Taxes and Spin

A lot of people are nervous about what might come out of Washington prompted by the current administration.  A lot of my clients have been asking about whether their taxes are going to go up.

Unfortunately, my crystal ball is in the shop, so my predictions are a little murky.

ProPublica has made use of this general public uncertainty to try to shine a light on the wealth (and tax position) of the super-uber-wealthy.  I’m not going to post a link – if you want to read the article, you can Google it (ProPublica Secret IRS File).  I don’t have an interest in driving more traffic to the site – it was picked up by all kinds of media, so if you pay attention to national news, you have likely already heard about this.

We get it – there are some super-weathly people that (seemingly) don’t pay their fair share of taxes.  But check out this analysis of the ProPublica article by Reason (and I will share the link to this article – which has links to most of its source material):

ProPublica’s Bombshell that Wasn’t, by Andrew Moylan and Andrew Wilford

Please read the full article, but here are the two most important points:

Despite ProPublica’s best efforts to make the information enclosed within seem damning, the data tell us little we didn’t already know. For the 2018 tax year, the last year for which we have data, the top 1 percent paid over 40 percent of federal income taxes, despite earning just under 21 percent of total adjusted gross income (AGI). The bottom 50 percent of taxpayers earned 11.6 percent of total AGI, but paid less than 3 percent of income taxes. The same story holds when looking at all revenue sources too, so it’s not just the income tax that is progressive.

ProPublica, however, tries to make the case that the wealthy are getting away with murder through the tax code, so they “do a calculation that has never been done before,” comparing growth in wealth over the course of a year to taxable income. They use this to calculate an individual’s “true tax rate,” which is sort of like handing out wins in a baseball game in the middle of the early innings and calling it the “true outcome” of the contest.

I’m not advocating one way or another for a change in how we administer income taxes – there probably needs to be some change and some increase in taxes to recover all that money the government has been spending on COVID relief.  There is probably some low-hanging fruit in the upper tiers of income tax payers.

For purposes of this post, I am advocating for some perspective, and sharing a reminder that perspective is important.  Please re-read the section that is emphasized above.   Unfortunately, Reason does not cite it’s source, but you can take a look at the IRS statistics published every year to confirm the information – you’ll just need to do a little math on your own:

IRS Statistics Website

Here’s a more direct link to the downloadable spreadsheets:  IRS Income Spreadsheets

Bottom line – watch for the agenda in a story – particularly one that seems like it really resonates.  This is an example of a click-bait story that received a lot of traction, but didn’t really demonstrate much (and used some very questionable tactics)

PS – Personal income tax returns are not public information, and the IRS is supposed to keep your income tax return confidential.  How did ProPublica get the information?  Does this mean your personal tax information is also in ProPublica’s hands?

 

PPP #1 and #2 for Farmers (and other businesses)

See the flowchart below to walk through whether you might qualify for PPP #1, an increase in PPP #1, or PPP#2. Loan applications are being accepted NOW – contact your banker immediately to start the process.

NOTE: According to the December 23 Tax Act (CARES update), PPP income is NOT taxable, but expenses paid with PPP dollars are fully deductible.

For more detailed information about the items in the flowchart, check out the Farm CPA Blog: Farm PPP Loan Flowchart.

IRS Audit Rates

Just in time for Halloween:  Few things spook my clients more than an audit.  This just in from the IRS website:  The rates of audits based upon income levels.


** Returns that show no total positive income report zero or negative income. The negative income could be negative business income and/or capital losses. Returns with no TPI are filed by taxpayers in any of the income categories, and there is no prevalence of one over the other. These returns account for less than 0.5% of the individual filing population.

From IRS:  IRS Audit Rates Significantly Increase as Income Rises

 

Do Farm Kids Need to File a Tax Return?

In many farm families, children help their parents with chores, caring for the animals, or tending the crops.  When they’re young, they often just want to help and “do what mom and dad do.”  But once they get old enough (and experienced enough) to perform more skilled or “grown-up” tasks, many farmers want to pay their children for their labor at a rate more in line with the fair market value of their labor.  When farmers start paying their children for work on the family farm, one general question invariably comes to mind:  “Do my kids need to file a tax return?”

Here are some frequently asked questions about when your children need to file taxes and paying them for work on the farm:

  • Q:  When do my children need to start filing taxes?
  • A:  Generally, you can assume that your child needs to earn the “standard deduction amount” before you must file taxes.  The standard deduction amount is $12,400 for a single person in 2020.  However, if your children have W2 income they might want to run the numbers to see if they qualify for a refund of the withheld taxes from that W2 income, in which case filing a tax return would be a good idea.
  • Q:  What if my child is an owner in the family farm and receives income through the family farm operation, or has income from dividends or interest on investments?
  • A:  If a minor has “unearned income” in excess of $1,100, then they will need to file a tax return, regardless of earned income.  A minor is taxed at their parents’ rate on any taxable unearned income.  For farm kids, this becomes an issue if they have an ownership interest in a pass-through farm entity and receive a K1.  If a child’s unearned income is only on bank account income, then filing a tax return is usually not necessary unless they approach the standard deduction amount in earned income.
  • Q:  How should I report my children’s’ farm income that I pay to them for their work on the family farm?
  • A:  It depends, based on how much that farm income is.
    • If your children’s total earned income for the year is under $600, then you don’t need to do anything.
    • If your children will likely be well within the $12,400 mark for their 2020 income but over $600, a 1099 is a good idea.  If their income is within the standard deduction amount then they won’t owe any income tax on earned income, and with a 1099 they won’t have to go through the process of filing a return to get a refund of withheld income.  On the other hand, YOU will be able to deduct the amount that you pay them as a legitimate farm expense.
    • If your children will be earning close to $12,400 mark and you are already issuing W2’s to other employees, then consider adding your children to the payroll system and issuing them a W2 as well. [NOTE – if you put your children on your payroll, remember that they are also subject to consideration in worker’s comp and unemployment reporting].
  • BONUS:  If you pay your child through normal payroll, your child has the opportunity to start funding an IRA.  While retirement years seem far, far, away for a minor, a small investment in a tax-deferred account can grow significantly over your child’s working life.