18th Anniversary of the 21st Century Taxation Blog

Well, I'm amazed to be marking today the 18th anniversary of starting this 21st Century Taxation Blog - and that we are still in need of having a 21st century tax system that reflects how we live and do business today. 

Today, I'll note the 2025 IRS Dirty Dozen list which was a topic of a webinar I delivered today for CCH/CPELink. I delivered a webinar on the 2024 list last year. In diving deeper into the list, I went back to its start in 2001 when there were just 8 items. I like to share with others work that I find helpful to me, so I posted by list of the Dirty Dozen items since 2001.  I categorize them into 3 broad areas:

1. Tax Shelters and Questionable Tax Minimization Strategies Involving Taxpayer Funds

2. Thefts and Other Frauds and Scams Against Taxpayers, Employers and Tax Preparers (mostly bad actors trying to get your money)

3. Fakes - Improper Reporting and Preparer Fraud (mostly improper ways to get money from the government)

See my chart here - https://www.sjsu.edu/people/annette.nellen/website/DirtyDozenTable.pdf

icymi - other items I post for reference you might find useful are lists of all Treasury regulations, and other official guidance from the IRS going back to 2011. The relevant Code sections for each item are listed and if it ties to a specific piece of tax legislation. And there are links to get the full text.  This can be useful to see what has been issued or if someone tells you there was, for example, a 2022 revenue ruling on the topic but they don't recall the number.  See the 2025 list and links to past lists here - https://www.sjsu.edu/people/annette.nellen/website/2025regs.html. 

I also have a variety of tax items posted here - http://www.21stcenturytaxation.com/

Looking forward beyond18 years of tax blogging, I want to focus more on how to improve tax and budget literacy so people can better understand their own taxes, and also understand how the system works and how to get involved in asking good questions of elected officials about tax changes as well as the logic (or lack of logic) of some existing tax rules. Quick example, only about 3% of employees earn tip income which Congress is about to exclude from income taxes. Where are the 97% of employees who don't have this type of income? Why not ask for a higher standard deduction or reduce the lowest two tax brackets to 9% and 11% (rather than 10% and 12%) to benefit far more individuals?  [For more on the tip income deduction, see my post of 2/23/25]

My goal in creating this website and blog was to highlight how tax systems can be improved to reflect how we live and do business today and to reflect principles of good tax policy.

I very much welcome comments and suggestions.

Thank you for reading!

Improving Tax Systems

Over the years, we see numerous federal and state tax law changes such as adding or modifying a credit, deduction or exclusion. We sometimes see rate cuts and increased deductions, such as most individuals experienced for 2018 through 2025 with the Tax Cuts and Jobs Act of 2017 changes that lowered the individual rates, almost doubled the standard deduction (which 70% of individuals used prior to 2018; today about 90% claim it), and the child tax credit was doubled from $1,000 to $2,000. But there were numerous other TCJA changes many of which only affect the top 10% of taxpayers or even the top fraction of the top 1% of individual taxpayers (such as an almost $14 million estate tax exemption per person for 2025).

What was the purpose of these changes? Mainly it was to improve the international competitiveness of the U.S. corporate tax system. So, why any individual tax changes?  Well, people tend to favor individual tax cuts rather than corporate tax cuts (see this Pew Research poll among others). At the state level, what is the purpose of yet one more sales tax exemption or a new exclusion from income tax?

What about review and reform of the entire tax system? Well, it is a big project, but not an impossible one. It requires a good look at how much revenue is needed (where does the government need to spend money and what are public goods and services that warrant use of tax revenues), what should the mix of taxes be, and should certain spending be done through the tax law like we have today via special deductions, exclusions, credits and rates, or done directly and more transparently?

In a January 2025 Tax Notes State article, I suggest the need to look at four areas that tend to be overlooked in discussions of tax law changes, but that would improve tax systems if considered:

1. Articulate and use the jurisdiction's economic, societal and environmental goals.

2. Identify what tax revenues should pay for and how (directly via payments and grants or by the government paying for them directly or by reductions in recipient's tax bills via special deductions, exclusions, credits and rates?

3. Find missing voices and data.  For example, while a sales tax exemption for infant diapers might sound like something to help low income taxpayers, if higher income people spend more on diapers, they get the bulk of this tax break or subsidy?  Why do we have a $1 million limit on the debt to produce deductible mortgage interest for itemizers (since 1987 although only $750K for 2018 through 2025) when the median home sales price in December 2024 in the U.S. today is only $427,000 (Census Bureau data)?  Most likely because the drafters of this tax rule have far more expensive homes with large mortgages.

4. Provide tax transparency and tax literacy.  Provide the detailed reasons for tax changes, as well as who is affected including breaking it down by income groups including breaking it down for the wide range of income levels comprising the top 1% of individuals. Find ways to help individuals understand their own taxes (such as covering it in high school civics classes) and understand how spending occurs through our tax system and how it compares to the direct spending you can see in looking at budgets of government agencies.

I encourage you to read the article - Overlooking Considerations That Could Improve Tax Systems.

What do you think?

7th Anniversary of Tax Cuts and Jobs Act Enactment

P.L. 115-97, An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly known as the Tax Cuts and Jobs Act (TCJA), was signed into law on December 22, 2017. It had many changes including significant ones such as a permanent change from a progressive corporate rate structure of 15% to 35% to a flat 21% on a permanent basis. Most of the 160 million individual filers got a tax reduction but on a temporary basis for 2018 through 2025 due to a drop in where tax rates begin, almost doubling of the standard deduction and a $2,000 rather than $1,000 child tax credit.

