Congress Mulls Changing Taxes on Residential Real Estate

The House Ways and Means Committee held a hearing on tax reform and residential real estate, considering the effect of changing popular tax breaks like the mortgage interest deduction.


Thursday’s hearing showed little indication that Congress is ready to abandon such a popular tax break, especially as the housing and the construction industries finally show signs of rebounding from the mortgage crisis.

House Ways and Means Committee chairman Dave Camp, R-Mich., contended that it was important to fix the broken Tax Code to make it simpler, fairer and more transparent for families and employers.

“Homeownership is an integral part of the American dream, and the Tax Code has long provided a variety of incentives to make it easier for families to buy and own a home,” said Camp. “We also know that the real estate industry plays a large role in our economy. So, this is an area that needs careful, thoughtful review.”

Camp noted that a number of federal tax preferences provide benefits for residential real estate, each of which is governed by different rules and criteria. For example, only taxpayers who itemize their deductions may deduct mortgage interest. “Other interactions within the Tax Code can also limit the use of this provision,” said Camp. “By way of example, the deduction for interest on home equity indebtedness is disallowed for purposes of the Alternative Minimum Tax.”

He pointed out that federal tax benefits for real estate treat homeowners differently than renters. A taxpayer who pays $1,000 per month to rent an apartment may not deduct that amount from income, but a taxpayer who pays mortgage interest of $1,000 may take a deduction if they itemize, Camp noted.

“You shouldn’t need an army of lawyers and accountants to understand our Tax Code,” said Camp. “And, it shouldn’t take American taxpayers over 6 billion hours and $168 billion every year to comply with the code. We should get rid of the loopholes in the code and make it more efficient and effective for hardworking taxpayers.”

His Democratic counterpart on the committee sees more fruitful areas for tax reform. “Let’s be clear. There are many egregious loopholes in the Tax Code. But the main provisions incentivizing home ownership are policies, not loopholes,” said House Ways and Means ranking member Sander Levin, D-Mich. “The failure to differentiate which is which—between policies and real loopholes—has led to facile proposals. Among them are proposals that begin without the mortgage interest or any other deductions or proposals that simply pick a much lower top tax rate then present law without any suggestions as to how to fill the trillions in lost revenue that would result.”

He referred to a report from the Joint Committee on Taxation that found 70 percent of the benefit of the mortgage interest deduction goes to households earning less than $200,000 a year. Less than a third of the benefit, 30 percent, goes to those who make more than that.

“By comparison, the reduced rate for capital gains almost exclusively benefits the very wealthy,” said Levin. “More than 70 percent of the benefit of that lower rate flows to people making more than $1 million a year. Just 12 percent goes to those making less than $200,000. These tax policies deserve serious consideration, beyond the easy rhetoric about simply broadening the base and reducing rates.”

Gary Thomas, president of the National Association of Realtors, pointed to the longevity of the mortgage interest deduction in his testimony.

“Some provisions in the Tax Code, such as the deductions for mortgage interest and state and local taxes paid, have been part of the federal Tax Code since the income tax was introduced 100 years ago,” said Thomas. “Thus, the values of such tax benefits are both directly and indirectly embedded in the price of a home. While economists agree that there is no accurate measure of the value of those embedded tax benefits, they all generally agree that the value of a particular home includes tax benefits. Real estate is the most widely-held category of assets that American families own, and for many Americans, the largest portion of their family’s net worth, despite the price declines of the Great Recession. Therefore, while NAR agrees that reform and revision to different portions of the individual tax code may be warranted, we remain committed to preserving the current law incentives for homeownership and real estate investment.”

Mark Fleming, chief economist at CoreLogic, a company that analyzes data on the mortgage industry, discussed the recent positive trends in the housing sector.

“One of the brightest spots within the uneven economic recovery is the housing sector,” he said in his prepared testimony. “Residential investment contributed 0.4 percentage points to GDP growth in Q4 2012, significant for a single industrial sector.”

He noted that housing starts increased to an annualized rate of 1 million, which is 47 percent above the level for the same month a year ago and the largest increase in 20 years. Home prices increased 10.2 percent year over year, the biggest increase in nearly seven years. Fleming credited the rebound in the housing industry in part to stimulus measures such as the First-Time Homebuyer Tax Credit.

