Archive for the ‘Legislation’ Category

Coming Attractions: When the IRS Writes New Law When They’re Not Allowed To

Tuesday, October 22nd, 2013

The IRS is part of the Executive Branch of government. The Executive Branch can’t write law–they can issue regulations based on laws passed by the legislative branch (Congress) and then only when Congress authorizes it. There’s an issue percolating in the courts which is likely going to cause a huge headache throughout the country: tax credits for federal health care exchanges.

Today, a federal court judge in Washington denied the Administration’s request to stop a lawsuit challenging the IRS’s interpretation of the ability to give tax credit subsidies on federal health care exchanges. US District Judge Paul Friedman denied a preliminary injunction but did order the case tried on an expedited basis; he said that he expects to issue a ruling by February. Earlier this year a judge in Oklahoma also denied an Administration dismissal request in a similar case. There are two other cases filed on this matter.

Jonathan Adler of the Volokh Conspiracy notes the issue succinctly:

The IRS rule contravenes the plain text of the PPACA, as the statute only authorizes tax credits (and subsidies) for the purchase of insurance in an exchange “established by a state” under Section 1311 of the law…Supporters of the IRS rule claim that Congress could not have intended that Americans in dozens of states would be unable to obtain tax credits to help them purchase insurance. They’re right. Congress intended for every state to create its own exchange, as PPACA supporters said time and again, but states refused. Now that their assumption has been proven wrong, this does not provide an excuse to rewrite the plain statutory text.

This matters because in tax when a statute says “x,” it’s “x.” A good example of this is some of the ludicrous ways the Alternative Minimum Tax impacts individuals. Judges have stated in their rulings that these make no sense but because it’s written into the statute, there’s no choice on this matter: Until Congress changes the law, they’re stuck. I expect the same thing to happen here. Of course, Congress could change the law but the chance of that happening is equivalent to the chance of snow in Las Vegas in July.

Assuming that this suit is successful, it will strike at the heart of the mandates in the law. Assuming this ruling comes in February, there will be even more of a mess with the law. The ObamaCare rollout has hardly been something one could call “smooth.” Proponents have been hopeful that the light they’re seeing is the end of the tunnel. To me, it looks like an oncoming train.

44 Days

Sunday, October 20th, 2013

44 days isn’t much time. It’s about a month and a half. Yet in the bizarre world of the Affordable Care Act (aka ObamaCare), it’s a big deal. Over the coming weeks I’m going to be looking at various provisions in light of the current law and the current difficulties–perhaps impossiblities–of individuals to actually sign up and obtain a policy. Consumer Reports is suggesting that perhaps a solution to signing up is to wait a while–at least a month; hopefully by then the software glitches will be gone.

Anyway, back to the point of this post, 44 days. Nancy Pelosi famously said, “But we have to pass the bill [ObamaCare] so that you can find out what is in it.” Well, there are some interesting deadlines in ObamaCare:

December 15th: Date you need to be enrolled by for coverage to take effect on January 1, 2014 [1];
February 15, 2014: Date you must have coverage by in order to be exempt from the Individual Mandate Tax; and
March 31, 2014: Final date to enroll for calendar year 2014.

The Obama Administration was unaware that someone who enrolls on February 16, 2014 will be subject to the individual mandate penalty tax until it was pointed out to them. The penalty for 2014 is $95 or 1% of Adjusted Gross Income, whichever is greater. I suspect for much of my client base the 1% of AGI will be greater, perhaps far greater than $95. Consider an amateur gambler who has $100,000 of gambling wins and $100,000 of gambling losses and who makes $100,000 of salary. He’s looking at a $2,000 penalty. Still, given the cost of health insurance under ObamaCare that might be a more financially prudent choice.

But do be aware that the true deadline is February 15th, not March 31st. It’s yet another quirk in the law.

[1] It is unclear if dates that fall on weekends–December 15th falls on a Sunday–cause the deadline to be extended a day. As best as I can tell, the answer to that is no…but I did not read the 3,000 page legislation.

