American Exceptionalism

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Exceptionalism: the belief that we Americans have been blessed with some sort of gift that allows us to act with impunity by claiming to be only interested in the common good, in democracy and freedom, or in punishing those who violate *international norms*. Of course, part and parcel with this gift is the mandate to be judge, jury, and executioner; a facet of exceptionalism that has become blatant with the use of drones to assassinate not only foreign individuals, but American citizens who are speaking out against the government. In fact, this sense of exceptionalism is so deeply ingrained in us, constantly through the media and the spin placed on news and through the *sanitized* history taught in schools, that you probably have a visceral reaction rejecting this premise that there might be something wrong or inaccurate about this belief. I congratulate you for continuing to read, as most people have already clicked on to some other, more palatable or less challenging piece of drivel.

What is important to note abut exceptionalism is its long history on this continent. The first invaders from Europe felt justified in slaughtering the Native peoples they found already ensconced upon the land because they believed they were exceptional. Our Founding Fathers exemplified a belief in exceptionalism as they granted rights to voting and property to only the few *exceptional* landed white men. Looking at every historical turning point throughout American history, you can smell the reek of white supremacy making decisions for the *betterment* of people who are not white; decisions that only further elevate those in power and grant them the resources they need to remain in power despite those resources having been the property of others. In many cases just in the past century: the two World Wars, Vietnam, Panama, the Philippines, Hawaii, the War on Drugs and the War on Islam Terror to name but a few, racism has been thinly veiled at best, or used to rile up the population into a frenzy of support for the killing needed to plunder other lands.

Some argue that racism should no longer be spoken of, that somehow we have managed to get past that. That sounds just like the average abuser, telling his victim that there is no need to look back, what’s done is done and let’s move forward. That sounds like the abuser who says the victim is lying. That sounds like the abuser who says that the victim *asked for it*. The fact that the current issue surrounding Syria in particular, and Egypt and Gaza and Afghanistan and Pakistan and Saudi Arabia and Mexico and all the rest, is being fomented by a black President only proves one thing: not that racism is a thing of the past, but rather that racism exists not solely based on skin color, but based also on class. A black President who is firmly entrenched in the upper class will act and respond as any other wealthy white power monger, if only to survive with his own wealth and power intact.

If you truly believe in morality and feel that there are people who need protecting, at least make an effort to be evenhanded and protect everyone. Don’t go along with cruise missile strikes in Syria (especially when the rebels have already been implicated in prior gas attacks without your protest) and drone strikes in Pakistan (that kill unnamed, unknown people who, at the age of 5 and 7, cannot possibly pose a threat to your security here in America) and the building of a wall that claims to be able to stop the refugees undocumented from crossing into the US from Mexico (while leaving the Canadian border in many places even unpatrolled).

If we are to ever see this belief in exceptionalism lead us into another World War, it is easy to see how the Middle East would be the match that lights the explosion. Russia has moved warships in to protect its only foothold in the region; an attack against Syria would be an attack against Russia. This is the part of the whole scenario of a *limited strike* that is the scariest: how personally would Putin take a strike against the weapons Russia has provided to al-Assad? Obviously in his op-ed piece printed in the New York Times, Putin is trying to point out the fallacy of exceptionalism and its potential to lead us into a war we will regret. Is it true that Obama’s credibility is so damaged over the *red-line* issue, that his manhood was so challenged by the refusal of Congress to back his plan for war, that he might act unilaterally and flip us all his middle finger? Is this turning into a desperate fight to burnish his image as a *war President* before he leaves office in two years? How much of this is ego, and how much for the good of all people?

And lastly, before wrapping this up for today, there is one other issue that works to explode the myth of exceptionalism, at least as far as it being a state of mind that we should want: America is demonstrably exceptional in these ways:

·         We are the only country to have used nuclear weapons against a civilian population

·         We maintain more nuclear weapons than all other nations combined; enough to end life on this planet many times over

·         We spend so much on our military that the rest of the world combined does not spend more than we do

·         We maintain a stockpile of chemical and biological weapons, and are not in compliance with the same international treaty we accuse Syria of violating, and for what purpose exactly?

·         We provide more arms, including chemical weapons, to other nations than any other country on Earth

·         We use cluster bombs and depleted uranium, both weapons that are banned by international law, and despite the fact that their use is considered to be a war crime

·         Our police, neighborhood watches, and vigilantes still, in 2013, kill a person of color without due process of law every 28 hours.

·         The criteria we appear to use when deciding who to help and who to hurt is based on profit or access to resources, not morality or justice as we claim

Sadly, we are exceptional after all.

Tax Season 2011 Starts Now!

So Congress passed the end-of-year tax package, leaving tax law basically unchanged for 2011. They put in the usual AMT patch, adjusting the filing status exemption to over $75,000 for married couples. They took away the Making Work Pay Credit after 2010, and they settled on higher exemption amounts ($5 million per person) for the estate tax than were expected.

