Nearly 100 years ago, the Italian economist, Amilcare Puviani, suggested 11 strategies that a government could use if its goal were to squeeze as much money as possible out of its population:

1)  Use indirect, rather than direct taxes to hide the tax in the price of the goods.

2)  Inflation (via a state-controlled central bank).

3)  Borrowing (to postpone the necessary taxation).

4)  Gift and luxury taxes (wrap the tax in the purchase of a "special" purchase, reducing the "annoyance" of the tax).

5)  Institute "temporary" taxes (and then never repeal them).

6)  Tax unpopular minority groups (ie, the rich, smokers, windfall profit recipients).

7)  Threaten social collapse or withholding of monopoly government services if taxes are reduced.

8)  Collect taxes in small increments (ie, sales tax or income tax withholding).

9)  Create taxes whose amount (and the amount of the programs it funds) and incidence can't be predicted in advance (ie, Medicare).

10)  Extraordinary budget complexity to obfuscate public understanding.

11)  Use generalized expense categories to make assessment of individual components difficult.

Take a look at the top government expenditures:

To see where the other 23% goes:  Your Federal Tax Receipt

Arthur Laffer recently wrote a piece in the Wall Street Journal detailing the huge cost of complying with our income tax code.

While you might disagree with his politics or his solution (I personally support a consumption-based tax rather than a flat income tax as he suggests), it's hard to argue with the incredible inefficiency of our income tax code when it comes to its most basic charge:  effectively collecting revenue.

"Tax compliance employs more workers than Wal-Mart, UPS, McDonald's, IBM and Citigroup combined."

Read the whole WSJ piece, The 30-cent tax premium.

If you have one or more taxable accounts at Folio or if you received one or more IRA distributions from a Folio IRA in 2010, your tax documents are now available on Folio's website.  Remember to access these documents for current accounts as well as any accounts that you may have closed in 2010.

Note:  Folio will not mail these tax documents; you must login in and download them.

For information on how to access your tax documents, go here.

Here is a summary of some key provisions in the tax code assuming that Congress does not act to change the sunsetting Bush tax cuts:

