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Saturday, December 20, 2014

Over 50 provisions retroactively extended on 12/19/14

On December 31, 2013, 57 provisions in the federal tax law expired. Many had expired before and been renewed.  While there was discussion in the congressional tax committees since at least April 2014, as well as votes, no consensus was reached until early December. The House passed the bill - H.R. 5771, the Tax Increase Prevention Act, on December 3 by 378-46. On December 16, the Senate passed it by a vote of 76-16. On December 19, President Obama signed the bill. The Joint Committee on Taxation estimates the cost of H.R. 5771 for one year as about $81 billion, but only $42 billion for ten years (because some of the items, such as bonus depreciation involved timing of deductions).

The extension means, for example, that if a business purchased new equipment in the first 50 weeks of 2014 not expecting to be able to claim 50% bonus depreciation on it (because that rule expired 12/31/13), they get the gift of extra depreciation for 2014.  This is contrary to the primary purpose of bonus depreciation which is to encourage businesses to buy new equipment.

The late extension, for just one year, also means that at 1/1/15, they are all gone again.

This is an odd way to design a tax system. When something is added temporarily, such as to help get out of an economic recession, it should be allowed to expire when the need no longer exists.  If another provision is deemed appropriate for a tax system, such as allowing individuals who itemize to deduct either their sales tax or their income tax (assuming there is even a reason to deduct either), make it a permanent part of the system.

Will the needed analysis of these extenders occur in 2015? Or will we reach the end of 2015 with a repeat of what happened this year?

What do you think?

[Photo is from the White House website (without the "extenders").]

Thursday, December 11, 2014

Filing status challenges and developments

This year there were a few cases and IRS rulings where a married couple tried to change their filing status. Two of the cases involved a couple who split up at year end (before the time to file that year's return). The cases are a reminder of the rule on when a married couple may amend a return to change from MFS to MFJ (before the statute of limitations runs out) and from MFJ to MFS (before April 15).

Also, in 2014, a few states that did not recognized same-sex marriage now due because of litigation challenging state law (such as Virginia and Wisconsin).

I've got an article in the AICPA's Tax Insider today (12/11/14) on these developments - here. We probably think that identifying your filing status for your income tax return is one of the easiest things to do. These cases show that there can be challenges.

On December 10, Congressman Camp, soon to retire from Congress, officially introduced his Tax Reform Act of 2014 which has been out as a draft since February 2014, as H.R. 1. That is the bill  Congressman Boehner held open for tax reform. Camp's proposal resolves one challenging filing status question - is someone entitled to use the favorable head-of-household status? Under his proposal, the question goes away as he'd repeal that filing status!

What do you think about filing status and tax reform?

Tuesday, December 9, 2014

An odd result for Premium Tax Credit or is it?

A few people have already pointed out this oddity in the Affordable Care Act including National Taxpayer Advocate Nina Olson in her 2013 Annual Report to Congress. Her excerpt notes that in determining if a person had affordable health coverage available to them from an employer, the measure is whether the self-only lowest cost coverage available to the employee costs 8% of less. It doesn't matter if the family coverage offered by the employer is affordable. The relevance is that the family members won't qualify for a Premium Tax Credit.

That seems odd if no "affordable" coverage was offered to the rest of the family. Isn't that the point of the Affordable Care Act? To help make coverage affordable to everyone?

There is an example in the instructions to the new Form 8965, Health Care Exemptions. See Example 2 on page 8.  It involves a family with two children and $90,000 of household income. The mother's employer offers coverage to the mother (Susan), self-only coverage that costs $5,000. The employer also offers family coverage that costs $20,000. To avoid the Individual Shared Responsibility Payment (the new penalty of Code section 5000A that became effective starting in 2014), you need to have "minimum essential coverage" (basically employer or government or Marketplace provided coverage) or meet an exemption or pay the penalty. If Susan declines the self-only coverage, she likely will owe the penalty. This is because one key exemption - unaffordability, won't apply to her because the cost of her self-only coverage ($5,000) is less than 8% of household income ($7,200). She should see if another exemption applies (there are 9 categories of them - see page 2 of the instructions).

