TALKING TAX REFORM

 

Tax “reform” is once again in the news – as the GOP TAX ACT 2 attempts to make permanent the provisions of the original GOP TAX ACT.

Tax reform discussions rarely touch on actual "reform" or the many inequities and basic “unfairness” in the US Tax Code.  And they usually minimize the growing complexity.  What the politicians call "tax reform" legislation actually continues to add complexity to the Code – and the current big allegedly beautiful bill working its way through Congress is no different.

As a retired veteran tax professional I am well aware that the Internal Revenue Code has grown into a convoluted “mucking fess”.

The major source of tax return errors, by both paid tax preparers and taxpayers who self-prepare, and tax fraud is the excessive complexity of the Tax Code.

As I have said often in the past, like Frankenstein in the Hammer film, the Internal Revenue Code must be destroyed!  The current US Tax Code, as revised by the recent tax legislation, must be totally shredded, and rewritten from scratch.

The new Internal Revenue Code MUST acknowledge and confirm the fact that the one and only purpose of the federal income tax system is to raise the money necessary to fund the government. 

The Tax Code MUST –

(1) Be simple – easy for everyone to understand.  Simplicity for simplicity’s sake. 

(2) Be fair and equitable - treat all taxpayers equally.

(3) Be consistent – treat specific conditions, situations, and activities, and maintain specific definitions and descriptions, the same in all instances.

(4) Encourage savings, investment, and growth.

(5) Index for inflation all allowable deductions and credits.

The Tax Code MUST NOT –

(1) Be used for social engineering, to redistribute income or wealth, or to deliver social welfare and other government benefits.

(2) Encourage or discourage certain economic decisions (other than savings, investment, and growth), or provide exclusive benefits for specific industries, business activities, or classes of taxpayers.

(3) Contain any refundable credits, or any phase-outs, exclusions or adjustments based on Adjusted Gross Income or Modified Adjusted Gross Income.

(4) Contain any “alternative” tax calculation systems (such as the current “Alternative Minimum Tax”).

(5) Contain any temporary deductions, credits, benefits, or provisions.

I discuss in some detail my personal recommendations for actual tax “reform” in my book THE JOY OF PREPARING TAXES – and also reminisce about my 50 years as a tax professional.

I will send you a copy of this book – as a pdf email attachment – for only $3.00!

Send your check or money order payable to Taxes and Accounting, Inc – and your email address – to:

TAXES AND ACCOUNTING, INC
THE JOY OF PREPARING TAXES
POST OFFICE BOX A
HAWLEY PA 18428

TTFN

THE EXPIRING GOP TAX ACT

 

The GOP Tax Act (aka “Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” or “Tax Cuts and Jobs Act”) expires on December 31, 2025.  Unless Congress does something, the US Tax Code will revert to what it was on December 31, 2017, for tax years beginning with 2026.

I think it is obvious that Congress will pass substantial tax legislation in 2025.  What it will look like depends on who controls the House and Senate.  (aside - If American freedom and democracy is to survive it is vital that the Democrats win control of both houses and the White House in the 2024 election.)

As I posted when the Act was first past, it contains good, bad, and ugly.  Here is a look at the major tax provisions of the Act affecting Form 1040 that are expiring, and my thoughts on whether they should be renewed.

ABOVE THE LINE:

1. Reduced tax rates.

I would support keeping the lower tax rates and revised brackets of the Act.

2. Replacement of the deduction for Personal Exemptions with an increased Standard Deduction and Child Tax Credit.

I personally preferred the “old” personal exemption deduction, but I would not object to continuing without it and keeping the increased Standard Deduction amounts and the increased Child Tax Credit.  However, while I have no problem with a carryover of excess credits, I strongly oppose all refundable credits, and therefore oppose any unused portion of the Child Tax Credit being refundable.

3 The higher exemption amounts and phase-out ranges of the dreaded Alternative Minimum Tax (AMT).

I support keeping these increases.  I oppose the existence of the AMT and would like to see it totally repealed.

