fix the tax code friday


As Congress gets to work on a second stimulus package, there have been a number of suggestions for how to kick start the economy.

Some ideas that have been made public include extending unemployment benefits, adding a second stimulus check, payroll tax cuts, expanding business loans (like the PPP), and a vacation tax credit to encourage taxpayers to travel. Some of those proposals have been met with enthusiasm, while others have been panned.

So, I’m going to the source: taxpayers. What do you want to see?

Earlier this week, I reported that Treasury Secretary Steven Mnuchin was still considering extending the tax season. Reactions to this idea were mixed. So, for today’s Fix The Tax Code Friday question, I want to know your opinion:

Earlier this week, the House introduced the Health and Economic Recovery Omnibus Emergency Solutions Act, or HEROES Act (you can read my summary here). Included in the bill were corrections to the CARES Act and an additional round of stimulus checks. It’s a controversial bill with some saying that the timing isn’t right.

That brings us to today’s Fix The Tax Code Friday question:

Is it time for a second round of stimulus checks?

(If you voted earlier, my apologies. The poll plugin broke the site! So, we’re going old school and you can sound off in the comments!)

It’s Fix the Tax Code Friday! Charitable deductions have been limited to taxpayers who itemize their deductions rather than claim the standard deduction. With the doubling of the standard deduction under the Taxpayers Cuts and Jobs Act, fewer taxpayers itemize their deduction. That means that fewer taxpayers have a tax incentive to make a charitable donation.

Earlier this year, I reported that the total number of taxpayers claiming the charitable donation deduction has dropped. For some organizations, that can – but does not necessarily – result in a dip in donations.

Some taxpayers have called for the deduction to be extended to apply to all taxpayers in the form of an above-the-line deduction (meaning that you don’t have to itemize to claim the deduction). Others argue that charitable donations should be made out of generosity alone and that tax incentives aren’t necessary.

That leads to this week’s question:

Should Congress extend the deduction for charitable donations to non-itemizers, and make it an above-the-line deduction (like the student loan interest deduction)?

For more than 100 years, the Tax Code has allowed taxpayers to claim a personal exemption on their tax return. For federal income tax purposes, the exemption is treated as a deduction meaning that you can deduct the personal exemption amount from taxable income before you calculate the tax due. This was true even if you claimed the standard deduction on your tax return.

In 2017, a taxpayer could claim a personal exemption worth $4,050 for himself or herself, as well as the taxpayer’s spouse and dependents. Phaseouts applied, reducing the exemption amount by 2% for each $2,500 that a taxpayer’s adjusted gross income exceeded $261,500 for single taxpayers or $313,800 for married taxpayers filing jointly. You can see the 2017 numbers here.

As part of theTax Cuts and Jobs Act of 2017 (TCJA), the personal exemption was effectively eliminated by setting the amount to zero. To offset the loss of the exemption, the standard deduction amount has been doubled and the child tax credit has been expanded (more here). The change was part of an effort to make filing more simple.

This is not a permanent change. By statute, most individual provisions in the TCJA, like the repeal of the personal exemption amount, expire at the end of 2025.

That brings us to today’s Fix The Tax Code Friday question:

Should Congress set the personal exemption amount to zero permanently?

A quick note in case you’re new here: This is meant to be a discussion. While reasonable minds can differ, I ask that you keep your comments civil, on topic and clean. You can read more about my comment policy here.

It’s Fix The Tax Code Friday!
Earlier this week, President Trump released his budget blueprint. As part of the proposal, President Trump suggested cutting the Internal Revenue Service (IRS) budget by $239 million. The proposal also included job cuts for the agency.
(More on the proposal here.)
The call for more job cuts at IRS was a surprise considering that Trump’s Secretary of the Treasury Mnuchin said in January that he would prioritize increasing IRS staff. Mnuchin seemed to think that the President would be on board at the time, saying, “I can assure you that the president-elect understands the concept of ‘we add people, we make money.’ That’s a very quick conversation with Donald Trump.”
Critics say the IRS is too big and bloated but Congress doesn’t seem inclined to reduce their workload, adding several new responsibilities over the past few years. However, Congress has consistently cut the IRS budget: the budget for the last fiscal year was $900 million less than its budget for the fiscal year 2011.
Two years ago, Taxpayer Advocate Nina Olson put concern that IRS does not have the resources to adequately serve taxpayers (or, as it appeared in her report, “Taxpayer Service Has Reached Unacceptably Low Levels and Is Getting Worse, Creating Compliance Barriers and Significant Inconvenience for Millions of Taxpayers”) at the top of her list of the most serious problems encountered by taxpayers. That report was delivered to Congress in 2015: funding for the agency was slashed again that year. For 2017, Olson again lamented that the IRS remains unable to meet basic taxpayer needs. She noted that a more simple Tax Code – and less burdensome compliance requirements – would make things much easier. Realistically, that’s not probably not going to happen any time soon.
That, of course, brings us to today’s Fix The Tax Code Friday question:

Assuming that the IRS isn’t going anywhere, do you think that funding for IRS should be cut?

