bipartisan tax code signed by President Reagan in 1986 set both income tax and capital gains rates at 28 percent. Since that time, increases in income tax rates together with reductions in capital gains rates have resulted in the 20 percent margin between the two rates that exists today. The capital gains tax rate is scheduled to increase on January 1, 2013 which will reduce that margin to 15 percent. President Obama is in favor of this increase while presidential hopeful, Mitt Romney, is against it. In addition, Obama is in favor of raising ordinary income tax rates while tax settlements Romney is in favor of decreasing them. Any of these proposed changes will be significant and are certain to be taken in to consideration by businesses and individuals when making decisions about the allocation of their assets.

The Current, Scheduled and Proposed Tax Rates

Current Rates
The top capital gains rate is currently 15 percent while the top ordinary income tax rate is 35 percent.
Scheduled Rates for 2013
The top capital gains rate is scheduled to increase to 20 percent for households earning $200,000 or less and to 23.8 percent for households earning more than that amount. There is no scheduled increase for the top income tax rate.
Proposed by Obama
Obama’s most recent budget proposes raising the top capital gains rate to 23.8 percent and the top income tax income tax rate to 39.6 percent.

Proposed by Romney
Romney has proposed eliminating the capital gains tax altogether for households earning $200,000 or less and setting the top rate at 15 percent for households making more than that amount. He proposes reducing the top ordinary income tax rate to

The Arguments

In Favor of a Preferential Tax Rate for Capital Gains – Those in favor of a preferential tax rate for capital gains say the lower tax rate helps to mitigate the double taxation of corporate income that has already been taxed at a 35 percent rate. They argue that raising capital gains taxes will discourage investors which, in the business sector, will have a negative effect on job creation and the economy. Since capital is now more mobile, those who favor a lower capital gains tax rate maintain that raising rates in the United States will drive capital to places that are more attractive for capital investment.
Against a Preferential Tax Rate for Capital Gains – Those against a preferential tax rate for capital gains say that double taxation is not as big an issue as some make it out to be. They argue that many companies don’t pay the maximum 35 percent tax rate. This group also makes the point that capital gains are earned on many assets such as real estate that are not subject to corporate taxation in the first place. They maintain that historically there has been no direct correlation between capital gains tax rates and the level of capital investment.

If you have questions about the implication of the current and projected income and capital gains tax rates for your specific financial situation, our experienced tax settlement professionals can provide you with the information you are looking for. We can help you make decisions about how to effectively allocate your financial resources for tax purposes. For more information about our tax debt resolution services or any other tax issue, visit us today at www.professionaltaxresolution.com. Contact us by phone at (877)-889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.

Gift and Estate Tax Changes Expected to Occur at the End of 2012

Posted on July 26, 2012 by Kursti Nakagawa

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act which was signed into law in 2010 increased the amounts of the estate, gift and generation skipping tax exemptions and, at the same time, lowered the tax rates for each of these taxes. However, unless Congress takes some action before the end of the year, the estate tax benefit benefits provided by this law will expire on December 31, 2012. The major provisions of the 2010 Tax Relief Act are outlined below together the changes that will take place on January 1, 2013 if Congress does not take further action.

Gift Tax

Current

The gift tax exemption is $13,000 per year for gifts made by any one person to any number of people. There is a lifetime gift tax exemption of $5,120,000 for gifts made above the $13,000 limit.

January 1, 2013

The gift tax exemption will remain at $13,000 per year (with a possible increase for inflation) for gifts made by any one person to any number of people. The lifetime gift tax exemption for gifts made above the $13,000 limit is scheduled to revert to $1,000,000.

Generation Skipping Tax

Current

The GST exemption is $5,120,000 with a tax rate of 35% on amounts above the exemption limit.

January 1, 2013

The GST exemption is scheduled revert to $1,390,000 per year (with a possible increase for inflation) with a tax rate of 55% on amounts above the exemption limit.

Estate Tax

Current

The estate tax exemption is $5,120,000 with a tax rate of 35% on amounts above the exemption limit. Portability of unused estate tax exemptions of one spouse to the surviving spouse is allowed.

January 1, 2013

The estate tax exemption is scheduled revert to $1,000,000 per year with a tax rate of 55% on amounts above the exemption limit. Portability of unused estate tax exemptions of one spouse to the surviving spouse will no longer be allowed.

With January 1, 2103 fast approaching, taxpayers are anxious to see what, if any, action will be taken by Congress. If Congress does nothing, the exemptions for gift, generation skipping and estate taxes will revert to their 2009 levels and the tax rates for amounts above the designated exemption levels will increase to 55%. On the other hand, if Congress votes to extend the Tax Relief Act, the exemption limit for these taxes will remain at $5,120,00 with a possible inflation adjustment and the tax rate for amounts above the exemption limits will be held at the current 35%. Barring a full repeal of the estate tax, the third alternative would be the passage of some sort of compromise law that would place exemption limits and tax rates somewhere in the middle of the 2009 levels and those set by the Tax Relief Act of 2010.

