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Archive for Annette Nellen

Federal Law On Tax Credits: What’s Appropriate For Phaseout Rules And Refundable Credits?

What's Appropriate For Phaseout Rules And Refundable Credits?

Our federal tax law has several phaseout provisions designed to prevent higher income individuals from claiming certain credits and deductions. These phaseouts are mostly all different in terms of how income (“modified AGI”) is measured and the amount of MAGI. I think the different dollar amounts serve to prevent someone from having a very high marginal rate when they move one dollar past any single dollar amount for the entry into “high income.”

I have never understood the great variation in what items are included in MAGI. Usually the §911 foreign earned income exclusion which is $112,000 for 2022, is included. That makes sense as clearly that is income but excluded for other reasons. Rarely is tax-exempt interest income included in MAGI which is puzzling (it is included in measuring taxable social security benefits under §86). Also, exclusions are rarely added back such as gifts, inheritances and employer-provided health benefits, even though such amounts might be a significant amount of income.

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30th Anniversary of Quill Decision: A Significant Nexus Ruling

30th Anniversary of Quill Decision: A Significant Nexus Ruling

On May 26, 1992, the U.S. Supreme Court issued its opinion in Quill Corp. v. North Dakota (504 US 298). This was a significant nexus ruling modifying the earlier National Bellas Hess decision (386 US 753 (1967)). In Quill, the Court ruled that physical presence was not required for due process nexus but still required for commerce clause purposes.

That meant that Congress could modify the ruling since it controls the commerce clause, but not the due process clause. But that was difficult to do so states started finding ways to find physical presence. For example, we saw New York enact the so-called “Amazon” law where the state found a connection between certain affiliates in the state helping to sell a company’s products and receiving a commission.

Finally, another case got to the Court – Wayfair, and the Court concluded “that the physical presence rule of Quill is unsound and incorrect.” I think that makes sense as it did lead to odd results. For example, a company would have sales tax obligations for having an employee in a state even for a few days. But another company with more sales in the state has no sales tax obligations in the state becuase it was able to avoid physical presence in the state. In fact, Wayfair is a multi-billion dollar company that avoided physical presence in South Dakota. Yet, the company with hundreds of engineers could easily create a software program to collect sales tax from all customers and properly remit it to the appropriate states.

In Wayfair, the Court found that South Dakota’s new nexus rule where a vendor has sales tax obligations if it delivered over $100,000 of goods or services into the state during the year or had 200 or more transactions of in-state deliveries.

Quill is still cited in some cases. It has a role in nexus history which is something I’m working on writing an article about – for the 30th anniversary.

Let me know if you have any observations to share. Thanks.

Annette Nellen, San Jose State University

Example Of How Exceptions To Rules Can Create Loopholes

Example Of How Exceptions To Rules Can Create Loopholes

A10093, Middle Class Tax Relief, introduced in New York on April 29, 2022, provides tax relief by removing overtime pay and tips from AGI. Overtime is working beyond 40 hours per week and likely means hourly workers rather than salaried ones.

While the intent might be good if aiming to help people who are seeking jobs with overtime to earn extra money to make ends meet, the reach (and the drop in tax revenue to the state) will be much broader than this.

The “justification” from the bill sponsor: “With inflation on the rise. The Middle Class is struggling. This Legislation would help lighten the load on Middle class families by suspending all sales tax on non exempt food items, no income tax on any work beyond a 41 hour work week and no tax on any tippable wages.”  (there doesn’t seem to be any sales tax aspect to A10093 though)

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Prop Regs Fix A Premium Tax Credit Issue 7 Years Later

Prop Regs Fix A Premium Tax Credit Issue 7 Years Later

The Affordable Care Act enables individuals to not only purchase insurance on an exchange but to also get a subsidy for it if they qualify. That subsidy is the Premium Tax Credit (PTC). There are eligibility criteria such as purchasing the coverage on an exchange (such as Covered California), if the person is employed the employer does not offer affordable coverage and the household income is below 400% of the federal poverty level.

When regs were issued in 2014 at the start of the PTC, section 36B(c)(2)(C)(i) that includes this clause:

“This clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee.”

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Increasing Teacher’s Deduction For Classroom Supplies Masks Problem Rather Than Fixes It

Increasing Teacher's Deduction For Classroom Supplies Masks Problem Rather Than Fixes It

Most employees don’t have to bring their own supplies to work or pay for materials customers need. For example, workers at most places that use cash registers to total up customer purchases are not required to fund and bring their own registers to work. Most employees required to travel for work get reimbursed for that expense.

But K-12 teachers are expected to buy supplies for their workplace and their students and about 94% of public school teachers buy these supplies (U.S. Dept of Education, May 2018). I say “expected” because clearly, most teachers use their own funds to buy supplies and since 2015 there has been a permanent tax rule that allows these teachers to deduct for AGI up to $250 of that spending. An inflation adjustment increases that to $300 starting in 2022. Prior to 2015, the deduction was temporary.

S. 3992, the Educators Expense Deduction Modernization Act of 2022, proposes to increase the $300 per year amount to $1,000. Per Senator Sherrod Brown’s April 6 press release, he proposes to quadruple the deduction (using the 2021 and earlier maximum of $250 rather than the 2022 amount of $300). He notes that $250 is “far less than most teachers spend each year out of their own pocket on classroom supplies.”

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Odd Tax Proposal Harms Tax Gap And Tax Transparency

Odd Tax Proposal Harms Tax Gap And Tax Transparency

H.R. 6937, Shifting Limits on Thresholds (SLOT) Act, is a bipartisan proposal to increase the information reporting threshold for slot machine winnings from $1,200 to $5,000 and adjust it for inflation. The sponsors note that the threshold has been $1,200 since 1977.

