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Today I received an email from an old friend who has a tax preparation business. Apparently the number of "tax/IRS related" scam attempts is surging this year, so here are some things to watch out for:
The IRS has informed us of some Tax Scams that you should be aware of. Please take the time to familiarize yourself with the following information so you know what to do if you receive an email from someone claiming to be the IRS.
 Emails posing to be from IRS agencies are not new, but this year they seem to have amped up. We want to bring to your attention the newest scams.
One email posed to taxpayers is allegedly from the EFTPS and "notifies" the reader that their tax payment has been rejected and needs to be re-submitted. Please be aware that the IRS does not solicit tax payments via email.
The second scam email targets the tax preparer. These emails contain information regarding IRS Tax Forums and tells the reader to click a link for more information.
In both of these cases upon clicking the links, malware/viruses are loaded onto the user’s computer and the computer is then compromised. The malware sends information stored on the computer back to the scammer.
This page on the IRS website is dedicated to helping people avoid tax scams.
A couple of weeks ago, I posted about income-tax refunds, noting the average refund this year was close to $3,000, similar to last year (see the latest filing-season stats from the IRS in the table below).
Tax columnist Laura Saunders at the Wall Street Journal reports that the size of the average refund has nearly doubled since 1999.
 Why? Likely answers: changes in the tax code, low interest rates, and a different mindset among younger taxpayers.
The past decade also brought new or short-lived tax benefits for which taxpayers may not have adjusted their withholding.... Examples include the American Opportunity education credit; two of the three home-buyer credits; and the expanded child credit.
But nontax factors likely came into play as well. The conventional wisdom used to frown on large tax refunds, because they amounted to an interest-free loan to the government and reduced investment capital by the same amount. Better, it was thought, to have the money upfront and invest it, or else let it earn interest.
Yet over the past decade the opportunity cost of big tax refunds fell sharply. Interest rates plunged to multidecade lows, while the stock market stagnated....
Meanwhile, with incomes for many people growing only modestly, the notion of a big lump-sum payment grew more appealing. It was like a bonus, in a smoke-and-mirrors kind of way....
[And there appears to be a generational shift,] with younger taxpayers who welcome large refunds, and older taxpayers who don't.
"We try to be withheld to within $100 of our actual tax," says Wes Schultz, 70 years old, a retired financial executive from the Milwaukee area. But he has younger family members who overwithhold on purpose. "One of them earmarks his refund to pay next year's property taxes and replenish his emergency cash supply," he says....
[Dara Rosenberg, a 24-year-old actress in New York,] tries to overwithhold all year long in order to ensure a larger refund; this year, it will be $1,600. Ms. Rosenberg reserves part to pay veterinarian bills for her bulldog, Truman. "I count on that every year," she says.
What about you? Do you go for a large refund? Or try to keep it as small as possible?
(By the way, if you want an "itemized receipt" for your income tax, Social Security, and Medicare payments for 2010, visit the White House's new Federal Taxpayer Receipt page.)
While doing research for an SMI project a few months ago, I stumbled across a 1985 Wall Street Journal article about the earliest days of the U.S. income tax.
With this year's tax-filing deadline almost upon us, it's an opportune time to post an excerpt from the article, authored by historian Thomas V. DiBacco (now retired from American University). You'll see that Congress-induced confusion is nothing new.
If you're about to go crazy doing your federal income tax, just be thankful you weren't around in 1914. That was the first year that Americans had to fill out a Form 1040 after the income tax, or 16th Amendment to the Constitution, was ratified in February 1913. Everything was in a mess.
For one thing, Congress didn't pass the implementing legislation until Oct. 3, 1913, which meant that the handful of officials and clerks authorized by the act had too much to do in too short a time.
No tax forms were available until Jan. 8, even though the deadline for submission was March 1....
The biggest problem was that the Internal Revenue regulations didn't answer all the questions that taxpayers had.... One of the most confusing provisions of Form 1040 was the exemption allowed husband and wife filing a joint return: Some taxpayers interpreted the authorizing language to permit a $4,000 exemption for both; others saw it as $7,000 for both; and still others were certain that it meant $3,000 to each.
Hardly a day went by that the Treasury Department did not issue a clarifying interpretation.... By Feb. 21, the government threw up its hands, saying that no more clarifying statements would be issued before March 1....
Expectedly, there were numerous errors in the returns. But the Internal Revenue was scarcely precise about the extent of the problem: The range of errors, it announced, was from 30% to 80%. The most common problem involved the tax period covered by the return (March to December 1913), which meant that only five-sixths of income and deductions were to be reported.
A few months later at the National Tax Conference in Denver, experts raked the government's noble experiment with income taxes over the coals.... A.C. Rearick of New York blamed the confusion of the first year on the taxing verbiage of the congressional act. "To begin with," he said, "the language in which the Act is couched is involved and its rhetoric bewildering. It contains sentences hundreds of words in length, in which clauses are added to clauses and provisos heaped upon provisos."
