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Thursday, July 20, 2017

ACA tax hits the court


This is the first case I've seen dealing with application of the Affordable Care Act (ACA). Yes, we had cases in the U.S. Supreme Court dealing with legality of some of the taxes and mandates, but this July 12, 2017 decision from the U.S. Tax Court gets at application of the advance Premium Tax Credit (APTC). When an eligible person purchases health insurance on the exchange (such as Covered California), and their household income is 400% or less of the federal poverty line, they get a credit that can be applied to the monthly premiums (by having the government send the money directly to the insurance provider) or claimed when filing that year's income tax return.

If you get the credit in advance and it turns out your income exceeds 400% of the federal poverty line, you have to pay the entire advance credit back!  That can be a hefty bill, as the Walkers discovered.

In Walker, TC Summary Opinion 2017-50, the court agreed with the IRS that the couple owed $12,924 for 2014 because their modified AGI exceeded 400% of the federal poverty line making them ineligible for the PTC that Covered California provided to them in advance. The IRS had originally also assessed a §6662 penalty of $2,584, but dropped that,

The couple’s monthly premium before the APTC was $1,378 but only $301 with the APTC. On their 2014 return, they reported AGI of $63,417 which included wages, retirement earnings and taxable Social Security income. After the return was filed, the couple separately filed Form 8962 for the PTC reconciliation. That form showed modified AGI of $75,199 (included the non-taxable Social Security income). As this exceeded 400% of the FPL, they were ineligible for the PTC. For 2014, the FPL for a family of two in California was $15,510; 400% of this amount is $62,040.

The couple told the court that if they had known they did not qualify for the PTC, they would not have purchased the insurance. While the court noted that Covered California may have erred in its information provided to the couple, the statute is clear that a taxpayer with income above 400% of the FPL may not claim a PTC.

That's a harsh result, but what the law provides. The exchange is supposed to use past tax return information along with information from the individual to determine eligibility. It sounds like the Walkers are retired (but not on Medicare which would make them ineligible for the exchange and PTC). A good question that should been asked of this couple was whether they might continue to have some earned income despite being retired. That is what may have put them over the 400% of the FPL (wages or perhaps a larger than planned withdrawal from their retirement plan).  They should have been counseled to take a much smaller APTC and to check their income monthly to see if they should be getting an APTC at all.

And note that the Walker's PTC is high because insurance costs more for older couples. However, affordability is still tied to 400% of the FPL even though when insurance costs more, you need much more income to pay for it. The law expects that the Walkers can use 22% of their income here to pay for health insurance! This is one of a few fixable flaws in the PTC.

One small potential consolation that I think is only explained in the  IRS Publication 502 on medical expenses is that the PTC paid back by the Walkers is treated as a health insurance payment rather than a tax. They can deduct it if they have enough to itemized and to the extent their medical expenses exceed 10% of AGI. This might not yield any deduction for them though and doesn't make up for the fact that they would have skipped the insurance if they had know they were not going to get a subsidy to help pay for it.

There are likely many other taxpayers in this situation.  If such individuals filed their return correctly, the payback of excess APTC will show up. If they fail to do the reconciliation, the IRS has enough information from the 1040 and Form 1095-A to determine how much, if any, needs to be paid back.

What do you think? Is there a better way to help a couple like the Walkers? 

Wednesday, July 19, 2017

House Budget Plan and Tax Reform

House Budget Plan
Speaker Ryan's email message and blog post today notes that the House Republican budget plan "paves the way for transformational tax reform." The Budget Committee has a markup session this morning. When Speaker Ryan tours the New Balance factory in Massachusetts on July 20 he will "promote the historic tax reform plan currently being developed by the House, Senate, and Trump administration." [7/17/17 press release

Here is what's in the 63-page budget plan released in July, Building a Better America – A Plan for Fiscal Responsibility, related to tax reform [page 22]:
    • The FY18 budget resolution “instructs the Ways & Means Committee to produce deficit-neutral tax reform legislation that will reduce tax rates and simplify the tax code to boost economic growth.” 
    • The budget plan presents the following reasons to simplify:
·   “Individuals, families, and employers spend more than an estimated 8.9 billion hours and $409 billion a year navigating its labyrinth of special rules, deductions, and tax schedules.”
·   Over 5,800 changes have been made to the IRC since 2001.
·   Tax breaks in the Code cost $1.4 trillion/year while tax collections are about $1.5 trillion.
    • A corporate rate reduction is desired to promote competitiveness.
    • Ways and Means Committee should develop “specific policies” for “deficit-neutral, fundamental tax reform that:
·  "Simplifies the tax code to make it fairer to American families and businesses and reduces the amount of time and resources necessary to comply with tax laws;
·   Lowers tax rates for individuals and consolidates the current seven individual income tax brackets;
·   Repeals the Alternative Minimum Tax;
·   Reduces the corporate tax rate; and

