Search This Blog

Saturday, July 30, 2022

New Inflation Adjustments Proposed for Some Tax Rules

On July 21, Senator Grassley introduced S. 4589, Middle-Class Savings and Investment Act. It aims to add a few inflation adjustments to dollar amounts in the tax law that are not adjusted for inflation. The ones selected seem aimed at low to middle income taxpayers. These adjustments would be for:

1. $2,000 child tax credit

2. $500 other dependent credit

3. Education costs in the American Opportunity Tax Credit and Lifetime Learning Credit (currently, only the income thresholds for inflation are adjusted for inflation).

4. Student loan interest deduction.

He would pay for this by extending the $10,000 SALT cap for one more year (through 2026).

See Senator Grassley's press release about the bill.

I think there is merit in adjusting the child and dependent credits for inflation. After all, the personal exemption (returning in 2026 with the child credit going back to $1,000) was adjusted for inflation. 

I can see some logic for the education credit and student loan deduction, but these provisions already have flaws and need greater improvements and perhaps even removal from the tax law since there are non-tax laws to help low-income individuals attend college. The AOTC provides tax breaks to many individuals with income too high to qualify for a needs based scholarship. Why not use those funds to provide larger Pell grants? And these credits do cause universities to justify increased tuition (the inflation adjustments to the credit calculation would likely do the same).  And student debt has problems outside of the tax law (I highly recommend The Debt Trap by WSJ reporter Josh Mitchell).

There are numerous dollar amounts in the federal tax law that are not adjusted for inflation, such as the $3,000 capital loss limitation and the $200K and $250K thresholds for the net investment income tax (NIIT). Good for Senator Grassley in not adjusting ones that are not applicable to low to middle income taxpayers.

One that seems appropriate for his bill though is are the taxability thresholds at section 86 to determine how much Social Security might be subject to tax. That affects middle class individuals receiving Social Security benefits.

I think this topic is one warranting greater discussion in Congress as part of other needed reforms, such as whether the advanceable, fully refundable child tax credit we had for 2021 should return. That is known to have provided help to many families with income below $150,000.

What do you think?



Sunday, July 24, 2022

Helpful Crypto Taxation Report From Kansas

Kansas state seal with bitcoin picture in middle
This month, the Kansas Legislative Division of Post Audit, a "non-partisan audit arm of the Kansas Legislature, released a very good background report on cryptocurrency and tax issues - Reviewing Issues Related to State Cryptocurrency Tax Policies. The Division's website also has a link to a 16-mimnute audio file that is about the best I have heard on the basics of cryptocurrency tech and tax. I recommend it if you feel you are missing the basics on these topics.

Appendix B is a helpful glossary of terms such as airdrop, blockchain, hard fork and staking.

A few interesting items from the report:

  • 16% of people in the US have invested in or used cryptocurrency (per Pew Research Center).

  • When there is not third party reporting (such as a 1099), only 45% of taxpayers accurately report their income. I have heard this before. Per the IRS (page 14), for income subject to substantial information reporting and withholding, there is only about 1% underreporting. In contrast, for income subject to little or no information reporting and no withholding, compliance is only about 55% (45% non-compliance).

    So if you wonder why IRC §6045 on broker reporting was expanded by the Infrastructure Investment and Jobs Act (PL 117-58, 11/15/21) to include virtual currency sales by exchanges (and perhaps by others), that the underreporting of transactions without third party reporting, is the key reason.

  • "State governments have yet to agree on a set of best practices regarding the taxation of cryptocurrencies." There are no uniform laws. There have been a good number of legislative proposals (tax and non-tax) including per the NCSL, 43 bills in 22 states since 2015.
Some of the open issues in most states regarding cryptocurrency include:
  • For states that subject digital goods and electronic transmissions to sales tax, are cryptocurrency and non-fungible token (NFT) transactions subject to sales tax. Recently, Pennsylvania confirmed that NFTs are subject to sales tax.
  • How does a business source income and gains from virtual currency?
  • How do unclaimed property laws apply to cryptocurrency and other digital assets?
At the virtual currency and blockchain website I maintain, search for "state information" and you'll see a long list of various rulings and legislation in states regarding cryptocurrency.

What do you think?  Any particular guidance you are waiting for on cryptocurrency from a state?

Sunday, July 10, 2022

Why Exclude Some Low Income Individuals From New California Families Tax Refund?

