How the government shutdown affects taxpayers and tax practitioners

Alistair Nevius for Journal of Accountancy writes: The failure of Congress to agree on a continuing spending resolution on Monday led to the first federal government shutdown since 1995–1996. The shutdown involves a large number of federal government functions, including many affecting taxpayers and tax practitioners. As this item was posted, it was not clear how long the shutdown would continue.

Here is a look at the status of IRS and other government functions during the shutdown:

What remains open?

The IRS will continue to process tax returns that contain remittances and all e-filed returns. Refunds will continue to be paid. The IRS has not announced the postponement of any return filing deadlines, such as the Oct. 15 deadline for individual tax returns on extension.

Preparations for next filing season, such as design and printing of tax forms and the completion and testing of filing-related computer programs, will also continue.

During the shutdown, the IRS will take steps to protect ongoing bankruptcy, lien, and seizure cases and to prevent lapses in the statute of limitation.

The IRS website (irs.gov) will stay up, with a skeleton staff of six to maintain it. This staff will focus on ensuring the site stays up, that emergency messages are posted, and changes can be made. It is not clear if any new content will be posted to the site.

IRS criminal law enforcement and undercover operations will continue.

While the IRS says legal counsel functions are not excepted from the shutdown, the personnel in the Office of Chief Counsel are excepted. The Office of Chief Counsel’s primary responsibility during the shutdown is managing litigation and the time-sensitive filing of motions, briefs, answers, and other pleadings related to the protection of the government’s material interests.

The federal judiciary has announced that federal courts will remain open for approximately 10 business days. All scheduled proceedings and deadlines remain in effect, and the electronic case management system will stay in operation. Around Oct. 15, the federal judiciary will reassess its situation and determine whether courts can stay open. If the federal courts do shut down, the IRS Chief Counsel personnel would be placed on nonduty status.

Forty-five employees of the National Taxpayer Advocate Service will remain on the job. They have been identified as necessary for ensuring that statutory deadlines are met.

The government will continue to mail out Social Security checks, since they are funded out of an indefinite appropriation. IRS employees who support this function will continue to work during the shutdown (even though their salaries are paid by annual appropriations).

The U.S. Postal Service will continue to function during the shutdown because it acts as an independent agency and is not funded by the federal government.

What is closed?

The shutdown brings a stop to all IRS taxpayer services, such as responding to taxpayer inquiries.

During the shutdown, all IRS audits and examinations will stop. All nonautomated collection activity will also stop.

The IRS will not process paper returns that do not contain remittances.

All IRS headquarters and administrative functions will shut down (although the commissioner will not be furloughed).

The IRS will enter into no new contracts and will not issue any purchase orders during the shutdown.

The Office of Professional Responsibility will be closed. However, the Return Preparer Office, which oversees the IRS’s return preparer regulation program that has been enjoined by a federal court, will remain open because it is funded by user fees.

Approximately 86,000 IRS employees will be furloughed, that is, placed “in a temporary status without duties and pay because of lack of work or funds or other nondisciplinary reasons” (5 C.F.R. §752.402).

The IRS’s contingency plan covers the first five business days of the shutdown (i.e., through next Monday). After that, if the shutdown continues, the IRS deputy commissioner for operations support will assess what needs to be done.

With Shutdown, Taxes Still Due But You Can't Ask IRS For Help

Kelly Phillips Erb for Forbes writes:  It’s official. After Congress failed to reach an agreement, the federal government has shut down.

With any luck, it will be quick and painless. But in the interim, the country is going to be doing a bit of a shuffle, trying to figure out what’s open, what’s closed and what it all means.

There’s good news and bad news for taxpayers.

The good news first: no audits! The Internal Revenue Service is suspending all audit activities while the federal government is shut down.

And that’s pretty much it for good news.

Here’s the bad news: if you’re on extension, your 2012 federal income tax return is still due on October 15, 2013. And yes, the IRS will cash your check on time.