Throughout the 2011 tax season, I will update this blog with news that pertains to taxes. Today, let’s look at one aspect of the law that was part of the Health Care reform package passed last summer. That relates to the filing requirements for Form 1099-MISC. In 2010, anyone who pays a person, not a business, more than $600 per year for goods or services is required to file this form with the IRS. It allows the IRS to attempt to match income with filed returns, to verify that business owners are reporting all of their income. Beginning yesterday, 1 January 2011, individuals are now required to file for businesses, not just people, and even businesses must file this form whenever non-credit- or debit-card purchases or payments to a single entity exceed the $600 annual floor. Beginning in 2012, residential rental properties will also be defined as a business for purposes of this reporting.

If you will fall into this category for the first time, it will help you to know that you will need the name, tax identification number (typically social security or employer identification number), and address of anyone you pay more than $600 to in one year. You may want to request this information from them at the time of service, to avoid a mad scramble in January each year. The Form 1099-MISC is due to the recipient by 31 January each year, with a copy (and a Form 1096) due to the IRS by 28 February. You could also identify a tax professional, or someone in the accounting business, to help you with preparing the forms. You will find that if you try to download the forms from the IRS website, you see a message that these forms cannot be printed at home and mailed in. The IRS scans these forms in their input process; they don’t do manual data entry. Thus, they need forms that are of better quality than many home printers provide. Do not fold the forms you mail to the IRS for this same reason.

Once again, I’m happy to answer questions about taxes. You may send them in via a comment to this blog, or by using my email: derek.tennant@hrblock.com

You may find out more information about me by viewing my page at:

http://taxprofinder.hrblock.com/TaxPros.aspx?OfficeID=4368&searchoption=showall

I’m the third person on page 2.

New Reporting Requirements?

Oddly, one change in regulation included in the health care reform package this year increased the reporting that must be done when taxpayers, both persons and businesses, transact business. Under the current rules, if you pay more than $600 in a year to a person, not a business, then that payment is to be reported using Form 1099 to the IRS. This is to facilitate their verification that the income is being reported on the appropriate tax return. You do not, however, report payments made to businesses. For example, writing checks that total $1,000 to John’s Landscaping Company carries no reporting requirement. Writing those checks to John, for his landscaping work, does need to be reported. The typical recipients of Form 1099 are household workers and independent contractors (people who do work for a company but are not on the company’s payroll).

The change in the law would require the Form 1099 to be filed even when the recipient of the money is a business. This conjures up many issues, not the least of which is what will happen to the cash economy. Today, you can buy office supplies at Office Depot, paying cash for the purchase, and save the receipt to use as a business deduction. We expect that if the new Form 1099 rules go into effect, you would not be allowed to deduct this as an expense, unless you file the Form 1099 once your purchases exceed $600 from that particular business in a year. Office Depot would need to provide their EIN (Employer Identification Number, similar to a person’s Social Security number and used to file returns) to purchasers, in that event. Currently, there is no easy procedure for filing the IRS portion of Form 1099, They rely upon scanner technology to process the incoming forms. Will some businesses elect to forego reporting the deductions in some cases, in order to dodge the reporting requirements? Will the IRS be inundated with forms even as their operating budget is reduced in the effort to reduce the federal deficit? Will the fact that so much income will continue to be exempt from reporting eliminate any possibility that this increased reporting will generate new tax revenues?

As with many tax questions anyone asks, and especially these days, we will just have to wait and see if Congress will change the law, and if not, how the IRS will propose to actually manage the process going forward. Stay tuned!

Alternative Minimum Tax

Alternative Minimum Tax, or AMT, is one of the least-understood aspects of tax law that affects people who otherwise believe their own tax situation is “simple”. Enacted in 1969, and at that time, targeting about 25,000 Americans who had been able to avoid paying tax by using deductions and large asset holdings, AMT means we have two tax systems in this country.  When we talk about tax rules, we nearly always talk about the “regular tax” rules, not AMT. Yet the law requires that every tax return calculate tax under both sets of rules, and that the taxpayer pays whichever tax is higher.

Because the AMT rules have not been updated as the American economy has evolved over the decades since, every year more taxpayers fall prey to its higher tax. It does not provide for exemptions from tax for each person on the return, instead it grants a fairly large deduction based on filing status. Thus having lots of dependents is of no benefit under AMT, although the deduction offered phases out quickly as income rises. I have seen taxpayers pay the higher AMT tax at income as low as $93,000, in cases where they have many children (8). Another big difference in the two systems is that AMT rules do not allow deductions for state income tax and property tax. As property values rose rapidly in California in recent years, many taxpayers here have fallen under AMT rules because of this restriction.

Every year, the “AMT patch” gets approved late in the year, once it becomes clear that wholesale revision of the structure will not occur. The patch, raising the filing status deduction to between $60k and $65 from the $40K it would otherwise be, limits the number of people affected by this higher tax. It is typically raised for one year at a time, leaving taxpayers unsure what the rules will be next year.  This year appears to be no different, a few days ago a letter signed by both Republicans and Democrats pledged to raise the deduction based on filing status during the lame-duck Congressional session beginning next week. Just don’t fall into the trap of believing politicians when they tell you that they are ‘fixing’ AMT when they apply the annual patch. They are not.

