In the midst of the current economic crisis, I know that many in Congress were hoping for a smooth transition to a new administration. That may not happen. President Elect Barack Obama’s nomination to head the Treasury Department has hit a road block: revelations that Timothy Geithner had failed to timely pay $34,000 in taxes.
Republicans and Democrats have indicated that the information about back taxes (which were eventually paid) would not necessary block the nomination. Sen. Orrin Hatch (R-UT) has said he had “no problem” with Geithner while Sen. Charles Grassley (R-IA) called the information “serious, and whether or not it’s disqualifying is to be determined.” With all of the buzz, it looks like it will definitely not be smooth sailing for Geithner at his confirmation hearing.
The problem stems from Geithner’s 2001-2004 stint at the International Monetary Fund. Geithner failed to pay SE taxes (self-employment taxes, which are basically the FICA equivalent for an independent contractor or otherwise self-employed person). At IRS audit in 2006, Geithner repaid the obligation for 2003 and 2004 but did not pay the tax for 2001 and 2002 until 2008. Remarkably, that amount due wasn’t discovered by the IRS at audit but by Obama’s transition team.
Many in Congress believe that the filing omissions were not intentional and that the confirmation hearing will proceed without further problems. Intentional or not, it’s a sure bet that no matter what Congress is saying now, the hearing will not be an easy one for Geithner.
Geithner formerly worked with the International Affairs division of the U.S. Treasury Department. He went on to serve as an attache at the US Embassy in Tokyo before working under Treasury Secretaries Robert Rubin and Lawrence Summers. Geithner then served as the director of the Policy Development and Review Department at the International Monetary Fund for the tax years in question. He was later named president of the Federal Reserve Bank of New York.
An impressive resume, for sure. But what about the tax issues?
It’s not surprising to hear about someone failing to file SE taxes – or other taxes related to self-employment. I see it all of the time – just look at my “ask the taxgirl” questions. But most of the time, the folks who make those mistakes are web designers, authors, engineers and writers… They are not people whose entire careers have been focused on money management.
Timothy Geithner’s career has always been about money and he’s now on tap to lead the Treasury. He will set the tone for how our country reacts to economic news, as well as tax policy. He will follow in the footsteps as such esteemed Secretaries of the Treasury as Alexander Hamilton, William Gibbs McAdoo and James Baker (I’ll conveniently leave out Henry “I’ve pulled one over on the American people” Paulson).
Is this really the face that we want as representative of our economic policy? Especially in a time of crisis? What do you think?
That’s what many folks think when asked to consider whether they will be affected by the AMT (Alternative Minimum Tax). But here’s where they’re wrong: the AMT is hitting middle class America more often. We’ve even argued about it a little bit on the blog (be sure and read the comments). And the consensus is that Americans hit by the AMT – and the estimate is that 20 million taxpayers will be affected this year – are not happy.
Congress is trying to sort out some of the mess. The mess is even more complicated than usual because the temporary relief from before evaporates in 2007.
So, we know that we hate it – but what the heck is it? The AMT is a secondary tax that can increase what you would generally pay with your “normal” tax bill. It was originally implemented to prevent the wealthy from artificially reducing their tax bill through the use of so-called tax preference items. The idea was that people who had very high incomes should not be able to use certain deductions to lower their tax bill below what should be reasonably expected for a taxpayer at their income level. Well, that was the idea anyway. The reality is that certain kinds of transactions could bump you into the AMT threshold.
Here are some transactions that can trigger or be affected by the AMT:
State and Local Taxes. If you live in a high tax state (like New York or Hawaii) or a municipality with high taxes (that’s right, I’m talking about Philadelphia but also New York City and Bridgeport, CT), the good news is that you can deduct those taxes on your Schedule A if you itemize. The bad news is that it’s a tax preference item that could subject you to AMT – and you could lose the deduction.
Medical Expenses. You can itemize these expenses on your Schedule A. AMT limits this deduction. So, if you have high medical expense deductions, such as self-employed persons who buy their own health care insurance, you can lose out on significant deductions.
Miscellaneous Itemized Deductions. See Medical Expenses above. It’s the same problem.
Incentive Stock Options. ISOs are the number one item that I’ve seen kicking folks into the AMT. Before the mid-90s, only the really wealthy exercised stock options. But that all changed once the market went nuts and companies started going public like crazy. Suddenly, folks who were making a little bit of money but exercised an large stock option package were subject to the AMT. This hurt, in particular, those who accepted the package as part of a retirement or separation deal. The income is subject to AMT – and you lose all of those other deductions mentioned above.
To make things worse, if you find yourself subject to the AMT and haven’t made estimated payments throughout the year, you may be subject to an underpayment penalty.
In response, Sen. Charles Grassley (R-Iowa) is proposing legislation that would exempt those subject to the AMT for the first time in 2007 from underpayment penalties. And Congress is otherwise considering raising the exemption for AMT for 2007 (um, guys, it’s July…). Band-aids, all.
Here’s a thought: why not just fix the darn thing once and for all?
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