		What Tax Provisions Apply? A Quick Summary The following chart provides a summary of the rules for key tax topics for tax years 2009, 2010, and 2011. Tax rates 2009 2010 2011 Federal income tax brackets 6 brackets: 10%, 15%, 25%, 28%, 33%, 35% 6 brackets: 10%, 15%, 25%, 28%, 33%, 35% 5 brackets: 15%, 28%, 31%, 36%, 39.6% Maximum tax rate on long-term capital gains 15% (0% for individuals in the 10% or 15% tax brackets) 15% (0% for individuals in the 10% or 15% tax brackets) 20% (10% for individuals in the 15% tax bracket)1 Tax on qualifying dividends 15% (0% for individuals in the 10% or 15% tax brackets) 15% (0% for individuals in the 10% or 15% tax brackets) Taxed as ordinary income Alternative minimum tax (AMT) Exemption amounts: $70,950 (married joint) $46,700 (single) $35,475 (married separate) Personal tax credits allowed against AMT Exemption amounts: $45,000 (married joint) $33,750 (single) $22,500 (married separate) Personal tax credits generally not allowed against AMT Exemption amounts: $45,000 (married joint) $33,750 (single) $22,500 (married separate) Personal tax credits generally not allowed against AMT 1 Slightly lower rates apply to qualifying property held for 5 or more years. Tax credits 2009 2010 2011 Making Work Pay tax credit Refundable credit equal to the lesser of 6.2% of an individual's earned income or $400 ($800 for married couples filing joint returns); phased out for higher incomes Refundable credit equal to the lesser of 6.2% of an individual's earned income or $400 ($800 for married couples filing joint returns); phased out for higher incomes N/A Earned income tax credit Increased 45% credit percentage for families with 3 or more qualifying children; increased phaseout amounts for married couples filing joint returns Increased 45% credit percentage for families with 3 or more qualifying children; increased phaseout amounts for married couples filing joint returns Increased percentage and phaseout amounts do not apply American Opportunity tax credit (Hope tax credit) Generally, a credit for up to $2,500 of a student's qualified tuition and related expenses for each of the first 4 years of post-secondary education; up to 40% of credit is refundable Generally, a credit for up to $2,500 of a student's qualified tuition and related expenses for each of the first 4 years of post-secondary education; up to 40% of credit is refundable Generally, a credit for up to $1,800 (figure could be higher for 2011 based on inflation adjustment) for first 2 years of postsecondary education; no portion refundable; phased out for higher incomes (phaseout ranges are significantly lower than 2009 and 2010 levels) Child tax credit $1,000 maximum per child; refundable to the extent of 15% of earned income in excess of $3,000 $1,000 maximum per child; refundable to the extent of 15% of earned income in excess of $3,000 $500 maximum per child; separate, limited rules apply in determining if portion of credit is refundable Deductions 2009 2010 2011 Deduction for teacher classroom expenses $250 above-the-line deduction available N/A N/A Deduction for qualified higher-education expenses Maximum $4,000 deduction, phased out for individuals with higher income N/A N/A Deduction for state and local sales tax Itemized deduction for state and local sales tax can be claimed in lieu of the itemized deduction for state and local income taxes N/A N/A Additional standard deduction for real estate property taxes Individuals who do not itemize are able to claim an additional standard deduction of up to $500 ($1,000 if married filing jointly) for real estate property taxes N/A N/A Itemized deductions Phased out for individuals with AGI exceeding $166,800 ($83,400 if married filing separately) 2 Not phased out at higher incomes Phased out for higher income individuals (AGI thresholds not yet available) Personal and dependency exemptions Phased out for individuals with AGI exceeding $250,200 (married filing jointly), $208,500 (single), $125,100 (married filing separately)3 Not phased out at higher incomes Phased out for higher income individuals (AGI thresholds not yet available) Definition of qualified education expenses (529 plans, Coverdell ESAs) Definition of qualified higher education expenses includes expenses for computers, equipment, software, and Internet access used while enrolled at an eligible educational institution Definition of qualified higher education expenses includes expenses for computers, equipment, software, and Internet access used while enrolled at an eligible educational institution Definition does not include expenses for computers, equipment, software, and Internet access Mortgage insurance premiums Can be deducted as qualified residence interest; phased out for higher incomes Can be deducted as qualified residence interest; phased out for higher incomes Not deductible Student loan interest deduction Student loan interest deductible (maximum $2,500), phased out for higher incomes Student loan interest deductible (maximum $2,500), phased out for higher incomes Deduction (maximum $2,500) limited to interest paid in first 60 months, phased out for higher incomes 2 Itemized deductions are reduced by 3% of the excess of adjusted gross income (AGI) over the threshold amount. For 2009, only 1/3 of the calculated reduction is actually used to reduce itemized deductions. In 2011, the full amount of the calculated reduction will be applied. 3 The exemption amount allowed is reduced by 2% for each $2,500 ($1,250 for married filing separately) of AGI in excess of the threshold amounts. For 2009, only 1/3 of the calculated reduction is actually used to reduce the exemption amount allowed. In 2011, the full amount of the calculated reduction will be applied. Business/self-employed individuals 2009 2010 2011 "Bonus" depreciation 50% additional first-year depreciation allowed 50% additional first-year depreciation allowed No additional first-year depreciation IRC Section 179 expensing $250,000 expense limit, reduced by amount by which cost of qualifying property placed in service during the year exceeds $800,000 $500,000 expense limit, reduced by amount by which cost of qualifying property placed in service during the year exceeds $2 million $500,000 expense limit, reduced by amount by which cost of qualifying property placed in service during the year exceeds $2 million Other 2009 2010 2011 Charitable IRA distributions IRA holders over age 70½ able to exclude from income up to $100,000 in qualified distributions made to charitable organizations N/A N/A Taxability of unemployment First $2,400 of unemployment compensation received excluded from income for federal income tax purposes N/A N/A Coverdell education savings accounts $2,000 maximum annual contribution phased out for higher incomes $2,000 maximum annual contribution phased out for higher incomes $500 maximum annual contribution phased out for higher incomes (reduced phaseout range for married couples filing jointly) Copyright 2010, Forefield Inc.

The recently enacted health-care reform legislation includes new Medicare-related taxes. These new taxes take effect in 2013, and target high-income individuals and families. While additional details and clarifications will become available between now and 2013, here's what you need to know.

If you receive a paycheck, you probably have some familiarity with the Federal Insurance Contributions Act (FICA) employment tax; at the very least, you've probably seen the tax deducted on your paystub. The old age, survivors, and disability insurance (“OASDI”) portion of this FICA tax is equal to 6.2% of covered wages (up to $106,800 in 2010). The hospital insurance or HI portion of the tax (commonly referred to as the Medicare payroll tax) is equal to 1.45% of covered wages, and is not subject to a wage cap. FICA tax is assessed on both employers and employees (that is, an employer is subject to the 6.2% OASDI tax and the 1.45% HI tax, and each employee is subject to the 6.2% OASDI tax and the 1.45% HI tax on wages as well), with employers responsible for collecting and remitting the employees' portions of the tax.

Self-employed individuals are responsible for paying an amount equivalent to the combined employer and employee rates on net self-employment income (12.4% OASDI tax on net self-employment income up to the taxable wage base, and 2.9% HI tax on all net self-employment income), but are able to take a deduction for one-half of self-employment taxes paid.

