So, you have two versions of a tax bill, its in conference committee and if history tells us anything, you’ll never know what will come out of it. However, we know a few things that MAY happen. It is highly doubtful that any bill will be effective for tax year 2017.
1. Removal of state income tax deduction. While there may be transitional rules, this is Congress’s chance to give high tax democrat states a big razzberry. So, if you can do so, it would be advisable to pay your 2017 state estimated tax before 12/31/17. That way if the state income tax deduction is repealed for 2018, at least you get a deduction in 2017. And who knows the refund may not be deductible under the new act.
2. If you live in a state with no income taxes, make that large purchase now. The sales tax deduction may not be there in 2018. There are usually great deals the last week of the year at car dealerships who have to pay personal property tax on inventory held on 1/1.
3. Defer any sales of stock if you don’t have to do so. With potential repeal of AMT and lowered capital gains rates, it makes sense to defer.
4. Go see the doctor or dentist in 2017. If you have something that will require a large co-pay (like tooth implants), get it done in 2017 while you still have a deduction.
5. Use Qualified Charitable Donation out of your retirement plan for 2017 it might not be around in 2018.
Adkins v. United States
Your author was lead counsel on the above case argued before the Court of Appeals in the Federal Circuit. The Federal Circuit ruled that the regulations regarding Section 165 theft losses. In particular the Court ruled that the regulations section dealing with reasonable likelihood of recovery and reasonable certainty that recovery would not be forthcoming have to be read together if the deduction is in the year following the year of loss. The trial court had a more bright line rule that all proceedings had to be abandoned prior to allowance of the deduction. The link to the opinion is attached hereto.
http://www.cafc.uscourts.gov/sites/default/files/opinions-orders/16-1961.Opinion.5-5-2017.1.PDF
TRUMP’S TAX PLAN
Of course, I haven’t seen one word of the statute proposed, but there are some interesting things in this plan. (1) Lowering Corporate rates and repatriation tax, evening out small business income rates to lower their rates. This is not trickle down if they also attack the huge tax penalty on small businesses. Currently an LLC has a maximum effective rate of 39.6% and unlike large corporations, profits cannot be deferred easily. Also many times this income is subject to self-employment taxes to the effective rate would be closer to 48% plus state taxes. So, obviously the devil is in the details, but this could be a huge benefit for jobs if done. (2) Eliminating deductions. This will have a negative impact on middle income taxpayers in the following ways. Tax deductions (except for Mortgage interest and charitable) will be eliminated. This effectively increases income and property taxes for the amounts taxpayers pay to the States. This may make people pay more attention to the amounts being paid to their states and localities and put some pressure on the states and localities to reduce taxes themselves. This eliminates employee business expenses which means that those deductions for workers who have to buy tools or uniforms will be hit. This also eliminates medical deductions. So, if mom is in a nursing home and having to pay $100,000 a year in long term care expenses, she will not be able to deduct it under this plan. I suspect this will be one area that gets some pushback from Congress. (3) Capital gains rate reduction and elimination of 3.8% surtax on unearned income is geared toward higher income taxpayers. (4) Elimination of estate taxes is popular with Farmers and Small to medium sized businesses whose values are close to $10 Million. So, we’ll wait for the details. But some interesting proposals for sure.
Estate Taxes and those pesky Pay on Death Accounts
Let’s say granny wanted to avoid probate and also keep her FDIC insurance exposure low and ran around to fifty banks buying CD’s and names children and grandchildren as pay on death beneficiaries of each account. There is no will and no probate of her estate and no executor qualified.
So, one of the POD beneficiaries figures out that granny was maybe worth over $5 Million and there is a necessity to file an estate tax return.
So he goes to Head in the Sand Credit Union and asks for details of any CD’s owned by the decedent and even gets his siblings to give him a notarized permission to find out the information in the accounts.
HITSCU says, “no way” we cannot accept that permission slip and we have to follow our own procedures and protect their privacy.
This little cautionary tale, points out the problem with pay on death accounts. Yes, they avoid probate, but they also create a mess in trying to locate the decedent’s assets when there may be an estate tax due. In such situations a revocable trust is more beneficial as the owner and provides more centralized control of the assets if granny wants to avoid probate.
Presidents and releasing tax information
No President prior to Franklin Roosevelt released tax returns. Since that time, Presidents Eisenhower, Kennedy, Johnson did not. President Ford disclosed information, not the returns. A couple of thoughts about tax returns and their publicity.
The IRS has a strict policy against disclosure by the Service of individuals tax return data. Such a disclosure carries a $5,000 penalty against the Government if willful and possible criminal sanctions (as well as administrative) against the employee who does it. The concept is that people will be less than honest on their returns if their information is disclosed to the public. People might pay too much in taxes by padding incomes, or too little by failing to disclose business arrangements that might be shady (mobsters for example).
In our history there have been two schools of thought on this as pointed out in a 2012 IRS study.
“The arguments for and against disclosure of individual income tax information haven’t changed much over time. Former President Benjamin Harrison (his term ended in 1893) said this,in making the case for disclosure in an 1898 speech:
“Each citizen has a personal interest, a pecuniary interest in the tax return of his neighbor. We are members of a great partnership, and it is the right of each to know what every other member is contributing to the partnership and what he is taking from it.”
For an alternative view, here’s Secretary of the Treasury Andrew Mellon, commenting in the aftermath of the 1924 income tax disclosures:
“While the government does not know every source of income of a taxpayer and must rely upon the good faith of those reporting income, still in the great majority of cases this reliance is entirely justifiable, principally because the taxpayer knows that in making a truthful disclosure of the sources of his income, information stops with the government. It is like confiding in one’s lawyer. … There is no excuse for the publicity provisions except the gratification of idle curiosity and filling of newspaper space at the time the information is released.””
This leads to two points of view about Presidential candidates disclosing their tax returns. One view is that we are electing a President and that person should tell the world everything about him or herself, so that we can make a decision about the character and background of the person. The other view is that we already have trouble attracting candidates from the business world as opposed to the political class. Do we want to exacerbate that divide?
As James Madison penned in Federal Paper #10:
“…the smaller the number of individuals composing a majority, and the smaller the compass within which they are placed, the more easily will they concert and execute their plans of oppression. Extend the sphere, and you take in a greater variety of parties and interests; you make it less probable that a majority of the whole will have a common motive to invade the rights of other citizens[.]” (No. 10)”
This inevitably leads to the question that all citizens should ask themselves. Would you want the world to see you tax return? The answer from most people is “no”. In a country with 300 Million people who have to decide who should be their leader and without the ability to conduct a person interview with the candidate, do we want the comfort in knowing more about the candidate?
Did Richard Nixon’s tax return disclose his paranoia that led to the Watergate break in? No. Did Bill Clinton’s tax returns disclose his past dalliances with women? No. Did knowing the fact that Mitt Romney gave a greater portion of his income to his church and charity than Barak Obama have any real effect on the outcome of the election? Did not knowing John Kennedy’s or Lyndon Johnson’s taxes have any impact their respective histories?
So, in the end, releasing tax information by candidates seems to have no effect on their qualifications for office, their electability, or their performance when they get there. In other words, its ” the gratification of idle curiosity and filling of newspaper space at the time the information is released.”