AICPA tax reform suggestions for individuals

This week the AICPA Tax Section submitted comments to the Senate Finance Working Group on Individual Taxation.  The suggestions address:

1. Simplified Income Tax Rate Structure;

2. Education Incentives;

3. Identity Theft and Tax Fraud;

4. Relief for Missed Elections (9100 Relief); and
5. “Kiddie Tax” Rules.

Some of these have been long-time suggestions of the AICPA Tax Division, such as unifying the education incentives to make them more usable and simpler.

The Senate Finance Committee is seeking comments for its five working group, with comments due by April 15!  I'm guessing they will also take them shortly thereafter (or anytime).

I'll have more later. I plan to submit comments.  Do you?

Starbucks College Plan and Taxes

I'm intrigued by the recent announcement by Starbucks that they would provide tuition reimbursement for employees (working at least 20 hours per week) who are working on their undergraduate degree. There are a few rules, but it still seems to be a decent deal for the employees.  The courses must be taken online at Arizona State University. Freshman and sophomores get partial reimbursement and juniors and senior get full reimbursement. Apparently this is to encourage the students to complete their degree. And, of course, they need to be admitted to ASU.

The FAQs on the Starbucks website states that the student must also secure financing:

"You will receive an automatic, upfront scholarship to cover part of your tuition costs. You never have to repay this scholarship. You will also submit a Free Application for Financial Aid (FAFSA), and may qualify for need-based financial aid through ASU, federal Pell Grants or other student aid. Your financial aid counselor will help you apply."

Another aspect that seems a bit confusing is FAQ 7:

"Each time you complete 21 credits, you are reimbursed for the full cost of the tuition and mandatory fees for those credits, as well as any other credits you earned that semester—provided you remain eligible for benefits, enrolled in classes and on track to graduation. Your reimbursements automatically appear in your paycheck— you don’t have to fill out additional forms or take extra steps to make it happen."

As Starbucks notes, college completion rates are quite low (under 50%) compared to how many students start college (about 70% of high school grads). Perhaps support from your employer will help.  But this will depend on the follow up Starbucks puts into this. For example, will shift scheduling consider when the employee has extra studying to do? Will they allow the student to log-on to the online courses at the workplace (free wifi!)?

What about the tax consequences? Among the numerous tax benefits for higher education is one for employer-provided educational assistance under IRC Section 127. The exclusion is a maximum of $5,250 per year and there must be a written plan (among a few other requirements).  (For a quick review of this, see page 64 of IRS Pub 970.)  It looks like that will cover about 10 units per year.  ASU has a nice tuition calculator on their website.

This won't help all students as some will likely prefer and do better in a face-to-face setting. But someone looking for some financial assistance with tuition and ok with all online, may seek out part-time work at Starbuck's.

Should there be a different tax break for this type of plan?  Or perhaps no tax break?  After all, if an employee gets $5,000 tuition paid for by their employer and it is subject to tax, that is still a better deal than having to come up with the entire $5,000 yourself.

What do you think?  How should the tax law fit into a plan for an employer to help an employee finish their undergrad degree?

Nov. 2016 update - ASU asked that I share this link - http://asuonline.asu.edu/.  So, here it is.

Summer hearings on comprehensive tax reform

 

On June 5, 2014, Senators Wyden and Hatch of the Senate Finance Committee announced three hearings for the summer on comprehensive tax reform. The topics:

June - Education incentives

July - (1) Identity theft and taxpayer privacy protection
          (2) Modernizing corporate taxation

They also mention:

• Simplification
• Promoting economic prosperity
• Innovative ways to fix the depleted Highway Trust Fund

A few observations:

• Education incentives - there are over ten today. There really is no need for any. Any government subsidy can take place through existing systems such as Pell grants. Also, a lower rate would help people save for higher education.  The existing provisions are for college, not for vocational training, so are limited. Also, they benefit higher income taxpayers more than lower income taxpayers.
• Modernizing the corporate tax - ideally, this should include some effort at integration, but that is unlikely. I'm guessing that they are mostly looking at a lower rate and a changed international taxation scheme.  If the result includes longer life for intangibles (such as 20 rather than the current 15), we are not really modernizing. The Camp and Baucus proposals included extending the life to help pay for a lower corporate tax rate.
• How to fix the depleted Highway Trust Fund.  While they are studying it, why not raise the rate from 18.4 cents per gallon, where it has been since 1993, to at least the inflation adjusted amount (30 cents).

