Taxable Talk

Last week the House of Representatives passed an AMT patch for 2008. That patch contained offsets (tax increases) which doom it in the Senate. Further, President Bush promises a veto if it somehow manages to make it out of Congress.

Eventually, Congress will pass a patch which doesn't contain offsets. Will it be in September or November? I think we're looking at a replay of 2007 and November is optimistic.

The IRS announced today that most taxpayers will be able to file their tax returns normally. However, about 3 to 4 million taxpayers who use just a few forms will need to wait until February 11th. (While about 13.5 million taxpayers use these forms, most do not file early.)

Here are the forms that will cause delays:

• Form 8863, Education Credits;
  
• Form 5695, Residential Energy Credits;
  
• Form 1040A Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers; and
  
• Form 8859, District of Columbia First-Time Homebuyer Credit.

Remember, the forms you get in the mail will be incorrect. Specifically, the exemption amounts on Form 6251 (Alternative Minimum Tax) are wrong. Other forms and instructions that reference these amounts will also be incorrect.

The IRS stated in today's press release that they will need seven weeks to update their computer system for those specific forms, but that individuals who don't use those forms should be able to file normally.

Congratulations to the IRS in working expediently to fix the mess that Congress created. As to Congress, can you do your 2008 AMT patch before Election Day next year?

In the no surprise department, the House passed the AMT patch bill that did not contain any offsets. It now goes to President Bush who will likely sign it tomorrow or Friday.

The IRS previously said that it would take ten weeks for their computers to be reprogrammed with the new AMT exemption amounts ($66,250 for joint filers and $44,350 for single filers). Assuming that's the case, the IRS computers will be ready to process returns on February 29, 2008.

If your refund gets delayed, you will know who to blame: Congress—specifically the Democratic leaders in the House and the Senate. They waited to bring this measure up until late November knowing full well what the impact would be.

Finally, Joe Kristan ended his post on this with a wonderful thought: "As the patch only covers 2007, it kicks the problem into 2008 - an election year. More fun awaits." Thanks, Joe. It's the Holiday Season, a time for good cheer, not reasons for the rest of my hair turn to gray.

TaxProf Blog linkfest on the AMT patch passage
Roth Tax Update post

News reports state that the House will consider an AMT patch bill that has already passed the Senate. The Senate version of the AMT bill does not contain any tax offsets (or "paygo") provisions. Earlier, the House had passed an AMT patch that contained such offsets.

Last night the Senate again considered the House bill and it again failed (48 - 46, with 60 votes needed). All but one of the Republicans present voted against the bill while all Democrats present voted for the measure.

Thus, the House was left with no option but to consider the Senate version of the AMT patch, or the Democrats would end up being blamed for a tax increase on the middle class. Unfortunately, due to the lateness of the bill, the IRS forms that millions of taxpayers will receive will have incorrect information, and it's probable that the IRS will be unable to process individuals' tax returns until sometime in March.

When NBC's Saturday Night Live looks saner than California's legislature, there's a problem.

Today, California's legislature will look at a new health insurance program, estimated to cost $14 billion. Interestingly enough, California's budget deficit for this fiscal year is now estimated at $14 billion.

Late today the Senate passed a one-year Alternative Minimum Tax (AMT) patch that did not have any corresponding tax increases. The measure will now go to the House where it faces an uncertain future.

The House had passed a two-year patch that contained corresponding tax increases. As I mentioned previously, there's no chance that an AMT patch which contains tax increases can pass the Senate nor would it be signed by President Bush. However, that doesn't mean that House Democrats have figured that out.

Other tax measures which are scheduled to expire were removed from the AMT legislation. A separate bill on those "extenders" will soon be introduced. However, because it will contain corresponding tax increases it, too, faces an uncertain future.

Meanwhile, tax forms (which will almost certainly be wrong) are being printed at the Government Printing Office, and I and other tax professionals will have to explain to clients why the forms are wrong. As I said before, I expect that by April 15, 2008 all of my hair will be gray.

What does the IRS have to do with health care? Very little today. However, if one presidential candidate gets his wish, the IRS will be intimately involved in health care.