·   Transitions the tax code from a “worldwide” system to a 'territorial' system.”
A few observations:
  • When will the tax reform plan be released and will it be an outline or legislative language?
  • Will there also be a lower rate for business income of entities not operating in the corporate form? The House Republican blueprint of June 2016 said yes (page 17, 23 and 27), the budget plan is silent (but brief).
  • Will the border-adjusted tax and consumption tax aspects of the June 2016 House Republican blueprint be part of the plan?  Speaker Ryan's press release about visiting New Balance's factory stresses that it's an American factory.
  • How will lower rates be addressed with base broadeners for revenue neutrality?
  • Will there be distributional neutrality?
  • Will there be hearings once there is legislative language? This question was asked by Senator McCaskill at the 7/18/17 Senate Finance Committee hearing. Chairman Hatch said he wasn't sure - he would like to have hearings, but could not guarantee it. Senator Hatch also noted that they were having a hearing right now, to which Senator McCaskill noted that they were not discussing an actual bill. Her questions start at about 2:02 hours into the hearing. All four witnesses - former Assistant Secretaries of Tax Policy at Treasury answered her question that "yes" bipartisan legislation would be good. For the Tax Reform Act of 1986, there were over 100 days of public hearings, markup, subcommittee meetings, and conference meetings (see pages 1 - 4 of General Explanation Of The Tax Reform Act of 1986, (H.R. 3838, 99th Congress, Public Law 99-514 (Bluebook)). That's a lot of hearings. Of course, not all likely were on legislative language. 
What do you think? Will we see tax reform this year? How transformational do you expect it to be?

Sunday, July 16, 2017

Are California taxes high?

California State Sales Tax Rate Breakdown. Most cities also have sales tax making the total rate higher,
such as 9.25% in San Jose.

Are California's taxes high? I was asked this question recently by a reporter with Politifact California. Assemblymember Travis Allen who is running for governor had stated that California had the highest taxes. His website says that California has the highest personal income tax and state sales tax rates. [Chris Nichols article of 7/11/17]

If just looking at the rate structure, those are correct statements. The Federation of Tax Administrators posts helpful and current tables of the PIT and sales tax rates among the states.

So far as the California personal income tax though, less than 5% of individuals are at the highest rate of 13.3%. Many Californians owe little or no state income tax because the exemptions in California are fairly high.

But, everyone pays the sales tax, directly and indirectly.

When a state has high tax rates, it is due to two possible reasons (and perhaps both at the same time):
  1. A narrow tax base
  2. Lots of spending
A narrow tax base is certainly the reason for California's high sales tax rate. We only tax tangible personal property and then not even all of that. We tax almost no personal services, entertainment or digital goods. This also makes the tax system inequitable, non-neutral and inefficient because the exempt consumption tends to be that of higher income individuals.

What do you think?

Thursday, July 6, 2017

Ryan says tax reform will happen in 2017

Speaker Paul Ryan speech on tax reform, 6/20/17

On June 20, 2017, Speaker Paul Ryan spoke to the National Association of Manufacturers about tax reform. He has a 1 minute YouTube video of highlights here. The tag line is "Tax reform is happening. Not next year or next Congress. It is happening now, in 2017."


Per his email message of 7/5, "We're not talking about some rinky-dink, watered-down version of reform where the status quo basically remains as is. No, instead, imagine transformational tax reform that closes decades of loopholes, shakes up the IRS, and actually encourages businesses to stay and grow here in America."

His email message of 7/6 includes: "America is losing good-paying jobs as businesses move offshore to foreign competitors with more competitive tax systems. Trillions of dollars—literally, trillions—are being stranded overseas as a result. And hardworking families continue to struggle under a tax code that is far too confusing and expensive. ... This unified Republican government—the House, the Senate, and the White House—are putting together a plan that will grow our economy and create jobs.

Our plan will simplify the code so you can file your taxes on a form the size of a postcard. And it will overhaul or corporate tax system—the worst in the industrialized worlds—in order to stop the drain of American businesses overseas."