4. The larger lifetime Estate and Gift Tax exemption.

I support keeping these increases.  I am not really a fan of the Estate or Gift Tax – however I support keeping it if it maintains the step-up in basis for inherited assets.

5. Limiting the deduction for job-related moving expenses to members of the military.

I oppose this limit and would welcome the return of the adjustment to income for all job-related moving expenses.  I would not object if this deduction was moved to Schedule A.

6. The Section 199A 20% Qualified Business Income deduction.

I see no reason for this deduction and would not continue it.  I do not believe QBI (basically self-employment income) should be taxed any less or differently than wages, pensions, or other “ordinary” sources of income.

BELOW THE LINE:

1. The $10,000 SALT (state and local tax) cap.

I strongly oppose this limitation on the deduction of state and local income or sales tax and property tax.  This deduction is one way of “geographically equalizing” the income tax (see my commentary “The SALT limitation from a different perspective”).  If it must be continued, the $10,000 limit should be increased to $20,000 on joint returns (and $10,000 for each spouse on separate returns) to make it fair.  

2. The limitation of the deduction of mortgage interest to acquisition debt.

I do not oppose the elimination of the deduction for up to $100,000 of “home equity” debt and would not object to keeping the mortgage interest deduction limited to “acquisition” debt.  I also have no problem with keeping the lower $750,000 principal limit on the deduction.

3. The elimination of the deduction for theft losses and the limitation of the deduction for casualty losses to those occurring as the result of a federally declared disaster.

I really do not care if this elimination and limitation remains or goes away, although if forced to provide an opinion I think I would support reinstating the casualty loss deduction for all casualties.

4. The elimination of Miscellaneous Itemized Deductions that were previously subject to the 2% of AGI exclusion – employee business expenses, investment expenses, tax preparation costs, etc.

I support allowing these types of itemized deductions and would want this deduction reinstated.  I oppose the 2% of AGI exclusion on these deductions.

5. The elimination of the reduction of total itemized deductions based on AGI.

I oppose reducing total allowable itemized deductions based on AGI (a “back door” tax increase) and would want to keep this provision of the Act.

Your thoughts?

If you would like to see how I would totally rewrite the US Tax Code to make it fairer and simpler, email me at rdftaxpro@yahoo.com with “Tax Reform Book” in the subject line and I will email you a pdf copy of my book THE TAX CODE MUST BE DESTROYED.

TTFN

 

READ MY LIPS - REFUNDABLE TAX CREDITS BAD!

 

Congress is currently considering several federal income tax proposals from both sides of “the aisle”.  One item being considered is reviving the COVID-19 inspired practice of sending monthly checks to families as advanced payment of the Child Tax Credit, which must be reconciled on the Form 1040.

The greatest source of federal tax fraud, Tax Code complexity, taxpayer confusion, and tax preparer agita is refundable tax credits.

As an example, quoting a recent BUZZ item (highlight is mine) –

“The EITC {Earned Income Tax Credit, which is refundable – rdf} has a long history of erroneous overpayments. Indeed, based on the data available on PaymentAccuracy.gov, between 2004 and 2022, the EITC error rate averaged 25 percent. After adjusting for inflation, EITC overpayments totaled $351 billion over that 18-year period.”

As a professional tax preparer, I always claimed the full amount of tax credits and other benefits to which my clients were entitled under tax law – but as a citizen and taxpayer I oppose most of at least the credits and all refundable components.

Refundable tax credits are a major part of a larger problem - the erroneous practice, an apparent favorite of Congress, of distributing federal welfare and other social program benefits via the Tax Code.

Let me re repeat what I have been saying for years – I very seriously and sincerely believe that the one and only purpose of the federal tax system is to raise the money necessary to fund the government. 

The federal income tax system should –

(1) Be simple – easy for everyone to understand.  Simplicity for simplicity’s sake.

