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Archive for Annette Nellen

November 23 – 100th Anniversary Of A Capital Gains Preference

November 23 - 100th Anniversary Of A Capital Gains Preference

Our federal income tax law did not have special treatment for capital gains until a much lower rate (12.5% rather than a top rate of 73%) was added by the Revenue Act of 1921 (P.L. 67-87; 11/23/1921).

So, November 23 marks 100 years of complexity, lots of discussion on why and how there should be any preference for capital gains, and fairly constant changes to these rules.

The Revenue Act of 1921 defined capital asset as “property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.”

The 1921 Act also

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Digital Asset Reporting In H.R. 3684 Infrastructure Legislation

Digital Asset Reporting In H.R. 3684 Infrastructure Legislation

Late on November 5, 2021, the House passed (228-206) H.R. 3684, INVEST in America – the infrastructure bill that has received a lot of attention this year. It already passed in the Senate on August 10 (69-30).

One of the few tax items here and added for tax gap concerns is to expand the definition of broker under §6045 to require additional reporting for certain digital asset transactions. A few observations:

1. There are much bigger tax gap concerns than misreporting or non-reporting of digital asset transactions such as underreporting and non-reporting by some cash businesses.

2. The text added to §6045 requires actions by the IRS and is confusing and potentially too broad to be administrable (unless the IRS addresses that broadness). The issue is that “broker” is expanded to include: “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” While the goal was likely to make virtual currency exchanges such as Coinbase and Kraken be brokers, the reach is potentially wider. For example, what about a company that provides various software for transfers or wallets?

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

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

Certain Tax Increases And Fixes Needed For Equity And Fairness

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).
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Crypto And §1031 – Still Relevant In California!

Crypto And §1031 - Still Relevant In California!
In 2019, California only partially conformed to the section 1031 changes made by the Tax Cuts and Jobs Act. For individuals below specified AGI levels in the year an exchange begins, the pre-TCJA version applies. These levels are under $500,000 of AGI for MFJ and HH and under $250,000 for single.
Besides real property, what might individuals exchange? Well today, the most common non-real property exchanged by the roughly 95% of Californians who are still subject to section 1031 is cryptocurrency! Many types of virtual currency can only be acquired with bitcoin or another virtual currency.
Of course, few people are dealing with virtual currency, but the number grows each day.
What are the factors that should be considered to know if one virtual currency held for investment or business is like-kind to another?

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House Ways And Means Markup Of Build Back Better

Let's Avoid Unnecessary Costs And Complexities

Let’s Avoid Unnecessary Costs And Complexities

The House Ways and Means markup of the Build Back Better Act (H.R. 5376) has over 120 tax changes included. This includes a lot of energy credits. Subtitle G on Green Energy is laid out in 257 or the 2466 pages of legislative text. The cost estimate over ten years from the Joint Committee on Taxation is $235 billion. In comparison, the social safety net provisions in Subtitle H cost almost four times as much, but will likely provide benefits to those more than in need than for the energy credits.

For example, there is a new refundable credit proposed at new IRC §36E for the purchase of an electric bicycle costing up to $5,000 (for a $750 credit) but the bike can’t cost more than $8,000. My Google search indicates that these bikes cost under $2,000. While there likely are ones costing more, if the buyer needs the $750 credit to buy it, why not skip the credit and the complexity it will add to our tax law and the buyer can instead buy one that costs $750 less.

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Recipe For Sales Tax On Food In Minnesota – Too Complex!

Recipe For Sales Tax On Food In Minnesota - Too Complex!

Our tax laws are generally more complex than necessary. Most of this complexity is due to special rules where we try to give some types of taxpayer or activities special treatment. While there might be good reasons for the tax exception, there usually are simpler alternatives.