But the door doesn’t swing both ways. If you are due a refund, it will likely be delayed (the extent of the delay is largely dependent on the length of the shutdown).

Walk-in assistance centers for taxpayers will be closed. Similarly, the IRS will not pick up the phones: all telephone hotlines would be closed.

Only 8,752 employees (just under 10% of total IRS employees) will report for work as “excepted employees” during the shutdown. Included in the list (report downloads as a pdf) are the Acting Commissioner; the Deputy Commissioner for Services & Enforcement; the Deputy Commissioner for Operations Support and the Chief of Staff.

Also on the “excepted employees” list are a number of appeals staff and a number of lawyers to ensure that statutory deadlines are met. Missing deadlines affects IRS as much as it does taxpayers and the IRS is assuming (as we all are) that Tax Court and other federal courts will remain open. If courts do close, then those affected attorney would switch over to “non-duty” status.

Seven staff will remain on duty in the Communications and Liaison Office. Those folks will coordinate information regarding the shutdown, furlough status and recall. They will also facilitate information with the taxpaying public and Congress.

Forty-five employees will stay on with the Taxpayer Advocate Service; those are personnel considered necessary for the protection of statute expirations, bankruptcy, liens and seizure cases. Specifically, Nina Olson (the National Taxpayer Advocate) will go to work, as will her executive and staff assistants and her senior advisor. Additional directors and deputies needed to provide oversight will also report during the shutdown.

Of course, the Affordable Care Act (ACA) Office will remain open: that office is responsible for coordinating the implementation of ACA. October 1, 2013, is a big ACA day (the exchanges open, among other things) so these offices are bound to be busy. In fact, a number of ACA related positions are “excepted” and those personnel will report to work.

A significant number of Criminal Investigation (CI) employees – more than 3,500 – will also report to work. This makes sense: if the bad guys don’t take a break, neither should those in pursuit of them. Currently, CI is working nearly 4,600 active criminal investigations with even more in the adjudication phase. That means that right now, nearly 9,000 investigations are in process on some level: special agents are actively gathering evidence, conducting critical interviews, testifying in court proceedings, executing search warrants and conducting arrests. CI will basically continue at “normal” levels since federal courts, federal prosecutors and federal law enforcement partners are operating with business as usual.

Just over 100 employees in the Large Business and International Division (LB&I) and just over 300 employees in the Small Business/Self-Employed Division (SB/SE) are “excepted” in order to ensure statutory deadlines are met. A mere 20 employees are “excepted” in the Tax Exempt and Government Entities Division (TEGE) for the same reasons.

The Office of Professional Responsibility and the Office of Online Services (OLS) will each retain a handful of employees. OLS has to remain online for, among other things, launching the ACA pages on IRS.gov. Additionally, the Privacy, Governmental Liaisons & Disclosure Division (PGLD) – the folks that ensure the proper protection and sharing of taxpayer data – as well as the Online Fraud Detection & Prevention (OFDP) office will be staffed at some level.

Employees considered “non-excepted” will be furloughed. Those “non-excepted” folks include auditors, some lawyers (admit it, you’re trying to think of a joke about lawyers not being essential) and the entire Whistleblower Office. They also include research, analysis and statistics personnel. Employees will know to report (or not) by letter, issued via email.

When it’s time to go back to work, IRS will contact the media to “help facilitate news coverage of reopening as necessary.” That means – and I’m not kidding – that “employees are expected to listen to radio and/or television broadcasts to learn when an appropriation or continuing resolution has been signed and to confirm the agency’s operating status using either the IRS Emergency Information Hotline or IRS.gov.” Of course, it would follow that the Media and Publications Office will retain some staff during the shutdown to make sure the word gets out.

It’s a lot to process. And even with a fairly detailed explanation about who will be at work – and who might not be – it’s still fairly confusing. I’ll update you as information becomes available.

