Take Congressman Nick J. Rahall II for example.  The congressman owns a house in his home state of West Virginia (in the district he represents) and like many members of Congress, owns property in Washington, D.C. as well.

Now D.C. has something called a homestead tax deduction, which basically means tax payers who own property in the city and actually live in that property as their primary residence (versus renting it out or running a business, etc.) are entitled to pay less property taxes than people who own property but don’t live there (we can debate the merits of this scheme some other time).

Apparently 107 members of Congress actually own property in Washington, D.C.  Presumably all members of Congress- not just those who purchase property in the city- primarily reside in their districts (it’s sort of required by the Constitution).  But Nick Rahall apparently decided he was entitled to D.C.’s homestead tax deduction (which equates to about $573 per year on his $890,000 home), even though his property in D.C. isn’t his primary residence.

Now the D.C. Office of Tax and Revenue is demanding $2,338.00 in back property taxes, interest and penalties.

But the story gets better, because not only did Congressman Rahall claim a deduction on his D.C. home, but he also claimed one on his home in West Virginia!  So basically he was telling D.C. tax collectors he primarily lives in D.C., and he was telling West Virginia tax collectors he primarily lives in West Virginia, all the while paying as little taxes as possible!

According to the congressman’s website, “I firmly believe that a key to unlocking the economic promise and potential of southern West Virginia lies in the ‘Three T’s’ – transportation, technology, and tourism.”

The congressman may not be honest when it comes to actually paying his taxes, but at least he doesn’t claim to believe in the 4th “T”!

The answer, of course, partly depends upon which state you live in, but the simplified answer can be stated this way: way too much!

Patrick Tyrrell at the Heritage Foundation has an excellent piece out that breaks down the approximate amount an average middle class single filer would pay in each state (see image to the right).  Naturally we need to control for certain variables, but this thought experiment is nothing short of scary regardless of one’s personal situation.

The federal income tax for 2013 will be around 28%, depending on what happens with the fiscal cliff.  Add to that the Social Security and Medicare payroll tax at 15.3% (projected 2013 rate) and we get an average federal individual tax burden of 43.3%.

Then we have to consider state taxes, which of course vary greatly from state to state.  But on average state income taxes are set at a rate of 4.82% for a total state and federal tax burden of 48.12%!

And yet this isn’t even the end of it!  Our analysis doesn’t include sale taxes, surtaxes on investment income and the slew of other taxes that require many Americans to hire special help to figure out.  When you factor in all of these other taxes, government very quickly consumes over 50% of an individual’s income.

Unfortunately both Democrats and Republicans seem to be on the same page that the federal government will have to raise taxes in order to get its fiscal house in order.  Maybe someone should point out to them that frankly, we’re taxed enough already.

The Internal Revenue Service recently released new rules for investment income taxes on capital gains and dividends earned by so-called “high income” payers.

Enter: the first surtax to be applied to capital gains and dividend income at 3.8%.  But the surtax is more complicated than it seems, because it applies to a broad range of investment securities such as stocks, bonds, commodity securities, specialized derivatives and more.

In addition, the new regulations also include a 0.9% healthcare tax on wages for individuals who make $200,000 or more per year and $250,000 or more for joint filers.

The IRS offered the following example: an individual filing their taxes and a single person with an annual wage of $180,000 also makes $90,000 from investment income making their modified adjusted gross income $270,000.

The 3.8% surtax applies to the $70,000 (above $200k) meaning the individual would have to pay Uncle Sam $2,660 for the privilege of being an investor.

If this isn’t bad enough, the rules remain unclear about exactly which forms of investment income will be taxed under Obamacare’s surtax.  For example, will rental income be taxed at the same rate?  Considering how shaky the real estate market remains, this is a very real and important question that needs answering.

If you have any questions about how this new surtax may affect you or  need help with your taxes this coming season, be sure to visit www.RapidTax.com and contact any of our experts.

Do you need a nose job?  Maybe some liposuction?  Or do you need some hair removed from your upper lip?

If you do, make sure you become a teacher in Buffalo, NY!

Teachers in Buffalo have what may be the most incredible, and most egregious “health care” benefits of all: free plastic surgery.

And when I say free, I mean it.  The 3,400 teachers in Buffalo who are eligible for free plastic surgery are billed literally nothing for any plastic surgery, and worse yet, they have no deductible.