The 2014 State Business Tax Climate Index: Bring Me the Usual Suspects

Wednesday, October 9th, 2013

The Tax Foundation released its 2014 State Business Tax Climate Index. In what will shock few readers of this blog, the usual suspects remain at both the top and bottom of the list.

First, let’s look at the top states–the best for business:

1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. Washington
7. Montana
8. New Hampshire
9. Utah
10. Indiana

What do these states share? Generally, low taxes (and in the case of some of these states, no income tax). But as the Tax Foundation noted, “But this does not mean that a state cannot rank in the top ten while still levying all the major taxes. Indiana, which ousted Texas from the top ten this year, and Utah have all the major tax types, but levy them with low rates on broad bases.”

What happens when you have high taxes, complex taxes, and non-neutral taxes? You end up in the bottom ten:

41. Maryland
42. Connecticut
43. Wisconsin
44. North Carolina
45. Vermont
46. Rhode Island
47. Minnesota
48. California
49. New Jersey
50. New York

Let’s take my home state, Nevada, and compare it with California (my old state) to see why each ranks where they do. The Tax Foundation looked at five taxes: Corporate Tax, Individual Income Tax, Sales Tax, Unemployment Insurance Tax, and Property Tax.

Nevada doesn’t have a corporate tax or an individual income tax, so the state is tied at number one for both. California ranks dead last on the individual income tax. Not only does the Bronze Golden State have the highest state tax rate, there are numerous conformity issues (with federal taxes), and a tax bureaucracy that is hard to work with. California is below average for the corporate tax. This isn’t because California is that good; rather, there are states that are far worse.

Nevada and California rank 40th and 41st respectively on sales tax. Both states have complex systems with rates that vary in different districts. Additionally, both states have fairly high sales tax rates. California significantly outranks Nevada on Unemployment Insurance Tax. Nevada’s tax rate is one of the highest; California’s is relatively low with conformity on the maximum income base for this tax ($7,000). Nevada slightly outranks California on property tax (9th versus 14th). California’s low ranking is because of limits from Proposition 13. It’s something that gives certainty and is probably the third rail of California politics.

What most observers forget is the importance of the individual income tax. Most businesses pay tax through individual income taxes, not corporate taxes. S Corporations, LLCs, LLPs, general and limited partnerships, and sole proprietorships are flow-through entities that are taxed on the individual level. States that provide low rates on individual income taxes generally do better for businesses. While California is known for its entrepreneurs (think Silicon Valley), its tax climate discourages such ventures.

And for those who think that taxes don’t matter, I’m in Nevada as a result of taxes and California’s miserable business climate. Nissan moved its headquarters from California to Tennessee, and taxes were a big factor. For both small and large businesses (and everyone in between), these issues count. The Tax Foundation’s full study is well worth your perusal.

House Passes Tax Bill; Most Things Stay the Same for 2012

Tuesday, January 1st, 2013

This evening, the House passed by a 257-167 vote the tax compromise. Here’s what this bill means:

Income Tax
– For 2013 forward, the Bush tax cuts were permanently extended except for the “wealthy.” That’s defined as $400,000 for individuals, $450,000 if married filing jointly (MFJ). Above this, the top marginal tax rate returns to 39.6%
– Welcome back, marriage penalty! (See above.)
– The Alternative Minimum Tax will no longer be patched each year; it is now indexed for inflation. Among other pluses with this, the tax filing season should begin normally in mid-January.
– Many tax credits were extended for five years, including the American Opportunity Credit, the Earned Income Credit, and the child tax credit (at a higher level than in the past).
– The ability to deduct sales tax instead of state income tax was extended for one year. Other deductions, such as the teacher expense deduction and the tuition and fees deduction, were also extended.
– Both exemptions and itemized deductions will again “phase out” at high incomes: $250,000 (single), $275,000 (head of household), and $300,000 (MFJ). Note that those itemized deductions which didn’t phase out in the past (e.g. gambling losses) will not phase out in the future, either.

Payroll Tax
The 2% payroll tax holiday has expired. Employee’s share of social security will return to 6.2% from 4.2%; self-employment tax increases to 15.3% from 13.3%.