The Example 2 in the instructions goes on to note that if the family doesn't take the family coverage costing $20,000, the husband and two children will meet an exemption because at $20,000 cost, it is unaffordable as it exceeds 8% of household income. If Susan did not get the employer-provided coverage and doesn't have any other coverage or meet any other exemption, she owes a Shared Responsibility Payment (ISRP) of $697 for 2014. That will go on new line 61 of her 2014 Form 1040 (still in draft form as of 12/9/14). Her family members don't owe an ISRP (but they also don't have coverage).

What the example doesn't say (because it is looking only at the exemption from the penalty), is that because the family was offered employee self-only coverage that was affordable, the husband and children are not eligible for a Premium Tax Credit (PTC). (See FAQ8 from the IRS.) This may not be a big deal for this family because their income is close to 400% of the federal poverty line which is where the PTC ends.

But is it odd that eligibility for the PTC is based on the affordability of employee self-only coverage?  Seems that way.  Or, perhaps the goal is to encourage Susan to go to her employer and ask that the cost of family coverage be lowered.  She should at least ask that the employer not offer unaffordable coverage to her husband because then he would potentially be eligible for a PTC (I say potentially because household income is close to 400% of the federal poverty line).

We'll keep learning more as filing season begins and individuals and preparers start dealing with these rules to complete the 2014 Forms 1040.

More later on the PTC and ISRP and the employer shared responsibility payment (effective starting in 2015, but things to deal with now to get ready to avoid it).

What do you think?

Wednesday, December 3, 2014

SJSU MST Journal - Fall 2014 issue published

The SJSU MST Program is proud to announce the publication of the Fall 2014 issue of The Contemporary Tax Journal (Volume 4, No. 1)).  I hope you'll take a look:

Table of Contents
Letter from the editor


  • 'Coin'ing the Tax 'Bit

  • Why Section 530 of the Revenue Act of 1978 Applies to the States
  • An Examination of the Tax Incentive For Child Support

  • November 2013 TEI-SJSU High Tech Tax Institute
  • February TEI-SJSU Tax Policy Conference

  • Dean Andal, Director at PwC

Thank you!

Wednesday, November 26, 2014

Inflation adjustments in the tax law

Our federal tax system includes numerous dollar amounts, such as for the standard deduction amount, personal exemption amount, credits, where different tax rates start and end, and defining the parameters of a "small taxpayer."  Some of these amounts are adjusted for inflation and others are not. Should they all be? That's a good question.

I think where the tax rates of the graduated rate system start and end should be adjusted annually for inflation. This prevents "bracket creep" where a taxpayer is pushed into a higher tax bracket just because their income increased by the rate of inflation (yet their buying power and sense of wealth remained the same). The same logic calls for adjusting the standard deduction and personal exemption amounts.

Our federal income tax is not consistent regarding the need to prevent bracket creep for all taxpayers. The corporate rate structure is not adjusted for inflation. Also, the definition of "small taxpayer" such as a corporation with $5 million or less of gross receipts, is not adjusted for inflation.  They should be.

Also, dollar penalties should be adjusted for inflation to ensure they remaining meaningful penalties.

One place where I think inflation adjustments are not warranted is for thresholds for filing information returns. For example, if a business pays a contractor $600 or more for the year, the payor needs to issue Form 1099-MISC. This measure helps ensure that the contractors properly report their income. If the threshold is raised annually for inflation, fewer 1099-MISCs would be filed and the tax gap would increase.

The Tax Foundation has an interesting map showing which states adjust the income tax brackets for the effect of inflation. I'm surprised so many do not adjust.  Not adjusting for inflation generally means that the state will collect more revenue each year. Not sure that is the reason some states do not adjust the tax brackets, perhaps their system has just always been that way.

Not adjusting for inflation has caused problems at the federal level for the highway trust fund (see my post of 5/6/14).

What do you think? Should all dollar amounts  in any tax system be adjusted annually for the effect of inflation?