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This started out as an essay on how Senator McCain's idea to exempt all capital gains from taxation was a bad idea. When I started to illustrate it with the Palins' 2007 tax return as an example, I found that the Palins not only don't think paying higher taxes is patriotic, but they aren't too eager to pay the taxes they currently owe.

Let's start off by pointing out that April 15 is NOT necessarily the deadline for filing your federal income taxes. You can get an automatic extension with form 4868, which makes the due date August October 15.

The Palins didn't file their federal income tax return until sometime after September 9, which is to say, long after she was tagged to be John McCain's running mate on August 29.

How do I know this? Because there's a W-2 missing, and Todd Palin included a statement saying that he was using the figures from his pay stub. It's signed - and it's dated September 9.

As I mentioned, this was originally to be an essay on capital gains. The stock market is down 40%, and it's highly unlikely that anyone will be selling their stocks or shares in a mutual fund for a profit. Who, then, would benefit from free capital gains? Why, enterprising businessmen like Todd Palin.

Todd Palin considers his snowmobile racing to be a business. I would call it a hobby. The definition of a business is an activity engaged in for purposes of profit. Todd took in $17,000 this year, and ended up losing $9639 - after taking $10,858 in depreciation.

On the other hand, Todd bought two new sleds this year, and he sold the old one, one that was 2.5 years old, at a significant profit. The original purchase price was $2781, and he sold it for $5000. We know he had a nasty wreck, and finished the last 400 miles of the race with a broken arm. Do you suppose that his wreck made the snowmobile worth that much more?

Or do you suppose he souped it up?  He spent $4608 for parts this year. It sounds like a considerable amount of his activity is turning ordinary snowmobiles into hot rods. If you lose money doing that, it's a hobby. If you make money, it's a business. Under no circumstances is it an investment.

But after depreciating out the $2781 in original purchase price, and deducting $4608 in parts this year, he faced $2781 recapture, and $2219 in capital gains.

Now, if he spent the money he deducted, and he's being taxed on the money he received, that looks like everything is square, right? It's not, because that money, recapture and capital gains, are being reported on the front of Form 1040. It should be business income - which is also reported on the front of Form 1040, but it's subject to Self Employment Tax as well.

When you get a paycheck, taxes are withheld that go to Social Security and to Medicare. A person who is self-employed doesn't get a paycheck, so he pays Self Employment Tax instead. Self Employment Tax looks like it's higher than the Social Security and Medicare taxes you pay, but that's only because both you and your employer each pay half; a self-employed person has to pay both halves.

This finagle saves the Palins about $578 this year. If capital gains were taxfree, they'd have saved another $555 on those.

Oh, and there's another interesting little tidbit. When you calculate the tax on their earnings, it's incorrect. In fact, it's exactly $250 short, the same amount you'd owe for $1,000 less income.

The return says it was prepared by H & R Block, but it appears to have been typed out, rather than printed by a computer. Computers don't make mathematical errors, and there's no preparer signature on the return.

Normally, if you've not paid enough in withholding and estimated taxes, there is a penalty. However, their 2006 return had a tax due of $11,944, and their estimated taxes plus withholding for 2007 amounted to $22,721, so they'd not get a penalty for underestimating their taxes. On the other hand, even if you get an extension to file, it's not an extension to pay. Their liability was $24,738 on the return, and there was $22,721 available to pay their taxes. That means they would have owed interest on the $2017 shortfall, from April 15 to the date they actually paid the taxes due.

And no paid preparer should miss that.

Has the return actually been filed, even now? October 15 is getting near.

Although you've heard lots of stories about the IRS and horrifying tax audits, the big secret is that nobody is out to nail innocent taxpayers. The biggest single reason tax returns are selected for audit is that they are ambiguous, that they've been prepared by someone who has no idea what they're doing - and it's not uncommon for an honest taxpayer to come out of an audit with an additional refund.

Most people think it's patriotic to pay their fair share of taxes. They don't want to pay any more than necessary, but they don't want to cheat on their taxes, either.

But sending in a tax return like this one is asking for an audit.  Tax cheats think they're smarter than the IRS is - and the IRS is quite happy to let them know otherwise.

Originally posted to Harl Delos on Sun Oct 12, 2008 at 10:12 PM PDT.

