I usually write about Missouri tax credits, that’s my state, but today I get to talk about New York. I love New York, it’s a wonderful place, but this new tax credit proposal has me shaking my head.
Have you heard about it? New York’s new state budget has a tax credit for (and I’m going to quote directly from the New York Daily News) “A talk or variety program that filmed at least five seasons outside the state prior to its first relocated season in New York.” There are more requirements here; the show has to be filmed in front of a studio audience of at least 200 people and has to have an annual production budget of at least $30 million.
Can you say, “Tonight Show?” Honestly, can you think of any other show that even meets that criteria?
This new tax credit will pay for 30% of the production costs of the show. Do the math here—the show has to have an annual production budget of at least $30 million, and the state will pay 30 percent of the budget—that’s a lot of money.
In fairness, New York has had tax credits for the film and television industry for years. The New York State film production credit program has helped hundreds of projects get made in New York and that film production has generated millions of dollars of revenue to New York. The cost of the tax credit to New York is around $420 million in lost tax revenue annually. One of the key provisions of the old bill was that the film or television projects had to originate in New York.
But this new credit—well it sounds a bit targeted. Really targeted. NBC has already started building Jimmy Fallon a new studio over at 30 Rock—supposedly for his Late Night show—NBC has not announced that it will actually move the Tonight Show from California.
Call me crazy, but if New York wanted to pay me $9 million to move my business over there, I’d be packing my bags in a heartbeat.
I recognize that states are vying to pull businesses from other states to boost their economies during this economic downtime. State legislatures all over the country are playing games with tax credits. I don’t really think it’s good for the country as a whole, but I can’t stop it either.
But a Tonight Show Tax Credit? Is this really in the best interests of the people of New York State? I’m not seeing it. Maybe it’s because I’m still from Missouri, and you’ll have to “show me.”
Here are two great links to check out:
If you usually claim the Earned Income Tax Credit (EIC) then you need to know about the new rules. Although the dollar amounts of the EIC have remained the same, the reporting requirements have changed dramatically. If you have your taxes done by a professional—then you need to be prepared for the additional paperwork.
So what’s different? It’s the new page 4 of Form 8867—Paid Preparer’s Earned Income Credit Checklist (http://www.irs.gov/pub/irs-pdf/f8867.pdf). That’s the form that tax preparers have to fill out and send in along with your tax return. The quick and dirty summary is: if a tax preparer doesn’t ask enough questions and fails to get enough information before submitting your EIC tax return, she’ll be subject to a $500 fine. Ouch. That’s $500 per tax return. A few bad tax returns can put your tax preparer out of business.
So what’s on this page 4? Well the first item is proving that the child you’re claiming EIC for really lives with you. Here’s what you can use to prove your child lives with you:
- School records or statement
- Landlord or property management statement
- Health care provider statement
- Medical records
- Child care provider records
- Placement agency statement
- Social service records or statement
- Place of worship statement
- Indian tribal official statement
- Employer statement
You don’t need to have all of these things, but you’ll need at least one thing to show your child lives in your house. The school records are probably the easiest if your child is of school age. For me, as a tax preparer, I would accept your child’s last semester report card as evidence of residency as long as the report card has your home address on it.
If you are claiming a disabled child, you’ll need to prove the disability. Here are the documents for that:
- Doctor statement
- Other health care provider statement
- Social services agency or program statement
So with a disability, you have a double issue—proving residence and the disability. Although to be quite honest, I suspect that these statements would also include a home address on them and serve a duel purpose.
And if you’re self-employed, you’re going to need to prove you really have some sort of business with the following records:
- Business license
- 1099MISC forms
- Records of gross receipts
- Income summary
- Expense summary
- Bank statements
These records are pretty standard for anyone who is self employed anyway so this shouldn’t be a burden. Bottom line here is—if you have a business, you need to run it like a business and keep proper business records.
In addition to the new paperwork requirements, of course you’re still going to have to show you and your children’s social security cards. Also, if you’re getting a bank product (where you pay for your tax preparation out of your refund) you’ll need to have a driver’s license or state ID card with your correct current address on it.
The IRS has already announced that people can expect their refunds to be delayed this year. For the fastest possible refund, you want to make sure that you’ve got all of your paperwork together before you even head to the tax office.
Be sure to check out http://www.eitc.irs.gov/central/main/ to answer any EITC questions you may have. Or call us and we would love to help.
The Government imposes taxes to make us behave the way it wants us to. Whew! That sounds like something one of my “nutjob government conspiracy type” friends would say, not me. Except that it’s true. If you don’t believe me, just take a look at the so called “sin taxes”. You know, the extra taxes imposed on cigarettes and liquor.
The federal government taxes each pack of cigarettes by a $1.01. Add to that the state taxes, here in Missouri, we have the lowest cigarette tax in the country at 17 cents a pack, but Washington State has a tax of $3.20 per one single pack of 20 cigarettes. You really gotta want a cigarette to smoke in Washington.