Most of the individual tax cuts and tax increases were only put into the TCJA for 2018 through 2025. That is, the TCJA had expiration dates for many tax cuts and tax increases (such as the $10,000 SALT cap and disallowance of a deduction for home equity interest). It also had built-in tax increases with significant ones affecting businesses already in effect such and capitalizing R&D rather than expensing it and phasedown of 100% bonus depreciation.

I have a list of the temporary provisions as well as the tax increases that have already started and ones to start after 2025 at the end of this post.  I also have track changes for some of the TCJA changes from this January 2018 blog post.

While we are hearing a lot about extending the individual and estate tax cuts, there are non-TCJA provisions that expire at the end of 2025 including the Work Opportunity Tax Credit, New Markets Tax Credit and enhanced Premium Tax Credit (PTC). For a list of all expiring provisions, see this JCT report issued every January - JCX-1-24 (1/11/24).

Will the expiring provisions all just be renewed including those that expired a few years ago (R&D, §163(j) formula, bonus depreciation at 100%)? Is this the best mix of tax changes for an effective tax law?  For example, the disallowance of miscellaneous itemized deduction subject to the 2%-of-AGI floor is contrary to the operation of an income tax as these include expenditures to produce taxable income such as hobby expenses (up to hobby income), investment expenses and unreimbursed employee business expenses. There are easily over 50 tax expenditures that don't belong in the tax law that could be modified or eliminated to enable for permanent lower rates and an even higher child tax credit for low-to-middle income taxpayers. These include the mortgage interest deduction, exclusion for employer-provided health insurance and other fringe benefits (these could be reduced based on income level and subject to a cap), the higher standard deduction for the elderly or tie it to income, and more.

Will we see a discussion of what changes are best for economic growth? Items other than the expiring or expired provisions?  We'll see.

What do you think?

List of expiring or expired provisions: (tax increases built into TCJA as enacted 12/22/17):

•        International Provisions:

•        tyba 12/31/25, deduction for GILTI reduced from 50% (10.5% US tax rate) to 37.5% (13.125% US tax rate)

•        tyba 12/31/25, FDII deduction reduced to 21.875% (16.406% effective tax rate on FDII) compared to 37.5% deduction (13.125% effective tax rate on FDII) for 2018 through 2025.

•        tyba 12/31/25, BEAT rate increases from 10% to 12.5%

•        BEAT = Base Erosion and Anti-Abuse Tax (§59A and Form 8991)

•        Business Provisions:

•        §174 expensing converted to capitalization and amortization for tyba 12/31/21.

•        100% bonus depreciation started to phasedown starting in 2023 (80%), continuing to no bonus in 2027.

•        §163(j) business interest expense became less taxpayer favorable starting for tyba 12/31/21. Prior to that time, add back depreciation, amortization and depreciation to adjusted taxable income (ATI) which is the limitation.  Today, don’t add it back making ATI smaller.

•        §199A Qualified Business Income Deduction ends after 2025.

•        §274(o) – no deduction for meals provided at convenience of employer including for operating facility for the meals starting for amounts paid or incurred after 12/31/25.

•        Individual Provisions:

•        It is a long list including of tax cuts and tax increases. Temporary tax cuts included the higher standard deduction, $2,000 rather than $1,000 child tax credit, lowered brackets and a few others. Temporary tax increases included disallowance of interest on home equity debt, no deduction for miscellaneous itemized deduction subject to the 2% of AGI threshold, the $10,000 SALT cap and others. See complete list from the JCT here.

Reforming Treatment of Business Start-up Expenditures

Today, once a business starts carrying on business (when it is no longer getting ready, but is instead ready to serve customers), it can start amortizing its start-up expenditures as defined under IRC Section 195 over 15 years. If the total is $55,000 or less, up to $5,000 can be expensed immediately and this amount phases down as the aggregate expenditures range from $50,001 to $55,000.

S. 5204, Tax Relief for New Businesses Act, would increase the expensing amount from $5,000 to $50,000 and the phaseout point to $150,000. The bill sponsors note that the average small business spends about $40,000 to get their businesses from getting ready to carrying on.

Those with over these amounts today or per S. 5204, are amortizing expenses over 15 years. Meanwhile, we allow use of the cash method of accounting by most businesses, and have Section 179 expensing of over $1 million. Why not just allow the small business to expense up to the Section 179 amount along with other eligible section 179 property? This sounds like simpler and would truly help small businesses. That is why amortize something over 15 years when Section 179 expensing is over $1 million?

This proposal is in a list of proposals from several years back from the AICPA Tax Division on modernizing the tax law for small businesses. I hope that upcoming tax reform will not just extend expiring or expired TCJA items but also take a look at reforms that would help businesses and make sense given other provisions in the law.

I've offered additional tax reforms to help small businesses in this blog. One of my favorites (beyond what is in the AICPA paper which I'm pleased to say I was able to assemble with other volunteers and staff when I was chairing the AICPA Tax Executive Committee), is allowing co-owners of a new business to elect to be a Qualified Joint Venture something which today is only available to spouses (where both file identical Schedule Cs). This would be very helpful for a start-up run by two or more people because while they are getting started, they don't have to deal with setting up an LLC or filing a partnership return - which is a lot of work when unfortunately, they might not survive. After a few years, they would be required to shift to a partnership or C or S corporation.

I'm sure many people have ideas to truly help simplify tax rules for small businesses. 

What do you think?

Improving the American Opportunity Tax Credit

Excerpt from Pub 970

In May 2024 I had the opportunity to participate in the California Lawyers Association Tax Section's DC Delegation. Participants identify a tax rule in need of reform and draft a paper explaining why change is needed and offer proposals for that reform.

My May paper was on modifying and clarifying the American Opportunity Tax Credit (AOTC) which offers up to $10,000 of tax credit (subsidy) to most families for a child (or themselves) in the first four years of college ($2,500 maximum credit for year for up to four years).