Eric Toder, co-director of the Urban-Brookings Tax Policy Center, noted that Congress’s Joint Committee on Taxation estimates that the mortgage interest deduction will reduce federal receipts by about $70 billion in fiscal year 2013 and by about $380 billion between fiscal years 2013 and 2017. Homeowners benefit from the deduction of real property taxes ($153 billion between 2013 and 2017) and the exemption of the first $250,000 ($500,000 for joint returns) of capital gains on the sale of principal residences ($130 billion between 2013 and 2017). However, he argued against eliminating the mortgage interest deduction.

“If the Committee is to achieve its stated goals of reducing the top individual income tax rate to 25 percent and maintaining receipts at their baseline projected level of 19.4 percent of GDP by the end of the decade, it will be necessary to eliminate or pare back some major tax expenditures,” said Toder. “But the mortgage interest deduction is one of the most popular benefits in the tax law, and politicians have in the past viewed it as untouchable. The mortgage interest deduction is the only tax benefit that President Reagan promised to protect in 1984 when his Treasury Department was preparing the wide-reaching reform proposals that would form the basis for the 1986 Tax Reform Act. In 2015, according to Tax Policy Center estimates, about 40 million taxpayers will benefit from the deduction.”

Robert Dietz, assistant vice president for tax and policy issues at the National Association of Home Builders, also cited the Tax Reform Act of 1986 in his testimony, but warned against any reforms that could hurt the real estate industry.

“Many in Congress have looked back to the tax reform efforts in 1986 as a guide for today,” he said. “And there are some important efforts to remember from that experience. First, it is possible to achieve those low [tax] rates and maintain strong incentives for housing. But we also saw for commercial and multifamily real estate the perils of significant tax policy changes. Most economists agree that the changes in the 1986 Act led to a crisis in commercial and multifamily real estate. How housing is dealt with in tax reform will shape the economy moving forward. Housing can be a key engine of job growth that this country needs.”

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Tips to Start Planning Next Year’s Tax Return


For most taxpayers, the tax deadline has passed. But planning for next year can start now. The IRS reminds taxpayers that being organized and planning ahead can save time and money in 2014. Here are six things you can do now to make next April 15 easier.

1. Adjust your withholding.  Each year, millions of American workers have far more taxes withheld from their pay than is required. Now is a good time to review your withholding to make the taxes withheld from your pay closer to the taxes you’ll owe for this year. This is especially true if you normally get a large refund and you would like more money in your paycheck. If you owed tax when you filed, you may need to increase the federal income tax withheld from your wages. Use the IRS Withholding Calculator at to complete a new Form W-4, Employee’s Withholding Allowance Certificate.

2. Store your return in a safe place.  Put your 2012 tax return and supporting documents somewhere safe. If you need to refer to your return in the future, you’ll know where to find it. For example, you may need a copy of your return when applying for a home loan or financial aid. You can also use it as a helpful guide for next year’s return.

3. Organize your records.  Establish one location where everyone in your household can put tax-related records during the year. This will avoid a scramble for misplaced mileage logs or charity receipts come tax time.

4. Shop for a tax professional.  If you use a tax professional to help you with tax planning, start your search now. You’ll have more time when you’re not up against a deadline or anxious to receive your tax refund. Choose a tax professional wisely. You’re ultimately responsible for the accuracy of your own return regardless of who prepares it. Find tips for choosing a preparer at

5. Consider itemizing deductions.  If you usually claim a standard deduction, you may be able to reduce your taxes if you itemize deductions instead. If your itemized deductions typically fall just below your standard deduction, you can ‘bundle’ your deductions. For example, an early or extra mortgage payment or property tax payment, or a planned donation to charity could equal some tax savings. See the Schedule A, Itemized Deductions, instructions for the list of items you can deduct. Planning an approach now that works best for you can pay off at tax time next year.

6. Keep up with changes.  Find out about tax law changes, helpful tips and IRS announcements all year by subscribing to IRS Tax Tips through or IRS2Go, the mobile app from the IRS. The IRS issues tips regularly during the summer and tax filing season.

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IRS Warns Donors about Charity Scams Following Recent Tragedies in Boston and Texas


It’s sad but true. Following major disasters and tragedies, scam artists impersonate charities to steal money or get private information from well-intentioned taxpayers. Fraudulent schemes involve solicitations by phone, social media, email or in-person.