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Comment Preferences

  •  Two Things Wrong With Your Analysis (2+ / 0-)
    Recommended by:
    ChuckInReno, arodb

    First, there's a second extension available, to October 15, so filing in Sept. is fine, so long as you sent in the second extension.  Also, they would not have a penalty on the $2,000+ difference, since as long as you have paid at least 90% of what you actually owe, you don't have a penalty.  However, you would owe interest on that money, from April 15 to the date you actually send it in.

    Notwithstanding those technical tax issues, the rest of your post appears accurate.

    The big joker in the deck, however, is that nowhere on their tax returns did the Palin report their per diems from the State of Alaska, which just about every tax expert has said would be reportable income.  Also, there was some discrepancy between what they reported as her income as Governor and what the State of Alaska sent them as a W-2 form.

    Hopefully, they'll both get into hot water over that tax return, and boy, is that not patriotic!!!!

    •  One yes, one no. (0+ / 0-)

      Texcap commented that the Form 4868 now gives you an extension to October 15, not August 15 as it was in the past. There used to be a second extension available, which was not automatically granted; you theoretically had to come up with a good excuse to get that one, although they seemed to accept almost anything that sounded halfway good.

      I didn't look at whether the Palins paid 90% of what they actually owe; they meet a different rule, having paid more in withholding for 2007 than their actual tax assessed for 2006. As I indicated in the post, there's no penalty for this, but there is interest due from April 15 until the rest of the tax is actually paid.

      The State of Alaska sent her a W-2 that shows Box 1 wages of 107987.00, Box 2 withholding of 14559.18, Box 5 Medicare wages of $122401.43, Box 6 Medicare tax withheld of 1774.85, and Box 12a of 356.00, which would be the Alaska Permanent Fund distribution.

      If you add together that $107,987 with Todd's BP W-2  of $43,518.67, $50 for Todd's USW wages, you get the $151,556 that they reported on their 1040.

      I don't have any documentation about how many days she received a per diem, or how much per diem she received. In general, if you receive a per diem and you don't file an expense report indicating the date, time, place, amount and business purpose of the expenses, then the per diem is taxable to you.

      However, the state should be issuing an 1099-MISC for this.

  •  your shot pattern is too wide (1+ / 0-)
    Recommended by:
    ChuckInReno

    his racing can certainly be a business and there's no rule that you have to make money on a business.

    The big item, though (and thanks for noting it) is that they may have tried to sneak out of self employment tax (and simultaneously claimed to have had their return prepared when it apparently wasn't, if your observations are correct).

    Please take down the bits about this being a hobby.  The IRS will look askance at several years of losses in a row, but businesses (especially small-time racing businesses) lose money all the time.

    I'd love to see a tax lawyer get ahold of that return.

    "Well, yeah, the Constitution is worth it if you can succeed." -Nancy Pelosi, 6/29/07.

    by nailbender on Sun Oct 12, 2008 at 10:35:07 PM PDT

    •  A profit is not without honor save in his own... (1+ / 0-)
      Recommended by:
      nailbender

      Racing CAN be a business, but only if you treat it as one.

      And you're right, there is no rule that you HAVE to make money on a business.  There IS a rule, however, that unless you have a bona fide profit motive, it's not a business.

      The presumption is high, when you are engaged in a sports or recreational activity, that it's a hobby. Unless you can show a reasonable expectation of profit, you're likely to lose in tax court.

      I suggest you take a look at these cases:
      Commissioner v. Groetzinger, 480 U.S. 23 (1987)
      Higgins v. Commissioner, 312 U.S. 212 (1941)
      City Bank Farmers Trust Co. v. Helvering, 313 U.S. 121 (1941)
      Owen v. Commissioner, 23 T.C. 377 (1954)
      Haft v. Commissioner, 40 T.C. 2 (1963)
      Schwinn v. Commissioner, 9 B.T.A. 1304 (1928)
      Schott v. Commissioner, T.C. Memo. 1964-272
      Engdahl v. Commissioner, 72 T.C. 659 (1979)
      Boyer v. Commissioner, 69 T.C. 521 (1977)
      Herrick v. Commissioner, 85 T.C. 237 (1985)
      Elizabeth Giles v. Commissioner, T.C. Memo. 2005-28

      •  If there are purses involved (0+ / 0-)

        (and I believe Palin usually races for money) then it's much easier to prove, especially if you win a fair amount (as he's reported to have done) but you have to show a profit before too long.