But there was at least one good thing: the original 1040 had only one page of instructions!
How much tax would you have paid under the original 1913 income tax law? You can find out by using the online calculator here.
In the latest issue of Sound Mind Investing we explain how to learn key things about your finances by examining the data on your income-tax return (subscribers' link).
 One of the most obvious, of course, is whether you're having too little or too much withheld from your paycheck. Ideally, you don't want either situation. But perfect withholding is a tough target to hit because so many things can affect your tax liability.
Most Americans, however, don't even get within a thousand dollars of dead-on withholding. The Wall Street Journal has the early figures for this year.
As of March 4, the Internal Revenue Service had received about 60.5 million individual income-tax returns. It had issued more than 52 million refunds, up 1.1% from a year ago. Those refunds totaled $161 billion, an average of $3,070.
The WSJ's Tom Herman points out the downside of getting a big refund — and offers a suggestion.
Uncle Sam doesn't pay interest on routine refunds. Thus, these taxpayers effectively have given Washington large amounts of interest-free loans.
Instead of doing this year after year, these people should consider taking a few moments to recalculate their tax withholding for 2011, their estimated tax payments or both.
Sure, it's a nuisance, and it may not seem worth the effort since interest rates remain so low. But tax-preparation software can make the job much easier.... [Also, t]he IRS offers a withholding calculator — at no charge — on its website.
It would make a huge difference in lots of households if that average refund of $3,070 could be dropped to, say, about $600. That would mean an extra $200-a-month in take-home pay for millions of taxpayers. Who couldn't use that?
The March 4 edition of the IRS's filing season stats are shown below, with a comparison to roughly the same period last year.
We moved last year, and in our relocation process we gave away a lot of stuff: clothes, housewares, decor, and miscellaneous items. Never wanting to give the government more money than I have to, I'm always diligent about getting receipts, writing down items we've given, taking pictures, and so on. It's a little work, but as you'll soon see, well worth it.
The hardest part in the process is in determining fair market value for the items. I'm never too excited about doing this, but thanks to TurboTax's ItsDeductible, the process isn't as bad as it could be. ItsDeductible is the easiest and cheapest way I'm aware of to determine the market value. And it's free (they are hoping you'll then import the information when you file your taxes through TurboTax). So how does it work?
After logging in with your current TurboTax login info (or creating a free account), you can choose to track your current year's donations, add donations to the previous year, or adjust donations for an amended return from two years ago. I selected the second option.
From there, you are given four types of donations: Items | Money | Stock | Mileage.
I naturally selected "Items." After than you will add/select a charity name and the date of the donation. Then you look up the item you donated. This can be done via search box, or from a list of categories/sub-categories. I find it easier to do a search, then select the appropriate sub-category generated from the search.
Once you've located an item(s), you have the choice of quantity and value: High Value, Medium Value, and Low Value. (I'm have not idea why they include the low-value option; the Pension Protection Act of 2006 disallows tax deductions for any clothing and household items that are not in "good" used condition or better.)
Choosing the value is the hardest part as we don't typically record the exact condition of the item, so there is a judgment call involved. Since we don't give away items in poor condition, I'll usually put half of the items in High Value and half in Medium Value unless I can remember that item's exact condition. (Note to self: Next time, it would be helpful to put an H next to the High Value and an M next to the Medium Value items when then them down.)
 Let's walk through an example:
Say you have some blankets you gave away. A search for the term "blanket" generates the following choices: Receiving Blankets, Bed Spreads, Blankets, Comforters, Duvet Covers, Quilts, and Quilt/Comforter. Since you just had a regular old blanket, you select "Blankets."
You're then taken to a few more choices, Electric and Non-Electric. And under each of those are even more options, from the size to the material. Since you remember that you gave away a really nice fleece blanket and a decent acrylic blanket, you put a "1" in the High Value box next to Fleece, and a "1" in the Medium Value box next to Acrylic.
Then you click "Add Items" and are taken to a summary screen showing what you've given so far and the value of it.
From there you can add more items or complete that donation. If you complete it, ItsDeductible shows a summary of all your donations and the estimated savings based on your tax bracket (which you selected in the sign-up process). You can also make edits from this screen, print individual donations, or be done with the donations.
If you're done, you're given a quick summary of all your donations, including any Cash, Stock, or Mileage donations you've entered, along with an option go to more-specific summaries that you can print. If you're not using TurboTax, you'll want to print the donations to include with your tax info.
It sounds like a lot of work, but it's not difficult, and you get faster with it as you do it more. I had it done in less than an hour. And it showed an estimated value of $2,193 worth of goods donated. Depending on your tax bracket, that's a savings of about $200-800... for an hour's worth of work! And that didn't include any Cash, Stock, or Mileage donations (and the miles to and from Goodwill can really add up).