Scam artists use a variety of tactics. Some operate bogus charities that contact people by telephone to solicit money or financial information. Others use emails to steer people to bogus websites to solicit funds, allegedly for the benefit of tragedy victims. The fraudulent websites often mimic the sites of legitimate charities or use names similar to legitimate charities. They may claim affiliation with legitimate charities to persuade members of the public to send money or provide personal financial information. Scammers then use that information to steal the identities or money of their victims.

The IRS offers the following tips to help taxpayers who wish to donate to victims of the recent tragedies at the Boston Marathon and a Texas fertilizer plant:

  • Donate to qualified charities.  Use the Exempt Organizations Select Check tool at to find qualified charities. Only donations to qualified charitable organizations are tax-deductible. You can also find legitimate charities on the Federal Emergency Management Agency (FEMA) Web site at
  • Be wary of charities with similar names.  Some phony charities use names that are similar to familiar or nationally known organizations. They may use names or websites that sound or look like those of legitimate organizations.
  • Don’t give out personal financial information.  Do not give your Social Security number, credit card and bank account numbers and passwords to anyone who solicits a contribution from you. Scam artists use this information to steal your identity and money.
  • Don’t give or send cash.  For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.
  • Report suspected fraud.  Taxpayers suspecting tax or charity-related fraud should visit and perform a search using the keywords “Report Phishing.”

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IRS Offers Tips for Taxpayers Who Missed the Tax Deadline


The IRS has some advice for taxpayers who missed the tax filing deadline.

  • File as soon as possible.  If you owe federal income tax, you should file and pay as soon as you can to minimize any penalty and interest charges. There is no penalty for filing a late return if you are due a refund.
  • Penalties and interest may be due.  If you missed the April 15 deadline, you may have to pay penalties and interest. The IRS may charge penalties for late filing and for late payment. The law generally does not allow a waiver of interest charges. However, the IRS will consider a reduction of these penalties if you can show a reasonable cause for being late.
  • E-file is your best option.  IRS e-file programs are available through Oct. 15. E-file is the easiest, safest and most accurate way to file. With e-file, you will receive confirmation that the IRS has received your tax return. If you e-file and are due a refund, the IRS will normally issue it within 21 days.
  • Free File is still available.  Everyone can use IRS Free File. If your income is $57,000 or less, you qualify to e-file your return using free brand-name software. If you made more than $57,000 and are comfortable preparing your own tax return, use Free File Fillable Forms to e-file. This program uses the electronic versions of paper IRS forms. IRS Free File is available only through
  • Pay as much as you can.  If you owe tax but can’t pay it all at once, you should pay as much as you can when you file your tax return. Pay the remaining balance due as soon as possible to minimize penalties and interest charges.
  • Installment Agreements are available.  If you need more time to pay your federal income taxes, you can request a payment agreement with the IRS. Apply online using the IRS Online Payment Agreement Application tool or file Form 9465, Installment Agreement Request.
  • Refunds may be waiting.  If you’re due a refund, you should file as soon as possible to get it. Even if you are not required to file, you may be entitled to a refund. This could apply if you had taxes withheld from your wages, or you qualify for certain tax credits. If you don’t file your return within three years, you could forfeit your right to the refund.

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5 Last Minute Tax Tips

Are you one of the millions of Americans who haven’t filed (or even started) your taxes yet? With the April 15th tax filing deadline less than two weeks away, here’s some last minute tax advice for you.

  1. Stop Procrastinating. Resist the temptation to put off your taxes until the very last minute. Our office needs time to prepare your return, and we may need to request certain documents from you, which will take additional time.
  2. Include All Income. If you had a side job in addition to a regular job, you might have received a Form 1099-MISC. Make sure you include that income when you file your tax return because you may owe additional taxes on it. If you forget to include it you may be liable for penalties and interest on the unreported income.
  3. File on Time or Request an Extension. This year’s tax deadline is April 15. If the clock runs out, you can get an automatic six-month extension, bringing the filing date to October 15, 2013. The extension itself does not give you more time to pay any taxes due. You will owe interest on any amount not paid by the April deadline, plus a late-payment penalty if you have not paid at least 90 percent of your total tax by that date.