It’s Fix The Tax Code Friday!
As the Republican-crafted proposal to repeal and replace Obamacare makes it way through the House, one of the key pieces that has tongues wagging is a new, refundable tax credit. The tax credit is intended to replace the current premium tax credit.
Here’s how it would work. Those folks who do not receive health care insurance from an employer or from the government (think Medicaid) would be eligible for the credit. The purpose of the refundable credit, of course, is to offset the cost of buying healthcare insurance on your own.
The amount of credit you might qualify for under the proposal varies by age as follows:

  • Younger than 30: $2,000
  • Age 30 to 39: $2,500
  • Age 40 to 49: $3,000
  • Age 50 to 59: $3,500
  • Older than 60: $4,000

The credit is capped per family (not per person) at $14,000. Phaseouts apply when income exceeds $75,000 for individuals ($150,000 for married couples). Under the proposal, you would lose $100 in credit for each $1,000 in income higher than those thresholds.
So, for example, a 25-year-old single person making $75,000 should qualify for the full $2,000 in refundable tax credit. A 25 year old single person making $85,000 should qualify for $1,000 in refundable tax credit ($2,000 less (10 x $100) = $1,000). A 25 year old single person making $105,000 would not qualify for the credit ($2,000 less (30 x $100) = less than 0).
(For more on the full health care proposal, check out this prior story.)
President Trump supports the use of the health care tax credit, saying in his joint address to Congress, “We should help Americans purchase their own coverage, through the use of tax credits and expanded health savings accounts — but it must be the plan they want, not the plan forced on them by the government.”

(You can read more about the joint address to Congress in our live blog coverage with annotations here.)
However, many conservatives oppose the tax credit on two principles:

  1. Refundable tax credits are notorious draws for fraud; and
  2. Many see no real difference between these tax credit and the subsidies under Obamacare (both, they argue are government entitlement programs).

The differences within the Republican party will, no doubt, be a central theme as the health care proposal goes to the House floor.
That, of course, brings us to today’s Fix The Tax Code Friday question:

Do you support the use of a new, refundable tax credit as a replacement for the current premium tax credit?

It’s Fix The Tax Code Friday!

How simple do you want your tax return to be? Taxpayers claim they want simple all of the time. Some love the idea touted by House Ways and Means Committee Chair Kevin Brady (R-TX) of making taxes so simple they could be filed on a postcard. Still others find President Trump’s plan to make the Tax Code so simple it would “put H&R Block out of business” appealing.

The problem with many of the plans to simplify taxes, of course, is that cutting through the Tax Code can also mean cutting tax breaks. And while taxpayers may like this idea in theory, it doesn’t always translate into support. In 2015, then-presidential hopeful (now Secretary of the Department of Housing and Urban Development) Dr. Ben Carson found this out the hard way when proposed completely eliminating tax deductions, including the charitable deduction. To offset the loss, he proposed a tax rate reduction.

It wasn’t a new suggestion. For years, Congress has recognized that the easiest way to scale back the Tax Code is to just start cutting. But where? And how much? As film director Martin Scorsese has said, “There’s no such thing as simple. Simple is hard.”

As Congress debates tax reform, the idea of limiting or eliminating certain tax deductions has been tossed around yet again. Two popular deductions, the home mortgage interest deduction and the charitable donation deduction, are considered so sacred that they are rarely touched. However, a Republican proposal to cap deductions would affect those deductions – just not directly. Politically, that’s a lot more palatable. But is it smart fiscal policy?

The Tax Foundation reported that the deduction for charitable contributions cost the federal government $58 billion in lost revenue in 2016. The Foundation also reported that “eliminating the charitable deduction would decrease the size of the economy by 0.09 percent due to the resulting higher tax burden.” The upside? “[T]he economy would grow by 0.79 percent if the revenues from eliminating the charitable deduction were used to cut the income tax rate.”

Statistically, about one in three taxpayers currently itemize their deductions on a Schedule A. That number is expected to drop to about one in six taxpayers under the tax reform proposal put forth by the Republicans in Congress. A decrease in the numbers of taxpayers who are in a position to itemize deductions could impact incentives to donate to charity, the same end result, some argue, as eliminating the charitable deduction altogether.

That, of course, brings us to today’s Fix The Tax Code Friday question:

Should we limit or eliminate the charitable deduction?