What do you think?

Should K-12 expenses be deductible?

I was surprised to see in a Louisiana Department of Revenue news release (7/27/12) that taxpayers may deduct expenses for elementary and secondary education including public or private schooling as well as home schooling expenses. The deduction is 50% of eligible expenses limited to a $5,000 deduction per dependent ($10,000 of expenses annually). For non-public schooling, the deduction is 100%, still limited to a $5,000 deduction. The taxpayer has to have documentation for the expenses and claim the student as a dependent. Expenses might include school uniforms, supplies, and private school tuition.

The individual income tax rates in Louisiana are a low of 2% and high of 6%. So a $5,000 deduction might save a parent $300. That doesn't sound like much, but it represents money the state doesn't have to spend for K-12 public education to benefit all school children.

Why allow a deduction for these expenses? It seems that the rationale may be tied to school choice, but the benefit is smaller than what is typically discussed for school vouchers (typically in the thousands of dollars). Perhaps it is to alleviate concerns of parents of having to purchase school supplies. But if the schools had the tax savings instead, they could purchase the supplies. So far as uniforms, parents need to buy clothes anyway.

Some states offer sales tax holidays for purchase of school supplies. I refer to sales tax holidays as "tax oddities" and bad tax policy. The benefit to families is likely less than the $300 for the Louisiana deduction.

Another flaw - if the family owes no income tax, they get no benefit. If they owe no income tax it is due to low income and that family likely needs the school assistance more than families with greater income.

Another flaw - complexity.  Special rules are needed to define what is deductible and families need to maintain records they would not otherwise likely keep.

I think the state and its citizens would be better off without the deduction and using the savings from repeal for direct K-12 educ to benefit all public school students.

What do you think?

Poor Use of the Tax Law and Lack of Care of Teachers

If you incur work-related expenses that your employer does not reimburse you for and they are proper employee business deductions, you can deduct them on your return if you itemize your deductions. The Tax Reform Act of 1986 limited this deduction further by requiring "miscellaneous itemized deductions" (such as unreimbursed employee business expenses) to only be deducted as itemized deductions to the extent they exceed 2% of your adjusted gross income (AGI).

The Job Creation & Worker Assistance Act of 2003 (PL 107-147) modified the above rule for K-12 "eligible educators" (teachers, principals, counselors, and aides in a school for at least 900 hours during a school year). Under the new rule (IRC Section 62(a)(2)(D)), these educators may deduct up to $250 of their work-related education expenditures "above the line" - meaning they may deduct them even if they do not itemize and regardless of their AGI level. This was a temporary, 2-year provision. It was subsequently renewed 3 times and now expires 12/31/09. The most recent extension for 2008 and 2009 was enacted on 10/3/08 (Emergency Economic Stabilization Act of 2008 (PL 110-343)). Some educators may not have kept their expense records for spring and fall 2008 since the provision had expired 12/31/07. [Recordkeeping is important - see these two IRS announcements: 2005 and 2007]

A current proposal - H.R. 28 (111th Congress), proposes to increase the above-the-line educator expense deduction to $500 and extend it through 2011.

As evidenced by the name of this blog, I hope that actions will be taken to move tax systems into the 21st century. Hopefully any such efforts will also consider what is the tax law supposed to do and not do (something we often lost sight of in the 20th century). I do not believe the tax law is to be used to either (1) address a failure of states and school districts to adequately fund K-12 classrooms or (2) allow for an odd way to get federal dollars into select classrooms (ones where the teacher is willing to spend his/her own money). The special deduction though, is helping teachers to fund these expenses and likely discourages states and schools from worrying too much about the reality that teachers are paying for what might be basic classroom items.