Buy Intuit - Favorable Market And Cheap Valuations

Stock Whisper for Seeking Alpha writes:  Intuit Inc. (INTU) is a California based software company that develops software and applications for financial management and tax computations for small and medium businesses, accountants and individuals. Intuit has a number of financial solutions platforms and software in the market, working both on personal computers and handheld devices, in addition to being available online as well. The various software developed by Intuit includes TurboTax, Quickbooks, GoPayment, Quicken, and the recently acquired Demandforce.

Intuit Inc. in the market today

Intuit Inc.'s shares closed at a price of $66.51 per share, gaining 0.94% from its opening price of $65.89 per share. The company's stock is currently trading at 23.45x its current annual earnings, while at 16.6x its estimated project annual earnings (12 months), with a market capitalization of $18.80 billion. The company's stock price has grown by 12.08% over the past one year, and is currently trading near the year's highest share price of $67.99 per share. The company's valuation (Forward P/E) against competitor Paychex's (PAYX) valuation of 22.29x suggests that Intuit is undervalued, and that its share price could be expected to increase in the future, since investors are currently paying less for the earnings that the company is expected to deliver in the future. Additionally, a PEG ratio of 1.31 suggests that the company is a growing entity, and thus buying its stock would yield profits in the future.

Financials

Intuit's quarterly revenues have increased to $378 million in Q4 2013 from $308 million in the fourth quarter of FY2012, experiencing a growth of 22.7% year-over-year, whereas its annual revenues have grown by 9.5% from the previous year. Its quarterly EPS has declined to -0.06 (loss of 6c per share) in Q4 2103 from 0.02 (profit of 2c per share) in Q4 2012, however, its annual earnings per share have increased by 8.84% year-over-year, from 2.6 in FY2012 to 2.83 in FY2013. Intuit's earnings have grown by 8.33% year-over-year, however, the total growth in earnings over the past four years is almost 50%. Moreover, its revenues have grown by 22.5% over the past four years, thus showing that Intuit is a company that holds promise of growth in the future too. The company's revenue guidance for the first quarter of the fiscal year 2014 estimates its revenues growing by 6% to 8% year-over-year.

The financial services applications market

With the growth in the smartphone and tablet industry, software and solutions businesses contributing to the mobile application industry have gained significantly from the growing handheld market. While Intuit has created its name in the financial services and solutions sector, it has nonetheless attempted to gain from the growth of the handheld industry as well. Among the numerous software packages that the company has produced for financial management, Quickbooks has earned its reputation as being the Number One rated accounting software for small businesses.

Quickbooks has recently launched a newer version that will be available to new users in late October this year, while existing users will be able to update their existing version of the software in 2014. The software update is said to come with a number of improvements that will help users manage the needs of a small business even better. The newer and updated version of Quickbooks has a more user-friendly interface, in addition to being cloud-based, which makes it accessible through iOS and Android devices in addition to a personal computer, via an active internet connection. Also, Quickbooks' online version has been refurbished and improved to specially perform better through mobile devices. Quickbooks has expanded its availability to more than 100 countries and more than 10 languages, thereby widening its target market.

It is believed that with the launch of the new version of Quickbooks, Intuit's market penetration will increase, as the newer and better Quickbooks software is predicted to attract more customers to the already increasing customer base of Intuit. Not only has Quickbooks been an encouraging factor for the company, Intuits' TurboTax solutions is also expected to increase the company's existing customer base. TurboTax, like Quickbooks, also enables its users to access and use its software through not only a personal computer, but also a smartphone or a tablet. Revenues for Intuit are expected to increase with the launch of the Quickbooks update.

Intuit has also been working on making its software packages more flexible in order to enable them to work with third party applications or software in order to attract more customers through ease of use of its systems. In an attempt to include third party systems on Intuit's financial services platform, Intuit has integrated Square, the mobile payment provider, with its Quickbooks software.