Estate Tax
The estate tax exemption continues at $5 million base, with inflation adjustments ($5.12 million for 2012). The rate increases to 40% from 35% above the exemption.

The ‘sequester’ (cutting of expenses) was put off for two months. Coincidentally, that’s about when the debt ceiling will be reached. That battle–likely to begin in February–will be interesting as most Republicans want significant cuts and most Democrats don’t.

This year figures to be quite taxing for Congress (and that pun was intended).

Fiscal Cliff Compromise Deal?

Tuesday, January 1st, 2013

Last night the Senate approved on a compromise deal that averts the “fiscal cliff.” Supposedly, most tax provisions that were to expire are extended in the deal (including the deduction for state income tax, a permanent indexing for the AMT, and cancelled debt relief on a primary residence). The House will likely vote on the deal later today.

There will still be major battles ahead inc Congress, as this measure does nothing on spending. The debt ceiling will be reached within two months, and Republicans likely will demand major cuts in spending to allow for a debt ceiling increase.

I’ll have more on this tomorrow when I’m back working.

Fiscal Cliff Deal Near?

Monday, December 17th, 2012

CBS News is reporting that a fiscal cliff deal may be reached by mid-week. Here is the report from Major Garrett of CBS:

We shall see. Presumably, an AMT patch is part of the negotiations.

Hat Tip: Hot Air

Math Is Hard

Wednesday, August 29th, 2012

Here’s a math question: What’s 15 +13? It’s 28, of course. Unfortunately, the Santa Clara Valley Water District (near San Jose, California) didn’t check their work. They added 15 years to 2013 and got 2029, not 2028. Oops. It’s a big problem because that’s what was written in a parcel tax proposal that’s on the November ballot.

The ballot proposal is now invalid, and the deadline for making changes on ballot proposals was two weeks ago. Now the water district must file a lawsuit and hope the judge allows a change to the measure. And it’s the second error with this ballot measure–a two-word clerical error was fixed a few weeks ago.

If approved–and that’s if it appears on the ballot–the proposal would add a $54 tax to each parcel within the water district.

It’s a Tax: What ObamaCare Means for You

Sunday, July 1st, 2012

Unless you were shipwrecked on a deserted island you know that the Supreme Court ruled that the Affordable Care Act, aka ObamaCare, is a legal “tax.” Back in February 2010 I wrote about the taxes in ObamaCare. Let’s run down the entire list (now that we know what’s in the bill) and see how this impacts you. The italicized text is from February 2010 (the proposal). Numbers refer to [individuals]/[families].

1. Individual Mandate Tax. For those who don’t purchase health insurance, this income tax surcharge continues to exist in this plan. I couldn’t determine the exact rate. This begins on January 1, 2014. The penalty is $95 (at first) but increases to the greater of $695 or 2.5% of modified adjusted gross income (MAGI) in 2016. (Families pay three times the individual number for the minimum tax.) The tax is indexed to the Consumer Price Index (CPI) for future years.

Something to realize is that most of the taxes in the measure are based on MAGI. This means your income before itemized deductions. For individuals who are, say, amateur gamblers who have $100,000 of wins and $100,000 or losses, you will pay taxes based on your winnings but not your losses. This is not a good thing (unless you like paying lots of taxes).

2. Employer Mandate Tax. On businesses with 50+ employees that do not offer health care, and at least one employee qualifies for a tax credit, $750/employee. This will cause many small businesses to stop growing once they reach 49 employees. Those figures come from the prior version.

In the final version of the law, the Employer Mandate Tax is $2,000/employee with it going into effect on January 1, 2014. There is also a $3,000/employee penalty if the government finds they provide workers with “unaffordable” health insurance. There ‘s an obvious solution to small employers: Don’t hire employee #50. And for those who have 51 or 52 employees, let those “excess” employees go. And that’s exactly what is guaranteed to happen.