FTB information on the credit

California  AB 192 (Chapter 5, 6/30/22) adds a few tax provisions including the Better for Families Tax Refund. This will provide a one-time rebate to most California taxpayers other than those with 2020 Adjusted Gross Income (AGI) above $500,000 and individuals with income so low they were not required to file a 2020 return and did not do so.  That is an odd group - highest income and lowest income, to exclude from this rebate which can be as high as $1,050 and as low as $200 depending on 2020 income and whether the taxpayer had a dependent in 2020.

The purpose of the tax refund/credit is to address financial challenges caused by COVID-19, inflation and increasing costs for gas, food and other necessities. (Per Assembly Analysis of 6/26/22.)

The qualifications for the credit:  [also see FTB website (FTB calls this a Middle Class Tax Refund*)]

        Filed 2020 return by 10/15/21

        Meet California AGI limits (see tables below)

        California resident for six or more months of 2020

        Not eligible to be claimed as dependent by someone in 2020

        Be California resident when refund is paid

The refunds are to be issued from late October 2022 to mid-January 2023.

CA AGI on 2020 Return

Refund with Dependent

Refund w/o Dependent

MFJ

HH

MFJ

HH

 

$150,000 or less

$1050

$700

$700

$350

 

$150,001 to $250,000

$750

$500

$500

$250

 

$250,000 to $500,000

$600

$400

$400

$200

 


CA AGI on 2020 Return

Refund with Dependent

Refund w/o Dependent

Other individuals

Other individuals

$75,000 or less

$700

$350

$75,001 to $125,000

$500

$250

$125,000 to $250,000

$400

$200

The reason why some low income individuals will not get a refund even though they could benefit from this refundable credit for the reasons given and even more so than people with income high enough to have had a 2020 filing obligation is that the individual had to have filed a 2020 California return by October 15, 2021 (the extended due date). Well, AB 192 was signed on June 30, 2022 so it is too late to file for 2020.

Last year, legislation was enacted to provide Golden State Stimulus payments I and II to low-income individuals. One of the requirements was that the individual have filed a 2020 return by October 15, 2021. But, SB 88 (Chapter 8, 2/23/21) and SB 139 (Chapter 71, 7/12/21) that provided GSS I and II were enacted before that date so people still had time to file a 2020 return even though not otherwise required to file.

Perhaps lawmakers figure all individuals who had no requirement to file for 2020 did so by 10/15/21 to get the GSS I and II so will also get this new Families Tax Refund, but there likely are some individuals who did not do so.

BUT - what is the reason to make someone without a filing obligation file a return? This can be confusing to many individuals because the FTB website on who needs to file states that if your income is below a certain level, you don't have to file.  This is a valid message (other than these bills requiring filing to get a special credit for low-income individuals).

The American Rescue Plan Act (PL 117-2, 3/11/21) included the higher fully refundable and advanceable child tax credit, just for 2021. This was available to individuals with children and income below the filing threshold (because fully refundable). The IRS made great efforts to reach these folks to be sure they could get their refundable 2021 CTC.

Yes, that is a lot of work. But wouldn't the following be a better approach for the credit:

Allow those without a filing obligation for 2020 to file an abbreviated tax return for 2020 by October 15, 2022. Or set up a toll-free number to allow individuals to call and provide the verification they need assuming it can be verified via some tax document (such as a 1099-R or Social Security benefits statement or W-2). 

What do you think?

*I think the FTB should change the name of its AB 192 website from Middle Class Tax Refund to Better for Families Credit. This credit is available to individuals with AGI up to $500,000 (MFJ). That is less than 2% of individuals and arguably, is not the middle class.  An Assembly Analysis of AB 192 of 6/26/22 refers to payments to low-income and middle-income Californians, but that is also a stretch as it makes 98% of individuals fall into low-income or middle-income categories.  

What is the income range for middle class?  Perhaps it is up to $500,000 for MFJ given the tremendous income gap in the top 1% from $500,000 to $500 million or more.

What do you think about that?

Monday, July 4, 2022

Arizona HB 2204 proposes unusual tax breaks for crypto

The Arizona House and Senate approved HB 2204 and sent it to the governor on June 29. This bill adds new reductions to Arizona gross income for the value of virtual currency and non-fungible tokens (NFTs) received from an airdrop. Apparently though any future appreciation would not be subtracted from gross income. While not clear, I assume these tax-free airdrops will have zero basis for Arizona and a gain when disposed of.