The phaseout income levels for the credit are quite high so at least 80% of families qualify.

But there is a bit of unneeded confusion and complexity in the provision including exactly how the "first four years of college" are determined. An example on the IRS website makes it sound like you can select which of the four years of college count which seems out of sync with Code Section 25A (Q&A 16).  But in sync if we are only required to ask if the student has reached "senior" status at the university. This basic issue should not be confusing, but is.

The IRS has an Interactive Tax Assistant tool on its website which can help but I found it might cause some users to give up such as asking if your spouse has an ITIN after answering "single" to the question about whether you are married.

There is also some complex planning possible if a student receives a scholarship, including a Pell Grant, that is partially taxable. One fix to help Pell Grant recipients has been proposed a few times but not enacted is to not require a Pell Grant recipient to reduce AOTC-eligible expenses by the amount of the grant.

For more background and my recommendations for both legislative and administrative improvements, see "Modify and Clarify the American Opportunity Tax Credit," Tax Notes Federal, 9/26/24.

What do you think?

Tax Reform Hearings of 118th and Prior Congresses

In case it is of interest to you, something I started doing in 2007 (same year I started this blog) was maintaining a website of tax reform hearings of the 110th Congress and have done so through today finally getting a webpage for the 118th Congress (which started in January 2023) posted today. I use the term "tax reform" broadly here as just about any tax hearing, even the typical April ones to debrief about the filing season can lead to reforms.

The website for the 118th Congress with links back to 110th is here - https://www.sjsu.edu/people/annette.nellen/website/118th-hearings.htm

Unfortunately, some older links on some of the pages are broken because the URLs were changed perhaps due to website redesigns or change in controlling party of the committees. But if you do a web search using the name of the committee, hearing and year, you likely will find the information.

Of interest for the 118th Congress so far is one on the child tax credit which was created in 1997 and its expansion continues to be debated along with other possible tax changes, perhaps as part of appropriation bills.  There are also a few on international tax reform.

I started doing this because in my teaching, research and writing on tax policy and reform, I often find interesting items and ideas in the testimony as well as just viewing the topics covered. Having the website with the tax hearings all in one place is helpful - and I'm glad to share.

What do you think?

More Overlooked but Needed Tax Reforms

Continuing with my list of reforms I think would help our tax system (see prior lists of 8/29/21 and 6/21/21), here are three more.

1. Consolidating education provisions further. Need to better identify purpose of these provisions and if their “cost” is appropriate and in line with direct spending such as Pell grants.

2. If higher education incentives are retained, be sure they also cover post-secondary trade schools and only for reasonable costs.

3. Make the IRC gender neutral – “his” is often used in the Code, sometimes even to describe a business (such as at §446(a)). Also, references to husband and wife should be changed to spouses.

Examples:

• §213 – Medical, dental, etc., expenses. (a) Allowance of deduction. There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7.5 percent of adjusted gross income.
• §446(a) – General Rule. Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.
• §7701(a)(17) defines “husband and wife”.
• §121(d)(1) – “If a husband and wife made a joint return for the taxable year of the sale or exchange of the property, ….”

While Rev. Rul. 2013-17 suggests a gender-neutral reading of the Internal Revenue Code, changes have not been made throughout.[1] This ruling was obsoleted by TD 9785 (9/8/16), adding Reg. 301.7701-18 defining spouse, husband and wife, husband, wife and marriage. No changes are made to the Code or other regulations to make them gender neutral.

H.R. 3833, Equal Dignity for Married Taxpayers Act of 2021, proposed to make numerous changes to the IRC to, for example replace “himself” with “self” and “husband and wife” with “married couple.” It would also repeal §7701(a)(17) that defines “husband and wife” and modify §7701(a)(38) that defines “joint return” to say it is by a “married couple” rather than a “husband and wife.”

There should also be a requirement to update regulations.

#letsfixthis

What do you think?

---

[1] For example, Rev. Rul. 2013-17 states: “consistent with the statutory context, the Supreme Court’s decision in Windsor, Revenue Ruling 58-66, and effective tax administration generally, the Service concludes that, for Federal tax purposes, the terms “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex if they were lawfully married in a state whose laws authorize the marriage of two individuals of the same sex, and the term “marriage” includes such marriages of individuals of the same sex.”

November 23 - 100th Anniversary of a Capital Gains Preference

Our federal income tax law did not have special treatment for capital gains until a much lower rate (12.5% rather than a top rate of 73%) was added by the Revenue Act of 1921 (P.L. 67-87; 11/23/1921).

So, November 23 marks 100 years of complexity, lots of discussion on why and how there should be any preference for capital gains, and fairly constant changes to these rules.

The Revenue Act of 1921 defined capital asset as “property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.”

The 1921 Act also

•        Repealed the excess profits tax on corporations.

•        Increased the corporate income tax rate.

•        Rejected a proposal for national retail sales tax.

Treasury Secretary Andrew Mellon supported taxing earned income “more lightly” than capital gains. He noted: “The fairness of taxing more lightly income from wages, salaries or from investments is beyond question.” At the time, middle and lower income earners were not subject to income tax. See background from Tax Analysts and CRS, Capital Gains Taxes: An Overview, 3/16/18.

The rationale for the lowered rate in the Revenue Act of 1921 is similar to today: To “stimulate sales of appreciated property.” [Treasury study, Federal Income Tax Treatment of Capital Gains and Losses, June 1951, page 2]

There were three key reasons offered for preferential treatment: [page 21]

•        Equity – to avoid treating gains generated over more than one year to the progressive rate structure that exists for ordinary income.