(2) Be fair and equitable - treat all taxpayers equally.

(3) Be consistent – treat specific conditions, situations, and activities, and maintain specific definitions and descriptions, the same in all instances.

(4) Encourage savings, investment, and growth.

(5) Index for inflation all allowable deductions and credits.

The Tax Code should not –

(1) Be used for social engineering, to redistribute income or wealth, or to deliver social welfare and other government benefits.

(2) Encourage or discourage certain economic decisions (other than savings, investment, and growth), or provide exclusive benefits for specific industries, business activities, or classes of taxpayers.

(3) Contain any refundable credits.

(4) Contain any phase-outs, exclusions or adjustments based on Adjusted Gross Income or Modified Adjusted Gross Income.

(5) Contain any “alternative” tax calculation systems (such as the current “Alternative Minimum Tax”).

(6) Contain any temporary deductions, credits, benefits, or provisions.

The Internal Revenue Service, and the tax professional community, should not be required to act as Social Workers and administer and verify government program benefit payments.  This practice is not only inappropriate, but it also invites and encourages tax fraud.

I am not saying that the government shouldn’t provide financial assistance to the working poor and college students, provide encouragements for purchasing health insurance, making energy-saving purchases and improvements and other ‘worthy’ actions.  What I am saying is that such assistance and encouragements should not be distributed via the Form 1040.

The benefits provided by the Earned Income Tax Credit and the refundable Child Tax Credit should be distributed via existing federal welfare programs for Aid to Families with Dependent Children. The benefits provided by the education tax credits and deduction for tuition and fees should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the Premium Tax Credit, the energy credits, and other such personal and business credits should be distributed via direct discount payments to the appropriate vendors or direct rebate programs, similar to the successful Cash for Clunkers program of a few years ago, funded by the budget of the appropriate Cabinet departments.

Distributing the benefits in this manner is much better than the current method for many reasons:

(1) It would be easier for the government to verify that the recipient of the subsidy, discount or rebate actually qualified for the money, greatly reducing fraud. And tax preparers, and the IRS, would no longer need to take on the added responsibility of having to verify that a person qualifies for government benefits.

(2) The qualifying individuals would get the money at the “point of purchase,” when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.

(3) We would be able to calculate the true income tax burden of individuals. Many of the infamous “47 percent” of Americans - who either pay no income tax or get a “gift” from the government by filing a tax return - would still be receiving government benefits, but it would not be done through the income tax system, so they would actually be paying federal income tax.

(4) We could measure the true cost of education, housing, health, energy and welfare programs in the federal budget because benefit payments would be properly allocated to the appropriate departments.

Your thoughts?

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

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

 

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

TAX REFORM PROPOSALS – FILING STATUS AND TAX CALCULATION

 
I believe EVERY taxpayer should be taxed exactly the same – regardless of marital status – under one tax rate schedule.  There should be neither a marriage tax penalty nor a marriage tax benefit. 
 
There should only be three filing categories – Single, Married Filing Joint, and Married Filing Separate. Married taxpayers can elect to file separately on one return or to file separately on separate returns.  The Head of Household filing status and Qualifying Surviving Spouse filing status should be done away with.  And there should only be one tax rate schedule for ALL taxpayers, regardless of filing status.
 
The Form 1040 (and 1040-SR – although I see no need for a separate 1040-SR) should have two columns for entering amounts of income, deductions. tax calculation, and credits - Column A for the numbers of a Single filer, the combined numbers of a married couple filing jointly, or the numbers of the first spouse if filing separately on one return.  Column B would be for the numbers of the second spouse filing separately on one return.   
 
Married taxpayers who elect to file a joint return on combined income and deductions would divide the total combined net taxable income by 2, calculate the tax on this one-half of combined income, and multiply the calculated tax liability by 2 to come up with the total combined tax liability, against which credits for exemptions would be applied.   
 