This tax is guaranteed to hurt the economy in numerous ways. It will cause employers to cut employees. It will cost employees health insurance; if the $3,000/employee penalty applies to health insurance that’s unaffordable and you have just 30 employees, the solution is simple–don’t offer health insurance. The title of my previous post was, “It’s unpopular, unworkable, and insane, so naturally they’re in a hurry to pass it.” It remains an insane plan.

3. Excise Tax on Health Insurance Plans. Beginning in 2018, 40% tax (the percentage may be wrong) on plans costing $10,200/$27,500. Is indexed to CPI. This is in the law at the percentages and dollar amounts noted; it goes into effect in 2018.

4. Health Insurance would be reported on W-2s. Another mandate that increases costs for business. It’s unclear whether this mandate survived. However, the White House release states that loopholes will be closed which implies this remains. It survived and is in the law.

5. “Medicine Cabinet Tax.” Limitation on HSAs, FSAs, and MSAs to purchase non-prescription medication except insulin. This is in the law and is already in effect (as of 2011).

6. HSA Withdrawal Tax Increased. The tax would increase to 20% from 10%. It’s in the law and went into effect in 2011.

7. FSAs capped at a maximum of $2500. They are now uncapped. This goes into effect in 2013 (it is indexed to CPI after 2013). This will especially hurt parents of special needs children who have utilized FSA dollars for special needs education. That kind of education can easily run over $10,000 per year.

8. 1099 Reporting for corporations. Requires businesses to send 1099-MISCs to corporations. This is another cost for businesses. This will begin in 2011 and will definitely increase my income. This is definitely in the proposal, but it’s unclear if this starts in 2011. While this was in the law, Congress repealed this section of the law after outcries from almost every business in the country.

8. Tax on Charitable Hospitals. This excise tax of $50,000 per hospital impacts hospitals that don’t meet new Department of Health and Human Services regulations. It’s unclear whether this is in the proposal. This went into law in 2010 and impacts hopspitals that do not meet “community health assessment needs,” “financial assistance,” and “billing and collection rules” set by the Department of Health and Human Services (HHS).

9. Tax on Drug Companies. There’s definitely a tax on drug companies, but the size and timing of the tax is unclear. This went into effect in 2010 as a $2.3 billion annual tax based on the share of sales made in a year.

10. Tax on Medical Device Manufacturers. This tax is in the bill, but the size and timing of the tax is not clear. This goes into effect in 2013, and is a 2.3% excise tax. How many medical device manufacturers will now establish overseas subsidiaries not subject to US taxation? I’d expect many to do so. Given that there are 360,000 people employed in the US in this industry, there will be layoffs in this industry caused by this tax.

11. Tax on Health Insurers. This tax is definitely in the bill, but the size and timing of the tax is unclear. This tax goes into effect in 2014, and phases in gradually until 2018. The tax immediately hits firms with $50 million in profits (or more) and is based on premiums collected.

12. Elimination of tax deduction for employer provided retirement prescription drug coverage. It is unclear whether this tax is in the measure. It’s in the law and goes into effect in 2013.

13. Increase of percentage of AGI required to deduct medical expenses from 7.5% to 10%. Few can deduct medical expenses today; fewer will be able to deduct them tomorrow. This goes into effect in 2013. However, for those 65 or older the AGI percentage will remain at 7.5% through 2016 (seniors will join everyone else at 10% in 2017).

14. Compensation Limitation for Health Insurance Executives. If you work in that industry, you will be limited to a salary of $500,000. There’s no mention of this in the measure. However, given the Obama Administration’s stance on various pay-related measures, it’s likely included. It goes into effect in 2013.

15. Medicare Payroll Tax Hikes. Once your income exceeds $200,000/$250,000 (MFJ), you will pay an additional 0.9% tax. Note that the employer will only collect (and be responsible for this tax) if you earn $200,000/$250,000 or more. This also impacts the self-employed. And the law is written so that the self-employed cannot deduct half of the new tax as a deduction to income tax. It appears this provision is dead. However, it’s been replaced with something worse (see below). Unfortunately, this tax is in the final version of the law and takes effect in 2013.