Former Senator John Edwards (D-NC) proposes that under his version of socialized medicine, Americans would have to submit proof of health insurance with their annual tax filings. If you didn't have insurance, the IRS would notify a newly created federal/regional bureaucracy; that individual would be required to obtain insurance (but would get a tax credit to help with his payments).

Now, I've probably got some of the details garbled, but I'm not apologizing for that. The IRS has enough difficulties administering taxes. Getting them involved in health care is a prescription for a headache that we'd all be sharing.

This afternoon I spoke to the Exchange Club of Irvine regarding tax law changes in 2007. One issue that came up that I couldn't give a complete answer to was the Alternative Minimum Tax (AMT). Would Congress pass another "patch" bill for 2007? Would Congressman Rangel's bill that included other tax increases pass? What would the impact be on the 2007 filing season?

Before I answer those questions, let me note that it's not just taxpayers who are concerned. The IRS Oversight Board is "gravely concerned" regarding possible delays in the filing season due to changes with the AMT. Paul Cherecwich, chair of the Board, sent a letter to the Senate Finance Committee noting the Board's concerns. The Oversight Board estimates that a late filing season start date of January 28, 2008 will result in $17 billion in delayed refunds, while a February 18, 2008 filing season start date will result in $87 billion of delayed refunds.

Other potential impacts of the delay include more taxpayers filing paper returns (the IRS can shut down electronic return processing but can't stop paper returns from being mailed) increasing expenses, increase errors, and generally make next tax season a nightmare. "In conclusion, the Oversight Board urges Congress to take quick action so as to mitigate the risks of AMT changes on taxpayers. Although it is difficult to quantify the exact impact with certainty, the risks are high and the effect on taxpayers is potentially very burdensome."

So, let me answer the questions that were posed today. Congress will pass an AMT patch that's acceptable to President Bush and Congressional Republicans because the AMT primarily impacts "Blue" states. Congressman Rangel's bill won't pass as currently written; House Democrats will have to live without their "paygo" rules. As to the impact on the tax season, let's just say that I think the rest of my hair will be gray by next April 15th.

I've been asked if I am a supporter of the "Fair Tax." The Fair Tax is an idea of scrapping the current U.S. Tax Code and replacing it with a national sales tax. You can go to the Fair Tax website and get detailed information on the program. The site gives fundamentals behind the program here.

I hadn't seen an unbiased review of the Fair Tax program until this weekend. Hank Adler, a professor of business at Chapman University, has published a lengthy critique of the Fair Tax. You can read it here (it is best read using Internet Explorer rather than Firefox). Professor Adler comes to the conclusion that while our current Tax Code may need to be replaced, the Fair Tax isn't the way to go.

I agree that our current Tax Code is not a very good system. I'm still digesting material on the Fair Tax, and haven't reached Professor Adler's full conclusion, but I do have many reservations about the Fair Tax.

Pork has gotten ridiculous in Congress. My Congressman, John Campbell, is one of the few who has said he will not ask for any earmarks for his district. Meanwhile, David Obey (D-WI), the Chairman of the House Appropriations Committee, said it will be a cold day in Hades before there's real earmark reform. At least he's honest.

But there is something we can do. When individuals complain to Congress, results occur. You'll see below a form that you can fill out to complain about earmarks (aka pork). The elimination of pork and a streamlined tax system go hand and hand. Join me and sign the petition—it's free and easy.

November 10th is Saturday. That's normally the day the IRS sends all of the forms and schedules to the printer. There's a problem, though: Will Congress enact an AMT patch for 2007?

The House is scheduled to vote on a patch tomorrow. The Senate will likely take up the bill next week. However, President Bush is threatening to veto the legislation. Besides the AMT relief the measure extends 38 expiring tax provisions.

There are reasons why the President is threatening a veto. First, the bill has revenue offsets that the President doesn't like. The measure would increase taxes on carried interest paid to financial managers and deferred compensation paid to some foreign hedge fund managers. Second, the bill would repeal the private debt collection efforts used by the IRS. President Bush is also upset that Congress has waited to the last minute to address AMT and other issues.