•        Solutions:

•        Lower rate – viewed as simple

•        Annual mark-to-market – constitutional issue regarding definition of income; complexity of measurement and verification

•        Assign the gain to the year actually accrued but don’t tax until sold – viewed as complex

•        Income averaging

•        Consider effect of inflation on the asset’s value

•        Incentive  - not explained in the 1951 report, but likely the incentive was to discourage holding of assets (lock-in effect).

•        Revenue yield  - not explained in the 1951 report; but likely this meant to encourage sales to generate tax revenues.

Note: The capital loss limitation was added in 1924 but tightened after large losses of 1929.

A preferential rate or deduction existed until the Tax Reform Act of 1986 which taxed all income under a two-rate system: 14% and 28%. The logic for no lower rate for capital gains was that the rate had been lowered so much already. The Joint Committee on Taxation's Bluebook on the TRA86 observed that using the same rates for all income would "result in a tremendous amount of simplification for many taxpayers since their tax will no longer depend upon the characterization of income as ordinary or capital gain. In addition, this will eliminate any requirement that capital assets be held by the taxpayer for any extended period of time in order to obtain favorable treatment." [page 178]

Discussions on the best way to tax capital gains continue.  I think the question I get most often from students is why capital gains are taxed at a lower rate than wage and business income. That is a good question. I think part of the issue is we hear more about the reasons why we have to have a lower rate without hearing much about weaknesses in such positions (there are strengths and weaknesses to the issues for taxing capital gains more lightly than ordinary income). 

For example, a common argument for the lower rate is to address inflationary gains. But that is a weak argument today when tax prep software can easily be designed to adjust basis for inflation based on how long the asset was held. 

Another argument for the lower rate is the bunching effect in that the entire gain is reported in one year rather than over the time the asset was held. The solution is to mark to market each year. While this adds complexity, it would address the issue. And to reduce complexity, it could only be required for individuals with AGI above a certain level such as the magic $400,000. Again, technology we have today that we did not have in 1921 simplifies the recordkeeping and calculations for mark-to-market.

Another argument for lower rates on capital gains is to stimulate investment.  This is also weak because not all capital assets generate investment such as a start-up company might produce. In fact, this is why a more targeted approach was used in 1993 with enactment of Section 1202 for qualified small business stock.  

The bulk of the benefit from the lower capital gains rate structure does go to very high income individuals who tend to have a lot more capital gain income than ordinary income. This is why Warren Buffet noted years ago that his secretary had a higher marginal rate then he did. An October 2021 report by the CBO on the distribution of tax expenditures indicates that the preferential rate on capital gain and dividends provides 95% of the benefit to individuals in the top quintile and 75% to the top 1% [page 14]. 

With Build Back Better, President Biden proposed to tax capital gains at the top regular rate for individuals with income above $1 million [Greenbook, page 61]. The House Ways and Means Committee suggested replacing the 20% top capital gain rate with 25%. The bill that passed the House on November 19 has a surcharge of 5% for individuals with income above $10 million and another 3% when income passes $25 million [Sec. 138206, page 2237]. This affects a very small percentage of the top 1%, but for capital gains is still below the top rate of 37%.

Regardless of what capital gains change ends up in the final Build Back Better Act, one thing is certain - it won't be the last time we'll see congressional discussions on what the rate should be or changes made.

What do you think? Are you doing to celebrate or at least acknowledge the 100th anniversary of the capital gains preference on November 23?

Cheers!

And - Happy Thanksgiving!

Certain Tax Increases and Fixes Needed for Equity and Fairness

Tax reform discussions in Congress for the week of October 17 have included possibly not including tax increases. Are taxes too high already? Perhaps. But they are also quite uneven in their application.  Here are a few examples:

• Vastly different rates exist for capital gain versus ordinary income for very high income individuals. A wage earner with over $400,000 of earned income will enter a 37% marginal rate today (39.6% after 2025). In contrast, a person with capital gain and dividend income will be in a marginal rate of 23.8%. This is a frequent question I get from both students and practitioners - why are capital gains taxed lower than ordinary income. There are reasons, but I don't think it supports a difference once income passes the $500,000 level.* Tax it all the same after some high level such as $400,000 or more.  And that high income wage earner will have 2.9% Medicare tax on income above $147,000 (figure for 2022) and an additional 0.9% on income above $200,000 ($250,000 if MFJ).  So a capital gain rate of 37% (or 39.6% once AGI exceeds $1 million as President Biden proposes (see page 8 of this table)), causes the high wage earner and high capital gain recipient to both be at a marginal rate of 43.4%. Note that I am only talking about very high income individuals (less than half of the top 1% of individuals).
  
  Yet, 43.4% is a high rate. I think it would be good to include with Biden's plan, repeal of the extra 3.8% net investment income tax (NIIT) which would also simplify the tax system.  That though would cause the wage earner to still be paying an extra 2.9% on all of their wage income, so perhaps add that to the high capital gain person. Or, keep the top rate at 37% + the 2.9% extra to equalize the high wage earner and high capital gain person. Or even a lower rate could be used along with reduction in some of the tax breaks for high income individuals, such as capping the tax benefit of itemized deductions and exclusions at 28%.
  
  We are talking about far fewer than 1% of individuals. But these few thousands of individuals have lots of income which for some is in the hundreds of millions of dollars annually.
  
