What the Airline Tax Holiday and the Tax Reinstatement Mean for Your Wallet

The short answer: probably nothing.

On July 22, 2011, Congress failed to extend the Federal Aviation Administration’s (FAA) budget and, along with it, airlines’ authority to collect taxes to fund the FAA, leading to a lot of questions and concerns about air travel in the US. Among these were whether this would bring furloughs for employees in the FAA (yes); if this would affect traffic control (supposedly no); and what would happen to ticket prices and who would be responsible for the uncollected taxes.

The third question was answered by each airline: most airlines raised fares by the amount of the taxes, so that consumers faced the same prices as before the tax expiration. Notable exceptions included Alaska Airlines, Hawaiian, and Spirit, which maintained their fares and passed the tax savings onto consumers. There were serious concerns, however, that once Congress reinstated the airlines’ authority to collect taxes, customers who didn’t pay taxes may be required to pay them anyway – perhaps the airlines that increased their fares to compensate for the tax expiration were doing customers a favor by effectively collecting the taxes preemptively?

Photo credit: Alaskan Dude (Creative Commons)

This confusion was finally solved last week, when Congress passed a retroactive reinstatement of the FAA’s budget from July 23rd.

The bad news: By making the reinstatement retroactive, Congress stated that taxes were technically applicable to the suspension period, July 23-Aug 8. Before the reinstatement, there had been talk that passengers who paid taxes on their tickets (because they purchased them before July 23rd) but flew during the suspension period might be due a refund on the taxes collected. The retroactivity has dismissed this possibility. No matter when you purchased your tickets or flew, you cannot get an airline tax refund.

The good news: The IRS is giving a relief for passengers who did not pay and airlines that did not collect taxes during the FAA budget lapse. This news may be better for airlines than for you, but is good nonetheless.  Since airlines collect about $200 million in taxes per week for the FAA, this two-week suspension generated almost $400 million in cumulative profits for the airlines that raised their tickets to match the expired FAA taxes – which they now get to keep.

For you, the relief means that if you managed to snag a ticket during that the suspension, at least you don’t owe any taxes on the ticket either. That would have been a savings of 7.5% on the base fare plus $3.70 if flying domestically, $8.20 if flying internationally to/from Alaska or Hawaii, or $16.30 for international flights to/from anywhere else, but since most airlines increased fares accordingly, you likely did not feel any difference in your wallet. On the plus side, with the reinstatement of taxes, at least airlines are lowering ticket prices back to pre-July 23rd levels.

So, unless you are one of the lucky few who scored tickets with an airline that did not raise prices during the suspension, this FAA budget story should not affect your wallet: ticket prices have stayed the same throughout since most airlines raised ticket prices (earning several millions along the way) when taxes expired and lowered them now that the taxes are back.

May 15: Mark Your Calendar for a Visit to the IRS

Next Saturday, May 15th, the IRS will be hosting open houses in about 200 locations throughout the country to help tax payers with their tax issues.  The event is open for questions from both individual filers and small businesses.
 
The last open house held by the IRS was in late March, mainly to help with tax filing.  But even with the filing deadline now long gone, the IRS has made it clear that the upcoming open house can still help you file if you missed the deadline or got an extension.  Those who already filed their 2009 tax return may also find the open house useful, as IRS professionals will also be available for one-on-one talks about repayment options for those struggling to pay their taxes as well as about audits and other notifications.
 
For a list of IRS locations that will be open next Saturday for the event, click here.  The open house will run from 9am to 2pm, and the IRS estimates that in the last event 88% of those who went to the open house had their problem solved the same day.
 

Estimated Taxes Due Today

Third quarter estimated taxes, covering June 1 to August 31, are due today.  To learn more about estimated taxes, including due dates, penalties, and different methods for calculating it, see our post for the previous quarter.  But for today, here are the main things you need to know:

  • There is a penalty for underpaying estimated taxes. In 2008, the fine was a 5-6% annual interest rate compounded daily.
  • Generally, you must pay estimated taxes if (1) you expect to owe at least $1000 in taxes after withholdings and credits AND (2) you expect your withholding and credits to be less than (a) 90% of your 2009 taxes or (b) 100% of your 2008 taxes covering 12 months.
  • You still have time to file your estimated taxes today.  If you paid estimated taxes last quarter and did not use the annualized income method to calculate how much you owed, just pay the same as you did last quarter.  If you are not using the annualized income method, to avoid penalties, you only have to pay in estimated taxes the lowest of (1) 100% of your 2008 taxes and (2) 90% of the taxes you expect to owe in 2009.  Divide that amount by 4 and that is your quarterly estimated taxes payment.

If you paid last quarter’s estimated taxes using the annualized income method, however, you must do it the same way this quarter.  Use publication 505 to guide you and, if possible, find your calculations from the previous quarter to help you fill in the blanks.

  • Paying is easy. Estimated taxes have the same payment methods as regular taxes, but you do not even have to send in the forms you used to calculate them.  Rather, if you are paying by check or money order, you only need to enclose the Payment Voucher 3 from the form 1040-ES with it.

You may also want to check whether your state requires estimated tax payments as well.  As with the regular income tax, completing state estimated taxes may be easier once you have already calculated your federal one.  And penalties may actually be higher if you don’t file.

Rollover – Not in Your Bed, But to a Roth IRA

With less than three weeks of work left, my calendar is quickly filling up with farewell lunches.  I have not, however, neglected other more important things related to my departure, such as making sure I will get paid for unused vacation days and that my calculation is the same as HR’s.  ALSO, I have been researching on what to do with my 401k once I leave, and below is a list of dos and don’ts.

