As the Flach Tax Reform Commission, consisting of Robert D Flach, meets to rewrite the US Tax Code we begin with “everything is taxable and nothing is deductible”. In this series of posts I will talk about what items of income I would exclude from taxation and what deductions, and credits (if any), I would allow in our new fair, simple, and consistent Tax Code – the “excepts” – as well as filing status and tax brackets rules.
I will not necessarily be working my way down the Pages of the 1040 in order – dealing with items of income before deductions. I will be skipping all over the place. But when the series is completed I will organize the posts in proper order in a published report.
As I said in the initial post of the series - Your comments on my recommendations are welcomed and encouraged. I especially want to hear from fellow tax professionals.
OK – let’s begin. Just coincidentally we begin with the topic of Filing Status.
Currently there are 5 choices for a return’s filing status, each with its own rules and regulations –
1. Single
2. Married Filing Joint
3. Married Filing Separately
4. Head of Household
5. Qualifying Widow(er)
In the new Tax Code I would reduce this to 3 –
1. Single
2. Married Filing Joint
3. Married Filing Separately
The new Code would create neither a “marriage tax penalty” nor, for the most part, a “marriage tax benefit”.
The Married Filing Separately status would permit a married couple, whether living together or not, to file as if they were filing two individual returns as Single. All of the exclusions from income, deductions and credits that are available to a Single filer would be available to the Married Filing Separate status. The Tax Rate Schedule (and Tax Table) for Married Filing Separately would be exactly the same as that for Single. As per current law this status would be elective, and two-earning families will be able to file a joint return if they so choose.
I would create a special 2-columned 1040 and 1040A form that would allow both spouses to file separately on one return. Married taxpayers would still have the option of filing separately on two separately filed returns.
The Married Filing Joint status would provide for double of everything available to the Single status. For example, if, as under current law, a Single filer can deduct up to $3,000 in net capital losses per year, a married couple filing jointly would be able to deduct up to $6,000. The standard deduction for Married Filing Joint would be twice that for Single, as it currently is under the extended “Bush” tax cuts. It would be as if the separate incomes and deductions allowed on the new 2-column 1040 for separate filers were combined in one column.
The Married Filing Joint status would provide a marriage tax benefit for most couples with only one working spouse, but I would support a benefit for couples where one spouse is a “stay-at-home” parent.
The tax benefits currently provided by the Head of Household and Qualifying Widow(er) status would be replaced by an increased either dependent personal exemption or dependent tax credit (I have not yet decided which) that would combine the current personal exemption for dependents and the Child Tax Credit. If a dependent exemption is used it would be much greater than the personal exemption allowed for taxpayer and spouse. If a dependent credit is allowed then there would be no personal exemptions for dependents.
I like the idea of having only one Tax Rate Schedule (and Tax Table) for all taxpayers, regardless of filing status. In the case of Married Filing Joint perhaps the net taxable income would be divided by two, the tax determined from either table or rate schedule on this half of the combined income, and then multiply that tax amount by two. This method assumes that income earned by and deductions allowed for the couple combined apply equally to each spouse if they had filed separately.
John and Jane Q Taxpayer file a joint return. The net taxable income on the return is $100,000. The tax is taken from the tables is based on $50,000 of income. If the tax on $50,000 is $5,000, then the tax liability on the joint return is $10,000 (the 10% tax rate on this level of income is used only as an example for simplicity).
TTFN
I will not necessarily be working my way down the Pages of the 1040 in order – dealing with items of income before deductions. I will be skipping all over the place. But when the series is completed I will organize the posts in proper order in a published report.
As I said in the initial post of the series - Your comments on my recommendations are welcomed and encouraged. I especially want to hear from fellow tax professionals.
OK – let’s begin. Just coincidentally we begin with the topic of Filing Status.
Currently there are 5 choices for a return’s filing status, each with its own rules and regulations –
1. Single
2. Married Filing Joint
3. Married Filing Separately
4. Head of Household
5. Qualifying Widow(er)
In the new Tax Code I would reduce this to 3 –
1. Single
2. Married Filing Joint
3. Married Filing Separately
The new Code would create neither a “marriage tax penalty” nor, for the most part, a “marriage tax benefit”.
