Having survived tax season for one more year, I was struck by how complex our tax code really is. I’ve been preparing taxes for over 40 years, yet I ran into several provisions that I had not previously encountered. I am fully aware that there is much wrong with the code, that there are some major overhauls needed. In the midst of all this complexity, it struck me that there are provisions in the code which are not big deals, but are head scratchers. Why are these things in the code? Eliminating them can go a long way toward helping the middle-class taxpayer.
1. There is a limit of $2500 per return for a deduction of student loan interest. Student debt is an issue of great concern in our society. Eliminate the limit. Help the student by giving him or her a full deduction for all student loan interest paid.
2. Employee business expenses are deductible as miscellaneous itemized deductions. An employee who doesn’t itemize doesn’t get this deduction and much of it is eliminated by the 2 percent threshold. This especially penalizes an employee who is under a non-accountable plan. He or she pays tax on the travel allowance but can’t deduct the full amount of the expenses. No deduction if they don’t itemize.
3. Gambling income is taxable on line 21 of the 1040, Other Income. Gambling losses are deductible to the extent of gambling winnings but as an itemized deduction. You don’t itemize, you lose the deduction, but still pay tax on the winnings. Allow losses to be deducted against winnings, and let losses carry forward to apply against future winnings.
4. A taxpayer can deduct medical expenses only if itemizing and only to the extent that unreimbursed medical expenses exceed 10 percent of adjusted gross income. Eliminating the 10 percent threshold would help mitigate the high costs of medical care.
5. If you receive social security, it is subject to tax. This is unfair. You paid into the SS system for years, now you’re reaping the benefits of that tax. You paid tax on the contributions when made. Don’t tax it again.
6. In a related vein, unemployment compensation is taxable. You have received unemployment because you are unemployed. Your income is down, you’re struggling to make ends meet. But you must pay tax on this. I realize that unemployment compensation is not welfare, but welfare benefits are not taxed. Why is unemployment compensation taxed?
7. Taxpayers are limited to deducting mortgage interest on two homes. While this may seem not to be a big deal, an unsuspecting taxpayer can get caught in this trap. It doesn’t say two homes at a time, it is two homes during the year. You own two homes, a mountain cabin and your primary residence. Both have mortgages. You sell your primary residence and purchase a new home, with mortgage. Congratulations. You have just paid interest on three homes this year, and you can only deduct the interest for two.
8. If you have a rental home or other depreciable business asset, the IRS requires that you take depreciation on that asset. Failure to take depreciation will invoke the IRS doctrine of “depreciation allowed or allowable.” In other words, the IRS reduces the basis of the asset regardless of whether you took the depreciation deduction or not. When you sell the asset your gain or loss is determined by subtracting the adjusted basis (cost reduced for depreciation) from the proceeds of the sale. If you haven’t taken depreciation you get double taxed.
9. If you are a US citizen or resident, you are taxed on all your income, worldwide, regardless of source. The United States is in the distinct minority in this regard. Granted, there are credits available to mitigate the double taxation, but we need to abandon this approach.
This by no means is a list of everything that needs to be changed in our tax system. But consider it a few suggestions to make taxes a little more simple and understandable for the average taxpayer. And I am certain many of you can come up with your own list.
Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.
Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.
He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.
9 comments on “Nine Tax Code “Head Scratchers””
No. 5 needs a correction. The amount you paid into social security (and other tax favored payments) is subtracted from your earned income (not included in Line 7 income (1040). Where I agree with your assertion that it shouldn’t not be taxed – when social security was passed (and when I started paying into the system), IT WAS NOT TO TAXED when you take it out. (CPA, 13 years experience)
Correction to my comments (other tax favored payments is subtracted from the adjustment area, not line 7.
Nice write-up and a good perspective.
Number 5: 85% maximum of Social Security is taxed. Inverting that, you are recovering your “investment” at 15% of payment. Similar to an employee who “paid” into a pension plan. What is really needed is indexing for inflation of the base amounts. When the $25,000 and $32,000 floors were put into place they were a considerable buying power amount. Today they are worth less than 30% of the original buying power.
Great post John!
Mr. Stancil:
Great post illustrating the absurdity and irrationality of major components of the Internal Revenue Code. Particularly could relate to:
“9. If you are a US citizen or resident, you are taxed on all your income, worldwide, regardless of source. The United States is in the distinct minority in this regard. Granted, there are credits available to mitigate the double taxation, but we need to abandon this approach.”
Might I suggest (to make your meaning more clear):
“9. If you are a US citizen or resident ALIEN LIVING ABROAD, you are taxed on all your income, worldwide, regardless of source. The United States is in the distinct minority in this regard. Granted, there are credits available to mitigate the double taxation, but we need to abandon this approach.”
Totally agree with you – and this problem has been exacerbated in the last few years.
Read your bio below and just read your book (Kindle ed):
“Tax Issues Faced by U. S. Missionary Personnel Abroad ”.
Very nicely done and good overview of the tax issues affecting ALL Americans abroad!
Acually citizens and resident aliens are taxed on worldwide income regardless of whether they live abroad or not.
Nr. 8 – I believe that in the final year (sale year), you can add the entire depreciation that was not taken to the Sch. E.
Form 3115 must be used as it is a change in accounting procedure
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