  1. Do not withdraw  – Apparently one of the biggest mistakes that people make when they leave a job is to withdraw the money from their 401k.  Not only will you be making a HUGE dent to your retirement funds, you will be paying heavily for it – income tax for the distribution plus an additional 10% tax  (the IRS says tax, I say penalty) for withdrawing before you hit the magic age of 59 1/2.
  2. Do not just leave it in its current account – Now is the time to assess how well the account has been growing.  Do you like the investment options offered by your company and the investment company they have selected?  Are you satisfied with the services?  If not, you are free to take your business elsewhere, whether to one you select individually or another 401k account offered by your new job.
  3. Do roll it over – If you do decide to transfer your 401k to a new account, do a rollover.  Once a check gets cut to you – even if you deposit it directly into a new retirement account – the IRS will consider that a withdrawal and you’ll be hit with the income tax and the 10% penalty.  It’s better to play it safe and arrange for a direct transfer, so that no money passes through your hands.
  4. Do consider a Roth IRA – As mentioned in previous posts, you contribute post-tax dollars to a Roth IRA but it then grows tax-free.  This is what I plan to do with my 401k account.  And while I’ll get hit with taxes in the beginning (because I contributed only pre-tax dollars to my 401k initially and Uncle Sam always gets his cut), I will never have to pay taxes on any subsequent earnings.  This is crucial, because I expect that I will earn more money as I get older and will be taxed at a higher tax bracket.  So this is not just a matter of paying taxes now vs. paying taxes later, it’s also a matter of paying less taxes now vs. paying more taxes later.  Further, I’m not required to roll over the entire balance at once.  I can control how much I want to roll over each year, so I can spread out my tax burden over several years.

The Toll to Savings and Discounts

If you plan to take a long road trip or live in an area where you have to pay tolls to get around, I highly recommend installing the E-Z Pass (or an equivalent electronic toll collection system in your state).  The E-Z Pass is made up of 25 transportation agencies from over 14 states in northeastern United States (for complete list, click here).  In other words, once you get it, you can road trip from Maine to as far as Virginia in the south or Illinois to the west without having to stop once to pay a toll. 

More than just the speed and convenience of the system, there are two major monetary reasons for getting an E-Z Pass.  First, depending on the agency/state in which you open your account, you may be eligible to discounts on tolls, especially if you are a resident of a certain district or you drive during off-peak hours.  Second, some states, such as Massachusetts and West Virginia, have enacted legislature to allow taxpayers to deduct certain commuter expenses (including E-Z Pass, up to a certain amount) from their gross income.

Before you sign up, however, do some calculations, as some agencies/states charge an initial fee for the transponder (as high as $25) and periodic maintennance fees (as high as $18 a year), to make sure that your driving needs justify getting an E-Z Pass.

Don’t Let Estimated Taxes Ruin Your Weekend Plans

As we mentioned last week, second quarter estimated taxes are due to the IRS on Monday, June 15.  You are likely required to pay these taxes if your employer does not withhold taxes for you (e.g., international organizations) or if you are part of the roughly 10 million self-employed work force in the US.

With only 3 days left, figuring out whether and how much you owe in estimated taxes is probably more than daunting.   Lucky for you, I completed my 1040-ES yesterday and read the IRS Publication 505, on withheld and estimated taxes, so that you don’t have to.  Here are the important points:

  • Deadlines. The due dates for the estimated tax payments (coverage period) are: April 15 (January 1-March 31), June 15 (April 1-May 31), September 15 (June 1-August 31), and January 15 of the following year (September 1-December 31).
  • Penalties. Pay your estimated taxes on time!  The penalty rates for underpayment 2008 were an annual rate of 5-6% for the number of days overdue.
  • Who has to pay estimated taxes. Generally, you must pay estimated taxes if (1) you expect to owe at least $1000 in taxes after withholdings and credits AND (2) you expect your withholding and credits to be less than (a) 90% of your 2009 taxes or (b) 100% of your 2008 taxes covering 12 months.
  • Who does NOT have to pay estimated taxes. If you were a US citizen or resident for all of 2008 and your tax year covered 12 months, but you did not have any tax liability for last year (i.e., your total tax came out to zero or you did not have to file a return), you do not have to file estimated taxes this year.
  • How much do you have to pay in estimated taxes? There are three ways to calculate your estimated taxes, listed from easiest to hardest:

1. Pay 100% of your 2008 taxes (or 25% each quarter).  Note: this year small business owners may be eligible to pay only 90%.

2. Pay 90% of the taxes you expect to owe in 2009 (or ¼ of that value each quarter).  Use the “2009 Estimated Tax Worksheet” that comes with form 1040-ES so that you can include deductions and credits in your calculations.

3. Use the Annualized Income Method to pay taxes on your earnings as you’ve earn them each quarter.  This method is most useful for people whose income is uneven throughout the year (i.e., you do not want to make an estimated tax payment if you have not earned any income over the respective quarter).

  • Consider your options. To avoid a penalty, you only have to pay the lowest value from methods 1 or 2, or the calculated value from method 3.  If you did not have an income from January to March (net of credits and deductions) or you missed the first quarter estimated taxes deadline, using the annualized income method may ensure that you don’t get penalized.
  • Check your 2008 tax return. If you overpaid taxes, did you ask to have some of it applied to your 2009 estimated tax (1040 line 74 or 1040A line 46)?  If so, you can count that against your minimum required estimated tax payments.
  • Payment. As with annual taxes, there are several different payment methods for estimated taxes.  If you, like most people, are paying by check or money order, make sure to send that with Form 1040-ES for Quarter 2 along with a slip that can be found on the IRS website, by Monday, June 15th.

And don’t forget to do the same for your state taxes!  The determinants for who has/does not have to pay as well as for the minimum payment are usually the same as for the federal taxes, though the penalty for underpayment might be even higher.  In DC, for example, the penalty is a 10% annual interest, compounded daily!