16. New Hospital Insurance Tax. “The Act will include an additional 0.9 percentage point Hospital Insurance tax for households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly.” I remember then-candidate Obama stating that if you made under $250,000, he wouldn’t increase your taxes. Yeah, right. This tax is not in the final version of the law.

16. New Unearned Income Tax. “[The Act] would add a 2.9 percent tax for households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly to unearned income including interest, dividends, annuities, royalties and rents (excluding income from active participation in S corporations).” This is yet another measure which will stifle the economy in the United States. For my amateur gambling clients, this is particularly bad—it means your taxes will go up based on your gambling winnings, not your gambling net income. This goes into effect in 2013. While it’s called a “Surtax on Investment Income,” it will include dividends, capital gains, interest (the things you think about), passive income (partnerships, S-Corps, and trusts), royalties, rents, and Other Income (including gambling income). It does not include active business income, distributions from retirement plans, and sales of ownership interests in pass-through entities. It also does not apply to non-resident aliens.

17. Blue Cross Tax. There is a tax deduction available today for Blue Cross and Blue Shield companies; this tax deduction will vanish if they don’t spend 85% (or more) of premiums on clinical services. There’s no mention of this in the proposal. However, it was in both the House and Senate Democratic proposals and I expect it’s in this one, too. This went into effect in 2010.

18. Tax on Indoor Tanning. A new 10% excise tax on indoor tanning salons. This one made the cut. This went into effect in 2010.

19. Paper Production and Cellulosic Biofuels. “[Close] the loophole that allows certain byproducts of paper production to be eligible for the cellulosic biofuels producer credit.” This new tax provision is in the measure. This went into effect in 2010.

20. Strengthen Economic Substance Rules. “[Help] prevent tax shelters by clarifying the definition of when activities have true “economic substance” beyond evading taxes.” While the details aren’t listed, it’s clear that this provision will strengthen the economic substance rules. This will increase costs for complex transactions, and will likely depress economic activity. This went into effect in 2010.

President Obama and his surrogates have stated that the ACA (ObamaCare) is not a tax. White House Press Secretary Jay Carney stated the following:

“It’s a penalty, because you have a choice. You don’t have a choice to pay your taxes, right?” Carney said.

Carney was initially reluctant to assign a label to the fine when pressed repeatedly by reporters Friday. “Call it what you want,” he said…“You can call it what you want,” he said. “If you read the opinion, it is not a broad-based tax. It affects one percent, by CBO estimates, of the population. It is not something that you assess like an income tax.” It was unclear which Congressional Budget Office estimate Carney was referring to. Despite being pressed on the issue, though, the spokesman would not relent.

Bluntly, this is B.S. There are twenty tax increases in ObamaCare. You can parse words any way you like, but many of these measures are labeled as “taxes” and “surtaxes”. If you can read what I wrote above about the twenty tax increases in ObamaCare and still state that it’s not a tax, well, I suggest you apply for a job at the White House. The Supreme Court said it’s a tax. It contains twenty tax increases. President Obama’s argument that it’s not a tax is clearly wrong.

For the rest of us, this gives a clear choice in the election this November. Mitt Romney has pledged that his first job if he takes office will be the repeal of ObamaCare. President Obama and his administration have pledged the full implementation of ObamaCare (and the rescinding of the Bush Tax Cuts). You can’t get a much clearer choice than that.

Politics First, Solving Problems Second: Dems to Schedule Vote on “Buffet Rule” for April 15th

Sunday, March 25th, 2012

Today on CBS’s Face the Nation, Senator Chuck Schumer (D-NY) said that Democrats will schedule a vote on the “Buffet Rule” for April 15th. The so-called Buffet rule would raise income tax rates on anyone making $1 million or more to a minimum of 30%. Democrats promote the rule as stating it will solve the problems of the deficit. Unfortunately, the truth is quite different: The non-partisan Congressional Budget Office says it will raise only $47 billion over ten years. This year’s budget deficit–that’s the budget deficit for just one year–is projected to be well over $1 trillion.

