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.
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