Buisness Insider

10 Of America Strangest Federal Tax Laws

HeascratchAmericans are known to bristle come April 15, but nearly 240 years after the founders threw a Boston Tea Party to protest unfair taxes, citizens are using less dramatic – but no less creative – ways to test the tax code. Modern-day challenges often end in U.S. Tax Court, where citizens can go to take on the Internal Revenue Service.

The basic questions that get brought up in Tax Court seem straightforward enough: What is income and what are its related expenses? The specifics can get, well, flat-out weird.

The IRS code may be full of loopholes and deductions as it is, but the IRS has also approved more than a few imaginative – even wacky – tax breaks.

If you have a huge deduction that you’d like to take but are unsure if it will pass muster with the IRS, talk to your tax preparer to see if a private letter ruling (PLR) makes sense, advises Gil Charney, principal tax researcher at the Tax Institute at H&R Block in Kansas City, Missouri. The PLR is written guidance from the IRS that provides an advanced decision on how it would treat the case. It does cost money, so make sure the deduction is worth it.

Maximizing the look of your muscles

Maximizing The Look Of Your Muscles

The Tax Court ruled that a professional body builder who uses special oils to prepare for competition could deduct their cost.

What is not deductible are the wheat-grass shots and buffalo meat he eats to tone his form. Go figure.

Tax breaks for drug dealers

Tax Breaks For Drug Dealers

If you make your money dealing illegal drugs, getting your taxes right might not be high on your list of priorities, but just because the money is made illegally, doesn’t mean the IRS won’t accept taxes on it.

The Tax Court has clarified some potentially helpful details on the situation. (Remember, sometimes tax evasion is easier to prove than more insidious crimes. Think Al Capone.)

Baggies and soil for marijuana plants are not deductible. Neither is the apartment you work from or the cost of your security team. However, you can deduct the cost of your product.

Depreciating breast implants

Depreciating Breast Implants

A stripper known as Chesty Love was allowed to write off her breast implants because they’re considered a stage prop. As it applies to business expenses, those assets can now be depreciated each year, even if her clients’ appreciation for them never diminishes.

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Bobby Jindal Is Proposing The Elimination Of All Income And Corporate Taxes In Louisiana

Bobby Jindal

Louisiana Gov. Bobby Jindal is proposing the complete elimination of income and corporate taxes in the state, and says he wants to replace the revenue by increasing sales taxes.

The Times-Picayune reported that Jindal is in the process of fleshing out the tax reform proposal, the goal of which, according to a statement from the Governor’s office and given to the paper, “is to eliminate all personal income tax and all corporate income tax in a revenue neutral manner. We want to keep the sales tax as low and flat as possible.”

“Eliminating personal income taxes will put more money back into the pockets of Louisiana families and will change a complex tax code into a more simple system that will make Louisiana more attractive to companies who want to invest here and create jobs,” Jindal says in the statement.

“Tax reform will remove administrative burdens from families and small businesses and improve Louisiana’s business prospects; create more business investment opportunities with increased job growth; and raise the state’s profile in national business rankings,” the statement continues.

“The bottom line is that for too long, Louisiana’s workers and small businesses have suffered from having a state tax structure that is too complex and that holds back economic prosperity. It’s time to change that so people can keep more of their own money and foster an environment where businesses want to invest and create good-paying jobs.”

Jindal will meet with state legislators over the next few weeks to talk about the plan.

The Louisiana governor, who is also currently Chairman of the Republican Governors Association, is considered a likely presidential hopeful in 2016.

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8 Tax Changes Coming With The Fiscal Cliff Deal

Girl Paying Taxes Calculator Frustrated Overwhelmed1. Beware the $740-a-year 'stealth' tax

While the fiscal deal makes permanent the Bush-era tax cuts, thus averting the biggest tax increases that would have gone into effect in 2013, it didn't extend the second biggest one.

Congress quietly let the temporary Social Security payroll tax cut expire. That means that the 2-percentage-point cut in the payroll tax that wage earners have enjoyed over the past two years ratchets back to its normal 6.2 percent level.