  
• A big income tax break for those who die with millions or billions of gains (and their heirs). Tax reform should include a provision to tax all income including gains that exist at date of death for those with assets above a specified amount. Biden uses $1 million (see page 8 of this table). If that were $3 million, there would be far fewer affected by the tax or some of the complexity.  And a good portion of this untaxed income today are appreciated stock gains of multi-billionaires such as Zuckerberg, Musk and Bezos. I think few people can justify why their unrealized gains should disappear and never be taxed under our current income tax system. President Biden's proposal with backstops to prevent having to sell a family business to pay the tax should be discussed in Congress. While that is a tax increase compared to today's system of letting these gains be untaxed, it should be viewed as fixing a longstanding, inequitable flaw in the system.**
  
  
• Tax breaks are worth a lot more to high income taxpayers. Let's raise taxes by reducing some tax breaks that don't make sense and are inequitable. Today, less than 10% claim a mortgage interest deduction. Perhaps this is the time to repeal this tax subsidy that primarily helps a higher income person buy a more expensive home. Reduce the exclusion for employer provided health insurance. Perhaps make some percentage of it taxable with that percentage higher as income goes up. This subsidy benefits about 65% of employees and reduces tax collections by about $200 billion annually. 
  
  And let's rationalize tax deductions. In a personal income tax, deductions should be allowed to remove some income from taxation (standard deduction and personal exemptions enable this) and for the costs of generating income.  And some would argue that the state and local income tax should also be deductible as that money is not available to pay federal taxes (but note that states don't allow a deduction for federal taxes) [see my 2008 article on reasons for and against state tax deduction]. But, some taxes are more in the voluntary category. For example, personal property taxes on more than one vehicle per person. And real property taxes on more than one home and when that home exceeds the median home value in the region.  Tax reform should include discussion of all these tax reductions (credits, exclusions and deductions) to be sure they make sense and are not providing breaks to people who don't need them or much larger ones to the highest income individuals.

#letsfixthis

What do you think?

*I'll cover pros and cons of lower taxes on capital gain income in my blog post for November 23, 2021 which is the 100th anniversary of the Revenue Act of 1921 that created a preference for capital gain income.

**There is a good deal of support for taxing gains at date of death and removing this odd and very large exclusion, usually with some threshold, such as President Biden's $1 million of assets per decedent.  That likely should be $2 or $3 million to be sure step up repeal is aimed at those holding the types of assets that might great appreciate providing significant income tax breaks to multimillionaires and multibillionaires. Think about the founder's stock that several billionaires have.

One of the founders of Facebook, Chris Hughes, a multimillionaire and author of Fair Shot, explaining and supporting universal basic income (UBI) states in this book: "we should adjust our tax code so that the wealthy ay the same tax rates on their investment income as hardworking Americans do on their wages. ... Second, we should cap deductions at 28 percent for the wealthiest Americans and close tax loopholes, like the one that allows for the gains on inherited assets to be be excluded from taxable income."

Also see a March 2021 press release from Senator Van Hollen and others on the rationale for eliminating the tax exclusion of gains at date of death and letting heirs get the assets at FMV.

Also see my September 2020 op ed in The Hill on not using a wealth tax to generate revenue but fixing the big leaks and inequities in our income tax.

More Necessary But Overlooked Tax Changes

Well, back to what I started with a June 21, 2021 post where I'm sharing my ever-growing list of what I think are necessary but usually overlooked tax changes. It would be terrific to see these in the next tax reform bill or even some picked up in other legislation. I hope you'll review my first list and this one, check back for future posts (I have more reform ideas on my list) AND please post a comment with your reaction and your tax reform ideas.

• Reform the personal income tax to its basic framework where reasonable deductions to produce income are deductible (they are not limited to 2% AGI or disallowed for 8 years (2018 through 2025)).
  
  
• Modernize §197 to include 21st century intangibles – see page 5 of my 2017 article.
  
  
• Update §170(f)(11) on qualified appraisals to expand situations where an appraisal is not needed because there are public listings of value, such as for most virtual currencies.
  
  
• Update §7503, Time for performance of acts where last day falls on Saturday, Sunday, or legal holiday – Some language here is outdated, such as reference to “internal revenue district.” Also, to avoid confusion regarding state holidays or those celebrated in the District of Columbia, consideration should be given to just using the national list of holidays at 5 USC 6103. This change will avoid confusion particularly when a DC or state holiday falls on the weekend so is possibly celebrated on Friday or Monday instead. For example, see Notice 2006-23 where the IRS had to clarify tax due dates where Patriots’ Day (relevant in Maine, Massachusetts, New Hampshire, New York, Vermont, Maryland, and DC) fell on Monday April 17, 2006 (Patriot’s Day is the third Monday of April and an April 15 Saturday makes April 17 Monday the date with Patriot’s Day then making the due date for those states April 18 Tuesday).
  
  
• Update §7523, Graphic presentation of major categories of Federal outlays and income, to not only include them in the 1040 instructions but have them on the IRS website, those of elected officials and other agencies. Consider having a more interactive tool to help taxpayers understand all federal taxes they pay, info on the taxes, marginal rates, etc. See Nellen, “Time to move Sec. 7523 budget information into the Digital Age,” AICPA Tax Insider, 11/8/12.

More later ...

What do you think? and please post your tax reform ideas in the comment box. Thanks!

Tax and Biden's Build Back Better - What's Included and What is Missing?

The tax provisions included in President Biden's Build Back Better plan are mostly similar to what he campaigned on, such as repealing tax preferences for fossil fuels and providing tax breaks for most families. 

I have posted a table listing the tax provisions in the Administration's FY2022 Greenbook. There is a lot there relevant to all individuals, wealthy people with lots of appreciated assets, alternative energy companies, oil companies,and more.