Last year, the Buffalo school district spent $5.9 million on this “cosmetic rider”.  If that isn’t bad enough, the school board president predicts the district will have a $42 million deficit in next year’s budget.

The union claims they are willing to give up their free plastic surgery, and are just waiting for the school district to sign a contract with them, but if the union really cares about the system as a whole- the $42 million deficit, the kids, their actual jobs- maybe it is time to get rid of the “cosmetic rider” all on their own, simply by having union members agree not to use it.  There is no reason the union and the school system need to have a contract in order for teachers to voluntarily save tax payers money.

The first thing everyone wants to know when it comes to late taxes is whether they will be charged any penalties and interest. In fact, fear of penalties is enough to keep some people from filing their taxes. But some late filers don’t have to pay any penalties at all. Arming yourself with information can help you make the best decisions when it comes to dealing with your late taxes.

No penalties

If you’re due a refund, you don’t owe the IRS any penalties or interest. That’s right. None. Zippo. Zilch. That means you can file a late return without having to worry about getting slammed with a massive bill. And what’s more, if your return is less than three years late, you can still get your refund money too.

So stop procrastinating! File your taxes! There’s a big fat refund check out there with your name on it and you’re not doing yourself any favors letting Uncle Sam hold on to it.

Failure-to-file penalty

The failure-to-file penalty kicks in when you don’t file by the deadline. Normally this is April 15. If you request an extension, you get an extra six months to file and the penalty starts on October 15.

The failure-to-file penalty amounts to 5% of your tax liability for each month (or part of a month) that your tax return is late. The maximum it can be is 25%.

Failure-to-pay penalty

The failure-to-pay penalty amounts to 0.5% of your unpaid tax liability. That means you should always file your return, even if you can’t afford to pay your tax bill right away. It will save you money in the long run.

The failure-to-pay penalty starts on April 15. An extension only gets you out of the failure-to-file penalty for six months. It doesn’t get you out of the failure-to-pay penalty. Technically, when you request an extension before the April 15 deadline, you are supposed to estimate and pay your taxes. You must pay at least 90% of your tax liability in April in order to avoid being charged the failure-to-pay penalty for those six months.

If you arrange for an installment plan with the IRS, the failure-to-pay penalty will be reduced to 0.25%, but only if you filed before the deadline.

Interest

You will, of course, also have to pay interest on your unpaid tax liability. The interest rate is currently set at 3%, but it changes every quarter. While it is sometimes possible to get out of paying penalties, you will almost certainly have to pay interest.

State taxes

States also charge penalties and interest for late taxes. Some even provide a calculator that can help you estimate these charges. For example, the New York State Department of Taxation and Finance provides a Penalty and Interest Calculator that could be of a lot of use to NYS taxpayers. Try checking with your state tax authority to see if a similar calculator is available.

What’s the best thing you can do to minimize penalties and interest? File your late taxes as soon as possible. Remember, you might even have a refund waiting for you.

The graph below illustrates the data obtained from the Bureau of Economic Statistics and the Tax Policy Center. From 1970 to 2011, the fluctuating Gross Domestic Product (GDP) growth rate (blue line) is compared to the top marginal tax rate (red line).

Effect of Tax Increases

Analysis of this date indicates that tax rate increases while the economy is in an upswing does not appear to reverse the trend. The GDP growth rate continued to increase in the mid-1990’s, despite the top marginal rate increase from 31% to 39.6%. Marginal rate increases, however, may exacerbate the downward trend in the economy. After the rate increase from 28% to 31% in 1990, we see a reduction in GDP growth from 3.6% in 1989 to -0.2% in 1991.

Effect of Tax Cuts

There is evidence that tax rate cuts do provide an initial boost to a struggling economy. Most notably, the Reagan tax cuts from 70% to 50% in the early 1980′s resulted in an immediate GDP growth increase from -1.9% in 1982 to 7.2 % in 1984. The subsequent marginal tax rate reduction from 50% to 28% reversed the apparent downward trend in 1985 and 1986 and maintained strong economic growth for another 2 years. Lastly, the gradual tax cuts from 39.6% to 35% from 2000 to 2003 shows a reversal of the downward trend and we saw an improvement in GDP growth from 1.1% in 2001 to 3.5% in 2004.