        "Well, yeah, the Constitution is worth it if you can succeed." -Nancy Pelosi, 6/29/07.

        by nailbender on Mon Oct 13, 2008 at 07:34:02 PM PDT

        [ Parent ]

  •  Time Magazine summed it up...... (2+ / 0-)
    Recommended by:
    craiger, Ann Hedonia

    But the Branchflower report still makes for good reading, if only because it convincingly answers a question nobody had even thought to ask: Is the Palin administration shockingly amateurish? Yes, it is. Disturbingly so.

    I don't think the Palin's are smart enough to be real "tax cheats". This is just one more piece of evidence to illustrate this family is more like something on a third tier reality show, than one ready for national office.

    Everything about them is tacky. Everything they do fits this stereotype of petty, grasping, self-absorbed, uncultured, shallow rubes--which unfortunately has become kind of a mainstream stereotype for many white Americans.

    To me, Todd epitomizes this even more than Moosetang Sally. His need to be included in the government, his attempts to exercise power behind the scenes, his stupid "snow machine racing", all scream of an insecure guy trying to prove his manhood.

    They have no values, other than the advertising slogans of mass franchises, the prepackaging bigotry of their church leaders, and the cliches of the republican party.

    Every description I have read of Wasilla is that it is a tacky place, full of strip malls and unregulated growth. It fits the Palins to a T.

    A Sarah Palin speech: "Like Gidget addressing the Reichstag.."

    by Azdak on Sun Oct 12, 2008 at 10:35:33 PM PDT

    •  Elitist! (0+ / 0-)

      Many readers might interpret your approach as rather, umm, elitist?

      Everything about them is tacky.

      Every description I have read of Wasilla is that it is a tacky place, full of strip malls...

      Many, many people live this way. I don't, but I try not to label their lifestyle, either.

  •  The extension deadline is now (2+ / 0-)
    Recommended by:
    Cordelia Lear, alizarin

    6 months, not the 4 months it was in the past, so the due date for filing your tax return in October 15th with a properly executed extension.

  •  You do know, don't you..... (0+ / 0-)

    ....that Obama proposed temporary elimination of capital gains taxes for small businesses.  He proposed that last week.  

    •  That's new? (0+ / 0-)

      According to http://www.barackobama.com/...
      there would be a capital gains tax rate of zero for individuals earning 250,000 or less.

      Is that something new, something that wasn't there before?

      I don't favor that move. There's no fundamental difference between capital gains and any other income, and making any distinction between them is silly. It primarily benefits the people who make a living from gaming the system. I did that for years, preparing taxes for farmers, professionals, and small businessmen.

      As far as that goes, I'm opposed to the federal income tax. I think it'd make a lot more sense to have a VAT, which basically taxes consumption rather than production.

      For one thing, after our manufacturers pay income tax here, then ship the products overseas and pay VAT as well, making them uncompetitive overseas. Foreign manufacturers have no income tax to pay, and they get VAT refunded when they export their products, meaning our domestic manufacturers are uncompetitive here.

      But I originally started out to explain how capital gains taxes are a too-convenient loophole. Willie Sutton was a fool to rob banks with a pistol; it's much easier to steal from Uncle Sam with a ball point pen.

  •  I have a tax question for the Palins (0+ / 0-)

    Todd Palin claims his house was built by some 'contractor buddies,' at least according to a recent rec'd diary.

    Isn't he required to pay taxes on services provided to him for free?  If so, did he report this income and pay the required tax?

    •  The gift tax isn't likely a problem (0+ / 0-)

      There's a federal gift tax, but the donor, not the recipient, is the one required to pay a tax on any gift.

      And it's unlikely that they crossed the threshold. You can give $12,000 to each recipient per year. If their house belongs to both of them, a guy could give $12,000 to Sarah, and $12,000 to Todd each year without paying any gift tax.

      Last night, my wife offered me a million dollars if I'd turn off the light on my side of the bed. I turned it off, then forgave that debt as a gift. Gifts to a spouse are also exempt from the federal gift tax, though, so I'm in the clear. Boy, is that a relief!

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