The existing $250 above-the-line deduction for eligible K-12 educators was likely created to help K-12 teachers since people knew that with budget cuts, many teachers were coming out of pocket to ensure that they could effectively do their work and because of their dedication to their students. But ....

• The tax benefit continues to be small and temporary.
• The longer the special rule exists (even if temporary), the greater the likelihood that states and school districts will forget that THEY are supposed to be funding these classroom expenses - not the teachers! Also - I would not be surprised if schools might even be encouraging teachers to spend up to the $250 to help the school.
• While the above-the-line deduction is better than the normal rule for miscellaneous itemized deductions, it is still not ideal for teachers who increasingly need to cover employer costs in order to do their job effectively. The teachers are still out-of-pocket - often for basic teaching materials. The deduction just reduces the outlay by their marginal tax rate (if the teacher is in a 20% tax bracket and spends $250, the tax benefit brings that cost down to $200). Often, this tax break is labeled as a tax credit (even by one of its congressional sponsors - see the title of this press release!), but that is incorrect. A credit is a dollar-for-dollar reduction in your taxes (a nice tax break!) which a deduction just saves you your tax rate times the expenditures ($50 in the earlier example).
• Think about it... How many employees other than teachers are expected to buy supplies to do their job and help students learn? How many CPAs and attorneys working in firms have to buy their own paper and computers to do their work? How many people working in retail have to buy their own cash register and perhaps incur costs to help customers get their purchases home?
• What about fairness to students? Not all teachers can afford to purchase classroom supplies with their own funds. Students of teachers who can afford the expense reap the benefit. A Montana school teacher testifying on behalf of NEA before a Senate committee in 2007 noted: "In my school, teachers' personal expenditures range from a low of $500 a year (a new teacher with a family to support on the low Montana starting salary) to my high of over $2,000." She says she had averaged $2,200 per year! Congress should not be encouraging this inequity.
• And think about - what message is really being sent with a proposal to double the deduction (I think the message is - "the government is going to cut education more so we're counting on you teachers to spend even more of your personal funds to get your classroom ready and here is a bigger deduction to help you")!

I realize that this provision is a good deal given the alternative and the reality that state and school district budgets don't seem to be covering sufficient classroom expenses.

But - how about these alternatives:

1. Until state budgets are designed to properly fund education, if the federal government really wants to help K-12 educators directly (rather than giving the money directly to the states or schools), change the deduction to a refundable tax credit. With a refundable credit, if the educator uses his/her own money to buy classroom supplies up to $250, they'd get a $250 benefit/reimbursement (of course, this would likely really lead schools to tell all eligible employees to spend $250 to help the school - free money from the federal government!)
2. Extend the deduction through 2012 with the caveat that it WILL NOT be extended beyond that.* The extension would also include a mandate that the federal government and states must find an alternative way to spend this money so it can be done more effectively - so teachers do not have to purchase basic educational supplies. This would be a more effective way to use these federal dollars (about $200 million annually). When government funds are in many different budgets or accounts, it is hard to see how much is actually being spent on something and it is difficult to generate purchasing efficiencies. In addition, when too many people have control over spending it really means that no one is overseeing it properly. There is a "cost"** to the federal government of the educator deduction, but it is not likely to be counted with other federal funding of education. Theoretically, all of these dollars could be spent more effectively by having one responsible party, such as the state, manage the spending.

* Even without the special deduction, teachers could still deduct unreimbursed employee business expenses the same way other employees can, but they would not have many such expenses because the school would pay for classroom expenses directly.

** Per the Joint Committee on Taxation's 2008 Federal Tax Expenditure report (p. 54), the "cost" to the federal government of the above-the-line deduction for teacher classroom expenses was $200 million for fiscal year 2008.

What do you think?