A recent news update from the Department of Minnesota included a Prepared Food Flow Chart. The first question is whether the seller heated the food or mixed or combined two or more food ingredients into a single item. That alone doesn’t sound too complex but likely results in “yes” to most prepared food including cooking an egg in a pan that has butter in it. But there is more. Despite combining food, if the item is a bakery item but no utensils are provided or needed (and if needed not made available), then the bakery item is not subject to sales tax. Also see the DOR’s Fact Sheet 102D on prepared food.
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# Let’s Fix This: Build Back Better Plan And Observations On Small Business Provisions

# Let's Fix This: Build Back Better Plan And Observations On Small Business Provisions
Tax items in President Biden’s Build Back Better plan were modified a bit by the markup that passed in the House Ways and Means Committee on 9/15/21 (24-19 with one Democrat voting no). I just want to comment now on a few relevant to “small business” including a reminder of the need to apply critical thinking to understand changes and commentary on them including from elected officials.
1. Corporate Rate Change: President Biden proposed to increase the TCJA rate of a flat 21% to 28%. The Ways and Means markup doesn’t go that high and brings back a graduated rate structure which includes a rate cut for corporations with taxable income of $400,000 or less. The markup rate structure is:
$1 to $400,000             18%
$401,000 to $5 million   21%
$5,000,001 and above   26.5%
$10,000,001 and above a surtax applies at 3% to phaseout the benefit of the graduated rates. At almost $20 million or more of taxable income, the corporation has a flat rate of 26.5%.

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Tax Reform – Did You Think It Would Include A Tax Subsidy For Local Newspapers?

Tax Reform - Did You Think It Would Include A Tax Subsidy For Local Newspapers?
This week the House Ways and Means Committee began marking up a tax reform bill to improve equity in our tax system, make modifications to have the system better comport with societal and environmental goals, and generate revenue to cover new spending particularly for infrastructure.
The list of changes under review includes several tax measures that were not included in President Biden’s Build Back Better Greenbook. These differences include:

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More Necessary But Overlooked Tax Changes

More Necessary But Overlooked Tax Changes

Well, back to what I started with a June 21, 2021 post where I’m sharing my ever-growing list of what I think are necessary but usually overlooked tax changes. It would be terrific to see these in the next tax reform bill or even some picked up in other legislation. I hope you’ll review my first list and this one, check back for future posts (I have more reform ideas on my list) AND please post a comment with your reaction and your tax reform ideas.

  • Reform the personal income tax to its basic framework where reasonable deductions to produce income are deductible (they are not limited to 2% AGI or disallowed for 8 years (2018 through 2025)).
  • Modernize §197 to include 21st century intangibles – see page 5 of my 2017 article.
  • Update §170(f)(11) on qualified appraisals to expand situations where an appraisal is not needed because there are public listings of value, such as for most virtual currencies. Read more

Vehicle Miles Traveled Tax Study Versus Action

Vehicle Miles Traveled Tax Study Versus Action

Seven years ago I blogged about California’s new legislation to study a vehical miles traveled (VMT) tax as an alternative to the gasoline excise tax (10/4/14 post). Oregon had already been studying one.

In July 2015, a Senate Finance Committee working group – working on tax reform, discussed a VMT in its report on infrastructure in reference to issues with the gasoline excise tax and Highway Trust Fund. Basically, with people driving more fuel efficient cars including electric cars that don’t use any gasoline, not enough money goes to the HTF. And the gasoline excise tax has been 18.4 cents per mile since 1993!  It is not adjusted for inflation and hasn’t been increased. The HTF has needed General Fund contributions since at least 2008 (the 2015 Senate report notes that over $65 billion had been transferred since 2008).

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Space Taxation And The Proposed Space Tax Act

Space Taxation And The Space Tax Act

The recent tourism type travel of well-known billionaires Richard Branson (July 11) and Jeff Bezos (July 20) is a big deal. It also raises tax considerations. I’m talking about tax considerations beyond whether these wealthy owners of space exploration companies (Virgin Galactic and Blue Origin) engaged in any transaction at the height of there journey where the sourcing of the transaction is uncertain.

Congressman Blumenauer (D-OR), member of the House Ways and Means Committee announced on July 20 that he will proposed the Securing Protections Against Caron Emissions (SPACE) Tax Act. While the text is not yet available, he mentions in his press release “new excise taxes on commercial space flights carrying human passengers for purposes other than scientific research.”

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