Tapping into the consumer market through the introduction of simple end-user software and applications that can be installed on a personal computer, or even more conveniently, on a tablet or smartphone, has been a very smart move by Intuit. This could help Intuit build its customer base even further, while making its existing customers more loyal to its products, thus producing greater and more stable revenues.

The current developments and improvements made in the company's business model, as well as the company's readiness in terms of taking advantage of favorable market conditions could be regarded as strength for the company, and could enable it to greatly increase its customer base.

Competition by Paychex Inc., a leading provider of payroll solutions should however be taken seriously by the company. The company would need to be very responsive to the dynamic nature of the market in order to retain its image and customer base, since due to the abundance of software available to customers today, users easily shift from one software to another in search of quality, ease-of-use, and stability.

Bottom line

Considering Intuit's valuation, financials, and the current developments made by the company as well as the favorable conditions prevailing in the market, the company seems a good long term investment and the current cheap valuations make it a solid buy.

Lock up 7 fleeting tax breaks

Business Management Daily writes: It seems to happen every year. The fate of several soon-to-expire tax breaks for small businesses remains unknown.

Strategy: Take full advantage of the key tax breaks that suit your business needs while they’re still available.

If Congress eventually passes legislation extending these tax incen­­tives, it’s likely you’ll be no worse off than if you had waited.

Here are seven of the “biggest and best” on the books.

1. Nail down Section 179 de­­duc­­tions. Under the American Taxpayer Relief Act of 2012 (ATRA), your business can currently deduct up to $500,000 of qualified assets placed in service in 2013, subject to a $2 million phaseout threshold. If the maximum allowance isn’t extended, it will plummet to a paltry $25,000 in 2014, with just a $200,000 phaseout threshold.

2. Reward yourself with a tax bonus. Bonus depreciation has been around for several years in various forms. The current version allows a business to claim a 50% bonus depreciation deduction, on top of other available tax breaks like Section 179(see No.1) for qualified new (not used) assets placed in service in 2013. This tax break generally expires in 2014, although the deduction continues through next year for certain types of property with longer production periods, such as aircraft.

3. Speed up other write-offs. It generally takes almost 40 years—39 to be exact—to write off the cost of improvements to business buildings. But you can elect a faster write-off period of 15 years for the cost of qualified leasehold improvements, qualified retail improvements and qualified restaurant buildings and improvements, using the straight-line method. Unless it is extended, this tax break expires next year.

4. Take aim at worker credits. If your business qualifies, it can claim the Work Opportunity Tax Credit (WOTC) for hiring from certain “targeted groups.” The credit is generally equal to 40% of first-year wages up to $6,000, for a maximum of $2,400 credit per worker (or up to $9,600 for certain disabled veterans). ATRA  extended the WOTC, but only through 2013.

5. Investigate the research credit. Your firm can claim a credit, as extended and modified by ATRA, for qualified research expenses incurred in 2013. The credit is equal to 20% of qualified expenses over a base amount or you can elect a simplified 14% credit. Although the credit has been extended numerous times, the estimated cost of $14.3 billion over 10 years is a deterrent.

6. Cut down the BIG tax. When a C corporation converts to S corporation status, it may have to pay a “built-in gains” (BIG) tax if it holds appreciated property. The minimum holding period to avoid the BIG tax was gradually reduced from 10 years to seven years to five years. ATRA temporarily extended the shorter five-year period for sales occurring through 2013.

7. Acquire qualified small business stock. Assuming certain requirements are met, you can exclude up to 100% of the taxable gain that would normally be recognized on a future sale of qualified small business stock (QSBS). This tax break was scheduled to expire after 2011, but was prolonged by ATRA to cover shares issued in 2012 and 2013. So the window of opportunity for QSBS may be closing at the end of this year.

Tip: Congress may or may not get around to addressing these issues before 2014. We’ll keep you posted.

How do dividend tax rates work at break points?

Over at Bogleheads we read: 

How do dividend tax rates work at break points?