It’s Fix The Tax Code Friday!
Tax reform continues to make the news. This week, at the Conservative Political Action Conference (CPAC), President Trump reiterated his promise to “massively lower taxes on the middle class.” How that’s going to happen is still up for debate. What may be more likely, however, is the elimination of a tax, as described recently a Tax Analysts post on Forbes, that “almost no one pays.” That tax is the federal estate tax.
The federal estate tax is a tax on estate assets over the exemption amount. For 2017, that exemption amount is $5.49 million per individual or, with portability, $10.98 million per married couple. Even then, there are estate tax planning techniques that can easily shift millions more dollars to future generations either tax-free or tax-deferred (trust me on this: I cut my teeth as an estates attorney). Those kinds of numbers mean that the tax tends to be paid by the ultra-rich.
In 2015, there were 2,626,418 deaths in the United States. According to the Internal Revenue Service (IRS), 11,917 federal estate tax returns were filed in 2015 (at that time, the estate tax exemption was $5.43 million). That works out to .45% of all decedents or less than 1/2 of 1%. Of those, 4,918 federal estate tax returns were taxable (6,999 were nontaxable returns). That brings the percentage of taxable estates for 2015 to .18% or less than 1/4 of 1%.
(In case you’re curious, the states reporting the most estate tax returns were – in order – California, Florida, New York, Texas, and Illinois.)
Despite the relatively low numbers of taxpayers affected by the federal estate tax, it remains highly unpopular. Efforts to repeal the tax have been introduced every year, but the quandary has been: how do you replace the revenue? One suggestion making the rounds (again) is to repeal the estate tax and replace the “step-up” in basis with capital gains tax. Why? Assets that pass at death get a “step-up” in basis to the date of death value which means that the appreciation to the date of death is not taxed.
Here’s a quick example:

  • Let’s say you bought $1,000,000 worth of Apple stock which, at your death, is worth $5,000,000.
  • If you had sold that stock just before death, you would have paid capital gains tax on the $4,000,000 worth of appreciation ($5,000,000 – $1,000,000 = $4,000,000).
  • If you die holding the stock, you would not have paid capital gains tax on the appreciation and your beneficiaries get to carry the asset with a new stepped-up basis of $5,000,000.

That’s what the current scheme looks like.
If you eliminate the federal estate tax and retain the full “step-up” in basis for all assets, those assets would get a double pass – no federal estate tax and no capital gains tax. While that sounds appealing, from a revenue collection standpoint, it’s not a winner. That’s why most serious plans to eliminate the federal estate tax (a la the 2011 “repeal”) include some kind of adjustment to the current capital gains tax scheme.
It’s a tricky concept. Eliminate the estate tax full stop? Eliminate and replace with a capital gains tax scheme? Or leave it alone?
That, of course, brings us to today’s Fix The Tax Code Friday question:

Should we eliminate the federal estate tax?

It’s Fix The Tax Code Friday!

Tax reform is front and center these days in the minds of many taxpayers. But what tax reform might look like is still a big question. Should it be a simple rate change? Eliminate tax credits and deductions? Or somewhere in the middle?

One proposal involves limiting rather than eliminating tax deductions. To limit deductions, instead of cutting the charitable deduction or the home mortgage interest deduction, a flat dollar amount would be imposed. If that sounds familiar, it is: the idea of capping deductions has been pitched by a number of candidates over the years, including former presidential hopeful Mitt Romney, who suggested a cap of $25,000. A 2014 study of the issue prepared for Congress noted that “proposals on the exact value of a flat-cap have varied from $17,000 to $50,000 per joint tax filing unit.” That same study found that a $17,000 cap would affect 71% of taxpayers who itemize while a $50,000 cap would affect taxpayers with incomes above $250,000, approximately 6% of all taxpayers who itemize.

(You can read the study, which downloads as a pdf, here.)

Currently, approximately two-thirds of all taxpayers claim the standard deduction. You tend to itemize your deductions if the total of your deductions exceeds the standard deduction. For the current tax year, the standard deduction for single taxpayers and married couples filing separately is $6,350 in 2017; for married couples filing jointly, the standard deduction is $12,700.

Another option would be to cap itemized deductions by a percentage of adjusted gross income (AGI). That feels like it might be more “fair” result (feel free to decide what you think that means) – but clearly, less simple.

The idea, no matter how it is capped, is to limit the amount of available deductions for taxpayers. The result, of course, without any further adjustments would be higher taxes for some taxpayers. That’s why the proposal in its various iterations tends to be tied directly to lower tax rates.

That, of course, brings us to today’s Fix The Tax Code Friday question:

Would you support a limit on itemized deductions in exchange for lower tax rates?