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Monday, September 25, 2023

Tax System Changes Can Help Reduce Poverty

Today I received information from the National Academies on their new report, Reducing Intergenerational Poverty, Sept 2023. It defines "intergenerational poverty," provides demographics of this poverty, describes education and health issues associated with continual poverty, and makes recommendations. 

The introduction reminds us of the relevance of this topic to us all (page 1):

"Capable and responsible adults are the foundation of any well-functioning and prosperous society. Yet low-income families struggle to offer their children the same advantages and necessities that better-off families can offer. As a result, throughout their childhoods children living in families with low incomes face an array of challenges that place them at much higher risk of experiencing poverty in adulthood as compared with other children."

"The costs of perpetuating this cycle of economic disadvantage fall not only on low-income individuals and families themselves, but also on society as a whole. Poverty reduces overall economic output and places increased burdens on the educational, criminal justice, and health care systems. Understanding the causes of intergenerational poverty and implementing programs and policies to reduce it would yield a high payoff for children and for the entire nation."

One of the recommendations is to increase and expand the Earned Income Tax Credit (EITC). Per the researchers: "The strongest direct evidence on the likely intergenerational effects for children is found for programs that increase both family income and parental employment during childhood and adolescence." [page 133]

IRS data reports that in 2020, 26 million filers claimed the EITC with the aggregate credit at $59.2 billion (Table A of Individual Income Tax Returns Complete Report 2020).

Where could the money come from to increase and expand the EITC? We can and should reduce various tax breaks that reduce the tax liability of high income individuals by far more than a taxpayer can currently claim as the EITC. The OMB reports that the "cost" of the exclusion for employer-provided health insurance is $224 billion per year. It is not uncommon for this exclusion to be about $10,000 (or even lots more) for one of the roughly 64% of employees who get this tax break (their employer pays all or a portion of their health insurance premiums). Assuming $10,000 of excluded income, this tax break is worth the following at each individual marginal tax rate as follows (the savings is similar to a tax credit of the amount listed below):

   10%     $1,000 tax savings
   12%     $1,200 tax savings
   22%     $2,200 tax savings
   24%     $2,400 tax savings
   32%     $3,200 tax savings
   35%     $3,500 tax savings
   37%     $3,700 tax savings

The average EITC for a taxpayer claiming it is, per the IRS, $2,043. Thinking of the above tax savings as similar to a tax credit, individuals with $10,000 of employer-provided health insurance who are at a 22% bracket or higher are getting a larger credit than the average EITC claimer.  And this is quite a tax savings because someone in these higher brackets can afford to pay their health insurance without the tax subsidy. Unlike the Premium Tax Credit, there is no income threshold or affordability limitations on claiming the exclusion for employer-provided health insurance (see blog post of 5/14/23).

Even if this one tax break for employer health insurance were cut in half to $112 billion per year, that would enable the EITC on average to be increased by about $4,000.  I note this example just to illustrate that there are tax breaks that can be reduced or eliminated, particularly where they provide a tax break much larger than a typical ETIC, but to people with far greater means for whom the tax break doesn't make a life-changing difference where it would improve the life of a low-income worker and improve economic conditions and living standards in the U.S. for everyone. There are over 100 other tax breaks that could be reduced, particularly where they provide significant subsidies and tax breaks to higher income individuals, whose well-being and that of our society is not improved much by them due to their income levels.

So, why don't we reduce some tax expenditures and use the funds in ways that will truly help people who need the assistance more and will benefit our society and economy as a whole?

What do you think?

Sunday, September 3, 2023

Tax Reform Hearings of 118th and Prior Congresses

clip from hearing video that says "Ways & Means will begin shortly"

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 -

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?

Sunday, August 27, 2023

Modernize 1970s Definition of "Tax Shelter" to Help Small Businesses

an umbrella over the word "tax"

Here is another suggestion from the testimony I submitted for the written record of a Senate Finance Committee and Small Business and Entrepreneurship Committee roundtable held 6/7/23 (see links at my 8/13/23 post).

This one has also been suggested by the AICPA including in letters I signed when chairing the AICPA Tax Executive Committee a few years ago, so it has been around for awhile.  It would be a terrific simplification because I think that since the Tax Reform Act of 1986 stated that a tax shelter as defined under IRC Section 448 must use the accrual method regardless of gross receipts level, I think this is likely one of the most overlooked provisions in the law. The additional accounting method simplification added by the TCJA of 2017 further highlighted that a "tax shelter" can't use the favorable methods.

The simplification recommendation:

One way an entity might be a “tax shelter” is meeting the definition of a syndicate as defined at IRC Section 1256(e). This definition pre-dates state law changes that allow the LLC business entity. A business that meets the definition of a “tax shelter” will not be allowed to use simpler accounting methods but instead will be required to use the accrual method, inventory accounting rules, and the uniform capitalization rules of IRC Section 263A.

