Taxable Talk

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