Californians Stiff Sacramento

In the Golden State, things are looking less golden for Sacramento’s bean counters.

The chief researcher for California’s tax agency told his supervising board that the state loses out on $10 billion every year at a time when the state is making billions in budget cuts.

There are multiple reasons why the tax gap is so large. Taxes aren’t paid in the underground economy. Some taxpayers – or non-taxpayers – just don’t file tax returns. And other taxpayers overstate their deductions. Other forms of tax evasion contribute, too.

Californians aren’t helping Sacramento out, either. The $10 billion figure – based on a tax gap study by the IRS – is up from $6.5 billion in 2005.

Just six years ago American taxpayers stiffed Uncle Sam $450 billion. That figure was due to corporations and people underreporting their income. After the IRS kicked its collection actions into high gear, the tax gap figure stood at $385 billion.

But with California’s economy one of the largest in the world, it’s own tax gap is going to be significant.

California’s tax gap figure can also be due to the state’s exodus of high income earners. Those earning more than $500,000 declined in numbers dramatically from 2007 (146,000) to 2009 (98,610), as California’s economy stagnated.

Whether you’re in California or in Oklahoma, the IRS will be out to collect if you owe back tax debt. But by hiring a tax attorney or tax professional, you’ll be in a better position to reach an agreement with the IRS and possibly save money along the way, which is a Golden State everyone can appreciate.

International Credit Crisis Averts Higher Tax Rates

After two years of scaring investors on both sides of the Atlantic, the Greek debt crisis is close to being resolved.

The country was set to default after living beyond its means since before it adopted the Euro as its currency. After it adopted the Euro, the country’s spending soared and private wages nearly doubled.

That might have felt good back then, but the coming austerity measures and increased alcohol, tobacco and fuel taxes are going to hurt the Greek people later. A national default would have felt worse.

American investors and their counterparts in Europe all breathed a sigh of relief after Greek officials and private lenders reached a bond swap deal. Holders of 85 percent of $177 billion worth of Greek bonds approved the measure that set the stage for a second round of bailouts.

Had a deal not been reached, private capital would have fled the country and its citizens would have likely made a run on the banks. That would have left the country bone dry in terms of credit and bring lending to a standstill.

With more than $7 billion of Greek debt held by the U.S. government and private U.S. banks, a default would have sent the stock market diving and investors jittery.

But what was feared the most were the repercussions. Other high-debt countries like Spain, Italy and Ireland were expected to follow Greece’s lead like a set of dominos, and that would have led Wall Street deep into bear territory.

Now that a deal has been reached to completely deal with Greece’s $485 billion in debt, the effects of an international credit crisis extending into the U.S. are less likely. The vacuum of billions in the U.S. economy that could have been filled by increased government spending fueled by higher taxes isn’t expected.

The situation in Greece can be a lesson for those in the states. Avoiding your financial liabilities for too long can come back to haunt you the same way avoiding your taxes can come back in the form of an IRS wage garnishment or bank levy.

But like negotiators that helped resolve the Greek debt crisis, a tax attorney can help you obtain a resolution option with the IRS that works in your favor. With the money you could save by avoiding IRS interest, fees and penalties, you may be able to take a trip to the Greek Isles.

Tax Credits Available for Educational Expenses

It’s fall, and that usually means that it’s back to school season.

If you’re not too cool, then school may be on your horizon. If you’re an adult, there are plenty of reasons to start hitting the books whether it’s your first or second time. You can expand your skill-set to get that promotion, or ride out a rough recession that’s leaving you with more free time than you would like.

If you decided to take the plunge this fall, or are thinking about it, here is how the tax code helps:

Scholarships and Fellowships: If you’re lucky enough to obtain either one of these, the funds you receive are tax free. You must be getting a degree, your school must be eligible and your funds can only go toward qualified education expenses.

Lifetime Learning Credit: Use this credit to help pay for undergraduate, graduate or professional degree courses, including those that enhance your job skills. If eligible, you can qualify for up to $2,000 per year.

Tuition and Fees Deduction: Up to $4,000 in tuition and related expenses may be tax-deductible for students and their parents.
Coverdell Education Savings Accounts: These accounts are set up solely for paying education expenses for a designated beneficiary, who must be under 18 years old when it’s set up. You can create as many accounts as you want, but you can only contribute a combined total of $2,000 per year to all of them. The funds are tax-free when distributed.

Qualified Tuition Programs: Also called 529 plans, these are maintained by states and allow you to prepay a student’s educational expenses for an eligible institution. You can’t contribute more than what’s needed, and similar to Coverdell accounts, contributions aren’t tax-deductible. A QTP and a Coverdell account, however, can be set up and contributed to simultaneously.

Student Loan Interest Deduction: Up to $2,500 in student loan interest is tax-deductible if your gross income is less than $75,000.

Work-Related Education Expenses: You may be able to deduct such expenses on Form 1040, Schedule A. To be eligible, the expenses must be for education that enhance or maintain your job skills or be required by your employer or the law for you to keep your job. The education can’t go toward making you qualified for a new line of work.

You may not be educated in the thousands of pages in the tax code, but you’ll want somebody who is if you have back tax debt. A tax attorney knows all of the IRS’ rules and regulations and can be your advocate if the IRS is threatening you with a wage garnishment or bank levy. You could end up with some super-sized savings!

Company Uses Economic Might to Resist Millions in Taxes

If there’s any company in the U.S. that can be called bold when it comes to avoiding taxes, it may be Amazon.

The shopping website and company may not be a Wesley Snipes, but when various states passed laws levying online sales taxes, Amazon called them unconstitutional and counterproductive.

Even more, Amazon used its position as a major online economic powerhouse to show they were serious. When California passed an online sales tax, the company refused to pay it. It cut its ties with 10,000 business and individuals who refer business to Amazon.com and bankrolled a $5 million effort to pass a referendum overturning the tax.

When Texas officials determined Amazon’s Dallas-area warehouse qualified as a local address for sales tax rules, they sent the company a $269 million tax bill. In response, Amazon shut down the warehouse and cancelled plans to build another one in the state. A hearing with state tax officials was scheduled to settle the matter.

California had to negotiate with the online bazaar. In early September, state officials announced a deal where Amazon would delay collecting taxes until September 2012, two months after it was supposed to begin, and the company would drop its referendum effort. The federal government is set to take up the matter of online sales taxes around then, and whatever gets passed would trump state online sales taxes.

In all this, mom-and-pop small businesses are crying foul. Small brick and mortar businesses support an online sales tax to level the playing field. What Congress and state officials do – and how Amazon responds – should be an interesting series of events.

While Amazon strikes deals with California and Texas, we strike deals for those who owe back taxes to the IRS. If you have tax debt, a tax attorney is the person you’ll need to get your finances out of the jungle and back on safe ground.

In the Spring of 1979, Congress was “playing politics” over the debt limit, but ultimately raised it to $830 billion (a far cry from today’s $14.3 trillion) with only hours to spare.

Unfortunately, because of the last-minute approval, there were delays getting the paperwork processed, resulting in thousands of late payments of about $120 million…technically defaulting on Treasury Bills.

There is debate over if this was a default or not, but regardless of terminology used, the delay in payment resulted in a raise in interest rates that translated into billions of dollars in interest payment on the nation’s debt (paid by taxpayers).

Even the US is not immune to interest charges as a result of unpaid debt. This minor blip in history resulted in a significant amount of additional debt.

If you have a tax debt, don’t make the same mistake Congress did and increase your burden with additional penalties and interest. The results could cost you!