So if you're not taking advantage of non-cash donations when you itemize your deductions, you're really doing yourself a disfavor — that is, unless, you make $200 or more an hour. In that case, hire someone to do it for you!
Every year, the National Taxpayer Advocate sends a report to Congress filled with complaints about the U.S. income-tax system — really.
The latest report came out this week, and since income taxes can have a huge impact on personal finance (to say the least), we thought we'd share a few excerpts from the report in our Personal Finance Friday post.
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that acts as an in-house critic. It is headed by Taxpayer Advocate Nina Olson.
Below is some of what she wrote in her 10th annual report to the U.S. Congress.
♦ ♦ ♦
The most serious problem facing taxpayers — and the IRS — is the complexity of the Internal Revenue Code.
A TAS analysis of IRS data shows that taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements. To place this in context, it would require more than three million full-time employees to work 6.1 billion hours, making "tax compliance" one of the largest industries in the United States....
Perhaps most troubling, tax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities....
Because of tax complexity, taxpayers often suspect that the "special interests" are receiving tax breaks while they themselves are paying full freight. Tax simplification would go a long way toward addressing these concerns.
The most promising approach would involve reducing tax preferences (often referred to as "broadening the tax base") in exchange for lower rates. However, it is essential that the taxpaying public have a realistic sense of the difficult trade-offs involved....
[W]e must understand that, in exchange for lower rates, some tax breaks will be eliminated immediately and others will be phased out. If tax reform proceeds on a revenue-neutral basis, however, the average taxpayer's liability will not change, and we will end up with a tax system that is simpler, more transparent, and easier and cheaper for taxpayers to navigate....
The IRS needs automation to administer tax laws and tax-based social programs efficiently.... [But] automation can substitute for judgment and discretion, to the taxpayer's detriment....
[P]olicies programmed into decision-tree tools...can result in decisions and determinations that harm taxpayers and that IRS employees, following the law and their good judgment, would not arrive at....
A little human contact and conversation can work wonders in understanding the taxpayer’s financial circumstances....
[If the collection process is] not handled appropriately, real and lasting harm can be visited upon taxpayers — destroying people’s lives and businesses....
Since 1999, the IRS has increased annual lien filings from 168,000 to 1,096,000, a rise of 550 percent. Lien filings can badly damage or destroy a taxpayer's creditworthiness because they are picked up by the credit rating agencies and retained on the taxpayers' credit reports for seven years from the date the tax liability is resolved, or longer if it is not resolved.
If lien filings were clearly correlated with substantial increases in revenue collection, one could at least understand the IRS's position. But over the same period that the IRS has increased lien filings by 550 percent, revenue collected by the IRS's Collection function has remained flat.... By damaging taxpayers' creditworthiness, the IRS may even be reducing long-term revenue collection.
♦ ♦ ♦
The National Taxpayer Advocate's full report is online here.
Building on our post last week about the draft report from the co-chairs of the White House deficit commission, here's a separate article detailing the recommendations for Social Security.
Not surprisingly, the approach suggested is to make modest adjustments over an extremely long period of time. The retirement age would continue to rise, to 68 by roughly 2050 and 69 by 2075. Benefits would gradually be scaled back for wealthier recipients. Cost-of-living adjustments would be tweaked. The taxable wage base would be gradually broadened. More workers would be added to the system (new state and local workers after 2020 — didn't know they weren't already included).
 Naturally, most everyone will find something to hate about this proposal (as they will with the broader list of recommendations).
That's what happens when compromise is required to solidify a budget, which is exactly what we're talking about here. Everyone smiles when it is expanded, and grimaces when it needs to be constrained. (Sounds pretty similar to every budgeting discussion we've ever had in my house.)
What's most striking to me in reading the Social Security recommendations, as well as the broader plan, is how doable all this sounds. I mean, really. For all the end-of-the-world-as-we-know-it carrying on of recent years, these changes really aren't that tough. (That's not to say we shouldn't all immediately go protest in the streets and burn stuff, as seems to be the popular response around the globe.) We're not talking about distributing ration cards here.
But for any of this to get passed, I think it'll all have to happen as one big package, and that concerns me because I'm not sure our politicians are serious enough to get something that significant done.
Taken together, most of the provisions put forth in these proposals seem pretty reasonable. There's a mix of distasteful medicine in there for everyone — rich, poor, old, young, Democrats, Republicans. And as long as everyone feels like this is legitimately a shared sacrifice, I think the people will accept it. (Wishful thinking?)
But if these provisions start getting split up into smaller proposals, forget it. That's when the problems start. Because if that happens, the seniors will get their legislators to kill the tough SS and Medicare stuff, the realtors will get their legislators to kill the home-mortgage deduction provision, the farm states will get theirs to kill the agricultural stuff, etc., etc.