If, for example, the total combined reportable taxable income of John and Jane Q Taxpayer, after all allowable deductions, is $100,000, a tax liability would be determined on $50,000, half of the total, based on the one tax rate schedule.  If the tax liability on $50,000 was, as an example only, $5,000, the couple’s total tax liability would be $10,000.  Credits would reduce the $10,000 to come up with the total tax liability for the couple.
 
If a couple chose to file separately on one return and the husband had net taxable income of $60,000 and the wife had net taxable income of $40,000 the husband’s separate tax would be calculated on $60,000 and the wife’s separate tax would be calculated on $40,000, and credits applicable to each spouse would then be applied.  The couple could elect to make separate payments or one payment of the combined balance due, or request separate refunds or one refund.
 
Currently married taxpayers filing separate returns are not allowed to take advantage of some tax benefits available to Single filers – or a deduction, credit or limitation is the same on a joint (or combined on separate returns) as it is for a Single taxpayer.  For example, the maximum capital loss deduction is $3,000 for a single filer, $3,000 for a married couple filing joint, and $1,500 for a married taxpayer filing separately.  The same applies to the $10,000 SALT limitation.  Each spouse should be allowed the same amount as a Single taxpayer – a married couple should be allowed a $6,000 maximum capital loss deduction – or $3,000 each on separate calculations – and a $20,000 SALT limit (if it still remains, which I think it should not) – or $10,000 each on separate calculations.
 
As an aside – excess capital loss deductions should be allowed to be carried back as well as carried forward.  But that is a subject for another post.
 
The bottom line is that when a married couple files separately, whether on one or two returns, they would pay the exact same net combined tax they would pay if they were two Single filers.
 
If memory serves me, the ability to file separate returns on one form was allowed on New York state income tax returns back in the 1970s.
 
Your thoughts?
 
TTFN

THE TAX CODE MUST BE DESTROYED!

 
I very seriously and sincerely believe that the one and only purpose of the federal tax system is to raise the money necessary to fund the government.  
 
As a tax professional for 50 years I know too well that the US Tax Code has grown into a complicated and convoluted mucking fess.  The major reason for tax return errors, by both paid tax preparers and taxpayers who self-prepare, is the excessive complexity of the Code. It needs to be shredded and totally rewritten from scratch.
 
The new Tax Code must –
 
(1) Be simple – easy for everyone to understand.  Simplicity for simplicity’s sake.
 
(2) Be fair and equitable - treat all taxpayers equally.
 
(3) Be consistent – treat specific conditions, situations, and activities, and maintain specific definitions and descriptions, the same in all instances.
 
(4) Encourage savings, investment, and growth.
 
(5) Index for inflation all allowable deductions and credits.
 
The new Tax Code must not –
 
(1) Be used for social engineering, to redistribute income or wealth, or to deliver social welfare and other government benefits.
 
(2) Encourage or discourage certain economic decisions (other than savings, investment, and growth), or provide exclusive benefits for specific industries, business activities, or classes of taxpayers.
 
(3) Contain any refundable credits, or any phase-outs, exclusions or adjustments based on Adjusted Gross Income or Modified Adjusted Gross Income. 
 
(4) Contain any “alternative” tax calculation systems (such as the current “Alternative Minimum Tax”).
 
(5) Contain any temporary deductions, credits, benefits, or provisions.
 
And, except for a true national emergency, retroactive tax legislation that becomes effective for the current year must be required to be passed by Congress before the end of October.
 
The Tax Foundation, a nonpartisan, educational organization, has earned a reputation for independence and credibility.  The Foundation has identified the “Principles of Sound Tax Policy”, which should be incorporated in the new rewritten Tax Code.  
 
“Simplicity: Administrative costs are a loss to society, and complicated taxation undermines voluntary compliance by creating incentives to shelter and disguise income.
 
Transparency: Tax legislation should be based on sound legislative procedures and careful analysis. A good tax system requires that taxpayers be informed and understand how tax assessment, collection, and compliance works. There should be open hearings, and revenue estimates should be fully explained and replicable.
 