Remember how this year some deductions weren't noted on the tax forms (e.g. the sales tax deduction), and that the IRS sent out a supplemental mailing? This also delayed refunds to those impacted by these tax breaks because the IRS had to reprogram their computers. Expect a similar situation this year.

I expect that eventually we'll see an AMT patch that both Congress and the President can live with. The AMT impacts individuals in "Blue" states more than "Red" states. However, I expect some of the 38 tax breaks that need to be extended won't be and will expire. And I won't be shocked if President Bush does veto the initial legislation, and that Congress will then pass something the President would (and will) sign.

Hat Tip: TaxProf Blog

Suppose you're an employee of a business in New York, and you reside in New York. You come to California on business for a convention and stay for ten days. Later, you visit relatives in California for a week. Did you realize that you owe California taxes?

Yes, that's the law. If you're not paying, you're not alone. Most employers ignore out-of-state tax issues, and it's very difficult for the Franchise Tax Board to go after employers in Nebraska (for example).

California's rule is 14 days. Other states have different rules. There's a bill in Congress to make the rule uniform throughout the United States and only allow states to tax out-of-state employees at 60 days. The AICPA has endorsed the bill; I like it, too. Unfortunately, the bill has only three co-sponsors and is unlikely to emerge from Congress quickly.

Hat tip: Tick Marks and Roth Tax Update

Back in March, I ran a post titled, "Be Afraid. Be Very Afraid." I asked the question, "Did anyone really believe that with a Congress controlled by Democrats we would be looking at lowered spending and/or a decrease in taxes?"

The answer has been clear from day 1, and it came more into focus today. Representative Charlie Rangel (D-NY), chairman of the House Ways & Means Committee, proposed sweeping tax legislation today. The legislation, which has no chance of being enacted into law in its current form (see below), would:
- Lower the top corporate tax rate from 35.0% to 30.5%;
- Eliminate LIFO (last-in, first-out) accounting for inventory;
- Defer deductions of foreign subsidiaries of corporations until funds are repatriated into the U.S.;
- Eliminate the Alternative Minimum Tax (AMT) after 2007;
- Add a 4% surtax on incomes above $150,000 (single)/$200,000 married filing jointly (MFJ);
- Add an additional 0.6% surtax on incomes above $500,000;
- Increase the Earned Income Credit, and the Child Tax Credit; and
- Have a one-year patch for the AMT.

The devil is in the details, of course, and I haven't seen them. And since except for the last part of the bill (the one-year patch), this bill will not be signed into law in this legislative term (the term ending in 2008), it just gives a flavor of what might be if we have a Democrat in the White House in 2009.

Why am I harping on this? Because of what's not mentioned in this legislation. Many of the Bush tax cuts will expire (beginning in 2009). Ask your legislators whether they will vote to extend them. The legislation introduced today implies that they're dead (at least in the view of Congressman Rangel). We're looking at a $200 Billion stealth tax increase!

Much of this legislation seems good to me. For example, I'm all for simplifying the Tax Code. However, a major issue—one which Democrats seem to ignore—is that if you increase the tax rate, the tax collected tends to decrease (the Laffer curve). This is definitely the case when this occurs on the wealthy. Indeed, because of the prevalence of S-Corporations and LLCs, much of the income of the "wealthy" is actually business income. If taxes increase on business income, business owners have far less incentive to innovate and provide additional jobs.

One day the American people will realize that a simple flat tax system is the way to go. Until then, be afraid.

Link to New York Times article here

The House of Representatives passed legislation yesterday that would extend the current ban on taxes on the Internet for another four years. The vote was nearly unanimous--405 to 2. The legislation now heads to the Senate, where it likely will pass before year-end.

This legislation will inhibit local government from adding connection taxes for Internet use. For example, you likely pay a city tax for your telephone and cellphone but you don't for your cable modem. Nine states that had taxes in place before 1998 can continue their taxes under this legislation.

Three Congressmen proposed on Monday a war surtax—a measure that would increase income tax rates from between 2% and 15% (the top tax bracket would become 50% if enacted). The move is a publicity stunt that has no chance of passage.