If you owe back taxes due to a gift or inheritance, we can help you determine whether the assessed amounts are accurate based on past and current estate tax laws. Very often, the process of accurately interpreting the law and making use of tax benefits the law provides can result in a significant reduction in the tax amount owed. Following this analysis, our experienced tax settlement professionals will resolve any existing tax debt in the most effective way available. For more information about our tax debt resolution services, visit us today at www.professionaltaxresolution.com. Contact us by phone at (877)-889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.

Wage Garnishment Process

Posted on July 5, 2012 by Kursti Nakagawa

If you have back taxes from unfiled or late tax returns, you could be subject to wage garnishment. Under IRS wage garnishment, 70% or more of your wages can be legally seized by the federal government to pay your back taxes. If you do not respond to IRS notices about your back taxes, the IRS can contact your employer to withhold a percentage of your wages—your salary, tips, commissions, or bonuses—to be sent to the directly to the IRS. If you a business owner and your employee is facing wage garnishment, you must comply with the IRS, or you will be liable for the amount of wages that the IRS was to collect. The majority of your assets can be legally seized by the IRS if you fail to respond to repeated notices and demands for payment or settlement of back taxes owed to the IRS.

When would I be subject to IRS wage garnishments? By the time you receive an IRS intent to levy (legal property seizure to satisfy a tax debt), you should have already received multiple IRS letters and possibly phone calls regarding your unpaid taxes. When these attempts to reach you go unanswered, the IRS will send a “Final Notice of intent to Levy.” Thirty days after you receive this notice, the IRS can start collections. They will analyze your financial status and determine the quickest way to be paid for your tax debt, which is usually wage garnishment. There are three requirements that IRS must pass before your wages can be garnished: 1) the IRS must have assessed your tax liability and demanded that you pay it, 2) you have not paid the taxes that were demanded and you have not reached some other agreement with the IRS, 3) the IRS has sent the “Final Notice of Intent to Levy,” and it has been 30 days since you received it.

What should I do if I am facing wage garnishment? The best way to avoid wage garnishment is to pay your taxes on time. If you are financially unable to pay off your taxes in full, it is recommended that you have a tax specialist help you to come to an agreement with the IRS to pay in installments, or come up with a payment plan. A tax expert can also help you determine if the amount owed on the wage garnishment is accurate, or if the IRS has made a mistake. If you did not file taxes and the IRS completed a substitute return, the return they prepared will not likely have covered the deductions that are available to you. The IRS would rather come to agreement with you than bear the costs of imposing IRS wage garnishments or another IRS levy.

A licensed tax professional will be familiar with all of the tax settlement alternatives available and can be invaluable asset to a taxpayer who is the subject of collection attempts by the IRS. If you have failed to meet tax filing deadlines or have an unresolved tax liability like wage garnishment, our experienced tax professionals can help you become tax compliant. For more information about our tax settlement services, visit professionaltaxresolution.com. The members of our staff have a thorough understanding of tax law together with the experience to know which tax settlement option will most effectively resolve your specific back tax issues. Contact us today at 877-889-6527 or info@protaxres.com to receive a free, no obligation consultation.

Tax Penalties: Removing the Failure to Pay Penalty

Posted on June 25, 2012 by Kursti Nakagawa

Have you received an IRS notice of Failure to Pay? Last week, we discussed the IRS penalties and consequences of Failure to Pay, which is when a taxpayer fails to either meet a tax filing deadline, or make a tax payment by its due date. The consequences for Failure to File include 5% per month of the taxes due according to a tax return that the IRS has prepared in your place, with the maximum penalty being 25% of the owed amount. For outstanding taxes, the monthly IRS Failure to Pay Penalty can be 0.25%–1.0% of the amount due, with the average being a 0.5% IRS penalty. These penalties can accumulate over time and become a large financial burden.

So, how can you remove the IRS Failure to Pay Penalty and reach a tax settlement? The IRS realizes that not every situation is black and white. They understand that a taxpayer’s full compliance is not always possible. Here are a few steps that may be helpful.

Reasonable cause If there is a legitimate reason for your failure to pay, the IRS may opt to remove your penalties. About a third of all IRS penalties are later removed. Reasonable causes include: the death of a family member or close friend, unavoidable absence (including hospitalization, prison, rehab, etc.), destruction of the location where the taxpayer’s records are held (by fire, flood, etc.), inability to pay due to material impairment by civil disturbances (such as divorce), bad or incorrect advice from a tax professional or directly from the IRS, and errors made while acting with “ordinary business care and prudence.” Whatever your reason, be prepared to answer questions about your situation and have the necessary applicable documentation to back it up.

