WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 
It’s been a while – but I’m back with some BUZZ.
 
* Kay Bell offers a “Tax credit lesson: American Opportunity vs. Lifetime Learning” at DON’T MESS WITH TAXES.
 
* Good news for tax preperers from the NATP BLOG – “Court says IRS overcharged for PTINs, orders refunds”.   
 
“A federal court has found the IRS overcharged tax preparers for their required preparer identification numbers (PTINs) from 2011 to 2017 and ordered the IRS to refund any fees that exceeded the agency’s expenses.”
 
I look forward to getting my check – but don’t expect it soon.
 
* The IRS has begun to release its annual “Dirty Dozen” list.
 
“Compiled annually, the ‘Dirty Dozen’ lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire someone to help with their taxes.”    
 
Click here to go to the Dirty Dozen webpage and checkout the individual releases of the Service’s unclean 12.
 
* Returning to Kay Bell, she lists “10 common tax filing mistakes to avoid”.
 
* And also from the IRS – “IRS provides tax relief for victims of severe winterstorms, flooding, landslides and mudslides in California”.
 
TTFN  

TAX REFORM PROPOSALS – GAMBLING WINNINGS AND LOSSES

 

More “unfairness” in the US Tax Code.

 

Gross gambling winnings, reported on Form W-2G, are generally reported in full as income on Line 8b of Form 1040 (or 1040-SR) Schedule 1, increasing AGI, while gambling losses, to the extent of reported winnings, are only deductible as an Itemized Deduction.  So more often than not a taxpayer pays federal income tax on net gambling losses.

 

Recently retired John Q Taxpayer buys $10 in state lottery tickets each and every week and drops $100 in the slots at Atlantic City twice a year.  One week he hits for $660, and received a Form W-2G to report this win.  He has no other gambling activity for the year.  He must report the $660 win in full as taxable income and, because he receives Social Security, potentially increases his taxable SS benefits by up to $561.  He, like most Americans, is not able to itemize and therefore cannot deduct any of his losses.   So, his AGI could increase by $1,221.  And if he is in the 22% bracket, he could pay up to $270 in federal income tax on $60 in net gambling losses. 

 

The bigger the win, the greater the increase to his AGI and the greater the tax.  Even if he were able to itemize and deduct some of his losses, because he collects Social Security his taxable benefits could still increase, and his increased AGI could also reduce available deductions or benefits that are reduced based on AGI, adding to his tax cost.

 

Thankfully Tax Court decisions and IRS regulation revisions have corrected this problem for some casino gambling – but not for all gambling situations.  And complying with the regulations requires detailed contemporaneous documentation.  The situation described for John Q Taxpayer above is the most common tax treatment.

 

I have no problem with limiting the deduction for gambling losses to gambling winnings – my issue is with where and how the losses are deducted.

 

The Solution – obviously, report net gambling winnings, after deducting losses, but not less than 0, as income on Schedule 1, as is currently done, for example, on the NJ state income tax return (Form NJ-1040).

 

Do you agree?

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 
* From the IRS – “May 15 tax deadline extended to Oct. 16 for disaster area ttaxpayers in California, Alabama and Georgia” (highlights are mine) -
 
“Disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023, to file various federal individual and business tax returns and make tax payments, the Internal Revenue Service announced today.

The additional relief postpones until Oct. 16, various tax filing and payment deadlines, including those for most calendar-year 2022 individual and business returns. This includes: Individual income tax returns, originally due on April 18; Various business returns, normally due on March 15 and April 18; and returns of tax-exempt organizations, normally due on May 15.
 
The Oct. 16 deadline also applies to the estimated tax payment for the fourth quarter of 2022, originally due on Jan. 17, 2023. This means that taxpayers can skip making this payment and instead include it with the 2022 return they file, on or before Oct. 16.
 
The Oct. 16 deadline also applies to 2023 estimated tax payments, normally due on April 18, June 15 and Sept. 15. It also applies to the quarterly payroll and excise tax returns normally due on Jan. 31, April 30 and July 31.”
 
* Michael Cohn tells us “IRS warns of new tax season scam involving bogus W-2 claims” at ACCOUNTING TODAY.
 
* And Michael Cohn also reports “Senate approves Werfel as IRS chief”.

* The NSTP blog announces “IRS Face-To-Face Saturday Help -March 11, 2023” -  

“Many IRS Taxpayer Assistance Centers across the country will open one Saturday each month in February, March, April and May, from 9 a.m. to 4 p.m., to offer in-person help without an appointment.”
 
TTFN  

 

TAX REFORM PROPOSALS - TAXING SOCIAL SECURITY

 

The US Tax Code is full of inequities and basic “unfairness”.  One example of this “unfairness” is the method for taxing Social Security and Social Security equivalent Railroad Retirement benefits.

 

When I first started out in the business Social Security was not taxed.  It first became taxable under Reagan in 1984.  Originally only up to 50% of benefits were taxed – the thinking being half of the contributions to Social Security are made by employees and half by employers, so only the employer half would be taxed.  This maximum was later raised to 85% so the “earnings” on Social Security benefits would also be taxed.    

