Final Rules on Taxation of Foreign Trusts Published: The Internal Revenue Service has published final rules on foreign trusts and estates, and the recognition of gain on certain transfers; and on foreign trusts that have U. S. citizens as beneficiaries.

Education Tax Breaks:

Compromising position: (Tax Planet 2001) If you can't afford to pay all you owe -- even in installments over a period of years -- you may be able to negotiate a deal with the IRS to pay less than 100 cents on the dollar owed. The IRS recently liberalized its "Offer in Compromise" program, which provides a way for individuals with serious financial problems to work out a settlement.

The IRS used to accept compromise offers only in cases in which the agency didn't expect to be able to collect the full amount owed from the taxpayer.

But the IRS will now consider offers in cases where paying the full amount would create a severe economic hardship for the taxpayer. An example would be someone facing costly bills for a long-term illness or disability. Another example would be a retiree who has sufficient funds in a retirement account to pay the entire tax bill, but wouldn't have enough left to pay for basic living expenses.

Audits: (2001) One in 200 taxpayers were audited last year down from one in 112 in 1999 and one in 60 in 1996. But between $70 to $300 billion are avoided each  year in abusive trusts and offshore accounts.   


The Family and Medical Leave Act (FMLA) imposes certain requirements on employers regarding group health plan coverage -- including family coverage -- for employees who take FMLA leave and involving the restoration of benefits to employees when they return from such leave. In 1995, proposed regulations were issued that addressed questions pertaining to the Act's effect on the operations of cafeteria plans. The Internal Revenue Service (IRS) has now issued final regulations (T.D. 8966), effective October 17, 2001, that clarify and make some changes to the 1995 proposed regs. Among the clarifications/changes made by the final regs are the following.

* A cafeteria plan subject to the FMLA must allow an employee who goes on FMLA leave to make the same election changes as employees who aren't on FMLA leave.

* An employee who revokes coverage or fails to make required payments has the right to be reinstated in the plan upon return from leave. If the employee doesn't elect to be reinstated in the plan upon his/her return from FMLA leave, the employer may require the employee to resume participation if it also requires employees returning from unpaid, non-FMLA leave to resume participation upon return from leave. This reflects a change in the 1995 regs, which prohibited employers from requiring employees whose coverage has terminated while on FMLA leave to reinstate coverage under a health flexible spending account (FSA) upon return from leave.

* If an employee does not have coverage under an FSA during FMLA leave because he/she chose to revoke coverage or didn't pay required premiums for any reason, the employer must permit the employee, upon return from FMLA leave, to either: 1) resume coverage at the original level and make up the unpaid premium payments; or 2) resume coverage at a level that is reduced under the proration rule and resume premium payments at the original level.

The rich get richer: (NY Time 2002) The number of Americans with million-dollar incomes more than doubled from 1995 through 1999 but the percentage of their income that went to federal income taxes, however, fell by 11 percent.

For those with million-dollar incomes, the share of their income that went to taxes fell to 27.9 percent in 1999, from 31.4 percent in 1995.

For those Americans who did not make a million dollars, the portion of their income going to taxes edged up in those years, to 12.8 percent from 12.5 percent.

Those making a million dollars or more, just one of every 625 taxpayers in 1999, more than doubled their slice of the nation's income to 11.2 percent that year, from 5.4 percent in 1995. These high-income taxpayers also captured a quarter of the nation's total personal income growth from 1995 through 1999.

The incomes of taxpayers making less than $1 million also rose, though not as sharply. The income of everyone making less than a million dollars averaged $41,000 in 1999, up from $33,500 in 1995, a 22 percent increase, the data, using adjusted gross incomes, showed.

The tax return data show that the number of taxpayers reporting incomes of less than $25,000 declined slightly, while those reporting incomes at higher levels increased.

IRS Audits: (USA Today 2002) It audited 1 in every 172 individual tax returns in the 12 months ending Sept. 30, 2001. That was more than the year before, when 1 in 204 returns was audited.

But the number of audits was still down from recent years. In 1996, 1 in 60 returns was audited.

More than 640,000 poor and middle-income workers were audited last year, up from 518,000 the year before. If one's income was less than $100,000, the chance of an audit rose 22%. More than half of audited returns involved people who claimed the earned income tax credit, generally those earning less than $32,000 a year.

If a taxpayer's total income was above $100,000, the chance of being audited fell last year. About 1 in 126 returns with that much adjusted gross income was audited, an all-time low. That was down from 1 in 100 the prior year.

Small businesses also faced fewer audits. Just 0.6% of the tax returns for companies with less than $10 million in assets were audited last year, down from nearly 0.8% the year before.