Call us if you need to file an extension and we’ll take care of it for you. If you need to file for late-penalty relief, we can help with that to. See Late-Penalty Relief for Late Filers under Tax Tips below)

  1. Don’t Panic If You Can’t Pay. If you can’t immediately pay the taxes you owe, consider some alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late-payment penalty rate. You also have various options for charging your balance on a credit card. There is no IRS fee for credit card payments, but the processing companies charge a convenience fee. Electronic filers with a balance due can file early and authorize the government’s financial agent to take the money directly from their checking or savings account on the April due date, with no fee.
  2. Sign and Double Check Your Return. The IRS will not process tax returns that aren’t signed, so make sure you sign and date your return. You should also double check your social security number, as well as any electronic payment or direct deposit numbers, and make sure that your filing status is correct.

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Eight Tax-Time Errors to Avoid

If you make a mistake on your tax return, it usually takes the IRS longer to process it. The IRS may have to contact you about that mistake before your return is processed. This will delay the receipt of your tax refund.


The IRS reminds filers that e-filing their tax return greatly lowers the chance of errors. In fact, taxpayers are about twenty times more likely to make a mistake on their return if they file a paper return instead of e-filing their return.


Here are eight common errors to avoid.


  1. Wrong or missing Social Security numbers.  Be sure you enter SSNs for yourself and others on your tax return exactly as they are on the Social Security cards.
  2. Names wrong or misspelled.  Be sure you enter names of all individuals on your tax return exactly as they are on their Social Security cards.
  3. Filing status errors.  Choose the right filing status. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction and Filing Information, to help you choose the right one. E-filing your tax return will also help you choose the right filing status.
  4. Math mistakes.  If you file a paper tax return, double check the math. If you e-file, the software does the math for you. For example, if your Social Security benefits are taxable, check to ensure you figured the taxable portion correctly.
  5. Errors in figuring credits, deductions.  Take your time and read the instructions in your tax booklet carefully. Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit and the standard deduction. For example, if you are age 65 or older or blind check to make sure you claim the correct, larger standard deduction amount.
  6. Wrong bank account numbers.  Direct deposit is the fast, easy and safe way to receive your tax refund. Make sure you enter your bank routing and account numbers correctly.
  7. Forms not signed, dated.  An unsigned tax return is like an unsigned check – it’s invalid. Remember both spouses must sign a joint return.
  8. Electronic signature errors.  If you e-file your tax return, you will sign the return electronically using a Personal Identification Number. For security purposes, the software will ask you to enter the Adjusted Gross Income from your originally-filed 2011 federal tax return. Do not use the AGI amount from an amended 2011 return or an AGI provided to you if the IRS corrected your return. You may also use last year’s PIN if you e-filed last year and remember your PIN.


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Obama Budget to Include Tax Bracket Changes

President Barack Obama’s budget plan will incorporate deficit-cutting proposals that include changing the calculation for Social Security cost-of-living increases and tax brackets, according to a White House statement.

The budget plan, set for release April 10, will track the offer on spending cuts and revenue increases that Obama made to House Speaker John Boehner of Ohio as part of an end-of-the-year deal on expiring tax cuts, according to the statement e-mailed today.

“While this is not the president’s ideal deficit reduction plan, and there are particular proposals in this plan like the CPI change that were key Republican requests and not the president’s preferred approach, this is a compromise proposal” that will be part of the budget, according to the statement.

Obama’s offer to Boehner “still stands,” it said.

“That means that the things like CPI that Republican leaders have pushed hard for will only be accepted if congressional Republicans are willing to do more on revenues,” said the statement. “This isn’t about political horse trading; it’s about reducing the deficit in a balanced way.”

That plan included a new inflation gauge that would effectively reduce cost-of-living increases for Social Security beneficiaries, a measure that is sure to draw opposition from many Democrats. It also proposed using the calculation for adjusting income tax brackets, which would mean higher payments for many taxpayers.

President’s Priorities
While Obama’s fifth budget proposal stands little chance of becoming law because of opposition from Republicans who control the House, it emphasizes the president’s priorities and will set the stage for talks with Republicans on a broader debt-reduction package.

For the first time, Obama is poised to incorporate specific entitlement benefit cuts in his official budget, an attempt to signal to Republicans that he still wants to reach a deal on reducing the deficit.

Republicans have said the president needs to take the lead if there’s any chance to address the biggest long-term driver of the debt, Medicare spending, because Democratic lawmakers have resisted trimming entitlement-program costs.