 

Because of the way Social Security and equivalent Railroad Retirement benefits are currently taxed it is very possible that for every additional $1.00 of income you pay tax on $1.85.  So, income that falls within the new 22% bracket can be effectively taxed at 40.7% - almost 4% above the current top tax rate.

 

Social Security and Railroad Retirement benefits are taxed based on the extent of your other taxable income and tax-exempt interest.  You could pay tax on up to 50% or 85% of the gross benefits.  So, an additional $100 of dividends, or interest or capital gains or W-2 income can cause an additional $85 of your benefits to be taxed, so the $100 increase causes your AGI to increase by $185.

 

Because taxable Social Security and Railroad Retirement benefits increase AGI, increases could also reduce tax deductions and credits that are affected by AGI – increasing the effective tax rate of the increase.  The increased AGI can, for example, result in some qualified dividends and long-term capital gains being effectively taxed at more than the “advertised” 0% or 15% rate.

 

The Solution – tax Social Security benefits the same as any other pension with “after-tax” employee contributions, using the “Simplified Method”.  The taxable portion of the benefit would be calculated by SSA and reported as such on the SSA-1099 and RRB-1099, similar to the way partially taxable pension income is reported on the Form 1099-R.   

 

Your thoughts?

 

TTFN

TAX REFORM PROPOSALS – DIVIDEND AND CAPITAL GAINS.

 

Here are my thoughts on reform of the tax treatment of dividends and capital gains.
 
There should no longer be a special lower tax rate on “qualified” dividends and long-term capital gain.  ALL income would be taxed at “ordinary income” rates.  Corporations should be allowed to claim a “dividends paid” deduction on the corporate return, reducing the corporation’s taxable income, so there would no longer be a double-taxation of dividends. 
 
As for long-term capital gain, it would be “déjà vu all over again”.  Back when I first started out in “the business” in the early 1970s Schedule D allowed for a 50% deduction for net long-term capital gain – only half of such gains were included in taxable income reported on the Form 1040.  If the combination of net short-term and net long-term capital transactions on Schedule D showed a gain you would deduct 50% of the smaller of the total net gain or the net long-term gain to come up with the amount to carryforward to the Form 1040.  I would return to this policy and, instead of taxing net long-term gain at a lower rate, provide for a 50% deduction claimed on Part 2 of the Schedule D.  So, if your tax rate was 10% the actual tax you would pay on net long-term capital gains would be 5%, or 12% if you were in the 24% bracket.   
 
I have always had issues with limiting the current deduction for net capital losses to $3,000.  Business losses are allowed a full current deduction, so why not investment losses.  However, I expect I would keep this limitation, but I would index the $3,000 for inflation.
 
What I would do is allow for excess net capital losses to be carried back at least one and perhaps three years.  Currently if you have $10,000 in net capital losses in 2022 you can deduct $3,000 against other income on the 2022 Form 1040 and carry forward the remaining $7,000 to apply against 2023 gains, again subject to the annual $3,000 limit.  If the $7,000 is not all used up in 2023 the excess is carried forward to 2024, and so on.  But the excess loss cannot be carried back.  I would allow taxpayers the option to first carry back the $7,000 to 2021, or 2019, to apply against any net gains reported on the 2021, or 2019, Form 1040.
 
I first proposed this idea in a letter to George W Bush back in 2002 when the initial Bush tax cuts were being formulated.  During the late 1990s and into 2000, when the stock market was flourishing, many taxpayers realized, and were taxed on, large capital gains, including excessive capital gain distributions from mutual funds. In most cases these capital gains were reinvested in the market and in additional mutual fund shares.  In 2001 and 2002 the bear market provided these same investors with substantial capital losses. It seemed to me at the time only fair that they be allowed to carry back the losses to apply against the earlier gains of the bull market and get a refund of the taxes paid on these gains.
 
Back then I had 1040 clients, a married couple, who had $200,000+ in net capital gains, much of it short-term, in one calendar year, followed the next calendar year by $200,000+ in losses.  So, in reality they did not have any net income.  However, the $200,000 was taxed, most at ordinary income rates, when earned, but only $3,000 in losses was deducted per year in subsequent years.  Unless the taxpayers had another huge gain in a subsequent year, it would take forever to fully use up the $200,000+ in net capital losses.  The client is still carrying forward the remnants of this $200,000+ loss.           
 
As an aside – here is the response I received to my letter to Dubya –
 
"Dear Mr. Flach:
 
On behalf of President Bush, I thank you for your letter. The President appreciates hearing your view and concerns.
 
President Bust remains confident in the faith and resolve of our Nation, and he is confronting our country's challenges with focus, clarity, and courage. As the President has said, this is a time of great consequence, and he is working for a prosperity that is broadly shared, strengthening domestic programs vital to our country, and answering every danger that threatens the American people.
 
To accomplish these goals, President Bush welcomes suggestions from all Americans. Thank you again for sharing your ideas.
 
