annette nellen | TaxConnections

17 May 2023

Professor Annette Nellen Discusses Inequities In The Tax System

Today marks the 16th year after I started this blog in 2007 while I was a fellow with the New America Foundation. My goal with this blog continues to be to analyze proposals and discuss ideas for helping our tax system to reflect how we live and do business today and to meet principles of good tax policy.
There are many inequities in our tax system such as special tax deductions, exclusions and exemptions that provide a larger benefit to higher income taxpayers relative to others. Examples include the mortgage interest deduction, exclusion of gains that exist at death, and the exclusion of employer-provided health insurance subsidies.

I think many of these exist because the vast majority of people don’t understand how they work. Tax literacy is low in the U.S. because we don’t teach about taxes in K-12 and even in college, accounting majors are likely the only ones to take a tax course. And tax and budget policy should be taught along with basics of how taxes work.

Today, let’s look at how the government, via our tax law, provides tax breaks for health insurance. The largest and more favorable tax benefit for obtaining health insurance is the exclusion for employer-provided health insurance. According to OMB and Treasury, the annual cost of this tax break (cost as in tax revenue not collected) is $237 billion for FY2024 (Table 3). At least 57% of individuals get health insurance from an employer. CBO estimates that 58% of employees under age 65 (156 million people) have health insurance from their employer or a family member’s employer.

This health insurance subsidy for employees is very favorable for many reasons:

Written by Annette Nellen | Posted in Tax System Inequities

11 Jun 2018

Tax Cuts And Jobs Act – Professor Annette Nellen Highlights Changes In Tax Legislation On Existing Tax Code

Tax Reform – A Few Provisions In Track Changes

I often find it helpful to see how tax legislation changes existing Internal Revenue Code sections. So, I took a few and made the modifications called for in P.L. 115-97 (12/22/17) (the Tax Cuts and Jobs Act), and show how they change the relevant Code section using track changes. I also include the effective date information. For the changes to 448, I also include a caution about how the favorable methods changes don’t apply to “tax shelters” which could include some limited partnerships and LLCs even though they don’t act like a typical tax shelter.

Here are the ones I modified:

Section 1 – tax rates including kiddie tax change

Section 62 – changes to AGI

Section 163 – changes to mortgage interest and the new interest limitation for non-small entities (and tax shelters – see comment above)

Written by Annette Nellen | Posted in Tax Refund

21 Sep 2016

TaxConnections Worldwide Tax Blogs Honors Annette Nellen

Every week, until the end of the year, we will be celebrating one of our top writers on TaxConnections.

This week we are honoring Annette Nellen.

Written by Kat Jennings | Posted in Tax Education • TaxConnections

02 Nov 2021

Professor Nellen On Tax Reform: Certain Tax Increases And Fixes Needed For Equity And Fairness

Tax reform discussions in Congress for the week of October 17 have included possibly not including tax increases. Are taxes too high already? Perhaps. But they are also quite uneven in their application. Here are a few examples:

Vastly different rates exist for capital gain versus ordinary income for very high income individuals. A wage earner with over $400,000 of earned income will enter a 37% marginal rate today (39.6% after 2025). In contrast, a person with capital gain and dividend income will be in a marginal rate of 23.8%. This is a frequent question I get from both students and practitioners – why are capital gains taxed lower than ordinary income. There are reasons, but I don’t think it supports a difference once income passes the $500,000 level.* Tax it all the same after some high level such as $400,000 or more. And that high income wage earner will have 2.9% Medicare tax on income above $147,000 (figure for 2022) and an additional 0.9% on income above $200,000 ($250,000 if MFJ). So a capital gain rate of 37% (or 39.6% once AGI exceeds $1 million as President Biden proposes (see page 8 of this table)), causes the high wage earner and high capital gain recipient to both be at a marginal rate of 43.4%. Note that I am only talking about very high income individuals (less than half of the top 1% of individuals). Read More

Written by Annette Nellen | Posted in Capital Gains Tax V. Ordinary Income

25 Apr 2024

Learn IRS Site Publications On Tax Credits That Are Not Easy To Find

Earth Day was April 22, 2024, TaxConnections takes responsibility for the delay in publishing..oops! Professor Annette Nellen at San Jose State University published this post originally on her 21st Century Taxation blog site. She starts the post with this statement:

Earth Day started in 1970 and one of the co-founders was Gaylord Nelson, who served as a Senator from and Governor of Wisconsin. He was also an alum of San Jose State University.

How about some individual tax credits to help reduce fossil fuel use? The Inflation Reduction Act of 2022 added a used clean vehicle tax credit and modified credits for new clean vehicles and residential improvements. See this 8/21/22 post for some information on the IRA and track changes to IRC Sections 25C, 25D, 25E, and 30D to learn more about these changes.

A helpful item I’ll share here are some IRS publications on these credits that are difficult to find (they are not listed at the main IRS websites for each of these credits, which I have linked below).