Post a reply

4 posts • Page 1 of 1

How do dividend tax rates work at break points?

by dmcmahon » Mon Sep 30, 2013 11:32 pm

Hypothetical 1: person has a high income due entirely to dividends.
Suppose the person is single and has $500k in dividend income. Is all 500k taxed at the 20% rate? What if the person has $401k of income - is that extra $1k triggering a tax rate in excess of 100% because it causes all of the prior 400k to be taxed at the 20% rate instead of 15% ?

Hypothetical 2: as above but with work income making up a portion of the total.
Suppose the person has $300k of regular income and $200k of dividends - same question re. the tax rate that applies to the $200k. Now suppose its $101k, just over the bracket for singles.

dmcmahon

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Re: How do dividend tax rates work at break points?

by 22twain » Tue Oct 01, 2013 12:36 am

dmcmahon wrote:Hypothetical 1: person has a high income due entirely to dividends.

I assume you mean qualified dividends. Ordinary dividends are taxable as ordinary income.

Suppose the person is single and has $500k in dividend income. Is all 500k taxed at the 20% rate?

No. 

What if the person has $401k of income

Assuming a single person, and that the $401K is the taxable income after subtracting the personal exemption and whatever deduction he's entitled to:

The first $36.25K is not taxed.
The next $400K - $36.25K = $363.75K is taxed at 15%, yielding $54,562.50 in tax.
The final $1 is taxed at 20%, yielding $0.20 in tax.

He also has to pay the new 3.8% "Medicare tax" on investment income above $200K, which in this case is $201,001, yielding $7638.04 in tax.

Total tax: $62,200.74.

22twain

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Re: How do dividend tax rates work at break points?

by dmcmahon » Tue Oct 01, 2013 12:43 am

After much googling finally seem to have the answer:

http://www.forbes.com/sites/anthonynitt ... s-it-work/

Thank you 22! Wondered about this after looking at another tax-related thread.

dmcmahon

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Re: How do dividend tax rates work at break points?

by 22twain » Tue Oct 01, 2013 12:47 am

dmcmahon wrote:Hypothetical 2: as above but with work income making up a portion of the total.
Suppose the person has $300k of regular income and $200k of dividends

In this case the regular income "pushes" the dividends upwards in the brackets. Imagine putting all the income in a stack with the ordinary income at the bottom and the (qualified) dividends on top. Now he has:

$100K taxed at 15% = $15K
$100K taxed at 20% = $20K

The "Medicare tax" threshold applies to (modified adjusted) gross income, so all the dividends are above the threshold: $200K taxed at 3.8% = $7.6K.

Total tax (on the dividends) = $42.6K.

What is the difference between pre-tax and post-tax paycheck deductions?

money.stackexchange writes:  I am getting insurance for about 4 months, the length of my contract with a company. I am given the option of having the cost deducted from my paycheck pre-tax or post-tax. What is the difference? There is a link about Section 125 of the IRS code concerning Cafeteria Plans, but a lot of it is foreign to me and I can't find much about it online.