The Married Filing Separately status would permit a married couple, whether living together or not, to file as if they were filing two individual returns as Single. All of the exclusions from income, deductions and credits that are available to a Single filer would be available to the Married Filing Separate status. The Tax Rate Schedule (and Tax Table) for Married Filing Separately would be exactly the same as that for Single. As per current law this status would be elective, and two-earning families will be able to file a joint return if they so choose.
I would create a special 2-columned 1040 and 1040A form that would allow both spouses to file separately on one return. Married taxpayers would still have the option of filing separately on two separately filed returns.
The Married Filing Joint status would provide for double of everything available to the Single status. For example, if, as under current law, a Single filer can deduct up to $3,000 in net capital losses per year, a married couple filing jointly would be able to deduct up to $6,000. The standard deduction for Married Filing Joint would be twice that for Single, as it currently is under the extended “Bush” tax cuts. It would be as if the separate incomes and deductions allowed on the new 2-column 1040 for separate filers were combined in one column.
The Married Filing Joint status would provide a marriage tax benefit for most couples with only one working spouse, but I would support a benefit for couples where one spouse is a “stay-at-home” parent.
The tax benefits currently provided by the Head of Household and Qualifying Widow(er) status would be replaced by an increased either dependent personal exemption or dependent tax credit (I have not yet decided which) that would combine the current personal exemption for dependents and the Child Tax Credit. If a dependent exemption is used it would be much greater than the personal exemption allowed for taxpayer and spouse. If a dependent credit is allowed then there would be no personal exemptions for dependents.
I like the idea of having only one Tax Rate Schedule (and Tax Table) for all taxpayers, regardless of filing status. In the case of Married Filing Joint perhaps the net taxable income would be divided by two, the tax determined from either table or rate schedule on this half of the combined income, and then multiply that tax amount by two. This method assumes that income earned by and deductions allowed for the couple combined apply equally to each spouse if they had filed separately.
John and Jane Q Taxpayer file a joint return. The net taxable income on the return is $100,000. The tax is taken from the tables is based on $50,000 of income. If the tax on $50,000 is $5,000, then the tax liability on the joint return is $10,000 (the 10% tax rate on this level of income is used only as an example for simplicity).
TTFN
5 comments:
Robert
My objection to treating MFS as single with all the rights and responsibilities of single may be premature. It depends on how you will be handling tax credits, taxable SS, passive losses and anytime there are special rules for MFS to keep taxpayers from manipulating their filing status to work around thresholds and limits.
If there can be no time where filing MFS provides a tax benefit over MFJ, I have no problem. But if A MFS can work your system to double up on credits or deductions, I have a big problem with them being treated as a single person.
TMc
Trish-
In my new Tax Code everything that is allowed for a Single filer would be double for a Joint filer. It would not be possible to do what you are suggesting.
There would be no phase-out ranges for anything, the taxation of Social Security benefits would not depend on the current formula and would be no different for single or married filers. There would be no marriage penalty to try to avoid. There would be no PEP or PEASE.
TWTP
The double return would be great for domestic partners in community property states. Right now there is no way for them to file correctly.
I live in Washington, which with California and Nevada are states where the community property laws apply to registered domestic partners (RDPs). This means that half of each partner's income legally belongs to the other partner, just as with a married couple.
For example, if I were to file MFS, I would put half of my husband's W2 income on my return, and he would put half of my self-employment income on his (income tax only - the SE tax stays with me).
One guess as to what happens when you try to do this on the two single filing status returns that RDPs have to do. They all get notices, and some practitioners have reported having them rejected as "frivolous".
I have resorted to reporting all the income for each partner on the appropriate line, as if they were single, and running the difference through line 21, with a detailed statement attached explaining the split.
Your proposal would make an excellent solution. Hopefully the IRS will realize they have to provide some way of handling this.
My inclination would be to have one filing status person.
PR-
I had thought about that myself - the ultimate in simplicity.
But what of the married couple with only one spouse working?
Would the non-earning spouse be a "dependent" of the earning spouse?
I am from a non-community property state, so I have no experience with separate treatment of "household" income or how that would solve the problem.
TWTP
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