Still in all, I'm encouraged by this report. There's nothing ruinous in here. Now granted, it doesn't solve all our fiscal problems either. But if we can get anything close to this passed, we'd be taking a huge step forward, one that would likely take a huge weight off the country's shoulders. If nothing else, it would help a great deal in turning the psychology around from the "we're all doomed, it's just a matter of time" feeling a lot of Americans have been carrying the past few years.
It can be done. Something like this is doable. Will our representatives rise to the challenge? That's the real question.
The final version isn't due for three more weeks, but the co-chairs of the National Commission on Fiscal Responsibility and Reform (i.e. the White House deficit commission) issued their preliminary recommendations yesterday — and the howls of protest have begun.
 "There are things in there that I hate like the devil hates holy water," Democrat Sen. Richard Durbin (Illinois) fumed — despite the fact that he serves on the commission. Outgoing House Speaker Nancy Pelosi (D-Calif.) called the recommendations "simply unacceptable."
(At right are a two tables — prepared by the Wall Street Journal — listing many of the draft plan's suggestions that would cut $200 billion in spending in 2015.)
Half-way around the world, in South Korea, President Obama "urged leaders of his own Democratic Party to hold their fire over the recommendations," according to the WSJ. "Before anybody starts shooting down proposals, we need to listen, gather up all the facts, and be straight with the American people," he said.
You can get fuller details on the draft plan's recommendations here (PDF), but the Journal offers this summary:
[I]n its current form [the plan] would end or cap a wide range of breaks relied on by the middle class — including the deduction for home-mortgage interest. It would tax capital gains and dividends at the higher rates now levied on wage income. To compensate, one version of the plan would dramatically lower and simplify individual rates, to 9%, 15% and 24%.
For businesses, the controversial plan would significantly lower the corporate tax rate — from a current top rate of 35% to as low as 26% — but also eliminate a number of deductions....
Overall, the plan would hold down the growth of the federal debt by roughly $3.8 trillion by 2020, or about half of the $7.7 trillion by which the debt would have otherwise grown by that year, according to commission staff. The current national debt is about $13.7 trillion.
 Other proposals include gradually raising retirement for full Social Security benefits to 68 by 2050 and 69 by 2075 and effectively cutting SS benefits for wealthier retirees by changing how benefits are taxes.
Always one for a colorful quote, commission co-chair Alan Simpson, a retired Republican senator from Wyoming, offered a metaphor that evoked Captain Ahab's quest for Moby Dick: "We have harpooned every whale in the ocean, and some of the minnows," he said.
Here are more details on early reaction, also from the WSJ:
Some conservatives, such as Grover Norquist of Americans for Tax Reform, castigated the recommendations as too heavy on tax increases and too light on spending cuts. But many Republicans held their fire.
"This is a provocative proposal, and while we have concerns with some of their specifics, we commend the co-chairs for advancing the debate. We will continue to work toward solutions that help spur economic growth and restrain the explosive growth of government spending," three House Republicans who serve on the commission, Reps. Dave Camp of Michigan, Paul Ryan of Wisconsin and Jeb Hensarling of Texas, said in a joint statement.
In contrast, Ms. Pelosi, other congressional Democrats, union leaders and liberal advocacy groups laid into the chairmen's conclusions, declaring them dead on arrival.
The WSJ notes that "[m]any of the plan's more provocative elements are intended as starting points for negotiation, not final recommendations." You can expect those negotiations to be boisterous.
The members of the deficit commission (most are members of Congress) are listed here.
In addition to writing for Sound Mind Investing, I also churn out the "Money" page for WORLD, the bi-weekly Christian-based news magazine.
I mention this because my report in the August 28 issue (already available online) relates to a comment someone made on the SMI member blog a few days ago: "I say 'Thank you Lord' for the rise of the Tea Party movement," he wrote. "Wouldn't it be great if the government had to cut back on spending and lower taxes?"
 Many Americans would agree with that sentiment — in theory. But where would such spending cuts be made? Social Security (the biggest area of federal spending)? Medicare? Veterans' benefits? The choices quickly get tough because voters are on the receiving-end of so many federal dollars.
That's why it seems likely that the easiest area to cut will be the defense budget, as Tea Party-inspired conservatives make common cause with Congressional doves. Last week, Defense Secretary Robert Gates tried to get out in front of the budget-cutting forces by making his own proposals for defense-spending reductions.
If you're interested in this sort of thing, read the WORLD story, "Tea Party at the Pentagon."
Update: Tuesday's Wall Street Journal provides a brief primer on the Tea Party movement by Dick Armey and Matt Kibbe, authors of the newly released book, Give Us Liberty: A Tea Party Manifesto (HarperCollins).
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