There is little we can do, in a tax-planning sense, to avoid paying the higher AMT rates. A taxpayer who pays property tax might be able to shift those payments out of a year when they are subject to AMT, and the tax savings may more than offset the late payment penalties.

As always, I am happy to answer questions about this or any other tax topic. Send me an email: derek.tennant@hrblock.com and let me know how I may serve you.

Tax Repatriation

Multinational corporations hide their out-of-the-U.S. income in offshore accounts, usually in tax havens that don’t charge any business income tax. Through a shell game of subsidiaries and a technique known in the tax business as “transfer pricing”, they effectively pay no tax on their foreign income. Their only problem is that they cannot bring that money into the U.S.

Noises are being heard here in Silicon Valley, arguably the home of more transfer pricing schemes than anywhere else in the country, that one way out of our current economic slowdown would be a tax holiday: a suspension of taxation on offshore profits for some short window of time, allowing the huge multinationals to bring home the bacon, which they supposedly will then use to spark development and hiring and infrastructure investment that will grow the economy once more.

Believe it or not, most people who work for the IRS understand transfer pricing schemes about as much as you do, right now. Our tax code has become so complex, that no one can possibly know everything there is to know about it. More and more tax professionals, both those who prepare returns and those at the IRS who examine them, rely on software to do the heavy lifting. Hopefully you will have someone like me help you, someone who understands the complexities your return presents. If your case is straightforward, it may be acceptable to rely solely on the program you buy at Costco or Office Depot. But even a phone call to the IRS is not likely to provide you with adequate, or even correct, tax advice. The bottom line is that the IRS is severely deficient in staff who can police the largest corporate tax plans.

The bare bones of transfer pricing is this: a company will transfer ownership of a patent or a process to a wholly owned subsidiary in another country. All foreign transactions related to the product are then conducted by that foreign company in return for a royalty payment of a tiny amount of the profit, say 5%. That way the U.S. parent is only on the hook for a small amount of income tax. The problem with this plan is that the other 95% of profits must stay in that foreign country, like tucking money under the mattress. Of course, there are a myriad of ‘flavors’ to this idea, but this is enough for you to understand the debate that you will soon hear more about in the media.

It is time to take a close look at our entire tax system. Today’s tax code is fraught with special exceptions that benefit certain segments of the taxpaying population. In 1948 corporations paid an average of 35% in income tax. In 2007 they paid less than 8%, due more to an expansion of credits and schemes like transfer pricing than to lower rates. In the arena of personal tax, we continue to see lower taxes (despite the perception that President Obama has raised taxes, the reality is that the Making Work Pay Credit lowered taxes in 2009 for more than 90% of taxpayers) despite the rapidly expanding national deficit. This is an unsustainable pattern that must be addressed soon. In future posts I will look at some of the proposals to solve this fiscal crisis.

Mortgage Interest Deduction

This week talk surfaced about doing away with the home mortgage interest deduction. Only in the ‘trial balloon’ stage, it’s impossible to judge if this change in tax law is near or not. Given the government’s need to raise revenue, at both the federal and state levels, this idea will get a significant amount of debate before it is either enacted or fades away.

Having this deduction in the spotlight reminds me of two issues which are often overlooked regarding mortgage interest, even by experienced tax professionals. First, the deduction is not unlimited; most tax pros know it is limited to the interest paid on no more than $1 million in interest. But the question we fail to ask our clients is, “How much was your original mortgage?” This question is relevant because the deduction is limited to the interest on ‘acquisition debt’ (the original, day one mortgage) plus $100,000. When the deduction was enacted decades ago, refinancing your mortgage and taking equity out to pay off credit cards or go on vacation was unheard of. It has only been recently, and only  in certain parts of the country, that multiple refinancings have allowed some homeowners to take out hundreds of thousands of dollars in equity. That taxpayer may be trying to claim the interest on much more mortgage than is allowed by law.

There is also an even tighter Alternative Minimum Tax (AMT) restriction on this deduction: it is limited to the original acquisition debt; there is no additional increase following refinancing. Anyone who is subject to AMT and deducting home mortgage interest should, if preparing the return properly, adjust the deduction if there is a mortgage today that is larger than the acquisition debt. And under both tax systems, remember that acquisition debt is gradually paid down over time, and that means the deduction goes away if properly calculated.

Please ask questions about this, as there are many concepts and details that I am not including here. I hope that this will get you thinking about the issues and will happily help in any way I can.

Welcome to my blog about US Income Tax

If you are like most people I meet, you have questions about our complicated, uncertain U.S. Income Tax system. What will Congress do about the capital gains tax rate? And what about the Estate tax rates? And I teach a class about the Alternative Minimum Tax, so I can answer questions about that, too. I welcome your posts, asking questions that you have about this arcane and onerous aspect of American life. I will post at least weekly, or as I find relevant news about taxes, until the beginning of the new year. I hope to post more frequently thereafter, as we see the changes in tax law that are affecting my clients for tax year 2010 and beyond. Let me know how I can help you! Private email can be sent to me at: derek.tennant@hrblock.com