I think it is also interesting what is not there such as:

• Limiting the QBI Section 199A deduction for individuals with income above $400,000.  I guess this is because 199A automatically goes away after 2025 so why waste political capital trying to reduce it for less than 1% of individuals.
• Capping the benefit of itemized deductions at 28%.
• No change to the estate tax exemption or tax rate. Again, this is likely because we automatically revert to the lower exemption and higher rate after 2025 (one of a few built-in tax increases in the Tax Cuts and Jobs Act, the temporary 199A).
• Fixing Section 174 so we don't start using the TCJA provision after 2021 that R&D must be capitalized and amortized rather than expensed. Expensing has been in the law since 1954. While the BBB plan mentions helping R&D, there isn't anything specific to fix the TCJA change.
• Reducing the over 100 special rules that don't need to be in the law such as the mortgage interest deduction, various education provisions, the exclusions for employer-provided health insurance, and more. These provisions are called tax expenditures and result in reduced revenues of about $1.8 trillion per year. Now would be a good time to phase out the mortgage interest deduction because only about 11% of individuals itemize deductions today and not all of them have a mortgage. This subsidy for higher income individuals doesn't belong in the tax system. If there is desire to use the tax law to help individuals purchase a home, a first-time homebuyer credit would be better. (more on this another time)
• An increase to the gasoline excise tax that has been at 18.4 cents/gallon since 1993.  Of course, this would represent a tax increase on individuals with income below $400,000, but with the outdated figure and a desire to reduce greenhouse gas emissions, seems like an oversight (and a reason why the campaign promise of no tax increases for those with income under $400,000 should have had some caveats).  And no mention of initiating efforts to shift from the gasoline excise tax to a vehicles miles travelled tax so that all vehicles contribute to the Highway Trust Fund rather than only gas-powered vehicles.
• Numerous simplifications and improvements. I started listing some of these in a recent blog post and will continue to and hope readers will add in their ideas in the blog comments.

What do you think?

Necessary But Overlooked Tax Changes We Need

I've been maintaining a list for several years of overlooked improvements I think are needed for our federal tax system. I keep adding to the list including based on oddities found in current court cases.  For the next few weeks, I'll post most of these suggestions. I hope you'll comment on them and add some of your own. It would be terrific to see these included in any tax reform legislation of the 117th Congress and Biden Administration.

1. Create a de minimus rule for personal use of virtual currency similar to §988(e) for foreign currency which excludes personal gains under $200. This is needed for simplicity. It should exclude bitcoin acquired after a certain date though due to the tremendous gains that exist with very low basis bitcoin (too much of a windfall rather than only simplification).
   
   
2. Repeal the §280A(g) exclusion when one's home is rented out for under 15 days (there is no purpose for this exclusion that mostly benefits high income individuals who own a home to rent for a high rental amount).
   
   
3. Replace §280A rental limitations with §469 limitations. There is no need to have two different rental expense limitations and the §469 one is easier and has more guidance.
   
   
4. Fix §6050P and regs (and perhaps consumer protection laws) to be sure a Form 1099-C is only issued if the debt is truly cancelled. A recent example of this issue is Gericke v. Truist, No. 20-3053 (DC NJ 3/26/21). This is a problem for the fisc and for borrowers. For example, in Stewart, TC Summary Opinion 2012-46, the borrower received a 1099-C in 2008 and did not report it. The court found that the debt was discharged in 1999 “when it was clear that the debt would not be repaid.” So it was too late to pick up the income. There are several cases involving mismatch of receipt of 1099-C and discharge of debt.  See my 5/10/21 blog post.
   
   
5. Fix §6050I to apply to governmental entities and units too. PLR 202118003 (5/7/21) held that a state liquor store was excluded from having to file Form 8300 as it was not a “person” for purposes of this Code section.

More later...

What do you think? 

14th Anniversary of the 21st Century Taxation Blog

I started this blog 14 years ago today as a way to share ideas and hopefully engage discussion on how to improve our tax systems to meet principles of good tax policy and reflect the ways we live and do business today. It's been enjoyable and I appreciate everyone who reads and comments on my posts!

A few thoughts of areas that need attention that we don't hear enough about (some I have blogged on):

• Repeal the kiddie tax - too much complexity and not needed. When an asset is truly given to someone else, that person pays taxes on it at their own tax rate.
• Repeal the rental revenue exclusion for renting out your home for less than 15 days (§280A(g)). Not needed and mostly benefits higher income with the home by the nice golf course where some tournament will be played.
• Fix the personal income tax to allow deductions tied to production of taxable income without any 2% of AGI limitation.  This is a basic feature of a personal income tax and we have continuted to move away from it since the Tax Reform Act of 1986 meanwhile while adding special rules that are not part of a basic income tax.
• Virtual meetings and meals are likely to stay. Let's get guidance on whether that meal delivered to your client or employee is still deductible (client one should be, but not clear about the employee; if given a gift card, likely taxable).
• Update Section 197 on amortization of intangibles to include URLs and social media assets.

And, of course, there are more areas in need of improvement.

What do you think?

34th Anniversary of TRA86 Enactment - What's Changed and Still Needed?

On October 22, 1986, President Reagan signed the Tax Reform Act of 1986 (PL 99-514). Take a look at this picture at the Social Security Administration website to see a group of men from the tax committees cheerily watching the president sign the bill outside of the White House. At the time, we had a Republican president and controlled Senate and a Democrat controlled House, all working together and holding numerous hearings about the reforms).

The TRA86 lowered rates and broadened the base. Prior to TRA86, the top corporate rate was 46% and the top individual rate was 50%. Today, the top corporate rate is 21% (flat, no longer graduated) and the top individual rate is 37% (goes back to 39.6% after 2025). 

The new rates:

• Corporations: 15%, 25% and 34%
• Individuals: 15% and 28% with capital gains taxed at the same rates

Why was there a TRA86? President Reagan wanted to lower the rates and there was bi-partisan support for a fairer, simpler tax law that would be more supportive of economic growth. There was also a desire to shut down some problem areas such as tax shelters that middle and high income individuals were investing in and get most corporations to use the accrual method of accounting and the percentage of completion method for their long-term contracts (as they would for their GAAP financial statements).

