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Monday, November 28, 2022

Dollar Amounts and MAGI in the IRC - Are Adjustments Needed?

There are many dollar amounts in IRC sections such as for amounts of deductions, credits or exemptions, as well as for phase-out levels. The Inflation Reduction Act modifies section 30D, Clean Vehicle Credit, and adds section 25E, Previously Owned Clean Vehicle Credit. Both of these provisions have phaseout levels based on "modified AGI" and dollar limits on the cost of the car (based on MSRP for §30D, and sales price for §25E). For these credits, none of these dollar amounts are adjusted for inflation and IRA 2022 puts these credits in existence though 2032 - even though in the law for 10 years and enacted as part of the Inflation Reduction Act. 

Likely no inflation adjustments were included for these two vehicle credits because then the bill would cost more as the credit amounts would increase each year.

But is that the right answer? Perhaps. It depends. If the credit causes the supply of these cars to go up, perhaps the price will drop or won't go up as much as annual inflation adjustments. And Congress can change the dollar amount of the credit in the future.

The modified AGI definitions in these two vehicle credit provisions is AGI increased by exclusions under §911, §931 and §933 for certain foreign income exclusions. The term MAGI has varied definitions in the Code.  It appears that one reason is so an individual won't potentially lose numerous tax benefits when they cross a single definition of MAGI.

But what is the thought process on what modifications should be made to AGI?  I think most exclusions and special deductions should be added back to get at a better measure of one's income.  And the more exclusions and deductions one has, the greater is their true income. So, why not add back such items as fringe benefits including employer-provided health insurance, tax-exempt bond income, life insurance proceeds and perhaps even some portion of gifts?

And why not add back special deductions, especially ones that are likely a larger amount for higher income individuals such as the mortgage interest deduction? Or add back some portion of such deductions? Also consider that if it were instead a credit, taxable income would be higher. (Adding back deductions would also require a change to the name modified AGI.)

Since the §199A deduction is really a rate reduction, that should not be added back and charitable contributions should not be added back to encourage them.

Would it be difficult to get these figures? Some are already on the return such as tax-exempt bond interest and mortgage interest deduction. Most should be on the return to help taxpayers understand the range of tax breaks they get and the tax savings from them.

What do you think?

Sunday, November 13, 2022

Information Security and the Clean Vehicle Credit

The Inflation Reduction Act of 2022 added and modified several energy credits. They are all fairly complex in terms of restrictions and numerous definitions. See prior posts on some of this complexity:

Section 30C Refueling Property Credit (9/18/22)

Various credits with track changes links to several including the section 30D Clean Vehicle Credit (8/21/22)

One item that seems odd in the revised section 30D, Clean Vehicle Credit is the 8th of 8 elements of the definition of a "clean vehicle". This requirement at §30D(d)(1)(H) provides that the seller must furnish a report to the taxpayer ad the IRS in guidance to be provided by the IRS. In addition to logical items like the taxpayer's name, the vehicle's VIN and whether the car meets the critical minerals and battery component requirements, it calls for the buyers tax identification number. We can see why the IRS wants that information but why should the buyer have to provide their TIN to the seller? This is contrary to one of the 12 principles of good tax policy - Information Security.

Hopefully the IRS will come up with secure ways to enable this requirement to occur. For example, the taxpayer could be directed to a website to obtain an identification number usable only for the report (a number other than their Social Security number), perhaps similar to getting an EIN.

What do you think?


Sunday, October 16, 2022

Gender-Neutral Text in Tax Laws

I was recently on a panel on Gender and Taxes at the Sustainability & ESG in Taxation conference in London (I was virtual from San Jose!). One of several topics we covered included me noting that the US tax law is not written in gender neutral language. It has always surprised me that there are so many uses of the terms "he" and "his". For example, the deduction for medical expense under §213 is for "the taxpayer, his spouse or a dependent." That implies that taxpayers are male. It should be changed to just taxpayer and dependent since for a married couple, both spouses are taxpayers.

Another odd one is at §446(a) on accounting methods which apply to all taxpayers but time spent with this provision will be for businesses. Yet the general rule provides: "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."  A fix would be to change "his" to "their."

In recent years there have been bills to address gender equity in the tax law which is an excellent idea. For example, H.R. 3833 (117th Congress), Equal Dignity for Married Taxpayers Act, calls for numerous changes throughout the IRC such as replacing "husband and wife" with "married couple."  It lists out over 50 specific provisions and describes the needed change. 

Expanding this bill to also make the Code gender neutral would be outstanding (and expanding the name of the bill). In addition, the bill should require Treasury and IRS to make regulations gender neutral and specify that if that is the only change to the regulation, there is no need for public comment. The bill can include a list of the needed changes, such as change "his" to "their."

What do you think?

Sunday, October 2, 2022

Colorado Now Accepts Crypto for Tax Payments

On 9/1/22, Colorado became the first state to accept cryptocurrency for all tax payments. There are many ways this could have been structured and I think the state picked an interesting one which I assume makes it easier for the state.

Payments have to come from PayPal Cryptocurrencies Hub. The PayPal account has to be a personal one rather than a business one. Per the DOR website on this:

"A sufficient amount of cryptocurrency to cover the tax, obligation and fees is converted to dollars and remitted to DOR to complete the online transaction. Service fees include an additional $1.00 plus 1.83% of the payment amount. You must have the entire value of your invoice in a single cryptocurrency in your PayPal Cryptocurrencies Hub. Effective on the date initiated, USDs will transfer in 3-5 business days." [also see https://www.colorado.gov/revenueonline/_/#1]

Per the PayPal crypto website, you can buy, transfer or sell Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.

