Oct 26

Written by: David Keligian
10/26/2017 2:49 PM  RssIcon

Regardless of your party affiliation, expecting Congress to enact rational tax reform is - - at least for individual income taxes - - like asking your dog to parallel park your car. You're foolish if you expect a good result. To paraphrase one observer's comment, you can't expect reform from those who deformed our income tax laws to begin with.

Let's talk about one of the first principles mentioned in the "Unified Framework for Fixing Our Broken Tax Code" (the "Framework"). The Framework is supposed to make the tax code simple, fair, and easy to understand. But fixes such as adding a "zero tax bracket", combining 7 tax brackets into 3, and eliminating most itemized deductions don't simply do anything for most taxpayers.

Most individual tax returns are filed with software that makes the number of brackets, or what itemized deductions are allowed, simple to address. The same point applies to repealing the alternative minimum tax ("AMT"). Again, most tax return software automatically generates AMT calculations. "Simplifying" the law has no practical impact for most people. What most taxpayers really care about is the bottom line. "How much do i owe?" or "How much is my refund"?

Where the real complexity lies in our tax code is not rate brackets or deductions, but what the definition of "income" is for tax purposes. Transactions involving 1031 exchanges, nonqualified stock options, qualified stock options, and similar transactions in our modern economy are what really add complication to our tax law. So does the entire foreign tax arena, including the numerous information returns that must be filed to report foreign ownership of entities and financial accounts.

One large component of the Framework is the proposed repeal of the estate tax. As far as why that change won't cut taxes, please see my blog article "Thoughts on Estate Tax Repeal", which was posted on June 20, 2017. In a word, any repeal of estate taxes will be replaced by higher income taxes - - income taxes that in some high income tax states may exceed the estate tax.

For taxpayers in high tax states (especially California), the promised Framework "tax cut" will probably result in a tax increase on high income taxpayers. Not allowing deductions for state and local income and property taxes will raise income taxes even if the top rates decline. Those increases most likely will not be compensated for by eliminating the AMT. In fact, my own proposal is that Congress consider an alternative maximum tax.

One observer once said that there are "lies", "damn lies", and "tax reform". As the Framework progresses through Congress, there will be many changes. We'll keep you up to date.

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