There were several extensive reports by the Treasury Department about issues with the existing system and analysis of possible reforms. See Tax Reform for Fairness, Simplicity, and Economic Growth: The Treasury Department Report to the President in 3 volumes with the third volume on a VAT.

The transmittal letter in the report included: "we believe we have followed your mandate of May 1984 to design a sweeping and comprehensive reform of the entire tax code. The Treasury Department study focused on four options: a pure flat tax, a modified flat tax, a tax on income that is consumed, and a general sales tax, including a value-added tax and retail sales taxes.”

Further: “These proposals are bold, and they will be controversial. Those who benefit from the current tax preferences that distort the use of our nation's resources, that complicate paying taxes for all of us, and that create inequities and undermine taxpayer morale will complain loudly and seek support from every quarter. But a far greater number of Americans will benefit from the suggested rate reduction and simplification. The achievement of fundamental tax reform and the manifest benefits it would entail -- will require extraordinary leadership.”

Several provisions of the TRA86 remain such as no deduction for personal interest expense and uniform capitalization rules and required use of the accrual method for large businesses. Some notable changes since TRA86:

• Max individual rate of 28% ended with addition of 31% bracket by OBRA’90 (P.L. 101-508), effective for 1991.
• Maximum capital gain rate remained at 28%.
• Corporate rate raised to 35%
• AMT preference for contributions of appreciated property was repealed by RA’93 (P.L. 103-66).
• Base broadening slowly eroded with addition of new preferences, particularly with Taxpayer Relief Act of 1997 (P.L.  105-34).
• Added child tax credit, Hope Scholarship credit, expanded §121 gain exclusion for residence, and repealed AMT for small corporations.
• Numerous credits and special deductions added (§199, energy credits, and more)

After the TRA86, other countries lowered their tax rate on corporate income until the US rate became one of the higest rates until loweredto 21% by the TCJA in December 2017.

Did the TCJA of 2017 address all tax issues? No.  Here is a partial list of once still in need of addressing that have been longstanding issues.

• Recognition of technology in tax compliance
• Compliance system still rooted in paper, and not as technologically modern as online banking or online shopping.
• Return-free system
• Called for in Treasury’s 1984 report
• GAO report Alternative Filing Systems (10/96)
• Many countries have gov’t or employer prepare return
• Camp’s HR 1 (2014) prohibits it - “SEC. 6103. PRE-POPULATED RETURNS PROHIBITED.”
• Clarification of worker classification system
• Revenue Act of 1978, Section 530 – Congress to study; added temp rules
• 1982 – made permanent
• Today – issues continue
• Debt reduction and other budget issues, such as Social Security and Medicare reforms

What do you think? 

2018 State Taxes Not Deductible in 2017

Updated 12/27/17: Tax reform has resulted in individuals not able to claim an itemized deduction for all of their state taxes for 2018 through 2025.  The final bill only allows up to $10,000 of a combination of real property taxes and state income taxes (or sales tax in lieu of income taxes). As the bills were progressing through Congress, some practitioners and taxpayers wondered if individuals can prepay their 2018 state income taxes by 12/31/17 and claim a deduction in 2017 before the new law kicks in on 1/1/18.

It seems though that the answer is no.  At 12/31/17, you have no 2018 state tax liability because 2018 hasn't started yet. In contrast, if your property taxes were assessed in 2017 but you can pay them over installments in 2017 and 2018, you can pay the 2018 installment in 2017 and claim the deduction because it is truly a 2017 liability. Also, your fourth quarter estimated payment for your 2017 state income taxes is usually due 1/15/18, but can be paid in 2017. That is still fine and people will want to consider doing so, but must consider the 2017 AMT effect which might result in no tax benefit.  That 4th quarter estimate needs to be reasonable. That is, you can't make a very large 4th quarter payment for 2017 knowing you'll get a refund of it in 2018 (see Revenue Ruling 82-208).

We have AMT in 2017 and for many individuals, they won't get a state tax deduction because they will owe alternative minimum tax where you don't get to deduct your state taxes.

For a great explanation of the tax technical reasons why individuals can't deduct 2018 state tax estimates in 2017, please see the following article by Kip Dellinger and Chris Hesse, CPAs:

"A 2017 federal tax deduction for prepaying anticipated 2018 state income taxes? Not likely!" Journal of Accountancy, AICPA, 12/14/17.

Update: The conference bill and explanation that was released late on 12/15/17 states that state or local income taxes paid in 2017 for 2018 is treated as paid on the last day of 2018. Thus, reminding us that a 2018 state or local income tax is not imposed until 2018. Be cautious if you think this means a prepayment of other state and local taxes for 2018 are deductible in 2017. If the tax is imposed for 2017 but can be paid in 2018, then generally, paying that 2017 in 2017 yields a 2017 deduction (again, don't forget about the AMT effect). The conference and statute language on this is helpful to those who paid 2018 taxes in 2017 because it still allows the cash basis taxpayer to deduct that 2017 payment in 2018 (but with the $10,000 deduction cap for state and local taxes on Schedule A).

Further update: On 12/27/17, the IRS released IR-2017-210 stating that prepaid real property taxes are only deductible in 2017 if assessed and paid in 2017. They provide an example where the county allows property owners to accept prepayments of property taxes for the 20`18-2019 property tax year. But because the tax is not assessed until 7/1/18, the prepayment of 2018 taxes in 2017 is not deductible in 2017.