Penalty abatement If you do have a reasonable cause, you may apply for penalty abatement. This is a formal dispute of the penalties and interest from failure to pay. Penalty abatement can also apply when you have an administrative waiver, or if IRS made a mistake. If you have a reasonable explanation for your situation and failure to pay, your penalties and interest could be completely removed and a refund could be claimed. Penalty abatements can be filed through sending a letter to the IRS or completing a Request for Abatement and Refund form.

IRS Fresh Start Program If you were unemployed for 30 consecutive days in 2011, or in 2012 prior to April 17^th, you may be eligible for the Fresh Start Program. This IRS initiative gives taxpayers 6 months to pay their taxes without incurring failure to pay penalties, as long as the tax liabilities are paid in full by October 15^th, 2012. The Fresh Start Program also applies self-employed individuals with a 25% or more drop in income during 2011. To qualify, the adjusted gross income (AGI) of a single filer must be less than $100,000, and joint filers less than $200,000. There is an application form for the Fresh Start Program on the IRS website.

If you have received an IRS Failure to Pay notice, our tax specialists can help you determine if the assessed tax penalty is accurate. Then, they can work with you on a payment plan, or determine if there was a reasonable cause that could apply to penalty abatement. For more information about our tax debt resolution services, visit us today at professionaltaxresolution.com. Contact us by phone at (877)-889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.

Tax Penalties: What is Failure to Pay?

Posted on June 18, 2012 by Kursti Nakagawa

A tax penalty is assessed when a taxpayer fails to meet a tax filing deadline or fails to make a tax payment when it is due. The IRS and State Tax Agencies impose such penalties as a method of encouraging taxpayers to meet their tax obligations. Both the Failure to File Penalty and the Failure to Pay Penalty must be announced through formal written notification from the IRS or State Tax Agency. The written notice must state the reason the tax penalty is being assessed and must also include a full explanation of how it has been calculated. Because tax penalty notices are computer generated and often include errors, it is important for a taxpayer to verify that the reported tax penalty amounts are accurate before making payment.

With the economic climate what it is today, many taxpayers owe taxes that they are unable to pay. A taxpayer who is faced with this situation should be well aware that the worst response is to ignore the problem and hope that it will go away. The financial consequences of disregarding tax deadlines and tax payments accumulate rapidly over time and more drastic measures are eventually imposed when a tax debt is ignored. A taxpayer’s best approach is to always comply with tax filing deadlines to make tax payments when they are due. When sufficient funds are not available to pay the full amount of the debt, the taxpayer should make full use of one of the many tax settlement options offered by the collecting tax agency.

The Consequences of Not Paying Your Tax Bill

When no tax return has been filed, the IRS or State Tax Agency has the authority create a Substitute for Return. This document is an educated guess as to how much a taxpayer owes based on information from other sources. Since the Substitute for Return does not include deductions and exemptions to which the taxpayer may be entitled, the estimated tax liability shown is usually greater than what is actually owed.

A taxpayer who fails to file a tax return can be assessed a Failure to File Penalty of 5% of the amount of tax due for each month that the return is overdue up to a maximum of 25% of the amount owed. In addition, although it is seldom invoked, a taxpayer who fails to file a tax return can be charged with a misdemeanor which can carry a fine of up to $25,000 and a one year prison term.

When a tax return has been filed but there is an outstanding tax amount due, a taxpayer can be assessed a monthly Failure to Pay Penalty of between 0.25% and 1.0% of outstanding tax balance. The Failure to Pay Penalty, which is normally set at 0.5 % per month, is assessed from the date the tax return was originally due until the full balance of the tax amount is paid or a tax settlement agreement has been negotiated with the collecting tax agency.

When tax penalties and interest are allowed to accumulate over time, the result is often a tax debt that is much more formidable than the original amount owed. In addition, the IRS or State Tax Agency will eventually resort to more aggressive techniques such as levies, liens, and wage garnishments when an outstanding tax obligation is left unresolved. These more drastic actions can have a lasting affect on a taxpayer’s credit rating and overall financial well-being.

If you have been assessed a tax penalty for failure to file a tax return or failure to pay a tax debt, we can help you determine whether the assessed tax penalty is accurate. Our experienced tax settlement professionals will carefully examine previously filed returns and file missing and amended returns when necessary. By identifying available tax benefits that have not been utilized, this process alone can often result in a significant reduction in the tax amount owed. If there is an outstanding tax liability, we can help you resolve it. For more information about our tax debt resolution services, visit us today at professionaltaxresolution.com. Contact us by phone at (877)-889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.