Section 25C, Energy Efficient Home Improvement Credit AND Section 25D, Residential Clean Energy – Publication 5797. This has a brief summary of each credit and a QR code to get more information. Also see main IRS website on these credits.

Section 30D, Clean Vehicle Credit – Publication 5866, which is a helpful checklist of qualifications.

Section 25E, Previously-Owned Clean Vehicles – Publication 5866-A, also a helpful checklist of qualifications.

Also see the main IRS website on clean vehicle credits (new and used).

And a publication on each of the energy credits for individuals – Publication 5886-A.

Finally, an Earth Day reminder from the Social Security Administration – Opt Out of Paper Notices.

Your commentary is appreciated below. Post contributed by Professor Annette Nellen, San Jose State University. San Jose State University has a great tax program.

Written by Annette Nellen | Posted in IRS Publications On Tax Credits

04 Apr 2024

Taxes And The Olympics

On March 1, the Commission on the State of U.S. Olympics & Paralympics issued a report: Passing the Torch – Modernizing Olympic, Paralympic, & Grassroots Sports in America. Per the announcement, this commission was directed by Congress to study recent reforms of the U.S. Olympic and Paralympic Committee to improve the organization’s “ability to fulfill its mission.”

The word “tax” appears 39 times in the report. Tax law changes suggested:

Page 17 – allow taxpayers to deduct the costs for their children to participate in youth sports.

Page 18 – allow taxpayers serving as volunteer coaches for youth sports to deduct out-of-pocket expenses.

Page 18 – to help support youth and grassroots sports, consider new revenue sources such as from an excise tax on legal sports betting and a voluntary checkbox on income tax forms for donations

The report notes the 2016 tax law change to add an exclusion from income for the value of the metal in gold and silver prize medals and bonuses winners receive (unless the taxpayer has AGI determined with the value of Olympic winnings above $1 million – IRC §74(d))

Written by Annette Nellen | Posted in Taxes And The Olympics

20 Mar 2024

American Opportunity Tax Credit Issues

Over the years, I have heard individuals and tax professionals raise various questions on the operation of the American Opportunity Tax Credit (AOTC at IRC 25A). This is the credit that for the past many years provides up to a $2,500 credit for each of the first four years of higher education at a college or university. It started in the early 1990s as the Hope Scholarship credit for a lower amount and only the first two years of college.

There are numerous other tax breaks for higher education including an exclusion for scholarships, a limited above-the-line deduction for student loan interest, the Lifetime Learning Credit, an exclusion for interest on education savings bonds, 529 accounts, and more.

Some of the issues I have heard for the AOTC include:

Do years at a community college count as part of the four years? I believe they do, but what if the student isn’t, at least at first, pursuing a degree?
What are all of the expenses that qualify?
What if the 1098-T received (and required to claim the credit) is incorrect in terms of the year or amount?
Why does it only cover college or university programs rather than also trade schools and similar?

I’m working on a paper of these and a few other administrative and legislative issues about the AOTC. If you have questions or issues you’ve encountered or wondered about, I would greatly appreciate you posting them in a comment here. Thank you!

Written by Annette Nellen, Professor San Jose State University

Written by Annette Nellen | Posted in TaxConnections

16 Feb 2024

Important Effective Date Item In Preamble To Digital Asset Broker Reporting Prop. Regs

The proposed regulations on broker reporting of digital assets released August 29, 2023 (REG-122793-19) included more than guidance under IRC section 6045. They also included related proposed regulations under section 1001 on amount realized and section 1012 on basis. I think that generally, the 1001 and 1012 proposed regulations are fairly straightforward and tie to the general rules at these provisions.

One clarification they offer is that in a transaction where a taxpayer exchanges, for example, X coin for Y coin and pays a transaction fee, 50% of the transaction fee is treated as a reduction to the amount realized for the disposition of X coin and 50% is added to the basis of the Y coin acquired.

Unlike the virtual currency FAQs #39 – #41, Prop. Reg. 1.1012-1(j) provides that in applying the specific identification method to know which digital asset was disposed of (when the taxpayer has more than one unit or code representing their digital assets), the taxpayer must apply specific identification on a wallet by wallet or exchange by exchange system. In contrast, the FAQs allow (or at least do not disallow) use of a universal tracking approach where the taxpayer transferring, for example, 2 Xcoin out of wallet 1 to buy goods, could specifically identify to say they used the basis of 2 Xcoin in T’s wallet 2. This would not be allowed under the proposed regulations. The long list of questions in the proposed regulations include though, whether there are alternatives to this approach (questions 44 & 45 at page 59616 in the Fed. Register).

Prop. Reg. 1.1001-7(c) and 1.1012-1(j)(6) provide that these proposed regulations are effective on the January 1 following when final regulations are published. However, page 59616 in the Fed. Register states that the 1001/1012 proposed regulations are reliance regulations. That is, per the preamble, taxpayers “may rely on these proposed regulations under sections 1001 and 1012 for dispositions in taxable years ending on or after August 29, 2023, provided the taxpayer consistently follows the proposed regulations under sections 1001 and 1012 in their entirety and in a consistent manner for all taxable years through the applicability date of the final regulations.”