So, sounds like if I owe $100 to the Colorado DOR, I can only pay in crypto if I have at least $103 worth of one of the four cryptocurrencies in my PayPal account. If I have $50 of Bitcoin and $53 of Litecoin, that won't work. I'd need to acquire more of one of those cryptocurrencies via my PayPal account to do the transaction.

Tax considerations: Per the website, PayPal is converting my crypto to dollars and remitting to the DOR. So, any broker reporting falls on PayPal. The taxpayer has a barter transaction per Notice 2014-21 and needs to calculate gain or loss using the value of the crypto used less their basis in that crypto.

Why might Colorado be doing this? Well, this question has been posed by many people for years - can I pay my taxes in crypto? I think this is only of interest to someone who happens to have sufficient crypto in an account to make the payment or doesn't want to convert it to cash first to pay. I think few crypto owners will pay taxes this way, but it is good to have the option. And it looks like for Colorado, they are just getting the cash as they typically would.

And Colorado will know which taxpayers have crypto because they received payment via PayPal Cryptocurrencies Hub.

But the state has to devote resources to explaining this. At 10/2/22, they even have 10 FAQs on this payment technique. 

FAQ #5 is interesting - Taxpayer changed their mind mid-transaction but realize afterwards that their crypto is gone from their PayPal account. What happened? "If you leave the process after selling your cryptocurrency in your PayPal Cryptocurrencies Hub, but before completing the entire checkout process, your cryptocurrency will still have been sold and the US dollar equivalent deposited into your PayPal balance."

So, be sure you want to pay via crypto before starting your tax payment transaction.  The FAQ should add here (and other places) - and you need to calculate the gain or loss from that conversion (whether or not it resulted in cash used to pay your taxes or for a transaction cancelled mid-point, cash in your PayPal account).

FAQ #10 - If I need a refund, will it be based off the current exchange rate of the cryptocurrency? "If a refund is to be provided for any reason, this will only be provided in US dollars for your invoice amount."

A few observations on FAQ #10:

  • Why not just make it really clear on the website that taxpayers are converting crypto in their PayPal account to cash with PayPal submitting that cash to the DOR?  And adding that you are really paying in cash and creating a gain or loss from the conversion of your crypto to cash. Then it would be more clear that, of course, any refund is going out from the DOR in US dollar. But perhaps taxpayers might think that the DOR will send the dollars to PayPal who would use it to buy more of the crypto that had been converted to US dollars to pay the tax.
  • If a person pays too much to the DOR and the value of the crypto converted to cash to pay the tax bill goes up, they lost out on that value by converting too much (or even using any of it to pay their taxes) and don't get any relief because the refund is NOT done by having that same quantity of crypto that was overpaid going back to them as a refund.
What do you think? Should more states and even the IRS do what Colorado DOR is doing?  Or allow another payment structure or just take the crypto directly and hold onto it?

Sunday, September 18, 2022

Complexities in Modified Energy Credits - Refueling Property As Example

IRC §30C, Alternative Fuel Vehicle Refueling Property Credit has been a temporary provision for awhile and expired at the end of 2021. The Inflation Reduction Act of 2022 retroactively extended it to now expire after 2032. Starting after 12/31/22, it will work differently than it does for 2021. This is a significant credit. For 2021, it can be up to $30,000 where the property is depreciable (owned and used by a business) or $1,000 for anyone else. The business credit goes up to $100,000 for 2023 through 2032. The credit rate is 30%  - but only 6% for depreciable proprty if the new wage and apprenticeship requirements are not met (see new §30C(g)).

I created a track changes version of this §30C credit to help understand the changes - here. There are some changes that are complex to understand. For example, qualified alternative fuel vehicle refueling property will have to be located in eligible census tracts (see §30C(c)(3)). This requirement says property is only eligible if "placed in service" in an eligible census tract. Usually "placed in service" refers to depreciable property, but the description doesn't say this requirement is only for depreciable property so likely applies to all such refueling property.

An "eligible census tract" means "any population census tract which is described in IRC §45D(e) or is not an urban area."  An "urban area" means "a census tract (as defined by the Bureau of the Census) which, according to the most recent decennial census, has been designated as an urban area by the Secretary of Commerce."

That all sounds confusing. I could only find information on the 2010 Urban Areas (perhaps 2020 data will be announced soon). The details on this state: "Urban areas - defined as densely developed residential, commercial and other nonresidential areas - now account for 80.7% of the U.S. population, up from 79.0 percent in 2000."

So, it appears that refueling property (such as charging stations) will only qualify if located where 20% of the population resides. Why not allow them anywhere?

But the definition of "eligible census tract" seems to say (I wish it were worded more clearly), that it is permissible to have the property in a population census tract described in IRC §45D(e) (§45D is for the new markets tax credit). That is a long definition (I included it in the track changes doc). Basically, these tracts are where the poverty rate is at least 20% or if not located in a metropolitan area, the median family income does not exceed 80% of statewide median family income or ...." But that is just about one-quarter of the definition.

Hopefully the IRS can provide a zip code list of what areas qualify for placing property that will qualify for the credit.  But that is a significant task for the IRS in addition to all of the other guidance needed under the IRA 2022. 

Seems the focus was to put the refueling property in rural and low-income communities. Is that the best investment for these areas? Will it create jobs that will remain after the property is placed in service?

Am I missing something here?

What do you think?