Friday, July 1, 2016
A PROBLEM WITH THE “REPUBLICAN BLUEPRINT FOR TAX REFORM”
I have several problems with the Republican “Blueprint for Tax Reform” provision that eliminates all itemized deductions except charitable contributions and mortgage interest. Most of them have to do with the elimination of the deduction for “Miscellaneous Expenses”.
One problem involves “employee business expenses”. Let’s look at two “outside salesmen”.
Jim’s company pays him a high commission, but does not reimburse him for any of his out of pocket sales expenses. So Jim’s sales expenses, including mileage, are truly “out of pocket”.
John’s company has an “accountable” reimbursement plan and reimburses John for all of his out of pocket sales expenses, including mileage at the government standard mileage allowance rate. Because of this John’s commission rate is smaller than Jim’s.
Jim’s W-2 for the year shows he was paid $100,000. But he had $25,000 in sales expenses, including mileage, which can be deducted as “employee business expenses” on Form 2106. In reality Jim has earned $75,000.
John’s W-2 for the year, for almost the same amount of gross sales as Jim, shows $76,000 in wages. As stated above Jim’s employer reimbursed him for all of his approximately $25,000 in employee business expenses, so he has nothing to deduct on Form 2106. In reality John earned $76.000.
Here is the problem. Jim must report $100,000 as taxable wages. He will be able to itemize and claim employee business expenses on Schedule A, but these expenses will be reduced by 2% of his AGI, so he will lose at least $2,000 in deductions (more if the employee business expenses are the main reason he is able to itemize). If Miscellaneous Expenses are no longer deductible, and there is no other provision made for true out of pocket employee business expenses, Jim will pay federal income tax on $100,000, even though he actually “took home” only $75,000.
John will be taxed on $76,000 – which is what he actually “took home” – regardless of whether or not employee business expenses are deductible.
So if, under the proposed Republican “Blueprint for Tax Reform”, there is no tax deduction for Miscellaneous Expenses like employee business expenses, Jim will pay a lot more tax than John on basically the same amount of “in pocket” income. Jim will be taxed on $25,000 that he did not “take home”. Although their “published” tax rate may be the same, the rate of tax that Jim pays on his “true” income is much higher.
Even under current tax law Jim is being taxed on at least $2,000 more in income than he actually “took home”. And if he is a victim of the dreaded Alternative Minimum Tax (AMT) he is royally screwed – as Miscellaneous Expenses like employee business expenses are not deductible in calculating AMT.
This inequity carries itself to the state tax return as well. And as an additional screwing, Jim also pays FICA tax on $24,000 more than John.
If the GOP “blueprint” wants to be “fair” it must address this problem.
And this is only one of the problems.
FYI – when I first started preparing 1040s in the early 1970s outside salesmen like Jim and John could claim their employee business expenses in full as an “adjustment to income” – an “above-the-line” deduction that did not require itemizing.
So what do you think?