Even Speaker Nancy Pelosi (D-CA) is against the measure. In an election year, raising taxes is a sure way to raise your opponents' vote totals. Democrats David R. Obey of Wisconsin, John P. Murtha of Pennsylvania and Jim McGovern of Massachusetts are very much in the anti-war section of the Democratic party, and would like to bring all the troops home immediately.

Along with Charlie Rangel's proposals to increase taxes, measure like this will do much to help the Republicans in 2008. Don't expect anything like this to become law until a Democrat is in the White House.

Lawmakers in Tennessee had an interesting idea a couple of years ago. Why not tax illegal drugs? So legislators in the Volunteer State required sellers of illegal drugs to get a tax stamp on their merchandise. If sellers were caught selling illegal drugs without the tax stamps, they would face tax charges (and probably charges relating to selling illegal drugs, too).

Of course, if you want to have such a tax, you must make sure that there's a wall between revenue agents and the drug police (or the tax would likely be unconstitutional under the 5th Amendment). A lower court found that Tennessee's tax violated that.

However, the Tennessee Court of Appeals ruled that the tax also violates the Tennessee Constitution, in that "...the statute is arbitrary, capricious, and unreasonable and, therefore, invalid under the Tennessee Constitution, in that it seeks to tax as a privilege, activity that prior legislation has designated as criminal activity...."

Tennessee will appeal to the Tennessee Supreme Court.

News Story: The Tennessean

Hat Tip: Tax Foundation

Today's Wall Street Journal has an interesting article about a phone tax battle in Missouri. [Note: $Pay$ Link] Various municipalities have claimed that their city telephone taxes apply to cellular phones; the cellular carriers disagree. On Thursday, a St. Louis County Circuit Judge will rule on whether or not he can rule on the case by summary judgment or whether a full trial will have to be held. No matter how he eventually rules, the case will likely be appealed.

You may remember that I wrote in May about the City of Los Angeles' cellular telephone tax increase being illegal. One of the arguments that the carriers are making is very similar: a popular vote is required under Missouri law for a new tax to be approved. Cities are arguing that the tax isn't new. Legislation was passed capping the cell phone tax, but it was ruled unconstitutional by the Missouri Supreme Court.

The carriers could owe as much as $500 million, including interest and penalties. One thing is certain, though. If the tax ends up being owed, the bill will be passed on to consumers. That's the nature of all taxes.

Congress is actually doing something smart. According to the TaxProf Blog, the House Judiciary Committee approved a proposal prohibiting patents of tax planning methods.

I'm amazed that Congress is actually doing something intelligent.

Democrats in Sacramento lack nothing in chutzpah. Democratic Assemblyman Charles Calderon is proposing an 8% tax on sexually explicit nightclub acts, sexually explicit pay-per-view movies, X-rated acts in public locations, and sales of sex toys.

Forgetting the dubious constitutionality of the proposed legislation, it is unlikely to go anywhere in Sacramento. Assembly Republicans, according to the story in the Sacramento Bee, vow to kill any new tax increase. Given the 2/3 vote required for an increase, this measure will die.

It would be nice to see our legislators in Sacramento looking at killing various government programs, so that instead of increasing revenues to cover a budget shortfall, they would be decreasing expenses. But that idea is, I think, over the head of the Democrats in Sacramento.

"Billy, Billy don't you lose my number
Cos you're not anywhere
That I can find you
Oh now Billy, Billy don't you lose my number
Cos you're not anywhere that I can find you, oh no"
(Don't Lose My Number, by Phil Collins)

There are a lot of people hoping that one person did lose their phone number. Remember Deborah Palfrey, the alleged D.C. madam who wanted to sell her phone list of clients? Well, her phone records have now been released to the public. You can go to this website and attempt to get the records. I say "attempt" because so many people have gone to the site that the website is currently down! A judge last week lifted the injunction against Ms. Palfrey posting her list.

Already, one Senator has found his name on the list. Senator David Vitter (R-LA) said in a statement, "This was a very serious sin in my past for which I am, of course, completely responsible." His name won't be the only one found on the list.

Meanwhile, Congress continues to look more like a "do-nothing" Congress as far as tax legislation and pressing issues such as AMT relief. Perhaps our representatives will look at fixing real problems rather than covering their past transgressions...though I doubt that's going to happen.