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Sunday, February 11, 2018

Tax system now 3 pages more complex; yet more will claim standard deduction

Annually, the Joint Committee on Taxation releases a report entitled - "Overview Of The Federal Tax System As In Effect For [current tax year]." The report for 2018 (JCX-3-18) was released February 7, 2018 and is 38 pages long. The last report for 2017 (JCX-17-17; 3/15/17) was only 35 pages long! And the 2018 report was issued two days before more tax legislation was enacted that mostly affects 2017 - the Bipartisan Budget Act of 2018 (H.R. 1892; P.L. 115-123 (2/9/18)). This new legislation mostly is the continuing budget resolution (CR) but also extends 33 tax items that expired at 12/31/16, mostly through 12/31/17 (retroactively that is!). These expiring provisions are generally not covered in these 30+-page overview reports by JCT. P.L. 115-123 also includes some disaster relief tax provisions and several miscellaneous items such as regarding whistleblower awards and the user fee for installment agreements to pay taxes.

Why is the 2018 report longer? It appears to be due to brief descriptions of new items added by the Tax Cuts and Jobs Act P.L. 115-97; 12/22/17) such as half a page for new Section 199A on the qualified business income deduction that is a 7-page long, temporary provision in the law, plus a few more data tables. These overview reports include interesting data and graphs, such as on sources of revenue, the make-up of income reported by individuals, and distribution of income and taxes.

A few interesting items from the reports:
  • Projected for 2018, 1% of individual filers have income over $500,000. For this purpose, AGI is increased by tax-exempt interest, employer contributions for health insurance, employer share of FICA tax, worker's comp, nontaxable Social Security benefits, AMT preference items, Section 911 foreign earned income exclusion and a few other items.
  • For 2017, JCT estimates that 31.7% of individual filers will itemize deductions rather than claim the standard deduction. For 2018, their estimate is that 13.1% will itemize.  This is a significant drop due to the increase in the standard deduction by the TCJA as well as removal of several itemized deductions.
What do you think?

Thursday, February 8, 2018

FBAR and Describing Return Due Dates

In 2015, due dates for a few types of tax returns were changed. This included for the foreign bank or financial account reporting if you have over $10,000 in foreign accounts (FBAR, or Report 114). For a long time, it was due by June 30 - an odd date in the tax filing world). It was changed to April 15 with possible extension to October 15. Thus, it matched the Form 1040 due dates. 

When the financial crimes division of the US Treasury Department, (FinCEN) explained how to get the extended due date, it told us that if we didn't get the form filed by April 15, we automatically got until October 15 to file the form.

So, wouldn't it be easier to have written the law to say the due date is October 15.  And then when FinCEN provides us the instructions (online, and the form must be filed electronically), it could just say it is due by October 15, but it is recommended to file the form at the same time you e-file your Form 1040 so you don't forget to file it.

FinCEN recently announced that when April 15 falls on a weekend or holiday, as it does for 2018, the form is due the next day - so April 17, 2018. But, if you miss that date, you have until October 15, 2018.

For IRS information on FBAR - click here.

What do you think? What would be the simplest way to describe the due date for any return?

Sunday, February 4, 2018

TCJA - Many areas in need of guidance

The Tax Cuts and Jobs Act enacted December 22, 2017 includes a lot of new provisions. For example, Section 199A, is seven pages long in single space! It allows a deduction for owners of business activity (other than as a C corporation). The purpose is to also provide some rate reduction for businesses other than only a rate reduction for C corporations. The new rule is lengthy because it involves a lot of definitions and special rules. Now, while many business owners have income below the thresholds where they must deal with the complexity, just understanding the basics might be complete for many.

The AICPA Tax Section volunteers and staff have identified 39 areas in need of guidance (as an initial list). Most of these will require IRS work, such as to define terms. Some might be clarifications from Congress or the Joint Committee on Taxation as to what was intended by language that is not completely clear.

Here is the AICPA's January 29, 2018 letter listing various items. And the AICPA also noted in a letter to Congress on January 30, 2018 that IRS needs resources to provide timely guidance.

What do you think? Where do you think guidance is most needed?