Neutrality: Taxes should not encourage or discourage certain economic decisions. The purpose of taxes is to raise needed revenue, not to favor or punish specific industries, activities, and products.
 
Stability: When tax laws are in constant flux, long-range financial planning is difficult. Lawmakers should avoid enacting temporary tax laws, including tax holidays and amnesties.
 
No Retroactivity: As a corollary to the principle of stability, taxpayers should be able to rely with confidence on the law as it exists when contracts are signed and transactions are completed.
 
Broad Bases and Low Rates: As a corollary to the principle of neutrality, lawmakers should avoid enacting targeted deductions, credits, and exclusions. If tax preferences are kept to a minimum, substantial revenue can be raised with low tax rates. Broad-based taxes also produce relatively stable tax revenues from year to year.”
 
Put simply, good tax policy promotes economic growth by focusing on raising revenue in the least distortive manner possible.
 
One of the biggest problems with the current federal tax system, and a large source of its complexity, is the use of the Code to deliver government benefits.  Donald Alexander, Commissioner of Internal Revenue from May 1973 - February 1977, correctly observed - “The tax system should be designed to impose and to collect taxes, not to administer social programs.”
 
The Internal Revenue Service, and the tax professional community, should not be required to act as Social Workers and administer and verify government program benefit payments.  This practice is not only inappropriate, but it also invites and encourages tax fraud.
 
I am not saying that the government shouldn’t provide financial assistance to the working poor and college students, provide encouragements for purchasing health insurance, making energy-saving purchases and improvements and other ‘worthy’ actions.  What I am saying is that such assistance and encouragements should not be distributed via the Form 1040.
 
The benefits provided by the Earned Income Tax Credit and the refundable Child Tax Credit should be distributed via existing federal welfare programs for Aid to Families with Dependent Children. The benefits provided by the education tax credits and deduction for tuition and fees should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the Premium Tax Credit, the energy credits, and other such personal and business credits should be distributed via direct discount payments to the appropriate vendors or direct rebate programs, similar to the successful Cash for Clunkers program of a few years ago, funded by the budget of the appropriate Cabinet departments.
 
Distributing the benefits in this manner is much better than the current method for many reasons:
 
(1) It would be easier for the government to verify that the recipient of the subsidy, discount or rebate actually qualified for the money, greatly reducing fraud. And tax preparers, and the IRS, would no longer need to take on the added responsibility of having to verify that a person qualifies for government benefits.
 
(2) The qualifying individuals would get the money at the “point of purchase,” when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.
 
(3) We would be able to calculate the true income tax burden of individuals. Many of the infamous “47 percent” of Americans - who either pay no income tax or get a “gift” from the government by filing a tax return - would still be receiving government benefits, but it would not be done through the income tax system, so they would actually be paying federal income tax.
 
(4) We could measure the true cost of education, housing, health, energy and welfare programs in the federal budget because benefit payments would be properly allocated to the appropriate departments.
 
Some people may wonder why a tax professional is calling for a simpler tax system. Does not each new tax law, and each complexity added to the code, put money in our pockets? Is not a more confusing Tax Code better for business?
 
I believe that a much simpler tax system would not hurt our business. I truly believe that if we did nothing but basic 1040s – the equivalent of the old “1040-A” - all day during the tax season, we would make more money, experience less agita, and substantially reduce the number of extensions needed.
 
I think many clients would not decide to do their own returns if the tax system was simplified; they would continue to come to us. Most taxpayers who use a tax professional simply don’t want to be bothered with the task of preparing their tax return, and want to make sure they do not miss anything.
 
Your thoughts?
 
TTFN

MY TAKE ON CURRENT TAX PROPOSALS

Kelly Phillips Erb, the internet’s TAXGIRL, recently posted “What You Need to Know About the Current Federal Tax Proposals” at her BLOOMBERG.COM blog.

It is very important to note that, as the title of her post indicates, these are “proposals” and NOT current tax law. 