White House press secretary Jay Carney said at an April 1 briefing that Obama remains open to using the inflation gauge, known as chained CPI, for Social Security as a way to cut the program’s cost. “That offer remains on the table, as we’ve made clear repeatedly since then,” Carney said.

Two Goals
changing the inflation calculator potentially provides Obama and congressional Republicans with a way to accomplish their goals. Obama is seeking more revenue through tax-code changes, while Republicans are pushing to trim entitlement programs such as Social Security in cutting spending.

The change in calculation would make the annual adjustments smaller than they are now. As a result, more income would be subject to higher income tax rates. The administration in its earlier proposal estimated that would bring in additional tax revenue of about $100 billion over 10 years.

In 2020, the change would raise taxes for 78.3 percent of households by an average of $124, according to the nonpartisan Tax Policy Center in Washington. Taxes would increase for 98 percent of households making between $75,000 and $100,000 a year.

Boehner’s spokesman said House Republicans will resist attempts to raise tax revenue to cut the deficit, which was $1.1 trillion in fiscal 2012.

Republican Response
“The president got his tax hikes already,” the spokesman, Michael Steel, said in an e-mail. “It’s time to deal with Washington’s spending problem, so we can get our economy moving again and create more American jobs.”

Switching to the alternative inflation yardstick for Social Security would save $130 billion, according to the plan Obama offered last year.

Obama hasn’t included the changes to Social Security and tax bracket calculations in previous spending blueprints.

The prospect of such a change already is generating opposition.

“Millions of working people, seniors, disabled veterans, those who have lost a loved one in combat, and women will be extremely disappointed if President Obama caves into the long standing Republican effort to cut Social Security,” Vermont Senator Bernie Sanders, an independent who caucuses with Democrats, said in a statement.

Market Reaction
While lawmakers wrangle over the budget, investors have focused on an improving economy. The benchmark Standard & Poor’s 500 Index has risen about 9 percent so far this year. The S&P added 0.3 percent at 3:12 p.m. in New York, rebounding from the previous day’s 1.1 percent retreat from a record.

The Bloomberg Consumer Comfort Index increased to minus 34.1 in the week ended March 31 from a six-week low of minus 34.4 in the prior period. The comfort readings from January through March were the strongest on average of any first quarter since 2008 as a pickup in hiring and record stock prices helped consumers overcome an increase in the payroll tax.

Even though the president’s budget is more than two months late, because of tax-and-spending-legislation at year’s end known as the “fiscal cliff,” Pat Griffin, former President Bill Clinton’s lobbyist in Congress, said the timing “may be just right.”

“If there’s one more chance this year to ignite this conversation, this would be it,” Griffin said.

Dueling Budgets
That’s because House Republicans and Senate Democrats have passed non-binding budget resolutions that are far apart, and there’s little likelihood they will be reconciled. Obama plans to dine with Senate Republicans the evening of April 10, just hours after his budget plan is released.

The chained CPI was a centerpiece of failed negotiations between Obama and Boehner over a “grand bargain” budget deal in the summer of 2011, and it was also the key tradeoff Obama was willing to make as part of the so-called fiscal cliff negotiations in December in the context of a broad debt- reduction package.

Unlike the consumer price index, chained CPI adjusts for consumers’ tendency to switch products when prices rise. In that way, economists say it is a more accurate measure of the cost of living for purposes of setting tax policy and Social Security benefits. The regular CPI tends to overstate inflation because it doesn’t adjust for consumer behavior, economists say.

A concern for Democrats is whether a change can be made in a way that would protect low-income and other vulnerable groups of senior citizens. Obama’s 2010 debt commission recommended instituting a flat-dollar benefit “bump-up” for Social Security recipients who have been receiving benefits for 20 years, and a minimum benefit for lower-income beneficiaries.

Another major concern for Democrats and Republicans will be protecting disabled veterans. That could be addressed by enhancing Social Security disability benefits or increasing certain credits for low-income taxpayers


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Seven Tips for Taxpayers with Foreign Income

The IRS reminds U.S. citizens and residents who lived or worked abroad in 2012 that they may need to file a federal income tax return. If you are living or working outside the United States, you generally must file and pay your tax in the same way as people living in the U.S. This includes people with dual citizenship.