2 Answers

activeoldestvotes

up vote3down vote

Pre-tax deductions are taken out before taxes, and therefore reduce the amount of income that you have to pay taxes on, known as your taxable gross income.1. Post-tax deductions come out after taxes and don't have an effect on your taxable income. If you're going to have the deduction anyway, pre-tax deductions can save you the amount of the deduction times your marginal tax rate. I'll give a simple example. Say you earn $70,000 a year in gross income. As of 2013, you'll pay a 25% marginal tax rate on any of your gross income above $36,250. In other words, you'll owe 25% of 70,000 - 36,250 = $33,750, i.e. $8,437.50 in taxes within that bracket (in addition to the lower tax rates on income below $36,250). If you have a pre-tax deduction of $5,000, you only owe 25% in taxes on 70,000 - 36,250 - 5,000 = $28,750, i.e. $7,187.50. Your take-home pay in that tax bracket, after the deduction and taxes are taken out, is 28,750 - 7,187.50 = $21,562.50. If you have a post-tax deduction of $5,000 instead, you still owe taxes of $8,437.50 on the $33,750, andafter the taxes are taken out, you also face the deduction of $5,000. Your take-home pay in the 25% tax bracket is now 33,750 - 8,437.50 - 5,000 = $20,312.50. It's no coincidence that the amount you saved when taking the pre-tax vs. post-tax deduction, i.e.21,562.50 - 20,312.50 = $1,250, is equivalent of the marginal taxes you owe on the $5,000 amount of the deduction: 25% * 5,000 = $1,250. Remember that in these examples, I'm only talking about your income in the 25% tax bracket. Per the Fairmark chart linked above, you'll still owe $4,991.25 on your income below $36,250, whether or not you take a pre-tax or post-tax deduction. 1) Depending on what other deductions and adjustments you have, your taxable gross income may be equivalent to your Adjusted Gross Income, which is a commonly-heard term. Note that some pre-tax deductions are phased out at certain levels, in which case there might not be as much of a difference between the savings of the pre-tax vs. the post-tax deduction. This occurs withtraditional IRA's, for example. Also, the pre-tax deduction may be enough to lower your taxable income into another tax bracket. For example, if you earned $40,000 in gross income, you would normally owe 25% of 40,000 - 36,250 = $3,750 in taxes, or $937.50. Add this to the $4,991.25 that you owe on your income below $36,250, and your total tax bill is $5,928.75. However, if you took a pre-tax deduction of $5,000, you would reduce your taxable gross income to $35,000, in which case you would owe 15% on the income above $8,925 (again, see the Fairmark table). Following the table for the amount of your income, you would owe892.50 + 15% * (35,000 - 8,925) = $4,803.75 in taxes. Also, there are situations where taking pre-tax deductions may reduce your adjusted gross income enough to open up other opportunities in the tax code. For example, if your gross income is above a certain level, you may not be able to make the full contribution to a Roth IRA. However, if you have enough pre-tax deductions, your adjusted gross income may decrease enough to allow you to make these contributions. shareimprove this answer edited 8 hours ago answered 9 hours ago John Bensin 9,65832568

1 I would suggest that using IRAs is a bad example for this issue which has to do with employers providing a benefit (e.g. employee can purchase health insurance for spouse and dependents at group rates) which can be paid for with pre-tax or post-tax dollars. Health insurance premiums paid post-tax are deductible from gross income in arriving at the taxable income, but with severe restrictions that make the deduction not usable by most people. IRAs, on the other hand, are very different beasts, and in particular have nothing to do with employers. (And please do not nitpick about SEP-IRAs). –  Dilip Sarwate 8 hours ago  1 @DilipSarwate Fair enough. I would argue that IRA's are still a good example of the basic differences between pre- and post-tax deductions, and the complications than can arise in dealing with them, but I'll work on writing up a different set of examples tonight or tomorrow and replace the parts of the answer that deal with IRA's. If you beat me to it, feel free to edit the answer or post a separate answer so that the information is at least included. –  John Bensin 8 hours ago

up vote0down vote

Most people elect to have these deducted pre-tax because it reduces your taxable income. That mean that it is pulled from your income before social security, medicare, state and federal taxes are calculated. The reduction of pre-tax income can also make other deductions possible if it keeps your annual taxable income low enough, this really only impacts a few people, and would be considered a bonus benefit. Bottom line for most people pre-tax payments results in a higher take home pay. The only reason I could find to make your health insurance premiums post-tax would be because that keeps your wages high when calculating monthly income for social security benefits. This would only impact people who were either near retirement, or were close to not making enough money in a quarter to potentially not get credit for the quarter. One other distinction was that if the premiums were made pre-tax you can only change your insurance if you had a life event. Post-tax premiums did allow you to make insurance changes without needing a life event. Again this would only impact a small number of people.