Tax Policy Calculator: Updated to show Republican, Obama and full expiration scenarios

The Tax Foundation has updated their interactive tax calculator which can be found here. This is a fantastic tool that will allow everyday taxpayers to run their own numbers through the calculator to see how they will fair alternatively under the Republican proposal, the Obama proposal and under the full expiration of Bush-era tax cuts.

The Tax Foundation explains the calculator.

"We've updated our interactive tax calculator at www.mytaxburden.com to reflect these new policy scenarios. The left column ("Republican Proposal") assumes passage of H.R. 8 (full extension of Bush tax cuts but not stimulus bill ones), as well as repeal of the health care bill (which includes new payroll taxes on high income earners scheduled to go into effect next year) while the right column ("Obama Proposals") assume that the changes proposed in President Obama's budget are adopted: extension of the stimulus bill provisions as well as the Bush-era tax cuts, but only for filers making under the thresholds."

I highly recommend that you run your numbers to see how your tax liability might change.

The Tax Foundation explains the changes here and summarizes:

"Very low-income filers, as well as filers receiving tax credits for college tuition, are likely to do better under the Obama/Democratic plan; very high-income filers are likely to do better under the Republican plan. For the vast majority of people, income tax liability will be the same under both plans."

Tax Calculator.

Table of tax parameters and rates under each scenario.

Washington State L&I: Insolvency (and a 19% per year rate increase) looms

The Washington Policy Center (WPC) has a great piece on the current fiscal position of Washington State's L&I worker's compensation system.

The most recent report by the State Auditor's Office found that L&I's Contingency Reserve (difference between fund's total assets and total liabilities) is at a "historically low level and below the Department's target." The report also stated there is a 56.9% chance of insolvency within the next five years.

According to WPC: "In a June 21 meeting an L&I actuary recommended workers' compensation taxes be increased by a staggering 19 percent every year for the next ten years to plug the $3.1 billion hole in the program's budget. The shortfall is the result of the critically depleted contingency reserve funds, in need of some $1.7 billion, and a decrease in expected investment returns that increase the value of future pension liabilities by $1.35 billion."

This annual 19% increase does not include normal annual increases necessary to achieve the program's break-even costs.

The WPC states the historically low reserve is the result of L&I using contingency reserve funds to artificially suppress worker's compensation rates for more than a decade.

Much more great stuff in the article which can be found here.

Payroll taxes only cover 35% of the costs of Medicare!

The majority of the cost of Medicare is paid by general revenues of the federal government and not by taxpayers paying payroll taxes.

Donald Marron at the Tax Policy Center has recently posted a very interesting piece about the portion of 2010 Medicare costs paid for out of the payroll tax.

His key findings from the Congressional Budget Office 2010 data:

• Payroll taxes covered only 35% of Medicare costs in 2010.
• Payroll taxes covered more than 93% of Social Security's costs in 2010.

The balance of the Medicare cost is covered by user premiums (13%) and general federal revenues (53%).

Marron describes the difference between Social Security and Medicare:

"The difference between the two programs exists because payroll taxes finance almost all of Social Security, but only one part of Medicare, the Part A program for hospital insurance. Parts B and D (doctors and prescription drugs) don't get payroll revenues; instead, they are covered by premiums and general revenues. But that distinction often gets lost in public discussion of Medicare financing."

Very interesting stuff from the Tax Policy Center!

S-Corporation shareholder basis of indebtedness: new proposed regulation.

The IRS has today issued proposed regulations that clarify the requirements for a shareholder to obtain "basis indebtedness" for the purposes of increases losses, or deductions.

Background: Generally, deductions and losses of an S-Corporation are passed through to its shareholders to the extent of each shareholder's adjusted basis in his stock. § 1366(d)(1) provides that a shareholder can take losses and deductions to the extent of the adjusted basis of the shareholder's stock and adjusted basis of any indebtedness (basis of indebtedness) of the S-Corporation to the shareholder. Court cases have interpreted these provisions of § 1366 as requiring the investment be "an actual economic outlay" by the shareholder to the S-Corporation in order for the shareholder to qualify the loan for "basis of indebtedness." E.g. Maloof v. Comm'r, 456 F.3d 645, 649-650 (6th Cir. 2006); Spencer v. Comm'r, 110 T.C. 62, 78-79 (1998), aff'd without published opinion, 194 F.3d 1324 (11th Cir. 1999); Hitchins v. Comm'r, 103 T.C. 711, 715 (1994); Perry v. Comm'r, 54 T.C. 1293, 1296 (1970). Due to ongoing disputes on what qualifies for basis of indebtedness, the IRS is proposing this regulation that will provide greater certainty to taxpayers.

Proposed Reg: The proposed regulation requires that the loan transaction in question must represent "bona fide" indebtedness of the S-Corporation to the shareholder. This means, that the shareholder would not need to otherwise satisfy the "actual economic outlay" doctrine for purposes of § 1366(d)(1)(B). The IRS will look to general Federal tax principles (many of which were developed outside of § 1366) to determine whether or not the indebtedness is "bona fide." The proposed regulation also confirms that shareholder guarantees of S-Corporation debt do not result in basis of indebtedness.

Effective Date: The regulation (as proposed) will only apply to loan transactions made after final regulations are adopted.

Washington Superior Court (King County) holds 2/3 vote requirement for tax increases unconstitutional

Today, in his memorandum opinion, Judge Heller of the King County Superior Court ruled that Washington State's supermajority requirement for tax increases is unconstitutional. This ruling will no doubt be appealed.

The Court reasoned that since Article II, § 22 of Washington's Constitution only requires a bare "majority" of the House and Senate to pass a measure, a voter initiative that requires a greater than majority (i.e. supermajority) for tax measures violates the State Constitution. Essentially, the Court ruled that the Constitution's requirement of a "majority" to pass a law constitutes both a floor (measures cannot be passed with less than a majority) and a ceiling (the people cannot require more than a simple majority to pass a measure).

As the Washington Policy Center points out, this 2/3 vote requirement has been approved by the voters 5 times since it was originally enacted 18 years ago, and this will ultimately end up before the Washington Supreme Court.