The difference? The IRS hired 1,301 officers and tax agents in 2001, the first new hires in six years. New computers were able to scan less-complicated returns.

EATON VANCE Examines Investor Tax and Diversification Savvy (2002)

"While taxpaying investors seem to have a good understanding of the importance of after-tax returns as a goal, they are still too often in the dark about how investment taxes work," said Duncan W. Richardson, chief equity investment officer of Eaton Vance Management. "Helping investors make intelligent tax choices is one of the best ways for financial advisors to add value for their clients."

Also, only 30% of investors are aware of the recently-adopted Securities & Exchange Commission rule that mandates after-tax performance disclosure by mutual funds. At the beginning of December, the SEC put a rule into effect that required mutual fund companies to include standardized after-tax returns in advertisements and sales literature that listed after-tax returns or claimed the fund was tax efficient. The rule was originally supposed to go into effect on October 1, 2001 but the SEC extended the compliance date to December 1, 2001. Effective February 15, 2002, mutual fund companies must disclose after-tax performance in the fund prospectus.

CBS MarketWatch mutual fund columnist Dr. Paul Farrell said the new rules should help investors understand the importance of mutual fund taxes, particularly over longer time periods.

"In advertisements, fund companies only tout funds that have outstanding quarterly pre-tax performance," said Dr. Farrell. "Data providers and fund companies need to place more emphasis on after-tax returns."

Eaton Vance also surveyed investors about their views on risk and diversification in the face of a troubled stock market in 2001, and found:

The results above jibe with anecdotal evidence that most equity investors are standing pat despite a prolonged bull market and lowered expectations of future returns.

"Many investors are realizing that the stock market was riskier than they thought it was, but most have decided to stay the course," said Morningstar senior fund analyst Scott Cooley.

Investors also indicated that the down market has reduced their faith in index funds, which reinforces the notion that the relative outperformance of S&P 500 index funds in the 1990s drove interest in retail index funds. From the Eaton Vance survey:

Finally, Eaton Vance found that about 85% of investors don't even know what an exchange-traded fund is.

Taxes: , "In 2002 individuals, businesses and non-profits will spend an estimated 5.8 billion hours complying with the federal income tax code. . .with an estimated compliance cost of over $194 billion." A separate report from the Internal Revenue Service points out that on average, individual taxpayers spend approximately 17 hours preparing and filing their federal taxes every year. With more than 130 million individual taxpayers in the United States, over 2 billion hours are consumed every year just to prepare federal tax returns. The average cost per person for completing their income tax return is $662.

IRA: (401(K) Cafe Traditional IRA Limits (2003)

Anyone may contribute to an IRA; the question is whether the contribution is tax-deductible. For many folks who participate in a retirement plan at work, it is not. The reason is that your ability to deduct a traditional IRA contribution depends on two factors:

whether you were an active participant in a retirement savings plan, such as a 401(k), 403(b) or 457(b) plan, at work

your modified adjusted gross income (MAGI) and filing status. (IRS Publication 590, Individual Retirement Arrangements (IRAs) contains a worksheet you can use to calculate your MAGI.)

Even if you only contribute one dollar, or if your employer makes a contribution on your behalf, you are considered a participant in the plan and your ability to make a tax-deductible IRA contribution depends on your income and filing status.

You may make a fully deductible traditional IRA contribution if you:

file as single, or head of household, and are not covered by a plan at work, or

file as married filing jointly and neither you nor your spouse are active participants in a plan at work.

Your W-2 should show if you were covered by a plan. If you are unsure, check with your employer.

The 2003 limits for taxpayers who are single or married filing jointly are $6,000 dollars higher than the 2002 limits. Here's how the new limits work:

If you participate in a defined contribution plan at work, your traditional IRA contribution will be fully deductible if you are:

Single with a MAGI less than $40,000;

Married filing jointly with a MAGI less than $60,000; or

Married filing separately and have no MAGI.

If you participate in a plan at work, your traditional IRA contribution will not be deductible at all if you are:

Single with a MAGI of $50,000 or greater;

Married filing jointly with a MAGI of $70,000 or greater; or

Married filing separately with a MAGI of $10,000 or greater.

If you participate in a plan at work, your traditional IRA contribution will be partially deductible if you are:

Single with a MAGI of $40,000 to $49,999

Married filing jointly with a MAGI of $60,000 to $69,999; or

Married filing separately with a MAGI between $0 and $9,999.

(IRS Publication 590 contains a worksheet you can use to calculate what portion of your contribution is deductible.)

So, if you are single and have a MAGI of $39,000 in 2003, you will be able to fully deduct a traditional IRA contribution of $3,000 from your taxable income. If your status is married filing jointly, and you have a MAGI of $68,000, you can only deduct a portion of a traditional IRA contribution.