Meanwhile, as I noted in my blog post of 7/2, Senator Hatch, chair of the Senate Finance Committee is seeking public input on tax reform ideas by July 17. He also has given assignments to some of the committee members and wants to work with others including Democrats. 

That statement along with Ryan's suggestion of transformational change sounds like they want a plan that can get bi-partisan support so it can be permanent rather than only a 10-year plan accomplished via budget reconciliation.

It would be nice to hear more about the progress of the House Republican blueprint released in June 2016. Is the Senate Finance Committee seeking input because they want something different or just to be sure everyone had an opportunity for input?  What about Senator Hatch's work on corporate integration? What about suggestions to pay for lower tax rates for corporations? Will the House Republican import tax (border-adjustable tax) remain? Which "loopholes" is Speaker Ryan referring to to close? How low can rates go in a revenue neutral manner by closing them?

Timing? The House and Senate are scheduled to be in recess for July 31 to September 4 (Labor Day). But that still leaves lots of days for hearings and markup sessions and conferences. And this process really kicked off in January 2011 with over 80 hearings held since then (see Congressman Camp's "First in a series ..." hearing link), lots of reports, working groups, discussion, etc.  That's more time that was spend on the Tax Reform Act of 1986 which kicked off in January 1984 with President Reagan's state-of-the-union speech and the Treasury issuing its 3-volume, 800+ page report on tax reform (including volume 3 on a VAT!). [See article on the history of TRA'86 and link to old Treasury reports on tax reform.]

What do you think? Will bi-partisan, transformational tax reform occur in 2017? What do you think it will look like?

Sunday, July 2, 2017

Senator Hatch and Tax Reform

Senator Orrin Hatch (R-UT)

Senator Hatch, chair of the Senate Finance Committee, has done the following regarding tax reform:
  • Study and hearings on corporate integration as a way to reduce the corporate tax burden. The proposal (per statements rather than a report) is a dividends paid deduction with withholding.
  • Hearing on 5/24/16 - Debt vs. Equity: Corporate Integration Considerations (+ JCT report).
  • Hearing on 5/17/16 - Integrating the Corporate and Individual Tax Systems: The Dividends Paid Deduction Considered (+ JCT report).
  • 6/16/17 – Press release asking for people to submit suggestions for tax reform by 7/17/17. He seeks recommendations in four areas:
  • 1. Providing much-needed tax relief to middle-class individuals and families through reforms to the individual income tax system;
  • 2. Strengthening businesses – both large and small – by lowering tax rates and broadening the relevant tax base in order to put the economy on a better growth path and create jobs;
  • 3. Removing impediments and disincentives for savings and investment that exist in the current tax system; and
  • 4. Updating our international tax system in order to make our nation more competitive in the global economy and preserve our tax base.”
  • 6/27/17 – In a speech on the Senate floor, Hatch said he is “committed to ensuring a robust process in the Senate for developing, considering, and passing any tax reform package.  That is how the Senate functions best, and that is what I intend to see happen.” He also noted that he has “been working to involve all the Republican members of the Senate Finance Committee in this effort.  We have a number of great senators on the committee, many of whom have put in years of work on different areas of the tax system.” 
  • He also noted he had given assignments to some SFC members, such as:
  • ·         Enzi and Portman – international tax
    ·         Grassley – individual tax
    ·         Thune – business and estate taxes
    ·         Heller and Cassidy – energy tax policy
    ·         Roberts – agriculture tax issues
  • Senator Hatch noted that tax reform would not be a “closed-door exercise” in the Senate. He also wants members outside of the Senate Finance Committee to be involved and he wants “to see Democrats at the table” and a “bipartisan process that renders a bipartisan result..
  • His final remarks:
At the end of this process, no one should be able to credibly claim that they were unable to participate or that they didn’t have enough information about the bill.  So, I hope this puts to rest any claims or suppositions that the tax reform process is going to be secretive in nature.  Because, if I have my way, this process will be both open and bipartisan. 
The goal of everyone in this body with respect to tax reform ought to be to help the American people by providing tax relief to American families, simplifying the tax system, improving our business tax system to allow American businesses to compete in the global economy, and create stronger growth in the economy, wages, jobs, and opportunity.  

I hope more of my colleagues will join me in supporting this important effort.”
What do you think? Will we see permanent, comprehensive tax reform this year?