All income is not created equal

Another study just out from the Congressional Research Service looks at taxes paid by different income groups and concludes—surprise!—that some people with seven-figure incomes have a lower percentage of their income going to taxes than that paid by people earning less than $100,000.

Specficially, the study as reported in the Washington Post shows that about one-fourth of all taxpayers earning $1 million or more annually take a lower overall federal tax hit, percentage-wise, than many households earning less than $100,000.

Those ultra-high earners had an overall federal tax burden of around 24%, which was lower than the percentage paid by about 10 million of the filers with adjusted gross income of under $100,000.

The main reason why the tax rate on “more” is less: Some of the highest-earners get a substantial portion of their income from dividends and capital gains, which are taxed at a top rate of 15%, regardless of how much you rake in. Working stiffs may pay a top tax rate of 25%, 28%, or higher.

I’m not saying it doesn’t pay to work. But from a tax standpoint, profits from capital are currently more favored than income from labor.


Nein, Nein, Nein

Apparently no idea is so bad that some politician won’t try to use it for short-term political gain—even when it first came from another politician.

The latest example: Presidential candidate Rick Perry says he’s going to propose a flat tax, following in the delivery shoes of fellow candidate, pizzaman, motivational speaker and Koch-brothers lackey Herman Cain.

Cain, you’ll recall, wants a 9 percent tax rate on individuals corporations, and all sales. Aside from the hole that would blow in federal revenues, it would also translate to an increase in taxes for lower-income workers, a cut for corporations, and a massive reduction in taxes for the wealthiest.

This isn’t the first bad financial idea Perry’s had. It’s just one of his dumber ones.

Remember: while the exact cutoffs vary, when you look at anything called a ‘flat tax,’ you’re generally talking about something that will translate to higher taxes on Americans earning under $100,000 and a tax cut for the fortunate few making more than $500,000.


Tax rules on cell phones start to reflect the real world

As part of its continuing effort to drag the tax code all the way forward to the 1990s, Congress now says that cell phones will no longer be subject to the detailed record-keeping requirements that have driven both employers and employees batty in recent years.

Technically, what has happened is that the Small Business Jobs Act of 2010 removed cell phones from the category of “listed property.” Listed property is what I think of as, “The Fun Stuff”–televisions, video equipment, automobiles, computers, and so on. Unfortunately, Congress thought these things could be fun also, and required that most people keep track of business vs. personal use in order to take any deductions.

cellphone Tax rules on cell phones start to reflect the real worldThat may have made sense for the days when cell phones resembled upholstered bricks and couldn’t be used for much more than, well, making telephone calls. Today I have clients who virtually run their entire businesses off of their cell phone and also occasionally use the device for a voice conversation.

IRS has announced that beginning with 2011, an employee’s business use of a company-provided cell phone will in most cases be nontaxable, and personal use of the phone will be considered a de minimis fringe benefit. That means no more having to log your business and personal calls or having the “value” of the personal usage added to your taxable income.

This is a good start. It makes life easier for businesses and their employees. What we need next is to have self-employed people be covered by the same guidelines, so that the phones they pay for themselves get the same preferred treatment. As things stand today, the typical one-woman-show self-employed professional is still supposed to keep track of her business use vs. personal use of a cell phone in order to be entitled to any deduction at all. Doesn’t seem fair, does it?

Check out IRS Notice 2011-72 or go to the Service’s website announcement if you want the thrill of getting all the details.


Rep. Paul Ryan: The millionaire’s friend

Rep. Paul Ryan–the author of the Republican plan to end Social Security and Medicare as you know it–on Sunday called President Obama’s proposal to raise taxes on people who have more than $1 million in earnings, “class warfare.”

Take a moment to absorb that. Here’s a leading speaker for the Republican Party, the chair of the House Budget Committee, leaping to the defense of the abused struggling group of Americans who take in more than a million dollars of income annually.

At the same time, the Republicans haven’t seen a cut programs that benefit the vast majority of Americans–whether to Medicare, unemployment benefits, government public works programs, environmental protection, food safety or a host of others–that they didn’t like.

Paul Ryan, this week’s real general in class warfare.


Avoiding sales tax on the Internet? Probably not for long.

If you buy stuff online, I can almost guarantee that you are a tax scofflaw.

How can I say such a thing? Well, if you live in a state with a sales tax, you’re supposed to pay that tax on anything you buy from internet companies that are located out-of-state.

What, you haven’t sent those sales tax payments in directly to your state revenue office? Shame, shame.

You’re not the only one, of course. And the states know that millions of dollars of sales tax is going uncollected when people make purchases from companies–the gorilla in this zoo is–that have no physical presence or what we tax weenies call, “nexus” in a state.

The states generally aren’t going after consumers, although you may have noticed a line for internet sales tax or use tax pop up on your state returns in the past few years. It’s a lot more practical for the state to try to collect sales tax from one vendor than from hundreds of thousands of consumers.

Is it right for your friendly neighborhood bookstore to have to compete with an out-of-state company that doesn’t have to charge sales tax? Whether it is or not, states are looking for ways of collecting tax on internet sales. And internet giants like are fighting back.

How much does Amazon hate the idea of having to collect sales taxes? In California, the company has already spent $5.25 million to back its proposed 2012 referendum on overturning the state’s new requirement that it and other internet businesses collect sales taxes from California customers.

The Amazon-backed referendum is no sure thing–the company will have to gather more than 425,000 valid signatures before the end of September for the measure to get on the state ballot in 2012.

What’s really interesting about this is that the sales tax is, of course, a tax on consumers and theoretically wouldn’t take any money out of Amazon’s pockets. Apparently the competitive advantage of not charging sales tax is great enough that Amazon feels it’s worth spending millions to fight back.

Stay tuned–this one isn’t over by a long shot.