In addition, gas fees not already added to the taxpayer's basis in virtual currency or NFT is also a subtraction from gross income. I'm not clear what this means for basis.

HB 2204 includes definitions for gas fee, NFT and virtual currency. The virtual currency one matches the IRS definition in Rev. Rul. 2019-24 on hard forks - "s a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency."

These changes, if enacted, would be effective after 12/31/22.

What is the purpose? I assume it is to encourage Arizonians to own virtual currency and hope for an airdrop of virtual currency or an NFT. It seems like an unusual way to encourage ownership of virtual currency particularly given that airdrops are not that common.

While IRS Rev. Rul. 2019-24 deals specifically with hard forks, it refers to hard forks following an airdrop. I think the IRS view of the tax treatment of receiving an airdrop is that once it is available for the taxpayer to access, even if the taxpayer doesn't want to access it, it is included in income at its FMV when received.

So, HB 2204 will create federal-Arizona differences in basis and gross income for owners to track.

If the lawmakers really want to encourage ownership of virtual currency, why don't they:

1) Add a de minimis rule to exclude gains.

2) Give all Arizonians some virtual currency. Or perhaps something like Miami did with MiamiCoin (4/21/22 FastCompany article and Citicoins info).

3) Give a tax break to miners and stakers residing in Arizona.

What do you think?

Addendum (8/4/22) - Thank you to John Schoenecker and Miles Fuller at TaxBit for raising an issue on my comment in the original post (above) on HB 2204 requiring Arizonians to track different basis for federal and Arizona.  I assumed that if the virtual currency or NFT is received tax free, it has a zero basis while it will have a federal basis equal to the revenue reported when received.

But I was thinking with a California perspective. John and Miles pointed out that Arizona follows federal AGI and then only makes additions and subtractions as noted in the statute (HB 2204 adds a new subtraction for the gross income picked up for federal from the airdrop and the gas fee adjustment).  So, if no addition or subtraction is provided for the disposition of the virtual currency seems to be the same gain or loss as for federal. Hopefully the Arizona DOR will clarify HB 2204.

Thanks John and Miles!

I still puzzle as to the purpose of HB 2204 as it applies to very few people unless there is some upcoming activity to provide lots of virtual currency or NFTs to Arizonians (unlikely, but you never know). Some ideas on the purpose:

1. Get some attention in the virtual currency/NFT arena as a tax friendly state.

2. Remove any tax issue on what the value is of the virtual currency or NFT received from an airdrop and exactly when it is income. This is weak though because the recipient still needs to do this for federal purposes.

3. Encourage Congress to enact something similar. Again though, seems weak as Congress has many other items on its agenda and this would be a revenue loser.

Thoughts?



Monday, June 27, 2022

How should a virtual currency exclusion work?

A frequent proposal for taxation of virtual currency is to add an exclusion similar to IRC section 988(e) for gain "by reason of changes in exchange rates after such currency" for personal transactions. This is a simplification measure as not records need to be kept such as when one is traveling and using a foreign currency. It is likely infrequent that the conversion gain exceeds $200.

H.R. 6582 (117th Congress), Virtual Currency Tax Fairness Act of 2022, would add section 139J to not include gain up to $200 due to changes in exchange rates, from disposition of virtual currency in a personal transaction (defined per section 988(e)). [also see rationale from the sponsors]

In contrast, the Responsible Financial Innovation Act, introduced by Senators Lummis and Gillibrand in June includes a different version of section 139J. This version says no gains or losses of $200 or less are recognized from the sale or excahnge of virtual currency in a paersonal transaction for goods and services. If the gain or loss is from an exchange of one virtual currency for another and the gain or loss is $200 or less, this exclusion does not apply. [see page 11 of the bill + see sponsor explanation of the entire bill]

So, which is the better version?

I think it is the Lummis/Gillibrand version.  If the purpose of any exclusion is simiplification, it should apply to gains and losses. Otherwise, the individual needs to track records for transactions to see if a loss was generated to be recognized, defeating simplification. Of course, if the virtual currency is only used for personal transactions without any investment intent, the loss of any amount would not be allowed.

And I think the exclusion should only apply when the virtual currency is used to acquire personal goods and services (as with the Lummis-Gillibrand bill).  If the virtual currency is used to acquire another virtual currency, it likely is for investment and all records of gains and losses need to be kept.

What do you think?