Question 1

What are the basics of tax law?

Accepted Answer

At the federal level, the primary tax is the income tax. Most know this form of taxation by the completion of the annual 1040 form for the IRS. The income tax is a relatively new creation, hav­ing only been in existence for approximately a hundred years. The income tax is designed to tax anything that is referred to as income or what otherwise might be of as economic gain. That gain can come in the form of wages, profits from the sale of property and securities, earnings from gambling, or proceeds from winning the lottery. Overall, the amount of tax that depends upon what tax bracket you are in. Currently there are several different tax brackets that are governed by your overall income level. Whatever income you hove may be subject to certain deductions and also to a variety of different credits that may be available. A deduction reduces your adjusted gross income. Common deductions are the home mortgage interest deduction, the payment of state taxes, the payment of real estate taxes, and charitable deductions. These deductions do not reduce your tax burden dollar-for-dollar. They simply reduce the amount of income you have that is subject to tax at whatever your tax rate may be. Deductions are contrasted with tax credits. A tax credit is a dollar-for-dollar reduction of your tax obligation. For instance, if your adjusted gross income is $100,000 and your total deduc­tions are $40,000, then your taxable income is $60,000. At that level of income, your total obligation may be in the range of $20,000. !f you then have credits that you are entitled to, those credits will reduce that $20,000 obligation dollar-for-dollar. As such, if you have the entitlement to $5,000 in credits, then your actual tax burden will be only $15,000. Income that you receive in some instances can be subject to double taxation. For instance, if you are a principal owner of a corporation and the corporation receives income, then the cor­poration may be taxed on that income. If you then distribute that income to yourself as compensation for being an officer or as shareholder dividends, then that income may be taxed a second time as your personal income. This double taxation can be avoided by designating your corporation as an S corporation. In an S corporation this tax liability is passed through to the indi­vidual owner or owners. In a C corporation the tax liability may exist both at the corporate level and at the individual level for the individual owners. At the state level, taxes may come in several different forms. The state income tax that exists in most states is generally keyed to the federal income tax, in which information from your federal return is transferred directly to your state return forms. The tax at the state level for income is generally considerably less than at the federal level. Other forms of state taxes include the sales tax, which is a tax on the sale of all goods. The sales tax is sometimes referred to as a regressive tax, meaning that it taxes lower income people disproportionately. That is, a 4% tax on sales of food and other necessities to someone earning $200,000 per year may not be a big bite on their budget, but a 4% tax on these sales for someone earning $20,000 is a big bite. There may also be a number of different state licensing taxes. Those taxes may come in the form of licensing motor vehicles professional licenses, or occupational licenses. Many localities have what is referred to as a business license tax. This tax in some jurisdictions is called a gross receipts tax. Generally, the rate for this tax is fairly low, but it is a tax on essentially every dollar that business brings in the door, irrespective of how much actual income the owner of the business may derive from it. As such, a business may have gross receipts of $1,000,000 and also have expenses of $1,000,000, in which event there is no income gener­ated. That business, however, is still going to pay a gross receipts tax on the $1,000,000 of gross receipts.

Question 2

Can the IRS take my house if l owe back taxes?

Accepted Answer

The IRS can seize just about anything you own-including your home and pension plans. There is a list of items exempt by federal law from IRS seizures, but it is hardly generous, and it doesn't include your residence. Moreover, state homestead-protection laws don't apply to the IRS. With that said, the good news is that the federal Taxpayer Bill of Rights discourages the IRS from taking homes of people who owe back taxes. In addition, the IRS doesn't like the negative publicity generated when it takes a home, unless of course it is the home of a notorious public enemy. Nevertheless, if the IRS collection division has tried-and failed-to get any cooperation from a tax debtor (for example, if the debtor has not answered correspondence or returned phone calls, or has made threats, lied about income, or hidden assets), the IRS may go after a residence as a last resort. An IRS tax collector can't make the decision on his or her own-it must come from top IRS personnel. If the IRS lets you know that it plans to take your house, your Congress person may be able to intervene and put some pressure on the IRS to stop the seizure. And if the seizure would add you and your family to the ranks of the homeless, you can plead that the seizure would create a substantial hardship. In the unhappy event the IRS does seize your home, all may not be lost. The IRS must sell the home at public auction, usually held about 45 days after the seizure. 'Then, the high bidder at auction must wait 180 days to get clear title. In this interim period, you have the right to redeem (buy back) the home by coming up with the bid price plus interest.

Tax Law

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