Today, a small business might be formed as an LLC with financing provided by some owners who will not be involved in running the business. If over 35% of losses are allocated to limited entrepreneurs (inactive owners), the entity is a tax shelter even though it is running a real business (and might just have start-up losses or some bad years). The definition needs to be modernized such as to only be defined as a tax shelter per IRC Section 6662(d) (having a significant purpose of tax avoidance or evasion).

What do you think?

Sunday, August 13, 2023

Simplify and modernize by removing exclusive use for a home office deduction

desk and accessories

Yet more from the testimony I submitted for the written record of a Senate Finance Committee and Small Business and Entrepreneurship Committee roundtable held June 7, 2023 (see my posts of 7/9/23 and 7/2/23 and 6/25/23). Another way to simplify tax rules for small businesses (such as ones operating out of the owner's home) and modernize tax rules is to remove the exclusive use requirement for the home office deduction.

Modern life makes it unlikely that anyone uses a home office only for business activities. Most people, for example, have a smartphone in their hands and might get a personal call or text message or use a weather app while in their home office.

An alternative would be to allow a home office deduction only if the space is used over 50% for business and to reduce the deduction based on the percentage of personal use of the space, such as based on time. Offering a standard home office deduction, such as allowed by Rev. Proc. 2013-13, would be helpful, with the amount adjusted annually for inflation (and no exclusive use requirement, but adjusting the standard deduction for the percent of personal versus business use of the space based on an average week of use). 

What do you think?

Sunday, July 30, 2023

Reminder on Resources for Tax Answers

cover of IRS Publication 936

A Tax Court Summary Opinion of June 26 on the mortgage interest deduction for 2019 when the taxpayer's aggregate mortgage debt on their principal and second homes exceeded the debt limit included a subtle reminder about the role of IRS publications to support positions taken on tax returns. [McNamara, TC Summary Opinion 2023-22 (6/26/23)]

The taxpayer's second home was only owned for 5 months of the year but in calculating the allowable mortgage interest deduction, performed the calculation as if owned 12 months. The taxpayer said they relied on IRS Publication 936, Home Mortgage Interest Deduction. The court relied on IRC Section 163(h) and related regulations, which it found "unambiguous" in determining the deduction as the IRS determined. 

In noting that reliance on the IRS publication was "misguided," the court added: See Miller, 114 TC 184, 195 (2000) which explains "that administrative guidance is not binding on the Court when the plain meaning of a statute is clear." But the court did not include the quote on page 195 of that case. Here is is:

"Well-established precedent confirms that taxpayers rely on such publications at their peril. Administrative guidance contained in IRS publications is not binding on the Government, nor can it change the plain meaning of tax statutes."

A few observations and reminders about what can be relied upon to take a position on a return:

  • IRS Publications, as well as tax forms and instructions, are not intended to be binding tax law interpretations or rules. They exist to help taxpayers better understand the law and comply with it. However, they might not present all possible rules and scenarios. Binding guidance is the IRC, regulations, and court cases (other than TC Summary Opinions which are not legally treated as precedent).

  • Why did the Tax Court use the term "administrative guidance" in referring to a publication? I think it is because the word "guidance" is commonly used (and misused).  Personally, I prefer to use the term "IRS information" when referring to non-binding items from the IRS such as publications, websites and FAQs (unless the FAQs were released as an Information Release (IR) and Fact Sheet). A better use of "administrative guidance" would have been for anything published in the weekly Internal Revenue Bulletin (IRB) such as regulations, revenue rulings, revenue procedures, notices, and announcements. While only final and temporary regulations are binding on taxpayers and the courts, taxpayers need to be aware of all items in the IRB and if they decide anything is incorrect and they don't plan to follow it, they should have a strong argument and likely it is a good idea to include a Disclosure Statement with the return (Form 8275 or 8275-R).
So, should we read IRS publications? Yes, I think they are helpful in providing an overview to the law in the area covered by the publication. We need to bear in mind though that they are not precedential (for example, you can't take a position per page 7 of Pub. X), and they likely are not covering all of the law in a particular area so research in binding guidance is needed.

Perhaps all items from the IRS should state in a common place among documents whether the item is:
  1. Binding guidance to avoid a penalty such as under Section 6662 or 6694 that can be relied on for taking a position on a return (after weighing all relevant binding guidance).
  2. Binding guidance to avoid a penalty but not precedential for the taxpayer such as a PLR or TC Summary Opinion. For example, the taxpayer can't say they are taking a position per PLR XXXX (unless it was issued to them).
  3. Non-binding information from the IRS

What do you think?