Hopefully a technical correction can be made to help homeowners who paid their 2018 property taxes in 2017 so they can still deduct them in 2018 even though paid in 2017 (a cash basis taxpayer has to deduct payments (if deductible), in the year paid).

Tax Reform Links and Examples

UPDATED 12/22/17: Tax reform went from legislative text from the House Ways and Means on 11/2/17 to a signed bill on 12/22/17.  The House Ways and Means Committee introduced its bill - H.R. 1, on November 2 and the House passed it on November 16. The Senate Finance Committee released its proposal on November 9 and passed it on November 16. Late on 12/1/17, the Senate passed a bill that made numerous amendments to the bill passed by the Senate (see the list of amendments in this JCT document). The House and Senate held a conference committee on 12/13/17 and did some behind the scene discussion to be sure they have the votes to pass. Late on Friday 12/15/17, the conference bill/report was released (1087 pages). On 12/20/17, House and Senate approved the bill and it was renamed to ‘‘an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.’’ President Trump signed the bill on 12/22 and it became Public Law 115-97 (12/22/17).

Following are links to the key documents on the bills and Joint Committee on Taxation analysis. I also show examples of how two different families fare under the House and Senate Finance Committee bills (final bill is a bit more favorable).  Please note that there are many variations possible of how H.R. 1 affects individuals depending on how many children a family has and their ages, the types of itemized deductions they have, and their income level and its nature.

Links in chronological order:

• H.R. 1 passed by the House on 11/16/17 (227-205) + House Report 115-409 (this started with H.R. 1 as introduced in House Ways & Means Committee on 11/2/17)
• JCT, Description of H.R. 1 before amendment (JCX-50-17; 11/3/17)
• JCT, Estimated Revenue Effects for H.R. 1 (JCX-54-17; 11/11/17)
• JCT, Distribution Effects of H.R. 1 (JCX-53-17; 11/11/17)
• Bill passed by Senate Finance Committee on 11/16/17
• Section-by-Section analysis of SFC bill
• SFC bill summaries from JCT: 253-page description of original proposal  (JCX-51-17; 11/9/17) + 103-page Chair mark (JCX-56-17; 11/14/17)
• JCT, Estimated Revenue Effects of the SFC bill (JCX-59-17; 11/17/17)
• JCT, Distribution Effects of SFC bill (JCX-60-17; 11/24/17)
• CBO, Distribution Analysis of SFC bill (11/27/17) + 11/17/17 letter to Senator Wyden
• Bill passed by the Senate on 12/1/17 (468 pages)
• JCT, Estimated Revenue Effects of the Senate bill (JCX-62-17; 12/1/17)
• Tax reform links of the House Ways and Means Committee + Senate Finance Committee
• Link to H.R. 1 and all of its versions, actions, and related items
• JCT, Comparison of H.R. 1 as passed by Senate and House (JCX-64-17; 12/7/17)
• Conference Committee language and report (12/15/17) + conference report only
• Legislation as passed by House and Senate (12/20/17)
• Legislation SIGNED by President Trump (P.L. 115-97, 12/22/17) + edited conference report noting final changes with links (from Gary McBride)
• I also have a few Code sections with track changes to show the changes - here.  and a brief summary for individuals - here.

Note: Due to the "Byrd rule" which requires budget reconciliation legislation to only deal with revenue, an amendment was made in the Senate late on 12/19 (SA 1863) to make three changes to what was agreed to by the conference committee (and voted on by the House on 12/19 requiring them to re-vote on 12/20). These changes:

  1) A name change from Tax Cuts and Jobs Act to a longer one (see first paragraph of this post).

  2) Removing homeschooling expenses from the expanded use for 529 accounts.

  3) Changing the language of new IRC Section 4968 (HR 1, Sec. 13701) to remove "tuition-paying" in defining students for purposes of this excise tax on investment income of private colleges and universities.

H.R. 1 - Two examples of individuals (based on HR 1 as passed by House and bill passed by Senate Finance Committee): [See a newer example based on final bill here.]

	Family of 4, wages $100K, state taxes $8K, mtg int $10.5K, charitable $500		Family of 4, wages $250K, mtg int $40K, State tax $35K, charitable $5K, misc $3K
	2018 current law	H.R. 1	2018 current law	H.R. 1
Taxable income	$64,400	$75,600	$150,400	$205,000
Tax	$8,708	$9,072	$28,908	$39,550
Child credit	$2,000	$3,200	$0	$3,200
Non-child dependent credit	--	$600	--	$600
AMT	$0	--	$3,372	--
Net tax	$6,708	$5,272	$32,280	$35,750

Note: The family above with $40,000 of mortgage interest has a debt greater than the new $500,000 limit allowed by H.R. 1, but falls under the transition rule. If this taxpayer instead had a new mortgage, the tax would be higher because H.R. 1 limits mortgage interest to a debt of $500,000..

SFC (note the Senate version which increased the child credit to $2,000) - Same examples as above:

	Family of 4, wages $100K, state taxes $8K, mtg int (AI) $10.5K, charitable $500		Family of 4, wages $250K, mtg int (AI) , $40K, State tax $35K, charitable $5K, misc $3K
	2018 current law	SFC	2018 current law	SFC
Taxable income	$64,400	$75,600	$150,400	$205,000
Tax	$8,708	$8,739	$28,908	$39,742
Child credit	$2,000	$3,300	$0	$3,300
Non-child dependent credit	--		--	--
AMT	$0	--	$3,372	--
Net tax	$6,708	$5,439	$32,280	$36,442
Tax HR 1		$5,272		$35,750

There are numerous changes for individuals, businesses, estates, and exempt entities in the proposals. The above examples aim to illustrate that not everyone gets a tax cut; it depends on the mix of their income and current deductions.

What do you think?