Sincerely,
Desiree Thompson
Special Assistant to the President and Director of Presidential Correspondence"  
 
So, what do you think?
 
TTFN

 

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 

* Kay Bell, the yellow rose of taxes, explains "How to get your withholding just right" at DON’T MESS WITH TAXES.
 
Many people use excess income tax withholding as a “forced savings” and hope for a large refund at tax time.  But any excess withholding – the amount of your refund – is an interest free loan to the government.  Financially and economically speaking it is “more better” to break even or owe a small amount to Sam at tax time than to get a refund.  While interest rates on savings had been miniscule in past years, nowadays you can earn 3-4+% in interest from bank and money market accounts.
 
Some people are aware that if they got an extra $100 or more in each paycheck, they would spend it.  But some employees can elect to have money from their paycheck automatically deposited to a credit union savings account – so the reduced withholding does not show up in the actual paycheck. 
 
Conversely, owing Sam or your state too much can be costly.  Sam will charge a penalty for underpayment if you owe more than $1,000 on your return – unless your arse is covered via one of the “safe harbor” methods.
 
* The TAX FOUNDATION provides detailed information on “State Individual Income Tax Rates and Brackets for 2023”.  
 
* Back to Key Bell – she provides a primer on reporting “Additional Income” on Part 1 of IRS Schedule 1 in “Got more than wage income? Here's how to report it”.
 
* As you prepare to file your 2022 tax returns let me suggest you first purchase and review my book THE JOY OF AVOIDING TAXES - a valuable collection of tax planning and preparation advice, information and resources from my 50 years of experience as a professional tax preparer and over 20 years of posts from my tax planning and preparation blog “The Wandering Tax Pro”.  Click here for details and to see the book’s contents.
 
* And New Jersey taxpayers need to buy and read my report AVOID NEW JERSEY TAXES LEGALLY, which explains in detail a tax strategy a NJ married couple can use to legally save up to $300+ in NJ state income taxes and it identifies a special, I expect unintended, loophole in NJ state tax law that older married couples can use of to save as much as $2,500 in state income taxes.  Click here.
 
* Before I end my shameless self-promotion – there is also ROBERT D FLACH’S THE 1040 LETTER, A monthly newsletter of tax planning and tax preparation advice, information and resources based on my knowledge and experience from 50 years of preparing individual income tax returns for individuals in all walks of life.  Click here.
 
* Some good advice from the IRS in it’s news release “Tax Time Guide: Things to consider when filing a 2022 tax return” (highlights are mine) -
 
“Taxpayers should wait to file until they receive all their proper tax documents, or they risk making a mistake that could cause delays.
 
They should also review their documents carefully. If any of the information is inaccurate or missing, taxpayers should contact the payer right away for a correction or to ensure the issuer has their current mailing or email address.”
 
TTFN  

TAX REFORM PROPOSALS – THE STANDARD MILEAGE ALLOWANCE FOR BUSINESS USE OF YOUR CAR

 

Happy Presidents Day – when we celebrate 45 of the 46 Presidents of the United States, and remember the damaging and potentially fatal mistake America made in 2016.
 
Time for another perhaps controversial tax reform proposal.
 
I love the Standard Mileage Allowance deduction for business, medical and charitable auto travel.  But . . .
 
The standard mileage allowance for business use of the taxpayer’s personal auto should NOT include a component for depreciation of the vehicle.   
 
For the most part taxpayers who use their car for business would own a car whether or not one was needed for business. The business use, however extensive, is basically secondary to personal use.   I have always owned a car.  Although a large percentage of my driving is for business, I own the car primarily for personal reasons, and would own a car whether it was needed for business or not.    
 
Currently the standard mileage rate for business is calculated using an annual study of the fixed and variable costs of operating an automobile - including depreciation, insurance, repairs and maintenance, tires, and gas and oil. The rate for medical and moving purposes is based only on the base variable costs, like gas and oil and does not include depreciation.
 
Because the main reason for purchasing a car is personal and not business, depreciating the cost of purchasing the car, based on business use, is not really a true business expense.  Only the business use percentage of actual operating expenses should be allowed as a deduction – because the more miles you drive the more you spend for gas, oil, repairs and maintenance, tires, and insurance.
 
Taxpayers using their car for business would continue to have the option of using the appropriate business use percentage or actual expenses, but without depreciation.  Those who lease a car and use it for business could also use the standard mileage allowance or actual expenses, but this deduction would not include the monthly lease payment.
 
In the case of motor vehicles legitimately used 100% in a business – trucks, vans, limos, cars that are leased out to others (including one’s corporation) or used exclusively by couriers or for deliveries – a deduction should be allowed for 100% of the actual costs of maintaining and operating the vehicle, including depreciation. The standard mileage allowance would not be allowed here.
 
And the Standard Mileage Allowance for charitable travel should be the same as that calculated annually for medical and moving driving.  The current deduction for charitable driving is set by Congress and has been 14 cents per mile for many decades (except for a couple of temporary increases in times of severe national emergency).
 
So, as always, what do you think?
 
TTFN