Beer, on the other hand, only brings in 5 cents per 12 ounce can to the feds. But a bottle of tequila will fetch $2.14 cents in taxes. And that’s before adding in the state taxes!
So maybe you don’t smoke or drink, you might think these taxes don’t apply to you. But it’s not just our sins that the government is trying to control; it’s our shopping behavior as well. Think about the First Time Home Buyer Tax Credit–a nice chunk of change of up to $8,000 for buying a new home. The energy tax credit–for making our homes more energy efficient. And of course the energy efficient vehicle tax credit–for buying an electric or fuel efficient car. All of these tax credits were intended to help various industries.
So maybe these programs didn’t apply to you either, but here’s one that probably did: The Economic Stimulus Act of 2008. Maybe you remember that’s the year that everybody got an extra $300 check in the mail. The idea was that if everyone in America got an extra $300, they’d go out and spend it and that would jump start the economy again. Unfortunately, that didn’t work. A large percentage of the population used that money to either pay down their credit cards or add to their savings accounts–we didn’t get the consumer bang that the government wanted. You might remember we later got the “Making Work Pay” credit, which basically gave us an extra $400 but it was doled out in our paychecks in tiny increments over the course of the year. People hardly noticed the increase in their paychecks, so the money just got spent.
The analogy that I think of here is that it’s kind of like having a $50 bill in your wallet. I don’t get 50 dollar bills very often, so when I do get one I tend to hang onto it for awhile. “I’ve got a $50 dollar bill, it’s special, and I don’t want to spend it!” Now give me a $5 or a $1 bill and it’s gone. My nephew calls it “blowing your money away.” (He actually uses a slightly different phrase but I’ve been edited for my G rating.) You understand though, it’s much easier to let small amounts of money slip through your hands than larger amounts. So these little tax games have made us spend more money–without us even being aware of it.
And I have a problem with that. I don’t like the idea of being manipulated for one thing. But more importantly, I think our tax code sends a message about American values that I don’t think we as a country should be sending. As a nation we talk about the importance of marriage and of children being raised in a two parent family–and then we pay a premium to unmarried parents through the Earned Income Tax Credit. I don’t think it was intentional, but that’s what happens. Young married families with two incomes get phased out of that tax credit, but if you don’t get married–then you get the money. And it’s huge! We’re talking thousands of dollars a year. That’s a big incentive for not getting married. Why are we doing that?
There’s already been lots of talk from the politicians about changing the tax code. “Tax the rich”, “don’t tax the rich” those arguments can go on for hours. But what I’m not hearing, and what I’d really like to hear, is where should our country be headed? How do we get there? How much is it going to cost? And how are we going to pay for it over the long haul? These quick-fix one-year only tax incentives aren’t the way to run a country. And while the rich are very concerned about their taxes (and rightly so, they seem to have the most to gain or lose during this election) the tax code affects everyone; rich, poor, and middle class. We need long range planning, long range goals, and a long term tax plan. Let’s bring the grownups to the table, drop the manipulation games, and get to work on a real solution.
The Retirement Saver’s Credit sounds like an old person kind of tax credit, but, for the most part, it’s really more of a young person’s credit and it gets totally ignored. The coolest part about the Saver’s Credit is that it’s a credit, not a deduction. That means that it’s a dollar for dollar reduction of your tax liability. A $100 tax credit would reduce your taxes by $100. A $100 tax deduction would reduce your taxes by $10 to $35 depending on your tax bracket. See the difference? Tax credits are better than deductions. The Saver’s Credit is for people with lower incomes so we’re looking at 10 to 15% tax brackets.
The Saver’s Credit can be worth up to $1,000 ($2,000 if you’re married filing jointly), so it’s pretty valuable. Basically, it’s like the government is giving you money for saving for retirement – how cool is that?
- You have to be 18 or over
- You can’t be a full time student
- You can’t be claimed as a dependent by someone else
So what are the income limitations?
- Single, married filing separately, or qualifying widower – $28, 250
- Head of Household – $42,375
- Married filing jointly – $56,500
So what do I have to invest in to get this tax credit? That’s the easy part, you can invest in any of the following:
- A traditional or Roth IRA
- Most any employer sponsored retirement plan
The one thing that doesn’t qualify is rollover contributions. Also, if you’ve taken money out of a retirement plan, it could reduce your ability to qualify for the credit.
So if I put $1,000 into an IRA the government is going to give me a $1,000 tax credit? No. I said it’s easy, but it’s not that easy. It works on a sliding scale: the lower your income, the larger the percentage you get, somewhere between 10% and 50% of your contribution. The form you need is form 8880. Here’s a link: http://www.irs.gov/pub/irs-pdf/f8880.pdf
Let’s say you’re single, you made $18,000, and you put $2,000 into a Roth IRA. You’d qualify for a $400 tax credit. You can figure that out by looking at the chart and you’ll see you qualify for a 20% tax credit.