That represents an extra $115 billion of revenue a year for the federal government, according to the Tax Policy Center, or about 22 percent of the total tax rise had all the "fiscal cliff" tax provisions taken effect.

The increase in the payroll tax would raise the tax bill for the lowest 20 percent of income earners by 1.1 percentage points, 1.3 percentage points for middle 20 percent, and 0.8 percent for the top 20 percent (who earn more from capital returns than from wages), the Tax Policy Center estimates.

The impact on the average taxpayer: an extra $740 a year.

2. Highest wage earners will pay more income tax

The one group that didn't escape an increase in income tax rates were the 0.7 percent of Americans who earn more than $400,000 a year as single taxpayers (or more than $450,000 as joint filers). For them, marginal income tax rates will rise substantially – from 35 percent to 39.6 percent.

Three-quarters of taxpayers who make between $500,000 and $1 million would pay an average $10,000 extra in 2013, according to the Tax Policy Center. Some 98 percent of those earning $1 million or more would owe $125,000 more, on average.

The bill also restores caps on itemized deductions and phases out the personal exemption for those individuals making more than $250,000 ($300,000 for couples).

3. Estate taxes go up

The tax rate on estate taxes will rise to 40 percent, up from 35 percent in 2012. The first $5 million of an individual's estate will be exempted ($10 million for family estates), the same as in 2012.

The deal averts the "fiscal cliff" provisions, which will have lowered the exemption to $1 million and increased the tax rate to 55 percent. And the exemption levels would be indexed to inflation, so gradually even bigger estates would avoid the tax.

4. Taxes rise on stock returns for the wealthy

The tax rate on dividends and capital gains above $400,000 ($450,000 for families) would rise from 15 percent to 20 percent. This would hit the wealthiest Americans, who tend to earn more from their capital investments than from wages and salaries – and raise only a few billion dollars in tax revenue in 2013.

When analyzing a similar provision for a broader set of Americans – those with dividends and capital gains above $200,000 ($250,000) – the Tax Policy Center estimated it would bring in only $8 billion.

That's not all: Courtesy of the 2010 health-care law, high-income taxpayers will be charged a new 3.8 percent tax on their investment income.

5. The alternative minimum tax drama ends

Every year, some 30 million middle- and upper-middle income earners waited to find out if Congress would extend the alternative minimum tax (AMT) patch, which would keep their tax rates from rising rapidly. Congress always did, but often at the last minute and sometimes even retroactively. The new deal ends that annual drama by adjusting annually the AMT thresholds for inflation.

6. Child, earned income, college tuition tax credits extended

President Obama's 2009 stimulus package helped low-income families by boosting the child credit and the earned income tax credit. Tuition tax credits were also expanded. Those provisions, which were due to expire in 2013, have been extended for another five years.

7. Extended unemployment insurance benefits preserved

The fiscal deal continues the extended unemployment insurance benefits for the long-term unemployed for an additional year. In some hard-hit states, that coverage provided aid for up to 99 weeks. That coverage was due to expire Jan. 1 and would have caused jobless aid to expire after 26 weeks of state unemployment benefits.

By one estimate, the new deal from Congress will keep some 2 million jobless from being cut off immediately and another 1 million from losing the aid early this year.

8. 401(k) conversions to Roth IRAs made easier

By easing the rules regarding conversions of 401(k), 403(b), and similar retirement plans, Congress hopes to encourage taxpayers to roll over their taxable retirement funds into nontaxable Roth IRAs. Under current law, taxpayers can only roll their 401(k) plans into Roth IRAs for specific reasons, such as a job change, retirement, or reaching 59-1/2. The new deal eases those restrictions, with the hope that more taxpayers would make the move.

Since rolling a 401(k) into a Roth is a taxable event, the looser rules are expected to generate immediate federal revenue. Congress wants to offset some of the $24 billion lost because of a two-month delay in the big federal spending cuts across the board that the "fiscal cliff" would have enforced beginning Jan. 1.

But it's a short-term revenue boost at the expense of long-term tax revenues that would come from 401(k) funds, which accumulate tax-free but are taxable once they're withdrawn from the account.

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