The CBS story says the vote will be on April 15th (a Sunday); this Providence Journal story says it will be on Tax Day, April 16th. Democrats apparently haven’t checked with the IRS or their tax professionals: Tax Day this year is Tuesday, April 17th. Like many things comes out of the left in Washington, it’s a proposal that sounds good, but doesn’t do what it’s supposed to do.

2011 Tax Offender of the Year

Saturday, December 31st, 2011

It’s time again to be considered for that most prestigious of awards, the Tax Offender of the Year. To be considered for the Tax Offender of the Year award, you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.

Coming in second was Mark Leitner. Mr. Leitner felt that the government shouldn’t lean on him, so he filed liens against the government…to the tune of $48.489 billion from seven individuals involved in prosecuting him. Mr. Leitner is not enjoying that money (those liens were, as you would imagine, quashed); instead, he’s spending some time relaxing at ClubFed.

Coming in third was Norma Coronel. Ms. Coronel gave birth to one child in December 2002. However, she thought that she could do better on her tax return by claiming she gave birth to 19 children…all at once. That truly Bozo tax fraud got her the joy of repaying, with interest, the over $300,000 she received from the IRS.

I’m giving a dishonorable mention to the IRS Automated Underreporting Program (AUR). I’ve had several clients who have responded to notices from the AUR group, and the AUR group, when writing back, helpfully notes that they’ve reconfigured the amount that the clients allegedly owed. The trouble is that the AUR group ignores the correspondence from the client, and simply restates the amount owed. I’m going to be sending Nina Olson, the National Taxpayer Advocate, a letter on this issue; I’ll post a copy of the letter in the blog in the coming weeks.

This year’s winner has a proud history; indeed, without them we likely wouldn’t be here. I’m talking about the United States Congress, who have moved up from being runner-up the past two years. Congress, especially the Senate, forsook its duties. Consider the budget passed by the US Senate…but that would be problematic as the US Senate didn’t pass a budget in 2009 or 2010 and waited until the closing days of December to actually pass one. However, these are minor issues in comparison with the major problem: The needless and horrible complexity of the US Tax Code.

Nina Olson, the National Taxpayer Advocate, has noted the problem year after year in her reports to Congress. For example,

The National Taxpayer Advocate on numerous occasions has identified the complexity of the tax code as the most serious problem facing taxpayers and urged Congress to simplify it. In this section, we discuss the sources and impact of code complexity and the practical obstacles to simplification. In an accompanying legislative recommendation later in this report, we outline principles and proposals that we encourage Congress to consider as it explores tax reform options.

In 1986, Congress simplified the Tax Code. It’s high time again for another round of simplification. Consider one of my areas of practice, dealing with individuals with foreign financial accounts. Not only do those individuals now have to file an FBAR (Form TD F 90-22.1), they must repeat that information on Form 8938 (if they have sufficient foreign financial accounts). I don’t blame the IRS for this duplication. Rather, I blame Congress. Congress enacted the laws requiring these forms; it is Congress that needs to enact laws that would simplify the Tax Code.

I’d like to see a simple, fair Tax Code. This is likely one of the few issues where the Tea Party protesters and the Occupy Wall Street protesters would agree. Again, consider Form 8938. The instructions note that the estimated average time to complete this form is one hour, five minutes. And that’s just one form. No wonder I’m not worrying about my employment.

I’d like to be put out of a job–at least, on the tax preparation side. Realistically, I doubt that will ever happen: There will still be plenty of complex corporate and business returns that need completion.

Today, taxpayers who do not have simple situations–and that’s millions of Americans–have tremendous difficulties completing tax returns on their own. Albert Einstein stated that, “The hardest thing in the world to understand is the income tax,” and that was over 60 years ago! The situation today is far, far worse and the blame is squarely with Congress. Unfortunately, 2012 is an election year and I believe there’s zero chance of anything coming out of this Congress. Indeed, President Obama has shown no inclination at simplifying the Tax Code. We likely need new leadership in Washington to ease the pain of all Americans.

And that’s a wrap on 2011. Everyone have a safe, happy, and healthy New Year. I’m sure I’ll find plenty of other Bozos to write about in 2012.