KPE lists the major proposals for individual taxpayers –

“* The top individual income tax rate would revert to 39.6% for single filers making above $400,000, head of household filers above $425,000, and joint filers reporting more than $450,000. Without any Congressional action, that would still happen in 2025 (because of an earlier reconciliation).

* The top capital gains tax rate for those same high-income taxpayers would increase from 20% to 25% for all sales and transactions closing after September 13, 2021.

* The temporary expansion of the child tax credit—and advanced payments—would be extended through 2025. Additionally, changes to the Earned Income Tax Credit (EITC) and the Child and Dependent Care Tax Credit (CDCTC) would become permanent.

* There would be a 3% surtax on modified adjusted gross income over $5 million for single individuals, heads of household, married couples filing jointly, and surviving spouses. The surtax would kick in at $2.5 million for married couples filing separately.

* A $10 million limit would apply to Individual Retirement Accounts (IRAs) contributions—allowing for no further contributions for married couples with taxable income over $450,000 or singles with taxable income over $400,000. The $10 million threshold would also accelerate required minimum distributions for those accounts.

* The proposal would also disallow the so-called “back-door” Roth IRAs by eliminating conversions for IRAs and 401(k) plans for single filers making over $400,000, head of household filers above $425,000, and for joint filers reporting more than $450,000.

* The proposal would also modify the wash sale rules to include commodities, currencies, and digital assets.”      

In addition –

“The top corporate tax rate would increase to 26.5% from 21% for corporate income above $5 million. (The 2017 law cut the rate for large corporations from 35% to 21%.) The tax rate drops to 18% for small businesses with income less than $400,000 and would remain 21% for all other businesses.”

Here are my thoughts on these proposals.

* I completely reject the Democratic Party tax policy of taxing the rich simply because they can afford it.  I am against punishing success and entrepreneurship.  I oppose the increased top tax rate, increased capital gains tax rate, and income-based surtaxes and surcharges.

The way to make sure the “wealthy” pay the proper tax is to eliminate all the special-interest tax deductions, credits, exclusions, and loopholes.

* I oppose the enhancements to the various “welfare” tax credits.  The one and only purpose of the US Tax Code is to raise the money necessary to fund the government.  It should NOT be used to distribute government welfare and other benefits, for “social engineering”, or to redistribute wealth.

I am not saying the government shouldn’t provide financial assistance to the working poor and college students, provide encouragements for purchasing health insurance, making energy-saving purchases and improvements and other ‘worthy’ actions.  What I am saying is that such assistance and encouragements should not be distributed via the Form 1040.

In addition, these tax credit changes add excessive complexity to an already complex Tax Code - and refundable credits encourage and result in excessive tax fraud

* I oppose limitations on investment in IRA accounts.  Savings and investment must be encouraged.

* As for the changes to the corporate tax rate, I am glad the rate is lowered for “small business corporations”.  The GOP Tax Act change to a flat 21% tax rate resulted in a significant tax increase for many smaller corporations. 

I do not necessarily oppose the increase in the top corporate tax rate.  However, I do believe corporations should be allowed a “dividends paid” deduction – subtracting dividends issued to shareholders from corporate net taxable income.  This would do away with the double-taxation of corporate profits, and encourage corporations to pay out dividends to reduce tax liability instead of trying to be “creative” a la Enron.  In addition to allowing for this deduction on corporate returns I would repeal the lower capital gains tax rates for individuals on qualified dividends (while keeping the lower rates for long-term capital gains) – as there would no longer be a reason for this.

So – I have given you my thoughts on the proposals.  What are your thoughts?

TTFN

DEALING WITH TAX MYTHS ABOUT THE GOP TAX ACT

My legitimate ongoing concern about the “urban tax myth” that CPAs are automatically 1040 tax exports by virtue of their initials (they are most certainly NOT) doesn’t mean that online CPA-related sources do not provide excellent and timely information and commentary on 1040 issues.