The coolest thing about the Retirement Saver’s Credit is that you can play with it. Let’s go back to the example above – you’re single and made $18,000. You have until April 15th to put money into an IRA, so you don’t have to have this all done before tax time. At $18,000 income, you qualify for a 20% tax credit, but at $16,999 you qualify for a 50% tax credit. So if you put $1,001 into a traditional IRA (instead of the $2,000 you were going to put into the ROTH), it will lower your overall income, making your “adjusted gross income” or AGI, $16,999. Now, instead of getting a $400 tax credit on $2000, you get a $500 tax credit on $1,001 – and you still have another $999 left over to save or spend.
So you might be thinking, “Cool, I’ll just put it all into an IRA!” And you can, but you reach a point where the credit doesn’t do you any more good. The Retirement Saver’s Credit is what’s called a “non-refundable” credit. That means that once you zero out your tax liability, you don’t get anything more.
Let’s go back to our example: you’re single, you make $18,000. This time you put the whole $2,000 into a traditional IRA. Now your AGI is $16,000, that means your taxable income is $6,500 and your tax liability is now $658. So you complete form 8880 and you see that you qualify for a 50% credit which is $1,000 but since your tax liability is only $658—that’s all the credit you get.
Now if you have $2,000 to put into savings, I am 100% behind you saving the full $2,000. But, you may be better off putting some of that money into a regular savings account instead. It’s something to play with. Never sneeze at a 50% return on your investment. Let’s be real, that’s what this is. Even the 10% and 20% return is a good deal. But once you’ve maxed out that return, then you need to look at what other options you’ve got. That’s why I like IRAs. You can figure out your tax return first before make the investment. The absolute best part – you can make the investment with your income tax refund! You can actually do your tax return, plan out your IRAs, and not fund them until after you’ve gotten your refund.
Not everyone will qualify for the Credit for Qualified Retirement Savings Contributions, but if your income is anywhere close, you’ll definitely want to at least look into it.
They’ve flip-flopped on the issue more often than a presidential candidate in a primary debate. If you’re a little confused about what you can or can’t deduct, you’re not alone. Hopefully this will help.
First, in order to claim this credit, any improvements must be made to an existing home and it must be your main residence. This means that landlords and new home builders are out of luck on this one.
The credit is smaller than before. If you did improvements in 2011, the credit is 10% of the cost of the improvements and it caps at $500. Some credits, like windows, are capped at an even lower amount.
There’s also a lifetime limit on the credit so if you received an energy tax credit anytime between 2006 through 2010 then your 2011 energy tax credit will be reduced by that much.
Excuse me for a moment while I rant and rave. The IRS says on its website that you should keep your tax records for 3 years. But for this case, the IRS is expecting you to go back through 5 years worth of information to see if you claimed a credit back in 2006? This is crazy. Nobody’s tax software has carried forward that information because it was never a carry forward issue until now. This tax credit is kind of a “Thanks, but no thanks,” kind of deal. Gee it’s nice that they extended it and all, but it’s really going to be a pain in the *#$. I’m expecting a lot of IRS “gotchas” with this credit and I think “gotchas” are morally wrong.
Okay, back to business now. The bottom line is, if you’ve claimed $500 worth of energy tax credits at any time over the past 5 years, don’t try to claim any more. Make sure you check (because the IRS most certainly will). The form you’re dealing with is Form 5695. I don’t have a link to the 2011 form yet.
Also, if you’ve zeroed out your taxable income, this credit is “non-refundable” which means it’s only a credit against your tax liability, if you owe no tax, this credit won’t help you.
Another thing is the whole “Energy Star” issue. You’ll want to make sure that the improvements that you make on your home qualify under the “Energy Star” program. Here’s a link to their website: http://www.energystar.gov/index.cfm?c=tax_credits.tx_index. But it’s important to remember that just because you buy something that has an Energy Start label doesn’t mean that you’ll qualify for a tax credit. I had a couple of clients last year who brought in receipts and Energy Star labels but it was for things that didn’t qualify for the tax credit.
If you need to install insulation or storm windows, go ahead and do the work. Do what’s right for your home and family. If you manage to qualify for a tax credit for it, great, but don’t count on receiving that tax credit as you calculate your expense of the project. There are a lot of land mines you have to step over to get to it.
Once again this year, most taxpayers will need to file a Schedule M in order to claim the Making Work Pay Tax Credit. Its worth up to $400 for single taxpayers and up to $800 for married filing jointly couples. It’s the same schedule M form that you had to file last year to receive the credit; it just hasn’t gotten very much publicity lately so some people might forget about it.
Most tax software will automatically calculate it for you, but if you’re preparing a return by hand, you need to remember to include the form. Here’s a link: http://www.irs.gov/pub/irs-pdf/f1040sm.pdf
Most people who earned wages or were self employed qualify for the Making Work Pay tax credit, although if your parents claim you as a dependent then you won’t qualify. Also, persons filing a non-resident return or persons filing a return without a work-valid social security number won’t be able to claim one either. There are also restrictions for high-income wage earners as well.
If you need more information, here’s a link to the instructions for the form. http://www.irs.gov/pub/irs-pdf/i1040sm.pdf