21st Century Taxation

Time to Increase the Annual Gift Exclusion Amount?

2026-04-05T23:53:00.000-07:00

IRC Section 2503(b) provides an exclusion from gift tax of any gift (other than a gift of a future interest in property) for the first $10,000 given to someone by the giver (taxpayer). This amount is adjusted annually for inflation and for 2025 and 2026 is $19,000. So, if you give $15,000 to your grandchild in 2026, no gift tax is owed and no gift tax return (Form 709) needs to be filed (unless there were gifts above the exclusion amount or of a future interest).

The OBBBA increased the estate and gift exemption amount at section 2010 to $15 million, adjusted for inflation after 2026. This is a very large figure and less than a third of one percent of people will die with over $15 million of assets.

But, if you gift $20,000 to your adult child in 2026 to help them buy a house or car (and let's assume the giver is single for simplicity), a gift tax return must be filed for the $1,000 above the gift exclusion. This person owes no gift tax, but instead must file to report they used $1,000 of their $15 million estate/gift exemption.

For the roughly 99.8% of people who will never have over $15 million of assets, what is the point of filing a Form 709? And, filing a Form 709 also means you have to report all of your charitable contributions (no effect on your $15 million exemption - just a requirement for Form 709 - see page 2 of instructions, right column). And this is all extra processing for the IRS with no tax effect for the bulk of the returns. Of course, there likely are many gift tax returns not filed either due to unawareness of the requirement or because the giver knows they are unlikely to ever owe estate or gift tax (but these are not justifiable reasons not to file).

Well, the estate/gift tax exemption increased significantly in recent years, but the gift exclusion did not. For example, in 2000, the estate exemption was $675,000 and the annual gift exclusion was $10,000. [see helpful summary from Tax Foundation] So, simple math means that from 2000 to 2026, the estate exemption increased 2,122% while the gift exclusion increased a mere 90%. That is quite a difference!

Of course, if the gift exclusion had also increased 21.22 times (to $210,220), this would be a tremendous estate planning option for people who do have over $15 million of assets. But, what about at least doubling the gift exclusion amount? The Joint Committee on Taxation can likely come up with a justifiable increase that will reduce the number of Forms 709 filed where the filer will never have $15 million to give away during life or at death, but not create a significant estate reduction tool for the few individuals who will ever owe estate tax today.

Also, the IRS has data on how many people may ever owe estate tax. Their Personal Wealth Study, prepared every three years, uses Form 706 (estate tax return) data "to estimate the wealth of the living population." Using the most recent data of 2019, when the estate exemption was $11,400,000, only about 206,000 individuals were estimated to have gross assets worth more than this amount. The breakdown:

113,249 estimated to have wealth between $11.4 and $20 million
72,012 with wealth between $20 and $50 million
20,209 with wealth of $50 million or more

The U.S. Census Bureau also reports on wealth. For 2023, the median household wealth was $191,100. One in 10 households had wealth of zero, while one is 10 households had wealth greater than $1.8 million.

Too bad they can't break this down into smaller increments in the top 10% because the variation in this group is quite wide.

And one more gift tax change that I noted in my 2/9/26 blog post on Trump Accounts is to modify Section 530A to include a provision similar to Section 529(c)(2)(A)(i) to treat contributions to a Trump Account as a gift of a present interest (even through gifts to 529 and Trump Accounts are future interests). This will avoid the need to file a gift tax return (the $19,000 gift exclusion only applies to gifts of present interests). Seems like an easy legislative fix. Or perhaps the IRS can simplify this filing by allowing the giver to report this gift on a line added to the Form 1040 starting in 2026 rather than filing a Form 709 (contributions to Trump Accounts cannot be made until July 4, 2026) and not file a gift tax return unless there were other gifts that warrant that.

What do you think?

Dept. of Labor FLSA Ruling and New Overtime Deduction

2026-03-30T23:44:00.000-07:00

The OBBBA added IRC §225 allowing a deduction of up to $12,500 ($25,000 if MFJ) for qualified overtime compensation. This pay is defined as paid under the Fair Labor Standards Act (FLSA) in excess of "regular pay". Only the excess is overtime and generally overtime is paid when an eligible worker works over 40 hours per week.

Some of the examples offered by the IRS in FS-2026-01 and Notice 2025-69 focus on a regular hourly pay rate such as $20 per hour and the overtime rate as 1.5 times that amount or $30 per hour with $10/hour constituting overtime pay.

But as illustrated in Department of Labor Ruling FLSA 2026-02 (1/5/26), regular pay might be an hourly rate increased by nondiscretionary pay. In this ruling, workers were paid $12/hour and qualified for overtime pay if they worked over 40 hours per week. The workers could earn additional compensation under a Safety, Job Duties, and Performance bonus plan. Under the FLSA, this is not a discretionary plan because terms are set out in a predetermined plan, which makes this bonus pay part of regular pay.

In the fact pattern, workers received $9.50/hour of nondiscretionary bonus pay making their regular pay rate $21.50/hour and overtime pay at 1.5 times regular pay or $32.25/hour.

Thus, under IRC §225(c), the qualified overtime compensation is $10.75/hour ($32.25 less $21.50).

Note that if the worker or employer incorrectly assumes that regular pay is $12/hour, they would treat $20.25/hour as overtime compensation generating a deduction which would be too high ($32.25 less $12.00).

In weeks where there is no nondiscretionary bonus paid, the overtime pay amount will be different. Thus, employers need good records to be able to properly prepare Form W-2 for 2026 through 2028.

For 2025, employers were not required to, but were encouraged to let workers know their amount of qualified overtime included in their wages. For 2026 through 2028, employers must separately state the qualified overtime on the Form W-2. Without information from their employer for 2025, will workers be able to determine the correct amount of overtime pay?

Notice 2025-69 does mention regular pay increased by a nondiscretionary bonus but no further details or example are provided (see page 24).

This is a good example of complexity that can arise in using a non-tax law to define a tax term, and when the measure of overtime pay can vary from pay period to pay period.

What do you think?

Time Running Out To Claim Refunds Owed for 2022 - WHY?

2026-03-26T00:00:00.000-07:00

Every year in mid-March, the IRS issues a news release about time running out to claim refunds owed to people for four year earlier where the statute of limitations is going to close on April 15. The latest is IR-2026-37 (3/20/26) stating that time is running out to claim $1.2 billion in refunds for 2022. The IRS has details on this to not only reach this figure, but they also have a table showing the refunds owed by state.

I have blogged on this a few times before including in 2023 suggesting that a modern system should prevent this situation. For example, why not change the law to allow the IRS to issue the refund? Some of these refunds likely are for people with wage withholding who did not know they had to file to get their withheld federal income taxes refunded when their income is below the filing threshold.

Some people who have not filed are also missing out on claiming a greater refund such as for the Earned Income Tax Credit.

Please see my March 2023 post for a few ideas on how to not have these refunds not get to the taxpayers they are owed to.

What do you think?

Tax Scams Continue to Grow; IRS Simplifies Reporting of Scams

2026-03-09T20:36:00.000-07:00

https://www.irs.gov/pub/irs-pdf/p6138.pdf

In February, the IRS announced a new online reporting tool for suspected tax fraud, scams, and illegal activities. Smartly, the link is on the main page (in the dark blue line):

This month, the IRS released the 2026 Dirty Dozen list of various scams to watch out for, such as fake charities seeking your money, phishing to get you to click on links that enable the scammer to get information from you, AI-enabled robocalls impersonating an IRS employee, misleading tax advice on social media, and more.

For a list of the dirty dozen since the IRS started this in 2001, please visit my table. You'll see that a few have disappeared but most continue or have morphed into digital scams.

The IRS also created two nice posters (pubs) with a QR code to encourage people to report scams. I think that while the IRS or other law enforcement agencies might not find your scammer, with more information, they do find some and can alert the public to new scams and ways to avoid them. These pubs are 6138 and 6139.

Something that has also changed is getting emails that clearly look suspect such as because they are poorly written with grammar and spelling errors. Well, scammers likely are using AI to write more grammatically correct, enticing looking emails and texts - we all need to be extra cautious. When in doubt, don't click but instead find another way to verify if the information is valid, such as logging into the online account they are talking about (using your usual link rather than the one in the email), such as your IRS online account (or one I get frequently is that my Amazon account has been suspended (!) when it has not).

What do you think? What more can be done to help people from being the victim of identity theft or falling for a tax scam such as claiming a bogus tax credit or giving money to scammers pretending to be the IRS or a state tax agency?

Minnesota Examines Tax Expenditures

2026-03-04T22:48:00.000-08:00

Tax expenditures are special rules in a tax system that are not part of a "normal" tax. For example, special deductions, exclusions and credits in our Federal Tax system generally are tax expenditures. This includes the exclusion for employer-provided health insurance (the largest tax expenditure at $296 billion costs per year per the Treasury Department), step-up in basis at date of death ($40 billion per year per Treasury), mortgage interest expense, tip and overtime deductions, and vehicle loan interest deduction.

The federal income tax has over 100 special rules. States typically have more, particularly in their sales tax system that usually has numerous exemptions. And many items of personal consumption that states do not tax do not get measured or identified as tax expenditures because they are not part of the state's statutory definition of the tax base. For example, California's sales tax applies to tangible personal property. So the fact that California doesn't impose sales tax on digital goods as textbooks and iTunes, isn't measured - which also masts who is getting tax savings.

Well, in 2021, Minnesota created the Tax Expenditure Review Commission consisting of legislators and the commissioner of revenue. They meet to evaluate the effectiveness of their state tax system's 327 special tax rules (tax expenditures). Apparently this past year they looked at 15 of these and made recommendations on their effectiveness and determined if changes were warranted. That is better than not looking at all, but out of 327, more seems needed.

But I applaud the lawmakers in Minnesota for creating the commission because tax expenditures result in lower revenue, and higher tax rates than would otherwise be needed without the special tax rules. They are spending that is easily overlooked in the state budget because only direct spending (sending money directly to an individual or business) is noted, not the spending this is done by lawmakers lowering your tax liability.

What do you think?

Should All Gains on Home Sales Be Tax Free?

2026-02-23T00:24:00.000-08:00

Since 1997, a significant tax break is the ability to exclude up to $250,000 of gain on sale of your principal residence if used 2 years of the 5 years prior to sale ($500,000 gain exclusion if married filing jointly and both spouses meet the 2 years of use requirement). This exclusion can be used every two years.

In December 2025, the U.S. Census Bureau reported that the median home price in the U.S. is $414,400. That sure makes a $500,000 gain exclusion seem like a big number.

Of course, there are a few parts of the country, such as San Jose, where people may easily have over $500,000 of gain upon sale of their residence. In that case, if married, they exclude $500,000 (saving taxes possibly of up to 18.3% or 23.8% on that excluded gain). Let's say the gain is $600,000 and they are in a 20% capital gain bracket + likely owe the 3.8% NIIT. They will have to pay $23,800 of capital gain tax on the $100,000 taxable gain. That sounds like a great deal given they had $600,000 of income! If that had instead been wages, stock gain or gain from sale of real property that was not their residence, it would all be taxable.

There are a few bills in the 119th Congress that would exclude all of the gain on sale of a principal residence, such as H.R. ____, Don't Tax the American Dream Act. Per sponsor Rep. Goldman, this would increase the national housing supply and repeal "costly taxes" on homeowners. He also notes that the $250,000 and $500,000 amounts have not been adjusted for inflation since 1997. Similarly see H.R. ___, Middle Class Home Tax Elimination Act. Sponsor Rep. Fitzgerald also notes that the Section 121 dollar amounts have remained constant since 1997.

I don't think the lack of inflation adjustment justifies this possible tax change because the exclusion amounts were already quite high in 1997 - particularly given that 29 years later the median home price is roughly $414,000 (making a $500,000 gain impossible). The relatively few people who will benefit from allowing any amount of gain to be excluded is much smaller than the number of individuals who would benefit from adding an inflation factor to other rules that lack them, such as the child care credit ($3,000 for 1 child and $6,000 for 2 or more children at this dollar amounts for over 20 years) and the taxation of Social Security benefits (dollar amounts set over 30 years ago).

And why no limit at all for the proposals that allow all of the home gain to be excluded. This is a tremendous benefit to those with very high value homes that have far more appreciation than lower value homes. Do a search for example, for movie and music stars who have sold homes for millions of dollars of gain - why should that all be tax free? (here is one example I found - perhaps $46 million of gain in 2021 (although there may have been improvements made in the 25 years of ownership reducing that gain) - but still a multimillion dollar gain - story here).

So, why not keep the high exclusions where they are now and use the savings from not increasing them for a small number of individuals and instead use those dollars to either keep our deficits lower or to add inflation adjustments to provisions that would benefit many more taxpayers, such as people paying for child care so they can work. I'm not sure where you find child care today for $3,000 per year for one child (note that OBBBA increased the rate of this credit, but not the decades old dollar amounts).

What do you think?

Trump Accounts - Interesting Idea

2026-02-09T10:27:00.000-08:00

https://www.trumpaccounts.gov/

The OBBBA created yet one more savings vehicle for parents and other relatives of children under age 18 to consider. While the new provisions are lengthy and a bit complicated, a good deal of understandable information is being pushed out by Treasury/IRS (such as https://www.trumpaccounts.gov/) and it is an interesting savings vehicle worth looking into.

New Section 530A basically allows new accounts that operate much like a traditional IRA only they are for kids under age 18 and have restrictions on what they can invest in. Up to $5,000 can be contributed to the account annually (this amount is adjusted for inflation starting in 2028) until the year of the child's 17th birthday. Of this amount, up to $2,500 can be contributed by an employer (per employee per year rather than per employee Trump Account) if the employer creates this employee benefit, written, per guidance to be issued by the IRS. The $2,500 is tax free to the employee (Section 128).

For a baby born in 2025 through 2028, the government will put $1,000 into the account if the baby is a US citizen and has an SSN and the parent or other relative makes the election. This doesn't count towards the maximum $5,000 contribution per year. The $1,000 is treated as a tax refund so not taxable.

No distributions are allowed until the year the child turns 18 but the goal is for the child to learn about future value, savings and perhaps a bit about taxes, and let the money continue to grow. The child can start contributing via IRA rules once working and keeping the account. If disciplined, to keep the account and not pull it out for a new car or big party, the account could grow tremendously. For example, parents starting one in 2026 (contributions can't start until 7/4/26) for their 3-year old child, contributing $5,000 per year until age 17 (15 contributions), assuming a 5% rate of return will have almost $108,000 at that time. If no further contributions, when the child is 60, the balance would be about $837,000.

You need to track basis in the account and if a state doesn't conform, also track state tax basis in the account. If would be a lot simpler if states conform.
For more information:

Website where apparently by July 2026 you can elect to set up an account - https://www.trumpaccounts.gov/

Form 4547, Trump Account Election(s)

Notice 2025-68

I offer a few suggestions to make these accounts more enticing and protected:

1. Add a provision similar to Section 529(c)(2)(A)(i) that contributions to the account on behalf of any designated beneficiary is treated as a completed gift to that beneficiary which is NOT a future interest in property to make it clear that the gift can be exempt from reporting and gift tax under the $19,000 annual gift exclusion.

2. Encourage contributions and people not forgetting about the accounts by allowing tax refunds to be directed to the account(s).

3. Rather than have parents or someone elect to set up an account for an eligible baby born in 2025 through 2028, set it up automatically when the parents apply for an SSN for the baby, and sent information to the parents about the account and encourage them to continue to add funds as they can and set them up for eligible siblings too if possible.

4. Add more than a 10% withdrawal penalty to discourage 18-year-olds from emptying the account at age 18 or soon thereafter. Provide an incentive to encourage them to convert the account to a traditional IRA and continue making contributions; the incentive might be another $1,000 into the account at age 21.

5. Encourage states to conform to the OBBBA Trump Account provisions to simplify tracking basis in the account and for conformity on annual tax effects.

6. Require trustees to make contact with beneficiaries (and parents until beneficiaries turn 18) because it is possible beneficiaries will forget about the account and the trustee will end up sending it to the state as unclaimed property at some point in the future. This regular contact would ideally include some financial literacy tips.

What do you think?

Let's stop hiding the income and outlay pie charts in an instruction booklet few read

2025-12-30T14:57:00.000-08:00

Pie Charts from Form 1040 Instructions for 2025
see links below to get to a larger version

I've written and blogged on this topic before,* but I think it is worth repeating ...

IRC §7523 enacted in 1990 requires the IRS to include pie charts with explanation in the Form 1040 instruction booklet - actual text at §7523(a) is for "any booklet of instructions for Form 1040, 1040A, or 1040EZ." We don't even have 1040A or 1040EZ anymore and people have not been mailed instruction booklets since 2010. While a pdf of the instructions is readily found on irs.gov, who looks at them?! Someone might look at them to find information about a line on a return, but they likely don't get to page 121 out of 125 pages of the 2025 instruction booklet (see draft here and soon it will be here).

The charts show the percentage of income and outlays of the federal government within broad categories. The income one also show how much comes from borrowing (27% for 2024) and the outlays one shows that 13% of them go to pay interest on the this borrowing. While these are general charts, I think they are helpful for anyone to get a basic understanding of federal government activities and perhaps generate questions for elected officials and those running for office.

I suggest the following basic enhancements for this information:

Along with the % put the dollar amount.
Highlight that outlays are direct spending and not also spending in the tax system via special exclusions, deductions, and credits. Another pie chart showing tax expenditures by category, as the Joint Committee on Taxation and Treasury use when they present reports on tax expenditures. These categories include national defense, int'l affairs, energy, housing, transportation and education.
Information on the tax gap should also be included such as from the IRS website which at 12/30/25 shows a net tax gap of $606 billion which is more than we collect from the corporate income tax ($530 billion for 2024 per JCT report at page 30).

And the pie charts need to be published beyond the 1040 instruction booklet and moved to the digital era. They should be an icon perhaps on all federal government websites where people can click to get more details.

What do you think?

*"Time to move Sec. 7523 budget information into the Digital Age," AICPA Tax Insider, 11/8/12. This article includes the first pie charts that appeared in the 1991 Form 1040 instructions + the 2010 charts.

Blog post of 11/10/12

"'Oh, I see:' Suggestions for Greater Tax Transparency," Tax Notes State, 11/20/17

Challenges with Tip Income Deduction, Particularly for 2025

2025-11-15T20:29:00.000-08:00

I've blogged already on the inequities of the tip income deduction (9/10/25 post). It also has some recordkeeping and compliance challenges for employers and employees, and payors and contractors. These challenges will be greater for 2025 because tipped workers won't have their qualified tips separately reported on their W-2, or 1099-NEC or 1099-K. That won't happen until 2026.

Recently, the IRS provided relief to employers and 1099 filers for 2025 because otherwise they could face penalties for not reporting the qualified tips. The IRS does encourage employers and others to find some way to get information to employees on their qualified tip amount and occupation code, such as via a written statement or online portal (see IR-2025-110 and Notice 2025-62).

Now you might think, don't tipped workers know how much their tip income is? Well, they might, but do they know what their "qualified" tip amount was? They are not the same thing!

For example, the following are tips, but not qualified tips that will generate a deduction for the worker.

Tip received by a waiter at a restaurant but it was automatically added to the bill such as because it was a party of 6. This is not voluntarily paid so is not a qualified tip, even if the restaurant gave it to the waiter.
The employee works for an employer who is a "specified service trade or business" (SSTB), such as theater or other performing arts business. This might also be confusing for employees with multiple jobs. For example, the bartender employee at the restaurant gets qualified tips (if paid voluntarily), but when she works at the performing arts center as an employee, those tips are not qualified.
The worker might not be in one of the many listed occupations per a table in the proposed regulations (§1.224-1 at REG–11003225 (9/22/25)). The IRS says it will have the lists at this website, but it is not operational at 11/15/25 - https://www.irs.gov/TippedOccupations.
The tipped worker is an independent contractor such as a gardener without a 1099. Their tips are only qualified if they are reported on a Form 1099-NEC or 1099-MISC or 1099-K. If the gardener works for households and gets paid in cash, they won't get a 1099. If they do work for businesses, they will get a 1099-NEC for 2025 if paid $600 or more. I'm assuming the contractor reports all income including the tips. As soon as they can, contractors who don't get a 1099, such as because paid in cash by households, they should start taking credit or debit card or PayPal or Venmo so they will get a 1099-K. We still don't know how PayPal and Venmo will get the tip info, likely they will be required to have the payor specify these amounts.

There is a lot of work here, particularly for the issuers of the W-2 and 1099s. For example, one example in the proposed regulations is a restaurant where the point of sale machine only offers 3 options on tips:15%, 18% and 20%. Since there is not an option to put in your own number including zero, this is not voluntary. BUT, since 15% is the minimum in this scenario, if someone tips 18% or 20%, that differential is a qualified tip! Of course, the restaurant or other establishment with this fact pattern will need to have its recordkeeping system set up to capture this.

Payors will definitely want to get recordkeeping systems ready very soon to be ready to report qualified tips on reporting forms. They might also want to see about changing customer billing arrangements to ease compliance, by, for example, making all tip amounts voluntary.

What do you think?

Inequities of tip income deduction + tip for contractors providing services to non-business customers

2025-09-10T00:33:00.000-07:00

The OBBBA (P.L. 119-21; 7/4/25) adds a new deduction of up to $25,000 for qualified tip income. I blogged on this idea before the text of the OBBBA proposal existed, noting several oddities of the deduction (2/23/25 post). Less than 3% of employees earn tip income (the Budget Lab at Yale estimates it is about 2.5% of employees and I cannot find an estimate of the number of contractors who get tips, but it likely is a higher percentage, but still a minority of contractors).

Why should these workers get a tax break that others with similar income levels don't get? Assume two employees each have wage income of $60,000 but for one worker, that figure incudes $10,000 of tip income. That employee will only have to include $50,000 in their taxable income and the non-tipped employee must include the entire $60,000 in their taxable income. It might even be that the non-tipped employee worked more hours than the other employee. What is the rationale for this? Why not increase the standard deduction or the EITC or add a new bracket below the 10% bracket? Note that both of these employees do pay employment taxes on the same amount of earned income - $60,000.

Unlike some other tip tax break proposals, the OBBBA tip income deduction also applies to contractors with qualified tips. But an oddity in the law creates inequities for contractors because a qualification for a tip deduction is, per IRC §224, that the tip income be "included on statements furnished to the individual pursuant to section 6041(d)(3), 6041A(e)(3), 6050W(f)(2) or 6051(a)(18) or reported by the taxpayer [employee] on Form 4137 (or successor)."

OBBBA amends the above reporting rules to require the issuer to note any tip amount. For example, §6050W on issuance of Form 1099-K was amended to require issuers to make a separate reporting of the portion of reportable payments that "have been reasonably designated by payors as cash tips and the occupation" of the recipient. Thus, Congress only allows contractors to get a tip income deduction (assuming all other requirements are met) if they are reported on a 1099-NEC, 1099-MISC or 1099-K.

Contractors who provide services to non-businesses, such as to households, do not get a 1099-NEC. For example, consider two gardeners each earning $70,000 including tips, who accept payment only by cash or check. The one gardener provides services to businesses each of which receives $600 or more in services in 2025 ($2,000 in later years), so will get Forms 1099-NEC on which the payors will be required to show the cash tip amount. In contrast, the gardener providing the same value of services to households with the same portion of tip income, will not have any Forms 1099-NEC so will not be able to claim a tip income deduction.

This is illustrated on draft Schedule 1-A, Part II, which only has lines for reporting tip income reported on the forms noted above.

But, there is a possible solution for contractors who provide tipped services to non-business clients. Have clients pay by credit or debit card, or use a third party settlement organization such as PayPal or Venmo and be sure you have over 200 payments totaling over $20,000 for the year to be sure the TPSO has to issue you a 1099-K. Guidance is not yet out, but I assume when it is, the TPSOs will ask payors how much, if any, of the amount transferred to someone for services is tip income and the occupation of the service provider. I assume that debit and credit card processors will have to start separately reporting the tip amount from charge receipts.

Was the required reporting on W-2, 1099-NEC, 1099-MISC or 1099-K purposeful by Congress to better ensure proper reporting of the tip income amount and the ability for the taxpayer, tax preparer and IRS to verify it? Perhaps, but it seems a bit harsh for contractors serving non-business clients when they are already required to keep proper records under §6001 and regulations.

AND, don't forget that §224 has a restriction that a worker receiving tips in a business that is a specified service trade or business (SSTB) under §199A(d)(2) cannot claim the tip income deduction. An SSTB is a business in the field of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees, or which involves performance of services that consist of investing and investment management, trading, or dealing in securities (§475(c)(2)), partnership interests, or commodities.

This is also an oddity and unfair. For example, a dancer, singer or magician employed by a casino or restaurant is eligible for the tip income deduction (assuming all requirements are met) because restaurants and casinos are not SSTBs. However, a dancer, singer or magician working for a company that provider entertainers for parties or is a theater company, appears to be an SSTB making these employees ineligible for the tip income deduction (see Reg. 1.199A-5 for more on SSTB). Seems unfair since regardless of the employer, they are in a tipped profession. Overall, the tax law would be more equitable to remove SSTB from §199A where it also creates inequities for some businesses that are SSTBs.

The tip income deduction will only be around for four years, unless extended. Hopefully the roughly 90% of workers who don't get this tax break even though they have earned income equal to or less than tipped workers, will seek its repeal with any income tax break instead tied to providing it to low to middle income workers based on income rather than occupation and who they work for.

What do you think?

OBBBA Includes 2 Marriage Penalties, 1 Neutral, and 1 Marriage Bonus

2025-08-24T20:31:00.000-07:00

A marriage penalty exists in the tax system where, all things being the same, the taxes of two single individuals goes up when they get married. A marriage bonus occurs when combined tax liability goes down when two single people marry. And some provisions result in no change. Generally a couple will face a combination of marriage penalty and status quo provisions, but rarely a bonus provision - except under a new temporary OBBBA deduction but likely less than 15% of workers qualify for it (see below). In my examples, I'm assuming the individuals have identical tax situations and consider what happens if they marry. Thus, I'm looking at marriage penalty and bonus built into the tax law rather than built into facts, such as where a low-income individual marries a higher income individuals causing the higher income individual to drop to a lower tax bracket.

Examples of marriage penalty rules including two OBBBA items:

Where the top 37% income tax bracket starts. At the brackets below this, the MFJ amounts are double the single rates. But at 37% - a rate that applies to less than 1% of individuals, the 37% rate starts at taxable income of $751,601 for MFJ and $626,351.
The net investment income tax (NIIT) threshold for married is $250,000 and $200,000 for single.
The maximum mortgage amount for an interest deduction is $750,000 if MFJ or single ($375,000 if MFS).
The state and local income tax (SALT) cap which for 2018 through 2024 was $10,000 for both MFJ and single ($5,000 for MFS). This penalty remains after OBBBA but at a higher cap of $40,000 for 2025, subject to a phasedown starting at modified AGI of $500,001.
OBBBA tip income deduction is $25,000 max whether married or single (generally $0 if MFS).
OBBBA car loan interest deduction is $10,000 whether married or single (however most people won't have even close to $10,000 of interest expense which equates to a loan of about $160,000).

Examples of provisions with no change for marital status (including one OBBBA item):

Individual tax rates and brackets at the 10, 12, 22, 24, 32 and 35% levels.
The standard deduction for MFJ is double the single deduction.
The gain exclusion for selling your principal residence is $250,000 if single and $500,000 if MFJ.
OBBBA senior deduction is $6,000 per eligible senior (but $0 if MFS).

Examples of provisions with a bonus (I'm just aware of one and it is from OBBBA):

OBBBA overtime income deduction - $12,500 if single, $25,000 if MFJ (generally $0 if MFS). This new deduction (Section 225) is not $12,500 per spouse. So, assuming that the married couple is below the phaseout level, if one spouse has overtime of $25,000 and the other has none, they get a $25,000 overtime income deduction. If that worker with the $25,000 overtime was instead single, they would only get a deduction of $12,500.

I can't think of other marriage bonus situations in the tax law. If you know of others, please post them in the comments - thank you!

So, why was the OBBBA deduction for overtime income written differently for married couples than the tip income deduction? Drafting error? Purposeful?

What do you think? Also see my chart below for a summary of four new OBBBA rules and relevance of marital status.

What Happened to the House OBBBA Provision on P.L. 86-272?

2025-08-10T23:17:00.000-07:00

Over the years there have been various proposals to modify P.L. 86-272 enacted in 1959, to address income tax nexus for companies that only sell tangible personal property. Proposals usually call for expanding the application of this rule beyond sellers of tangible personal property and perhaps to taxes other than income taxes. See, for example, H.R. 3063, Business Activity Tax Simplification Act of 2019 (116th Congress).

The key premise of P.L. 86-272 is that a state may not impose income tax obligations on a company selling tangible personal property if the only activity in the state is solicitation of orders that are approved and shipped from outside of the state. The public law doesn't define solicitation of orders.

There was recent activity, including a provision in the House passed version of the OBBBA, to modify P.L 86-272. But it was not included in the Senate version of the bill or the final bill. Will it return in another tax bill or standalone legislation? Perhaps.

H.R. 427 in the 119th Congress includes this House OBBBA provision. The change involves adding a definition of "solicitation of orders" that is broader than defined by the U.S. Supreme Court since 1992 when the decided Wisconsin Dep't of Revenue v William Wrigley, Jr., Co., 505 US 214. Here is the additional term proposed to be added to P.L. 86-272:

Likely the proposal ties to a new interpretation of P.L. 86-272 by the Multistate Tax Commission in 2021 to consider our digital era that did not exist when this law was enacted in 1959. It might also be aiming to provide greater clarify per recent court cases such as Uline, Inc. v. CIR Minnesota, No. 9435-R (Tax Court, 6/23/23). In this case, sales reps prepared some sales notes and market news notes and helped with a few product returns. This market research was found to be beyond mere solicitation of orders. There were some other activities going on including job fairs in MN.

Query: Why was this multistate provision in the House OBBBA bill but not in the Senate or final bill? Possibly it was dropped since it doesn't directly involve federal revenues so did not meet the requirements for a budget reconciliation bill.

Should this change make its way into another federal bill this year?

What do you think?

OBBBA H.R. 1 - Some Track Changes and Commentary

2025-07-12T02:21:00.000-07:00

I find it helpful in understanding changes to Code sections to use track changes to readily see what was removed and what was added. And when the text of the public law says something like replace "(B)(ii)" at paragraph (d)(1), it is difficult to picture that in your head and you might make a mistake in figuring out what the change does.

I've done this with past public laws such as the TCJA and IRA 2022.

Here are a few for the OBBBA:

Section 36B with various changes to the Premium Tax Credit but not the one many folks were hoping for to make permanent the removal of the requirement for a PTC that household income cannot exceed 400% of the Federal Poverty Line. Perhaps Congress will do this before 2026. Otherwise, many people will see their health insurance costs increase and many will drop their insurance. With fewer in the insurance pool, costs for everyone is likely to go up. Why did Congress put this limit in the PTC to start with? After all, about 60% of employees get a great tax break by being able to exclude the health insurance premiums their employer pays and there is no requirement for this exclusion that one's income has to be below 400% FPL (which is about $62K for a single person). Also, even individuals eligible for the PTC might not get it if based on their age and zip code and the §36B affordability factors, they may be found to be able to afford a second lowest cost silver plan. Again, harsh since there is no affordability factor for the exclusion for employer-provided health insurance.

Section 45S with changes to the employer credit for paid family and medical leave to expand coverage and make the provision permanent (was set to expire at the end of 2025).

Section 67 to allow educators to claim their §62(a)(2)(D) expenses that exceed the dollar amount ($350 for 2026), as miscellaneous itemized deductions that are not subject to the 2% of AGI limit so they are allowed for itemizers (non-itemizers limited to the for AGI amount at §62(a)(2)(D) (adjusted annually for inflation).

Section 68 with the new limitation for itemizers in the 37% top bracket starting in 2026. There have been proposals in the past for further cut back such as to provide that the savings from itemized deductions can't be more than 25% or 28%. This cut back to 35% is not much.

Section 108(f)(5) makes the discharge of debt exclusion for student loans when a student dies or becomes disabled permanent, but does not extend the general exclusion for cancellation of student loans that the American Rescue Plan Act of 2021 added through 2025. Also requires an SSN for the exclusion for death or disability of the student.

Section 163(h) with change to the mortgage interest deduction and new temporary interest on domestic car loans. It is odd that they put the car loan at Section 163(h)(4) thereby splitting the mortgage interest rules that are at 163(h)(3) and (5). I already posted comments on the car loan provision that likely won't get a lot of use for the target group based on income and given the tremendous difference in price between new and used cars and domestic versus foreign, and the small tax savings from the interest deduction.

Section 163(j) with return to calculating the interest expense limitation threshold by adding back to taxable income, depreciation, amortization and depreciation effective for tyba 12/31/24; and some other changes effective for tyba 12/31/25.

Section 170 on charitable contribution deduction with a few OBBB provisions making changes.

Section 199A on the qualified business income (QBI) deduction with key change being making it permanent at the same 20% rate (House proposal for a 23% deduction is NOT in final legislation). A minimum $400 deduction if QBI from active business of at least $1,000, starting after 2025. A few modifications due to §68 limitation on overall itemized deductions.

Section 460(e) with changes to reduce the number of dwelling units per dwelling for home versus residential contracts.

Section 461(l) on excess business loss of noncorporate taxpayers is made permanent (it was already in the law through 2028). Minor modifications on inflation adjustment.

Section 1202 on gain exclusion for noncorporate holders of qualified small business stock. The holding periods, maximum gain exclusion and size of the C corporation are changed.

Hope these are helpful.

H.R. 1 OBBBA's New Limited Deduction for Interest on Car Loan

2025-07-06T23:08:00.000-07:00

H.R. 1, the One Big Beautiful Bill Act (OBBBA) (officially known as An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14) was signed into law on July 4, 2025. It has just over 100 tax changes! One of these is at SEC. 70203, No Tax on Car Loan Interest. Technically, it is a deduction for interest on certain car loans available to individuals below specified modified AGI levels, whether or not they itemize.

In reviewing the details, it doesn't seem that it will benefit too many people because the Senate added a requirement that it must be a new vehicle (the House allowed the deduction for a used vehicle), the income levels are low relative to the average price of a new vehicle being almost $50,000, and the eligible individuals having a marginal tax rate of 10%, 12% or 22% will find that the tax savings will be less than the money savings of buying a used car. Note that by "benefit" I don't mean just getting a lower tax bill, but having to spend more money to get the tax break when comparing the cost differential between a new and used vehicle.

Here is my summary of this new provision and some observations and an example (it's a bit long as is SEC. 70203!).

• §163(h)(4)

• Existing (h)(4) becomes (h)(5).

• Deduction available for 2025 through 2028.

• Deduction from AGI even if don’t itemize.

• Apparently also allowed for AMT.

• Qualified Passenger Vehicle Loan Interest - Debt incurred after 2024 for purchase of, and secured by, a first lien on “applicable passenger vehicle” for personal use.

• Refinancing of such debt that doesn’t exceed balance at refinancing date.

• No related party financing.

• Interest deduction can’t exceed $10,000 for any tax year.

• Phaseout - Reduce otherwise deductible amount by $200 for each $1,000 or portion thereof by which MAGI exceeds $100,000 ($200,000 if MFJ)

• MAGI = AGI + §911, §931 and §933 exclusions

• Must include VIN on return.

• “Applicable passenger vehicle”

• Original use starts with taxpayer.

• Manufactured primarily for use on public roads.

• Has at least 2 wheels.

• Is a car, minivan, van, SUV, pickup truck or motorcycle.

• Treated as a motor vehicle under Title II of Clean Air Act.

• Has gross vehicle weight of less than 14,000 pounds.

• Final assembly was in the U.S. (§163(h)(4)(E)(i)) (Observation: Likely dealer will have info.)

• New §6050AA – lender required to issue information report (likely 1098 type) if interest is $600 or more. Must show origin date of loan and year, make, model and VIN of vehicle, and other info required by IRS.

• Observations:

• Interest rates on new cars per B of A at July 2025 is 5.64%.

• Higher if have poor credit score.

• Average new car price per Kelley Blue Book is $49,740.

• Loan amount to generate $10,000 of interest expense is

• $166,667 if interest rate if 6%

• $ 76,923 if interest rate is 13%

• Once MAGI reaches following, no interest deduction:

• $150,000

• $250,000 if MFJ

• If financing 80% of new car costing $45,000 (so loan of $36,000), likely need income of $30,000 before taxes (but also relevant other expenses and debts outstanding).

• Interest expense on $36,000 loan at 6% = $2,160

• Tax savings at marginal rate of

• 12% = $259

• 22% = $475

• Given price difference between new and used vehicles, tax savings of deducting interest not enough to justify buying a new versus used vehicle.

• Example:

• 1/2/25 - Amy, single, with 2025 MAGI of $110,000 purchased new car for personal use for $35,000 and financed $30,000 with dealer at 6%.

• Car assembled in U.S.

• 2025 interest expense is $1,800

• Amy’s MAGI of $110,000 requires her to reduce deduction by 10 x $200 or $2,000, but not below $0 so she has no possible deduction.

• If Amy’s MAGI were instead $100,000, she can deduct entire $1,800 of interest. Savings for Amy who has marginal rate of 22% is $396.

• Observation: Amy will save far more than $396 per year for four years by purchasing a used vehicle and having a smaller loan or buying a less expensive new car with a smaller loan.

My take: Given that the people who qualify for this won't have $10,000 of interest expense, the phaseout level starts at fairly low amounts for people likely to be able to afford a new car, the reporting requirement for lenders, this provision should have been omitted and the $30 billion it costs the fisc over 4 years (per JCX-35-24 (7/1/25)) should have been used for deficit reduction.

Comments? Do you think I got anything wrong?

What do you think?

OBBBA Effective Dates Caution

2025-06-29T23:34:00.000-07:00

Often, the effective date for tax legislation is for tax years beginning after 12/31/xx with xx being the year the legislation was enacted. So, provisions often start the year after the law is enacted. That doesn't give much time for planning or for the IRS to issue needed guidance. For example, the Tax Cuts & Jobs Act was signed into law on December 22, 2017 with most provisions effective 1/1/18.

The House's 5/22/25 and Senate's 6/28/25 versions of the One Big Beautiful Bill (H.R. 1) have varying effective dates both within the bill and between these versions for similar provisions. Also, some provisions in the House are temporary and most in the Senate are permanent.

But I want to highlight a few changes that would repeal provisions for individuals this year that were supposed to be in the law through 2032!

These provisions were set to expire after 2032 per changes made by the Inflation Reduction Act of 2022.

Residential energy credits of Sections 25C and 25D (§25D was to phase out for 2033 and 2034):

House and Senate bills - these credits end for property placed in service after 12/31/25.

Used clean vehicle credit of Section 25E:

House bill - must acquire (take possession) by 12/31/25

Senate bill - must acquire by 9/30/25

New clean vehicle credit of Section 30D:

House bill - ends after 2025 but for 2026, limited to vehicles for which manufacturer produced no more than 200,000 vehicles.

Senate bill - must acquire by 9/30/25

So, it's important to watch for the effective date in the final bill. But, if someone is eligible and really wants the clean vehicle credit, best to assume it ends 9/30/25. And if you really want the solar panel credit of §25D (or other items it covers) or energy efficient doors, windows and other items of §25C, best to act now to be sure it is all installed by 12/31/25. While it is unlikely the new termination date will be later than 2025 for the residential energy credits given current versions of OBBB, you never know.

What do you think?

H.R. 1 OBBB Depreciation Query

2025-06-23T22:44:00.000-07:00

H.R. 1, One Big Beautiful Bill (OBBB) Act, was passed by the House on May 22 and the Senate is still working on their version although the Senate Finance Committee released their tax provisions on June 16. There are lots of tax provisions in the bill! Just look at the House version's table of contents with tax changes running from SEC. 110000 to 112208 + SEC. 70301 modifying a multistate tax nexus provision from 1959.

Changes include extending many of the temporary provisions of the TCJA passed in December 2017, such as lower tax rates for individuals and a higher standard deduction. H.R. 1 brings back 100% bonus depreciation for eligible assets. Bonus depreciation had begun to phase down per TCJA terms to 80% starting in 2023, 60% in 2024 and 40% in 2025. See SEC. 111001

But I question what seems like an odd effective date for this depreciation change - eligible property acquired and placed in service after January 19, 2025 (so starting on Inauguration Day). Property placed in service on January 1 to January 19 gets 40% bonus depreciation. Generally bonus depreciation rules apply per calendar year even for fiscal year taxpayers. So, why not allow 100% for all of 2025 especially given that the 40% for the first 19 days is from the TCJA drafted by the same party drafting H.R. 1? And it would follow the general rule of having the same rule for an entire calendar year.

