filing-status

Robert D Flach, the internet’s “Wandering Tax Pro“, writes:

If I ruled the world, or at least had a voice in rewriting the Tax Code, not only would every man be as free as a bird and every voice be a voice to be heard, but I would also make the following changes to our current convoluted tax system to remove some of the its “inequities” –

1) First and foremost I repeal the dreaded Alternative Minimum Tax (AMT).

2) I would do away with “refundable” tax credits, such as the ones for Earned Income Credit and the Child Tax Credit. Refundable tax credits breed tax fraud. I would take a long, hard look at the Earned Income Credit, which is really a welfare program.

3) I would do away altogether with the “marriage tax penalty” by making the filing status “Married Filing Separately” equal in every way to that of “Single”. No longer would any tax benefits be unavailable to married taxpayers choosing to file separately – and the Tax Rate Schedule (and corresponding Tax Tables) for MFS would be the same as the one for Single. The filing status would be renamed “Married, But Filing as Single”. I would probably also reduce somewhat the “marriage tax benefit” so that the Tax Rate Schedule for MFJ is closer to that of Head of Household.

A couple choosing to file separately would be able to file a “2-column” Form 1040 (or 1040A) – so that they could report their individual items of income, deduction and credit separately, but end up with one net refund or balance due amount. This is similar to the way I remember the New York State income tax return to be when I first started out in the business.

4) I would allow taxpayers to “carry back” as well as “carry forward” net capital losses in excess of the annual maximum deduction (which would now be annually adjusted for inflation) to apply against gains in prior years. I would probably have a three-year carry back period.

This idea came about because many of my clients had reported and paid a substantial amount of federal, and state, income tax on six-figure capital gains, most short-term, in 1999 and 2000, but when everything turned around in 2001 and 2002 they had six-figure capital losses. The bottom line was that over a 2 or 3 year period of investment activity they had a net capital gain of about “0”. But they had been highly taxed in the years they had gains – and were only able to deduct a maximum of $3,000 in the years they had losses, with the excess loss “carried forward”. Unless these taxpayers would have a big score in future years they would never be able to fully claim all of the losses in their lifetime. This same situation occurred again in 2007 and 2008.

5) I would make all items of deduction indexed annually for inflation. If we are going to index some items we should index them all. I believe the $25 limit on business gifts has remained unchanged for as long as I have been doing taxes – over 37 years – and the $3,000 limit on deductible net capital losses has been the same for decades.

6) One current inequity in the Tax Code is that a person who wins a legal settlement, award or judgment, except in the case of a claim for unlawful discrimination, must report the gross amount as income on Page 1 of the 1040, which increases AGI and adversely affects a multitude of deductions and credits, and deduct the associated legal costs as a miscellaneous itemized deduction subject to the 2% of AGI reduction. In these cases a person could be awarded $300,000 but only end up “in pocket” $100,000-$150,000 after the lawyer takes his chunk.

In the case of claims for unlawful discrimination the associated legal fees and court costs are allowed as an “above-the-line” adjustment to income, so that the AGI properly reflects the true economic reality. I would allow the same adjustment to income for the corresponding costs of all settlements, awards and judgments.

7) I would permanently remove all of the income and “employer plan covered” restrictions on deductible IRA contributions and ROTH IRA contributions.

8) I would do away with the deduction for depreciation of real property. I discussed this idea in detail in my post “HYPERLINK “http://wanderingtaxpro.blogspot.com/2007/11/here-is-something-to-think-about.html” Here Is Something to Think About” { HYPERLINK “http://wanderingtaxpro.blogspot.com/2007/11/here-is-something-to-think-about.html” http://wanderingtaxpro.blogspot.com/2007/11/here-is-something-to-think-about.html} at THE WANDERING TAX PRO.

9) One minor item that irks me is that the standard mileage allowance deduction for using your car for doing volunteer or charity work is not set by the IRS along the same lines as the SMA for business, medical and moving use – but is set by Congress. Except for a temporary increase a few years ago restricted to driving related to Hurricane Katrina relief, this number, currently only 14 cents per mile, has not been raised in years. It should be the same as the allowance for medical and moving travel.

10) I would call for re-establishing something similar to George W’s “President’s Advisory Panel on Tax Reform” to carefully review all options. I would have them report their findings directly to Congress, and would take their findings seriously.

And that is only the beginning!

Oh well – I can dream, can’t I?

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