Beginning in 2013, the new health reform legislation increases the hospital insurance (HI) tax on high-wage individuals by 0.9% (to 2.35%). Who's subject to the additional tax? If you're married and file a joint federal income tax return, the additional HI tax will apply to the extent that the combined wages of you and your spouse exceed $250,000. If you're married but file a separate return, the additional tax will apply to wages that exceed $125,000. For everyone else, the threshold is $200,000 of wages. So, in 2013, a single individual with wages of $230,000 will owe HI tax at a rate of 1.45% on the first $200,000 of wages, and HI tax at a rate of 2.35% on the remaining $30,000 of wages for the year.

Employers will be responsible for collecting and remitting the additional tax on wages that exceed $200,000. (Employers will not factor in the wages of a married employee's spouse.) You'll be responsible for the additional tax if the amount withheld from your wages is insufficient. The employer portion of the HI tax remains unchanged (at 1.45%).

If you're self-employed, the additional 0.9% tax applies to self-employment income that exceeds the dollar amounts above (reduced, though, by any wages subject to FICA tax). If you're self-employed, you won't be able to deduct any portion of the additional tax.

Beginning in 2013, a new 3.8% Medicare contribution tax will be imposed on the unearned income of high-income individuals (the new tax is also imposed on estates and trusts, although slightly different rules apply). The tax is equal to 3.8% of the lesser of:

• Your net investment income (generally, net income from interest, dividends, annuities, royalties and rents, and capital gains, as well as income from a business that is considered a passive activity or a business that trades financial instruments or commodities), or
• Your modified adjusted gross income (basically, your adjusted gross income increased by any foreign earned income exclusion) that exceeds $200,000 ($250,000 if married filing a joint federal income tax return, $125,000 if married filing a separate return).

So, effectively, you're only subject to the additional 3.8% tax if your adjusted gross income exceeds the dollar thresholds listed above. It's worth noting that interest on tax-exempt bonds, veterans' benefits, and excluded gain from the sale of a principal residence that are excluded from gross income are not considered net investment income for purposes of the additional tax. Qualified retirement plan and IRA distributions are also not considered investment income.

Together, these two new Medicare-related taxes are expected to provide a major source of revenue to finance other parts of health-care reform. The Joint Committee on Taxation projects that the combined revenue attributable to these two new taxes will exceed $210 billion over the ten-year period ending in 2019 (Source: Joint Committee on Taxation, Publication JCX-17-10, March 20, 2010).

Copyright 2010 Forefield, Inc.

Just a reminder that the 3rd quarterly IRS payment for 2010 must be postmarked by Wed., 9/15 to avoid penalties.

Estimated Taxes

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

Who Must Pay Estimated Tax

If you had a tax liability for 2009, you may have to pay estimated tax for 2010.

General Rule

You must pay estimated tax for 2010 if both of the following apply.

1. You expect to owe at least $1000 in tax for 2010 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of; 
   • 90% of the tax to be shown on your 2010 tax return, or
   • 100% of the tax shown on your 2009 tax return. Your 2009 tax return must cover all 12 months. 

Source: IRS Website Article

By allowing the estate tax to disappear in 2010 (only to reappear in 2011), the government is allowing the heirs of the richest of the rich (who are unlucky enough to die this year) to reap a windfall profit.

The most notable recent example is George Steinbrenner, who died earlier this year.  His heirs will pocket an estimated $500,000,000 (that's 1/2 of $1 billion if you're not used to seeing that many zeros) more than had Steinbrenner died in a year other than 2010.

Read the whole article

Please don't conclude from the above commentary that I support the estate and gift tax.

 I am adamantly opposed to any tax that:

1. Generates less revenue than it costs to collect
2. Taxes income that has already been taxed multiple times.

Sadly, the estate tax achieves both.

I am, however, getting a little tired of hearing politicians talking out of the side of their mouths about "taxing only the rich."

Last time I checked, most people consider billionaires to be rich.

This tired debate can be solved by scrapping our pitiful excuse for a tax code and replacing it with a consumption-based tax ala the Fair Tax.

More on the Fair tax:

Fair tax website

Fair tax FAQ

The case for the fair tax

Why democrats should love the fair tax

"Do not pervert justice; do not show partiality to the poor or favoritism to the great, but judge your neighbor fairly."

-- Leviticus 19:15

"In 1967, the House Ways and Means Committee predicted that the new Medicare program, launched the previous year, would cost about $12 billion in 1990. Actual Medicare spending in 1990 was $110 billion—off by nearly a factor of 10."

Source:   Senate Joint Economic Committee Report on Government Medical Cost Estimates

Some highlights of a recent AP article about IRS phone traffic: