Dollar Amounts And MAGI In The IRC – Are Adjustments Needed?

Dollar Amounts And MAGI in the IRC - Are Adjustments Needed?

There are many dollar amounts in IRC sections such as for amounts of deductions, credits or exemptions, as well as for phase-out levels. The Inflation Reduction Act modifies section 30D, Clean Vehicle Credit, and adds section 25E, Previously Owned Clean Vehicle Credit. Both of these provisions have phaseout levels based on “modified AGI” and dollar limits on the cost of the car (based on MSRP for §30D, and sales price for §25E). For these credits, none of these dollar amounts are adjusted for inflation and IRA 2022 puts these credits in existence though 2032 – even though in the law for 10 years and enacted as part of the Inflation Reduction Act.

Likely no inflation adjustments were included for these two vehicle credits because then the bill would cost more as the credit amounts would increase each year.

But is that the right answer? Perhaps. It depends. If the credit causes the supply of these cars to go up, perhaps the price will drop or won’t go up as much as annual inflation adjustments. And Congress can change the dollar amount of the credit in the future.

The modified AGI definitions in these two vehicle credit provisions is AGI increased by exclusions under §911, §931 and §933 for certain foreign income exclusions. The term MAGI has varied definitions in the Code.  It appears that one reason is so an individual won’t potentially lose numerous tax benefits when they cross a single definition of MAGI.

But what is the thought process on what modifications should be made to AGI?  I think most exclusions and special deductions should be added back to get at a better measure of one’s income.  And the more exclusions and deductions one has, the greater is their true income. So, why not add back such items as fringe benefits including employer-provided health insurance, tax-exempt bond income, life insurance proceeds and perhaps even some portion of gifts?

And why not add back special deductions, especially ones that are likely a larger amount for higher income individuals such as the mortgage interest deduction? Or add back some portion of such deductions? Also consider that if it were instead a credit, taxable income would be higher. (Adding back deductions would also require a change to the name modified AGI.)

Since the §199A deduction is really a rate reduction, that should not be added back and charitable contributions should not be added back to encourage them.

Would it be difficult to get these figures? Some are already on the return such as tax-exempt bond interest and mortgage interest deduction. Most should be on the return to help taxpayers understand the range of tax breaks they get and the tax savings from them.

What do you think? Professor Annette Nellen, San Jose State University.

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

Twitter LinkedIn 

Subscribe to TaxConnections Blog

Enter your email address to subscribe to this blog and receive notifications of new posts by email.