If one spouse is covered by a retirement plan at work, but the other isn't, higher limits apply to the spouse who isn't covered if the couple is married filing jointly. These limits are the same in 2003 as they were in 2002, and are as follows:

MAGI of $149,999 or less - the traditional IRA contribution for the non-covered spouse is fully deductible

MAGI of $150,000 to $159,999 -- the traditional IRA contribution for the non-covered spouse is partially deductible

MAGI of $160,000 or more -- the traditional IRA contribution for the non-covered spouse is not deductible.

Tax shelters: (WSJ 2003) Can you depend on the opinion of the accountant or attorney?: "Many opinion letters about tax-motivated transactions are basically worthless. "They hide the ball within a matrix of boiler-plate recitations of complex regulations, but when you cut through all of the cant, what they really say is, 'this will work, unless it doesn't.' "

Clients often whip out opinion letters when the government challenges their tax maneuvers. If the letter proves to be wrong, you still have to pay the tax, plus interest. But the conventional wisdom is that the letter will protect you from penalties. That isn't always true. You may have to pay penalties unless you can prove you were relying on that opinion with reasonable cause and good faith.

The Treasury has already said it will take steps to limit the ability of taxpayers to rely on opinion letters from lawyers and accountants to avoid penalties arising from shelters.

SAVING FOR RETIREMENT: TAXES MATTER (2004) To encourage individuals to save for retirement, federal tax policy provides various tax advantages for investments in self-directed accounts, such as traditional and Roth IRAs, and 401(k) plans. However, the differential tax treatment of these accounts and traditional taxable accounts can make it difficult for individuals to choose where to put their money and, once they have begun to accumulate assets, to evaluate how much they will have available in retirement. This Issue in Brief begins with a brief description of the types of accounts that individuals may consider for retirement saving. It then analyzes two separate issues that are relevant to different stages of the investment process: 1) where to invest; and 2) how to value existing investments.

Stock options: (2004) The IRS has ruled that, when interests in nonstatutory stock options and nonqualified deferred compensation are transferred from an employee to his/her former spouse pursuant to their divorce, the transfer does not result in a payment of wages for purposes of the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). However, there are FICA and FUTA tax consequences when the options are eventually exercised or the nonqualified deferred compensation is paid (or made available).

Roth IRA Conversions: Beginning January 1, 2005, taxpayers considering conversion of traditional IRA assets to a Roth IRA will find one less impediment to eligibility. Only those individuals whose modified adjusted gross income (AGI) is below $100,000 may make a qualified rollover to a Roth IRA. In past years, the amounts an individual received as required minimum distributions (RMD) from qualified retirement plans counted against that $100,000 requirement. Thus, individuals with a significant amount of money in qualified plans would not qualify for a Roth IRA conversion because of the large RMDs taken each year that will be added to modified AGI.

The new law drops the participant's annual RMD from the determination of modified AGI for purposes of assessing eligibility for the Roth IRA conversion. This change will open the door to many individuals who were foreclosed from Roth IRA conversions in the past because of excessive RMD being included in their income. You may well have some clients who will wish to take advantage of this change to participate in the Roth IRA with all of the advantages this plan offers.

State and Federal government sites related to taxation.

State revenue sites

Other Government Sites

Tax Evasion: Cheating Rationally or Deciding Emotionally? (2008) The economic models of tax compliance predict that individuals should evade taxes when the expected benefit of cheating is greater than its expected cost. When this condition is fulfilled, the high compliance however observed remains a puzzle. In this paper, we investigate the role of emotions as a possible explanation of tax compliance. Our laboratory experiment shows that emotional arousal, measured by Skin Conductance Responses, increases in the proportion of evaded taxes. The perspective of punishment after an audit, especially when the pictures of the evaders are publicly displayed, also raises emotions. We show that an audit policy that induces shame on the evaders favors compliance.

2006 TAX FACTS - (2009) 'Soak the rich' is a popular concept among some groups. Raise taxes on the wealthiest among us, and we'll raise revenue and be rolling in surplus cash, right? But setting anecdotes and politics aside, a quick look at the facts will tell you the notion that the U.S. can tax its way to prosperity is all wrong. 

According to the Treasury Department, the number of millionaires in the U.S. nearly doubled between 2003 and 2006, from 181,000 to 354,000. Part of the reason for that increase is that favorable capital gains rates encouraged Americans to invest more, and corporations that pay lower tax rates are more able to pay dividends. But also, history shows that when taxpayers feel tax rates are fair, they are less likely to invest in tax shelters or to simply hide income, and more likely to report what they actually earned.