In conclusion, this simple analysis considers only changes to top marginal tax rate. If we assume that the top marginal tax rate changes outweighs any other tax law changes at the time (e.g. lower marginal tax brackets, payroll taxes, capital gains, state/local taxes), the data shows evidence of the following:

• Tax rate changes do not have a permanent effect on long term GDP growth.
• Tax increases do not necessarily negatively influence a good economy.
• Tax increases can aggravate a struggling economy.
• Tax cuts consistently kickstart a bad economy.

Under the current economic conditions, what do you think we should do?

The gay marriage debate extends all the way to the tax code

President Barack Obama’s surprise announcement last week of his support for gay marriage has the whole country talking about either the equality or sanctity of marriage, depending on your political perspective.

Though the President’s announcement has no practical effect on government policy, it has exposed the shifting fault lines in America’s culture wars. Since 1996, when Congress and President Clinton passed the Defense of Marriage Act (DOMA) defining marriage exclusively as the legal union of one man and one woman, public opinion has changed across the political spectrum. As Slate observes,

Democrats, who initially opposed gay marriage and then were evenly divided, are gradually uniting in favor of the idea. Republicans, who used to be united against gay marriage, are becoming more closely divided. And independents, who used to lean against gay marriage now lean toward it. In 2004, if you raised gay marriage as a wedge issue, you divided Democrats, united Republicans, and pushed most independents to the right. Today, if you raise gay marriage as a wedge issue, you divide Republicans, unite Democrats, and push most independents to the left.

Or, in the immortal words of the Who, “The parting on the left, is now the parting on the right.”

And as open gay couples – even some with kids (gasp!) – become a fact of life in more areas than just San Francisco and Manhattan, people are beginning to turn an eye to the practical consequences of gay marriage, including taxes.

The most obvious tax consequence of DOMA is that same-sex couples can’t file a joint tax return, which denies them all the benefits that the married filing jointly status can bestow. Most married couples choose to file a joint return – and not just so one spouse can get out of preparing a return.

According to the IRS, “if you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Also, your standard deduction (if you do not itemize deductions) may be higher, and you may qualify for tax benefits that do not apply to other filing statuses.”

Plus the issue of children make things even more complicated. If the two same-sex parents can’t file a joint return, only one of them can claim their child as a dependent, and get all of the attendant tax benefits.

Gay couples’ tax bills can often be thousands of dollars greater than their straight counterparts, simply because they are denied the ability to file a joint return.

But while many have made a big deal about the benefits gay couples aren’t able to receive while they’re together, relatively few have made note of the costs they incur when their relationships end. When gay partners try to divide assets between them at the end of a relationship, they could get hit with gift and income taxes that wouldn’t affect straight married couples at all.

Here’s an excerpt from a very insightful Forbes column by Robert W. Wood:

If you are married and divorce, you can divvy up property tax free. Again, there’s no limit. So if you jointly bought a house, you can transfer your interest to your ex without tax.

Not married? Same sex or not, if you’re not married unwinding a relationship can be very taxing, including income taxes, gift taxes or both. Suppose you give your half of the house to your ex-partner and receive nothing in exchange? You’ve made a taxable gift.

Suppose you’re not feeling that generous and instead deed your half of the house to your ex in exchange for some of your ex-partner’s stock holdings. You both could be hit with income taxes. As the departing partner, you’ll be treated as selling your half of the house to your former partner.

Suppose you bought the house together decades ago for $400,000 and it is now worth $1,000,000? Your half has a $200,000 basis and a value of $500,000. That means you, the departing partner, will have a $300,000 gain. If you qualify for the exclusion on sale of a principal residence (up to $250,000 per person), only $50,000 of it is taxable.

What about the ex-partner who is keeping the house and handing over $500,000 in securities? If the staying-put partner’s basis in the stock is $300,000, he or she will have a $200,000 gain. But here’s the kicker: If the same couple had been married, there would be no taxes paid on these asset transfers.

The President’s announcement will surely not be the last shot fired in this battle, and Americans everywhere have very strong opinions. But before we allow our emotions to get the better of us, we would do well to consider the cold, hard, dispassionate calculus of the tax code and how it affects millions of Americans when they file a return.