Here are seven tips taxpayers with foreign income should know:

1. Report Worldwide Income. The law requires U.S. citizens and resident aliens to report any worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.

2. File Required Tax Forms. In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Some taxpayers may need to file additional forms. For example, some may need to file Form 8938, Statement of Specified Foreign Financial Assets, while others may need to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, with the Treasury Department. See Publication 4261, Do You Have a Foreign Financial Account?, for more information.

3. Consider the Automatic Extension. U.S. citizens and resident aliens living abroad on April 15, 2013, may qualify for an automatic two-month extension to file their 2012 federal income tax returns. The extension of time to file until June 17, 2013, also applies to those serving in the military outside the U.S. Taxpayers must attach a statement to their returns explaining why they qualify for the extension.

4. Review the Foreign Earned Income Exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion. This means taxpayers who qualify will not pay taxes on up to $95,100 of their wages and other foreign earned income they received in 2012. See Forms 2555, Foreign Earned Income, or 2555-EZ, Foreign Earned Income Exclusion, for more information.

5. Don’t Overlook Credits and Deductions. Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income.

6. Use IRS Free File.  Taxpayers who live abroad can prepare and e-file their federal tax return for free by using IRS Free File. People who make $57,000 or less can use Free File’s brand-name software. People who earn more can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available exclusively through the website.

7. Get Tax Help Outside the U.S. Taxpayers living abroad can get IRS help in four U.S. embassies and consulates. IRS staff at these offices can help with tax filing issues and answer questions about IRS notices and tax bills. The offices also have tax forms and publications. To find the nearest foreign IRS office, visit the website. At the bottom of the home page click on the link labeled ‘Contact Your Local IRS Office.’ Then click on ‘International.’

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Job Creation up at Small Businesses, but Not Hiring Plans

While small businesses again appear to be hiring, plans to create more jobs appear to be slackening, according to the National Federation of Independent Business.


Small-business owners reported increasing employment an average of 0.19 workers per firm in the month of March, which was the best reading the NFIB has recorded in a year and the fourth consecutive month of small-business job growth, according to NFIB chief economist William C. Dunkelberg. Forty-seven percent of the owners hired or tried to hire employees in the last three months and 36 percent (or 77 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. But, while actual job creation appears to be rising, plans to create jobs took a dive, falling 4 points to a net zero percent of small employers who plan to increase total employment.

“It seems that the stamina for growth is waning, even with decent reports on consumer spending at the macro level,” Dunkelberg said in a statement.

Eighteen percent of all business owners reported job openings they could not fill in the current period, down 3 points from February. This measure is highly correlated (inversely) with the unemployment rate, so it is suggestive of a minor increase in the percent of our labor force that is unemployed. The Bureau of Labor Statistics numbers on Friday will likely hold steady, Dunkelberg predicted, but prospects for stronger gains over the next few months are not promising.

“Once again, our bifurcated economy may have large firms doing well, but the Main Street owners not sharing in the gains and finding little reason to take on new employees,” said Dunkelberg. “Owners are still pessimistic and see little reason to hire. Small businesses need a shot in the arm; but seeing as this is unlikely, the slow crawl to eventual prosperity might be the best we can hope for.”

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Top Six Tax Tips for the Self-Employed

When you are self-employed, it typically means you work for yourself, as an independent contractor, or own your own business. Here are six key points the IRS would like you to know about self-employment and self-employment taxes:


  1. Self-employment income can include pay that you receive for part-time work you do out of your home. This could include income you earn in addition to your regular job.
  2. Self-employed individuals file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040.
  3. If you are self-employed, you generally have to pay self-employment tax as well as income tax. Self-employment tax includes Social Security and Medicare taxes. You figure this tax using Schedule SE, Self-Employment Tax.
  4. If you are self-employed you may have to make estimated tax payments. People typically make estimated tax payments to pay taxes on income that is not subject to withholding. If you do not make estimated tax payments, you may have to pay a penalty when you file your income tax return. The underpayment of estimated tax penalty applies if you do not pay enough taxes during the year.
  5. When you file your tax return, you can deduct some business expenses for the costs you paid to run your trade or business. You can deduct most business expenses in full, but some costs must be ’capitalized.’ This means you can deduct a portion of the expense each year over a period of years.
  6. You may deduct only the costs that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.


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