Per co-sponsor Rep. Anthony G. Brown, this proposal “is a necessary modernization of our tax code.”

Really?  This proposal would harm our tax law by reducing gambling winnings that get reported (that is, it would increase the tax gap) and make many people think that such winnings are only taxable if they exceed $5,000.

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Gasoline Excise Tax Is Not Too High

Gasoline Excise Tax Is Not Too High

The gasoline excise tax has been 18.4 cents per gallon since 1993. It is not adjusted for inflation and Congress has not changed its rate or its operation. This tax funds the Highway Trust Fund for road construction and maintenance. Costs for those projects continue to go up yet we don’t even adjust the gasoline excise tax for inflation. If we did, the tax would be 36 cents per gallon.  If the tax were adjusted for how we fuel our cars, we would have a vehicle miles traveled tax (VMT) rather than one tied to buying gasoline. Today, many cars use the road where owners buy no gasoline.

In 2020, the gasoline excise tax generated about $24 billion of revenue. That is not a lot for a roughly $3.5 trillion federal budget. It is not near enough to fund all needed road projects. Occasionally, such as with the recent Infrastructure Investment and Jobs Act (PL 117-59; 11/15/21), funds need to be transferred from the General Fund to the Highway Trust Fund. The gasoline excise tax needs a fix, not repeal, even if temporary.

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1040 Virtual Currency Confusion From Two Years Ago Is Still Confusing

1040 Virtual Currency Confusion From Two Years Ago Is Still Confusing
Just posting a reminder today of an IRS website added two years ago on February 14, 2020 about virtual currency.  Here is the link and here is the entire text:
“The IRS recognizes that the language on our page potentially caused concern for some taxpayers. We have changed the language in order to lessen any confusion. Transacting in virtual currencies as part of a game that do not leave the game environment (virtual currencies that are not convertible) would not require a taxpayer to indicate this on their tax return.”
Prior to this 2020 post, the IRS website on virtual currency stated (thanks to the Wayback Machine for the information!):
“Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin, Ether, Roblox, and V-bucks are a few examples of a convertible virtual currency.”
Today (since 2/14/20), that website reads:

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TAX PROS: Dealing With IRS Form 1099 Errors – Input Desired

Professor Annette Nellen

Tax season has started and by now (February 6) we should have our 1099s and W-2s and perhaps a few other reporting forms. We need to review them for accuracy, even forms from the IRS, such as Letter 6419 on the advance Child Tax Credit (see IRS Fact Sheet (FS-2022-5) on possible errors).

Some forms, such as Form 1099-C on cancellation of debt might be correct from the issuer’s tax requirements, but not correct for the recipient. For this 1099-C issue, I’ve blogged on it before (4/13/13 and 6/21/21). The 1099-C instructions also remind the recipient that their debt might not have really been discharged and they should not report the income until the year it has truly been discharged. The IRS doesn’t tell the recipient what to do with the 1099-C that isn’t reportable. That’s too bad because when the recipient figures out it isn’t reportable for the year printed on the 1099-C, the IRS doesn’t know.

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IRS FAQs Observations And Cautions

IRS FAQs

FAQs published by the IRS seem to increase exponentially each year. Just for the advance child tax credit of the American Rescue Plan Act (P.L. 117-2, 3/11/21), the IRS has over 80 FAQs and continue to update them even 10 months after enactment (but then, it is a multi-facited somewhat complex provision).

On October 15, 2021, the IRS announced a modification to its FAQ process for those issued on newly enacted legilation and emerging issues (IR-2021-202). Those FAQs will be released in a news release along with a Fact Sheet. Later updates should result in an updated Fact Sheet and we should be able to find any deleted or modified FAQs in prior fact sheets. As a news releases these FAQs are “authority” under Reg. 1.6662-4, although a low level of authority.

Fact Sheet FAQs will also include a disclaimer which includes:

Because these FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer’s case, the law will control the taxpayer’s tax liability. Nonetheless, a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax.”

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What’s Appropriate For Phaseout Rules And Refundable Credits?

What's Appropriate For Phaseout Rules And Refundable Credits?

Our federal tax law has several phaseout provisions designed to prevent higher income individuals from claiming certain credits and deductions. These phaseouts are mostly all different in terms of how income (“modified AGI”) is measured and the amount of MAGI. I think the different dollar amounts serve to prevent someone from having a very high marginal rate when they move one dollar past any single dollar amount for the entry into “high income.”

I have never understood the great variation in what items are included in MAGI. Usually the §911 foreign earned income exclusion which is $112,000 for 2022, is included. That makes sense as clearly that is income but excluded for other reasons. Rarely is tax-exempt interest income included in MAGI which is puzzling (it is included in measuring taxable social security benefits under §86). Also, exclusions are rarely added back such as gifts, inheritances and employer-provided health benefits, even though such amounts might be a significant amount of income.

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Suggestions For Improving U.S. State And Federal Tax Systems

Suggestions For Improving U.S. State And Federal Tax Systems

What we might do differently in 2022? I offer a few suggestions for improving state and federal tax systems.

  1. Modernize tax systems: Computing and paying our taxes should be as easy as e-commerce, online banking, and email. Income taxes should be a just-in-time system where we select software we want to use to compute our tax liability regularly and we pay in or receive any overpayment at least weekly. This will work for businesses if your software accurately computes your taxable income with each transaction you engage in. Also, if you need to amend a return, just log into your account and adjust your return.
  2. Simplify!: Why does our federal tax system have over 100 special rules (see the Joint Committee on Taxation list here)?
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