Value Added Taxes

I have warned about the possibility of a value added tax (VAT) in several blog entries throughout the year, and every day it becomes a more likely possibility. The benefit to the government is that a VAT could generate billions of dollars in revenue. It is meant to add taxes to manufacturers but consumers always end up paying higher prices as a result. Proponents claim that increased tax credits for low-income families would help with the added VAT burden, but in today’s economy consumers are not spending like they used to. If a VAT was implemented it would almost certainly reduce consumer spending.

Fair Tax

You may remember hearing the phrase “fair tax” during the recent presidential election. Republican candidate Mike Huckabee was a large supporter of this tax, which would pretty much eliminate the current tax system, and possibly even the IRS. It may sound nice, but to make up for the lost revenue the Federal government would need to impose a 23 to 30% tax on the purchase of all goods. Although supporters say that the price of products would decline without payroll or corporate taxes, there is no way to know what the “break even” point would be. This new type of tax is unlikely to come to fruition in 2010 as there are no bills currently being debated in Congress. However, it may gain traction as a campaign talking point during the run-up to Congressional elections in late 2010.

Estate Taxes

As I explained earlier last week, Congress failed to take any action on the estate tax. This means that in 2010 there will be no estate tax levied whatsoever, unless Congress passes a retroactive bill. However, beginning in 2011 the estate tax will return and target even more taxpayers. If current laws are not changed, in 2011 the estate tax will return to a historic rate of 55%, and it will get levied on all estates valued at $1 million, which would represent the highest estate tax since the early 1990’s. Unfortunately for anyone inheriting a sizeable estate in 2010, Democratic leaders in Congress have vowed to deal with the estate tax as soon as they return to session, which could result in a permanent 45% estate tax rate.

War Taxes
It is widely known that military spending, especially during a war, adds up quickly. Over the past eight years, the costs of the military efforts in Afghanistan and Iraq have cost an estimated $1 trillion. As such, David Obey, (D – WI) – chair of the House Appropriations Committee – has proposed a war surtax that would range from an additional 1 to 5% income tax on the highest-earning households. Not surprisingly, there is a lot of opposition to this tax, and many experts claim that unused TARP funds could be used to pay for the military costs. On the other hand, some insist that a war tax would create a nationwide sense of urgency to end the wars.

Retroactive Payments

Yes, you read that correctly! You can make payments retroactively, up until the tax deadline. Therefore, you can make a contribution now, that will lower your tax liability from last year.

IRA Deduction

When you make contributions to a traditional IRA – not a Roth IRA – you can deduct your yearly contributions from your taxable income. You will need to include it on Line 32 of IRS Form 1040, or Line 17 on IRS Form 1040A, and then subtract the amount from your total adjusted gross income.

Income Level Phase Outs

If you are a single taxpayer then you can only claim the full deduction if your income is below $55,000 per year, or $89,000 for married couples filing jointly. The deduction phases out slowly as your income increases, and taxpayers earning over $65,000, or $109,000 for married couples, cannot claim the deduction.

Contribution Limits

Unfortunately there is a limit on the amount of contributions you can claim on your tax return. For the tax years 2008 and 2009 the dollar limits for IRA contributions are $5,000 for taxpayers under the age of 50, and $6,000 for those 50 and over.

Rules per the IRS
According to IRS Tax Topic 451, “to contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year and you, or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self–employment. In addition, taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes.”