This year, in a fitting twist of fate, Tax Day and Tax Freedom Day both arrive on April 17. What is Tax Freedom Day? Don’t worry, it doesn’t involve crazies in tricorn hats carrying posters of President Obama with a Hitler mustache (though trust me, April 17 will see its share of crazy protesters). No, Tax Freedom Day is designated annually by the Tax Foundation as the day that Americans have earned enough income to pay off their tax burden.

Americans will have to work 107 days to pay off the 29.2% of their income that they owe to federal, state, and local taxes. If you’re curious that’s

• 32 days for individual federal income taxes
• 8 days for individual state and local income taxes
• 23 days for federal social insurance taxes
• 4 hours for state and local social insurance taxes
• 2 days for federal sales and excise taxes
• 12 days for state and local sales and excise taxes
• 12 days for state and local property taxes
• 9 days for federal corporate income taxes
• 1 day for state and local corporate income taxes
• 3 days for other federal taxes
• 4 days for other state and local taxes

And that’s only to pay for what the government is taxing, not what it’s spending. If it were to close the budget deficit with an additional $1.014 trillion, Americans would have to work until May 14 to pay it all off!

This year Tax Freedom Day has crept a little later in the year, compared to April 12 last year. In 2000 the latest-ever Tax Freedom Day fell on May 1, but on the plus side the government did enjoy a budget surplus. A century earlier, before the existence of the welfare state and before America had shouldered the burden of international responsibility, Tax Freedom Day fell on January 22.

Of course, Tax Freedom Day varies by state. Red states tend to enjoy an earlier Tax Freedom Day – Tennessee as early as March 31 – and those of us deep in the blue have work a couple more weeks. The latest in the nation is the tri-state trifecta, with New York and New Jersey clocking in at May 1 and Connecticut on May 5.

Though an interesting visualization Tax Freedom Day is something of a gimmick, an easy way to incite a mildly libertarian sigh of outrage. As Joseph Heath writes in his book Filthy Lucre

It would make just as much sense to declare an annual “freedom day,” in order to let mortgage owners know what day they “stop working for the bank and start working for themselves”…But who cares? Homeowners are not really “working for the bank”; they’re merely financing their own consumption. After all, they’re the ones living in the house, not the bank manager.

But with all this talk about Tax Freedom Day, don’t forget about the actual Tax Day. File to get your fast refund today (literally) before your taxes become late.

The Mega Millions jackpot has reached a record high of of $640 million, shattering the previous U.S. record of $390.

Coworkers are pooling money to buy tickets on their lunch breaks, local liquor stores and bodegas are crowded with anyone feeling even remotely lucky, and Twitter users are fantasizing about blowing the money on everything from classic cars to cupcakes to AK-47s.

But no matter who is lucky enough to win the money, there’s one sure thing they’ll be spending it on: taxes. Before you start training those baby snakes to kill Congressmen, you’ll have to pony up to Uncle Sam a pretty hefty chunk of change.

The federal tax rate on gambling winnings of this sort is a whopping 25%. Then after you factor in state and in some cases city taxes, that’s about a third of your winnings down the drain right off the bat. Exactly how much depends on how you opt to get paid.

If you choose the lump-sum you get $462 million upfront. Depending on your specific tax situation, a whopping $157 million of that goes straight to taxes, leaving you with about $305 million. Alternately, you could choose to receive annual payments, which would amount to about $20 million every year for 26 years. But that means you have to kick $6.8 million dollars over to the IRs, leaving you with the still not too shabby sum of $13.2 million as an annual income.

Before you rush off end world hunger with a boatload of Ramen Noodles, you might want to consider a little tax planning. Purely from a tax perspective, the best thing to do is take the lump sum. Almost everyone expects tax rates to rise at the end of the year or very soon after.

Taking all of your winnings now might save you some money, but it won’t do you any good if you just run off and spend it all at once buying every Taco Bell in the U.S. (between you and me, there are better investments). According to Don McNay, who wrote the book Son of a Son of a Gambler: Winners, Losers and What to Do When You Win the Lottery, 9/10 winners blow through their money in less than 5 years.

But if you can exercise some self-control – so hard when you could be swimming in a large vault of gold à la Scrooge McDuck! – all you have to do is invest that lump-sum and you could spare yourself a few extraneous tax dollars.