Written by Annette Nellen | Posted in TaxConnections

18 Jan 2024

IRS Selects 12 New IRSAC Members For 2024

WASHINGTON — The Internal Revenue Service announced the appointment of 12 new members to the Internal Revenue Service Advisory Council.

The IRSAC, established in 1953, is an organized public forum for IRS officials and representatives of the public to discuss a broad range of issues in tax administration. The Council provides the IRS and agency leaders with relevant feedback, observations and recommendations. It will submit its annual report to the agency at a public meeting in November 2024.

The IRS strives to appoint members to the IRSAC who represent the taxpaying public, the tax professional community, small and large businesses, tax exempt and government entities and information reporting interests.

The following individuals were appointed to serve three-year terms on the council beginning this month:

Robert Barr – vice president of business engineering, CGI Federal, Dallas, Texas. Barr has led digital transformations for both public and private sector organizations, including the South Carolina Department of Revenue, Intuit, Dell, Blockbuster and USAA. He also served as the Internal Revenue Service Assistant Commissioner for Electronic Tax Administration where he branded IRS e-file and the Electronic Federal Tax Payment System (EFTPS), established the National Accounts Program, enabled credit card payment of taxes and digital signing and other initiatives. Barr formerly served on the Commissioner’s Advisory Group, the Information Reporting Program Advisory Committee and the Electronic Tax Administration Advisory Committee.

Andrew Bloom – head of tax strategy, Golub Capital, based in Northern Virginia. Bloom advises on tax issues for investors, general partners, large partnerships, foreign corporations and business development companies as a Securities and Exchange Commission (SEC) registered investment advisor and international asset manager. He also manages substantive tax issues, including investment fund structuring, financial product planning, international tax planning, Fixed, Determinable, Annual, Periodical (FDAP) and Foreign Account Tax Compliance Act (FATCA) withholding and tax treaty planning and compliance. Previously, he was a partner at Dechert LLP in New York.

Written by TaxConnections Admin | Posted in IRS Advisory Council • IRS Notice • TaxConnections

17 Jan 2024

Fewer Clean Vehicles Qualify For Federal Tax Credit In 2024

The §30D Clean Vehicle Credit that was greatly modified for 2023 through 2032 by the Inflation Reduction Act of 2022 has increasingly strict qualifications each year. Per the IRS and Dept. of Energy list of qualifying vehicles, there is a drop for 2024. For clean vehicles purchased from April 18, 2023 through December 31, 2023, 27 vehicles qualified an eligible buyer for a $7,500 credit and 16 for a $3,750 credit.

As of today (1/1/24), the list for 2024 includes just 10 vehicles for the $7,500 credit and 9 for the $3,750 credit. The drop is due to a combination of no longer meeting the higher critical minerals or battery component requirement or involving parts of assembly by a “foreign entity of concern” such as China.

I suspect that more vehicles will be added during the year, but this drop will likely continue annually for the next several years. If you’re looking for a good deal on a clean vehicle, likely that happens the last week or so of the year when dealers are eager to sell eligible vehicles that won’t be eligible the next year.

And new starting in 2024 is the ability of buyers to transfer their credit to the dealer (if registered) so the customer/taxpayer can get the value up front rather than waiting to when they file their return.

There is more information at:

Written by Annette Nellen | Posted in Federal Tax Credit

31 Oct 2023

Gasoline Excise Tax Outdated – What Will Come From Recent House Hearing On This?

The federal gasoline excise tax that helps fund road construction and maintenance has been 18 cents per gallon since 1993! The tax is not tied to the price of gasoline or adjusted for inflation. It requires an act of Congress to increase the tax.

For many years there have been federal and state government studies and ones by think tanks and academics on alternatives to the gasoline excise tax to fund roads, mainly driven by the fact that we drive more fuel efficient cars each year and today many cars run on electricity not gasoline. Since 2008, Congress periodically transfers money from the general fund to the Highway Trust Fund to help it out.

What’s the remedy?

While the gasoline excise tax could be increased, that imposes a higher burden on those driving gasoline powered vehicles to fund the roads that are used by others as well. But at least tying the amount to inflation seems to make sense.

Fuel efficient cars and electric cars could be charged an annual registration fee equal to what they would likely pay in excise taxes if instead they drove a typical gasoline burning vehicle.

A road usage fee could be charged, such as a vehicle miles traveled tax (VMT), that has been heavily studied in Oregon and California (and likely elsewhere as well). It is not difficult to track how many miles someone drives and there are ways it can be paid monthly or at least annually when the owner registers their car with their state (with the state sending the tax to the federal government).

Written by TaxConnections Admin | Posted in Gasoline Excise Tax

06 Oct 2023

Tax System Changes Can Help Reduce Poverty

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]
Read More

Written by Annette Nellen | Posted in TaxConnections