Posted 6/28/2017 08:00 am
This is an updated version of a previously published article.
As the owner of a CPA practice, I’m always interested in the daily detail and I take the time to communicate with my staff on ways to improve our tax practice and service to our clients.
Recently, there has been a lot of presidential rhetoric about major tax reform in the scope of those seen in the Reagan years. From an accounting standpoint, sometimes complexity can be resolved with simplicity. As I learned in law school, income taxation is a consortium of social policies — not a rigid set of rules for tax collections.
As April 18 has come and gone and we begin to prepare almost immediately for April 2018, I thought suggesting a few tax code tweaks to our congressmen in the name of simplicity might get us down the road more quickly and result in a more sociable, equitable tax code for my constituents, the small business owners. Here are six steps to consider that follow good social policy, which I would hope lawmakers would agree are worthy of implementing.
Step 1: Follow the social policy of helping working families, namely two-wage earning family members, and allow them to file on the same return and start at zero income and tax, and then pay tax on graduated income and rates. This effectively gets rid of stacking one spouse’s income on top of another and allows each spouse to pay tax on his or her respective income if it’s more advantageous. This step is the simplest and reaches the largest segment of the tax base, our dual income working families. They’re the backbone of society and currently bear an undue amount of taxes and paperwork. A bonus for Arkansans, this is how we calculate our Arkansas individual income tax.
Step 2: Providing further education (after high school graduation) is another sound social policy. Allow a full tax deduction by the parent or student (with a high school diploma) for all out-of-pocket educational expenditures. This extended deduction should cover all additional education in the form of technical training, serving apprenticeships, or college and university schooling. As we all know, more educated or trained individuals create higher wage earners (and taxpaying) individuals.
Step 3: Eliminate any and all limitations on itemized medical deductions. It is sound social policy to have a healthy society. Medical expense either for treatment or prevention of physical or mental diseases should be fully deductible and not subject to floor limitations. With the boomer generation aging out, if income is spent on medical care, why not allow it to be fully deducted and not subjected to income tax? I have yet to meet anyone who has been able to save his or her way to good health. Changing the perception that medical treatment is an investment and not an expense can change the overall health and wealth of our society.
Step 4: Eliminate limitations on charitable giving. Charitable giving is good social policy for individuals and for society. If an individual wants to donate more than 50 percent of his or her adjusted gross income a year to a charitable cause, they should be allowed to do so, and to fully deduct the donation against their income earned for the year. The more we are encouraged to help those around us, the less help will be needed in the future from government programs and the tax revenues required to fund those programs.
Step 5: Provide for one graduated tax structure for all taxpayers. This can be done in a series of smaller steps:
- Eliminate the Alternative Minimum Tax. If the tax rate structure is graduated, then leave it graduated and eliminate the flat rate tax from the tax structure. The most common AMT added back to income is state income tax. If an individual pays it, allow the deduction.
- Reinstate the 10 percent Investment Tax Credit for all purchases of IRC 1245 type property, namely business vehicles, equipment, furniture and fixtures. Allow the credit to reduce tax liability dollar for dollar, and allow for carry backs and carry forwards for unused amounts.
- Stop limiting capital losses on the sale or exchange of a capital asset. I have been practicing for 40 years and have never understood the practice of limiting capital losses on the sale or exchange of a capital asset. If you have a graduated tax system for income and tax rates, why do you cut the capital loss off at the pass, and say “No, you cannot deduct this loss against your other income even though you have incurred a tax loss.”? The practice has been around since I began practicing and I still don’t get it.
Step 6: Eliminate the limit on passive type losses and the limit of their deductibility against income earned, which is then subjected to higher graduated rates. The tax system is a graduated rate and income driven, but then kicks out certain types of losses and taxes the remaining income at higher rates. If the passive loss limitation were removed from the graduated tax system, then wouldn’t it serve as sound social policy to encourage investment in real estate property? If you change the depreciable lives of commercial real estate buildings and structures to 15 years, it would encourage real estate investment, the economy would grow and additional tax revenues would be collected.
On a recent flight into Little Rock, I visited with Dennis Cooper, CPA at Frost PLLC. Dennis mentioned that he had read the Six Steps to Tax Reform, but felt a seventh step was needed. He asked why there should be a tax on social security benefits. I pondered the question and thought this probably should be the number one item meshing social policy with tax policy.
Step 7: Remove the tax on social security payments. When you pay in your social security tax on wages and profits earned from your trade or business, you pay with tax dollars that are federally and state taxed. You cannot deduct the social security and Medicare tax of 7.65 percent as a tax deduction. Yet, when you retire and/or become disabled and report over $30,000 of gross income when filing your tax return, (current tax policy) the government taxes you up to 85 percent of the amount received. If we wanted to make the tax code simple and more fair, retirees and disabled employees — who probably now live on less income than when a member of the working public — would not pay taxes on social security or disability benefits. Would that not benefit our retirees and disabled employees, who probably live on less income than when they were working yet have increased need for additional dollars for basic food, clothing, shelter, as well as added medical bills? Thanks Dennis, for Step 7.
Over the next several months, and possibly years, I am certain tax reform and discussion will continue with a positive outcome for those of us who pay all the taxes. Regardless of the level of change, it might be good social practice to start small, with the steps above. Any headway is progress. However, should our political leaders achieve a large scale overhaul, rest assured I will be more than excited to learn about the changes and assist my clients in preparing their returns.