Case in point “Tax Reform Myths and Facts for 2019: What the TCJA Really Means for Taxpayers” by Dave Duval, EA (you will note that he is an EA and not a CPA) at CPA PRACTICE ADVISOR.

Dave makes some excellent points in his piece, beginning with – “As tax practitioners, we wear many hats: tax aficionado, document sorter, government form translator, timekeeper, empathetic ear, and counselor.”

The article deals with the “plethora of information (and more pointedly, misinformation) about the Tax Cuts and Jobs Act of 2017” that is out there.  

Here are some of the good “take-aways” from Dave’s discussion (highlights are mine) –

* State Income Taxes: “Depending on the state, there may be full conformity {with the GOP Tax Act} or none at all. For example, in California taxpayers will still be able to deduct unreimbursed employee business expenses that are over 2% of their federal adjusted gross income. It will be crucial communicating to our clients that states may or may not have conformed to the federal changes, and it is still important to continue to retain documentation on certain deductions that may have been eliminated at the federal level but still apply at the state level. Retaining the documentation may result in lower state taxes, thereby easing the sting of losing the deductions on the federal return.”

NJ residents can still deduct out of pocket medical expenses, including some expenses that may be “pre-tax” for federal tax purposes but not for NJ state taxes, in excess of 2% of NJ Gross Income whether or not they itemize on the federal return.  And PA residents are able to deduct most employee business expenses without any income limitation.

* Alimony: The changes to the rules for reporting and deducting alimony “is only true for divorce or separation instruments executed on or after January 1, 2019. Alimony that is paid pursuant to a divorce or separation agreement executed before January 1, 2019, will still adhere to the alimony rules in place before TCJA. Divorce or separation agreements that were in place before January 1, 2019, and are modified after December 31, 2018, will still follow the old alimony rules unless the modified agreement specifically states it now follows the new rules.”

* Home Equity Interest: “As tax practitioners, we may need to spend more time with our homeowner clients discussing the difference between acquisition and equity loans, and performing interest tracking on how the proceeds were used. Additionally, we may need to request additional paperwork from our clients, such as the loan documents, and hope they recall where they spent the money.”

It is the responsibility of the taxpayer, and not the tax preparer, to separately track acquisition debt and home equity debt.  The importance of doing this cannot be stressed strongly enough.  Taxpayers should begin to work on this task NOW.  Check out my “Mortgage Interest Guide”. 

* Section 199a Deduction: “Many small business taxpayers are anticipating a big tax break this year due to the new 20% qualified business income deduction. Those small businesses that are organized as C corporations may be wanting to switch to a sole proprietorship or S corporation in order to take advantage of the deduction as fast as possible. Hopefully, these taxpayers will be contacting us first and not an online legal site where they can make the switch themselves {very, very important – consult your tax professional before you do anything regarding a change of business entity – rdf}. Many small business owners are not aware of the limitations and complexities to this deduction. Furthermore, there may have been very important reasons why a business formed as a C corporation that goes beyond taxes. By switching entities, these reasons may fall by the wayside.”

The Section 199a deduction is ridiculous, and ridiculously complicated, and unnecessary.  More proof that the members of Congress are idiots.

* The New “Postcard” 1040: “Some taxpayers will be lulled into a false sense that this means taxes are now simpler, and therefore the fee to prepare the return will be lower. As we know, expensive things can come in small packages. With all the changes courtesy of TCJA and state nonconformity, this tax season may be one of the most complicated we have seen. As such, we will need to educate our clients on this and caution them that the preparation fee may be larger this year.”

The “postcard” 1040 is perhaps the stupidest idea I have seen in over 45 years of preparing tax returns. 

Dave’s bottom line truly tells it like it is –

“One thing is for certain about the upcoming tax season − just about every tax return is going to take extra time and care.”

Thanks to Dave for an excellent discussion that should be read by all taxpayers and tax preparers (not just CPAs).

TTFN