This week, Gail explains why some East Coast residents get an extra day for filing federal tax returns this year and also offers a stern reminder: just because you get a refund in the mail, that doesn’t mean the IRS can't decide you must give it back.
This one may be especially tough for New Yorkers to swallow, but they ought to thank their neighbors to the east for some relief—and I’m not talking the Keith Foulke variety.
Usually, if April 15th, the normal date for filing your federal taxes, falls on a weekend (Saturday this year), the deadline is extended to the following Monday.
Mo Time for Nor’easterners
However, it just so happens that the third Monday in April is celebrated in Massachusetts and Maine as “Patriots' Day” (the colonial kind, not the gridiron kind, although I’m sure some diehard fans would argue otherwise). That means the federal emplyees who work at the huge IRS processing center in Andover, Massachusetts have the day off.
As a result, residents of five states in the Northeast and the District of Columbia get an extra day—to Tuesday April 18th—to file their federal tax returns this year. The affected states are: Maine, Massachusetts, New Hampshire, New York and Vermont.
To keep things simple, if you live in the above states or Washington, D.C., the extended deadline applies even if your income tax return is supposed to be sent to a different location. It also applies to requests for a 6-month extension, estimated quarterly payments for 2006, and claims for refunds related to 2002 taxes (the 3-year period to file for this expires next month).
AMT Assistant Debuts
No, this isn’t another government bureaucrat. Instead, think of it as a tool to prevent a heart attack.
In yet another example of the IRS seeking to make our lives easier, there is now a handy Internet calculator that will warn you if you are going to be hit by the Alternative Minimum Tax (AMT) —the “AMT Assistant”.
Frankly, having to go through the calculations required just to see if you might be a candidate for the AMT is almost as painful as writing the check. The online calculator supposedly reduces this to about a 10-minute exercise.
Each year, millions of middle income taxpayers are being sucked into paying this stealth tax [Click here to read an archived column on this topic]. That’s because the income limits that trigger the AMT have only been occasionally—and partly—adjusted for inflation over the past 37 years. In fact, recent adjustments that raised the income threshold that triggers the AMT have expired. At this point, barring another temporary “fix” by Congress, the 2006 AMT exemption amounts are below where they stood in 2001.
Tax Cut? What Tax Cut?
One of the reasons the AMT is snagging more and more taxpayers is the fact that regular income tax rates have been reduced in recent years. The law requires that you pay the higher of: a) your tax bill calculated under the regular system, or b) your tax bill calculated according to the AMT rules. Thanks to tax cuts, many people are finding that their taxes are lower based on the “regular” way of figuring them, making it more likely their AMT bill will be higher.
A new report by the Congressional Research Service predicts that if reductions in the regular income tax are made permanent (which is far from a done deal given the level of comradery between the political parties), “then the number of taxpayers subject to the AMT will increase from about 1.8 million in 2001 to over 41 million by 2013!
This is a sleight of hand made in political heaven: politicians can tout the fact that they’ve “cut” income taxes, but unless they fix the AMT, in reality you’re paying at least as much—if not more—than you did before tax rates were reduced!
When is a Refund Not a Refund?
Here’s the kicker about the AMT: the more deductions you have—personal exemptions, dependants, state income tax, property taxes, etc.—the more likely you’ll fall victim to the AMT. That’s because you cannot take most of the deductions allowed under the regular tax system, as Sandra Murray and Khaled Aboueinoor found out.
The married couple filed their 2002 income taxes and was sent the $3,085 refund they had calculated. Awhile later they received a letter from the IRS stating that they owed money—$2,747—because they were actually subject to the Alternative Minimum Tax.
The IRS came to that conclusion after re-computing the couple’s taxes, which involved adding back many of the $55,302 in itemized deductions they had claimed on their regular 1040 return.
Murray-Aboueinoor sued, alleging that by sending them their refund, the IRS had, in essence, accepted their return as accurate. In December the federal Tax Court ruled against them saying the argument was “without merit.”
Here’s the lesson: just because you get a refund, that doesn’t stop the IRS from later issuing a “notice of deficiency.” That’s what audits are all about.
Deductions and Divorce
Speaking of deductions; remember that child support is never deductible. However, provided they are required under a legally-sanctioned divorce decree or agreement, alimony payments are.
If you’re on the receiving end, remember that alimony payments have to be reported as income since taxes are not withheld from checks-from-the-ex.
The Perennially Stupid
It always amazes me that there are people who think the federal income tax system is illegal. After all, it’s only enshrined in the 16th Amendment to the Constitution! Numerous Supreme Court cases have upheld the legality of the tax code.*
Every year, there are multiple lawsuits filed by (take your pick): pig-headed idiots/cockeye-eyed optimists who think they’re going to out-smart the government. Every year their lawsuits clog the courts. Every year, a portion of our taxes is used to deal with these ridiculous lawsuits.
Inevitably, those filing them end up losing the battle.
Who Needs to Pay Social Security Tax?
Walter Thompson owned “Cencal Sales,” a company that made suitcases and other gear for travelers. Some two-dozen people worked for Cencal. But for four years Thompson refused to withhold federal employment taxes (e.g. FICA) from his employees' wages because he claimed the Internal Revenue Code (IRC) was illegal.
According to the IRS, that cost the U.S. Treasury—you and me—more than half a million dollars. In a 14-count indictment, the IRS sued Thompson to collect. He responded with counter-claims that the court described as “frivolous filings.” Thompson also made a mockery of the court system by failing to file various motions in the legally-required time period.
Moreover, this wasn’t the first time Thompson had thumbed his nose at the tax code. According to the U.S. District Court, he had a history of making “nonsensical challenges to the authority of the courts and the entire federal tax system.” His behavior was described as a “persistent and obstinate refusal to comply with the federal tax laws … despite contempt charges and subsequent incarceration.”
To stop him from pulling the same thing again if/when he starts another company, last September the Court issued an injunction requiring Thompson to withhold and pay over federal employment and unemployment taxes as well as file all the necessary tax returns.
I wonder how many years behind bars it takes to produce $500,000 worth of license plates? They oughta throw in the cost of tying up the courts, too.
Drilling for Dollars
Then there’s the case of Dr. Charles Raad, who filed suit challenging the government definition of “income” and demanding that the court strike down the 16th Amendment. He also requested that the District Court order Congress to re-write the Internal Revenue Code in clearer language.
Oh, did I mention that Raad, a dentist, wanted $10 million in punitive damages because he claimed he’d been badgered by the IRS for not paying taxes on the income his dental practice produced?
I’m all for simplifying the tax code, but since Congress writes the tax laws and the U.S. Treasury Department writes the regulations, the court system is not the place to get the ball rolling.
Last year the District Court judge ruled Raad’s allegations “patently frivolous.”
In other words, his counter-suit lacked teeth. Sorry.
Next week: Reminders about tax deductions you don’t want to miss.
*See wells vs. Clinton, 1996WL 807430 (W.D.N.C. 1996) (citing Brushaber v. Union Pacific Railroad Co. [1USTC Section 4].
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