Tuesday, January 30, 2018

Tax Cuts and Jobs Act, Complexity and Data

There is certainly some new complexity in the Tax Cuts and Jobs Act (P.L. 115-97 (12/22/17)). But it won’t affect most individual filers. Here are some data points to support that statement.
  • Prior to reform, IRS data indicate that 69% of individual filers claim the standard deduction rather than itemize deductions. The increase to the standard deduction by the TCJA will increase that number significantly. Thus, fewer people deal with itemized deductions.
  • 16% of filers file a Schedule C (2015 data; about 18.8 million reporting income and 5.9 million reporting loss). Those generating income will likely qualify for and need to (and want to) deal with the new Section 199A, Qualified Business Income deduction but most will be below the income limits in this rule which means the calculation will be simpler than for the minority of individuals with higher income ($157, 500 if single and $315,000 if married filing jointly).
  • IRS stats indicate that 83% of individual filers have adjusted gross income (AGI) of $100,000 or less. Individual filers hit the top 10% of filers by AGI once they reached AGI of $133,445 (for 2014).
  • Also, per IRS stats, only about 6% of individual returns report S corp or partnership income, so will deal with the new Section 199A deduction but some of these folks overlap with the Schedule C filers.
  • Also per IRS stats, about 7% of individual filers report rent or royalty income which can also lead to calculating a Section 199A deduction. But again, there is overlap among the filers meaning that they might have a Schedule C, partnership income and/or rental income.
  • Zillow Research estimates that with the lower acquisition debt cap of $750,000 for qualified residence interest (mortgage interest) (note it is up to $1 million if it existed at 12/15/17), and the cap on state and local tax deduction, only about 14% of homes are likely to lead the owner to itemize deductions. They note that the percentage varies from county to county. (! – that’s my comment living in an area where the median home price is just over $1 million! [see 1/29/18 Mercury News article])
So, yes, complexity exists along with getting used to a variety of new rules depending on the types of income you have, but compliance remains relatively simple if you only have wage income and can file a Form 1040-EZ or 1040-A. But so far as transparency, I think many individuals may be confused as to what has changed for their income tax calculation (such as personal and dependency exemptions versus a child credit and non-child dependency credit, etc.).

For CPAs, their client base tends to include the individuals in the top 20 to 30% of income levels and so they deal with the complexity, as well as dealing with business returns which can often involve complex multijurisdictional transactions and complex tax rules.

What do you think?

Sunday, January 21, 2018

A more temporary tax system

For at least the past decade, our federal tax system has had several temporary provisions. That is, rules added to the law with an expiration date. Many of these items are credits that often are not included as permanent items because they tie to economic stimulus or temporary energy needs (such as promoting alternative fuels by lowering their cost). Another reason for temporary provisions that result in less federal revenues is that they don't "cost" as much in a 10-year budget window if in existence for one or two years rather than for all ten years.

The Tax Cuts and Jobs Act (P.L. 115-97 (12/22/17) has increased the number of temporary provisions in the law. Most notably, most of the individual tax cuts, such as lower rates, a higher standard deduction and child credit, as well as lost deductions such as interest on home equity debt and casualty/theft losses, are only in the law for eight years (2018 through 2025).

Each January, the Joint Committee on Taxation (JCT) publishes a list of all temporary provisions and when they expire. Below I have a summary of the number of expiring provisions identified in their January 2017 report and the one issued in January 2018.

Year
2017 JCT Report
2018 JCT Report
2016
36
34*
2017
2
1**
2018
1
3
2019
10
9
2020
1
1
2021
4
3
2022
2
2
2023
1
1
2024
0
0
2025
1
23
2026
0
2
2027
0
1
TOTAL
58
80

As you can see, we go from 58 temporary provisions last year to 80 temporary ones today. Also, the number is really higher each year because the JCT combines some similar items, such as various empowerment zone tax incentives.

Missing Item: I think the number for the 2018 report is missing at least one new temporary item.  P.L. 115-97 provides that for tax years beginning after 12/31/22, taxpayers may no longer follow Code section 174(a) on expensing of R&D expenditures. Instead, such costs must be capitalized and then amortized over 5 years (15 years for foreign research). Thus, I think we really have 4 temporary items expiring in 2021 because section 174(a) should have been included.  Also, I expect that Congress will find a way for this capitalization provision to never go into effect. Favorable treatment of R&D expenditures should be in our tax law for a few reasons: simplification, incentivizing R&D, and international competitiveness.  So, why did Congress add a provision that harms economic growth?  Likely to help generate revenue to help reach the $1.5 trillion cost of tax reform without going over that amount.

What do you think?

*Includes section 199(d)(8) for certain Puerto Rico benefits. P.L. 115-97 repeals section 199 effective for tax years beginning after 12/31/17, so this temporary item is only relevant for possibly seeing Congress renew it for 2017. An item removed from the 2016 for the 2018 report is the 7.5% threshold for deducting medical expenses for individuals age 65 or over. It got moved to the 2018 list because for 2017 and 2018, all individuals use a 7.5% threshold for both regular tax and AMT.

**Airport excise taxes were renewed one year by 2017 legislation (so got moved to the 2018 list for the 2018 JCT report.