My query: What do you think - should we have 100% bonus for all of 2025 or only starting after January 19 and deal with 40% for the first 19 days? 100% versus 40% is a big difference in first year depreciation.

How Does the Revised SALT Cap in House OBBBA Work?

2025-05-26T19:44:00.000-07:00

On May 22, the House passed H.R. 1, the One Big Beautiful Bill Act (OBBBA), and it now goes to the Senate Finance Committee where changes will occur. Some of the House provisions will need to be removed due to the Senate using the Budget Reconciliation Process which calls for restrictions on the nature of the changes, such as they must deal with revenues. And, the Senate will have different ideas on what is currently in the bill which includes over 40 tax changes and some non-tax provisions.

One item of contention among members of both parties is whether to keep the TCJA $10,000 SALT cap that expires at the end of this year. This is an important provision because it could cause the bill to not get enough votes to pass so compromise is likely. The House bill will increase the cap but adds a lot more, particularly to IRC Section 275, Certain Taxes. This rule is in Part IX of Subchapter B of Chapter 1 of Subtitle A or Title 26 (IRC); Part IX is titled Items Not Deductible. With the TCJA, the SALT cap was at IRC Section 164(b)(6) and was brief.

Where a legislative proposal or public law makes changes to various parts of an existing Code section, I often find it helpful to create a track changes of the affected Code sections to get a better understanding of the changes. I have created such a document for the House's SALT changes which you can find in this 18-page pdf with changes shown using track changes. Part of the reason it is long is because I include all of Section 164 despite few changes to it in order to get a better understanding of the changes to Section 275. The SALT cap changes also change a few partnership provisions.

I wish I could explain here how the SALT cap changes work, but I still need more time to figure it all out as the changes are a bit intertwined with other Code sections and H.R. 1 changes. This change does not meet the principle of simplicity!

If you have figured it all out I applaud you! Please leave comments to help us all out.

It is likely that the Senate and Conference Committee will continue to make changes.

What do you think?

18th Anniversary of the 21st Century Taxation Blog

2025-05-14T13:03:00.000-07:00

Well, I'm amazed to be marking today the 18th anniversary of starting this 21st Century Taxation Blog - and that we are still in need of having a 21st century tax system that reflects how we live and do business today.

Today, I'll note the 2025 IRS Dirty Dozen list which was a topic of a webinar I delivered today for CCH/CPELink. I delivered a webinar on the 2024 list last year. In diving deeper into the list, I went back to its start in 2001 when there were just 8 items. I like to share with others work that I find helpful to me, so I posted by list of the Dirty Dozen items since 2001. I categorize them into 3 broad areas:

1. Tax Shelters and Questionable Tax Minimization Strategies Involving Taxpayer Funds

2. Thefts and Other Frauds and Scams Against Taxpayers, Employers and Tax Preparers (mostly bad actors trying to get your money)

3. Fakes - Improper Reporting and Preparer Fraud (mostly improper ways to get money from the government)

See my chart here - https://www.sjsu.edu/people/annette.nellen/website/DirtyDozenTable.pdf

icymi - other items I post for reference you might find useful are lists of all Treasury regulations, and other official guidance from the IRS going back to 2011. The relevant Code sections for each item are listed and if it ties to a specific piece of tax legislation. And there are links to get the full text. This can be useful to see what has been issued or if someone tells you there was, for example, a 2022 revenue ruling on the topic but they don't recall the number. See the 2025 list and links to past lists here - https://www.sjsu.edu/people/annette.nellen/website/2025regs.html.

I also have a variety of tax items posted here - http://www.21stcenturytaxation.com/

Looking forward beyond18 years of tax blogging, I want to focus more on how to improve tax and budget literacy so people can better understand their own taxes, and also understand how the system works and how to get involved in asking good questions of elected officials about tax changes as well as the logic (or lack of logic) of some existing tax rules. Quick example, only about 3% of employees earn tip income which Congress is about to exclude from income taxes. Where are the 97% of employees who don't have this type of income? Why not ask for a higher standard deduction or reduce the lowest two tax brackets to 9% and 11% (rather than 10% and 12%) to benefit far more individuals? [For more on the tip income deduction, see my post of 2/23/25]

My goal in creating this website and blog was to highlight how tax systems can be improved to reflect how we live and do business today and to reflect principles of good tax policy.

I very much welcome comments and suggestions.

Thank you for reading!

SE Tax, NIIT, Additional §1401 Tax - What's Up?

2025-04-21T08:59:00.000-07:00

There has been more focus on self-employment tax in recent years than in many years prior. There is ongoing litigation on what "limited partner, as such" under Section 1402(a)(13), added in 1977, means. This special rule provides that net earnings from self-employment does not include the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments for services actually rendered to or on behalf of the partnership.

Does limited partner mean that under state law you are a limited partner, or does it depend on what the partner does? After all, Congress did not just say "limited partner," it wrote "limited partner, as such." Most limited partners are not involved in partnership operations, but some (as hinted at in (a)(13) above) are providing services for which they receive a guaranteed payment. Some "limited partners" might be involved in some key activities of the partnership such as in a recent case - Denham Capital Management LP, TC Memo 2024-114 (12/23/24). As noted by the Tax Court: "The Partners treated their work for Denham as their full-time employment. Each of the Partners participated in the management of Denham in some way."

In this case, the court agreed with the IRS that these limited partners were not limited partners as such. They found these partners were operating the business in a way that Congress would view them as subject to SE tax.

There are other cases in appeals, such as Soroban Capital Partners LP, 161 TC 310 (2023).

In January 2025, the IRS updated its training materials on SE tax and partners with lots of background on the relevant law and issues.

A few observations:

These limited partnership cases involved lots of dollars - well beyond the Social Security wage/SE base which is $176,100 for 2025, so the issue is whether the limited partners owe Medicare tax of 2.9% on their distributive share + the 0.9% additional Medicare tax under Section 1401 for a total of 3.8%.

What isn't addressed in the cases is the Section 1411 net investment income tax (NIIT) and application of Section 469, passive activity loss limitation. Because the limited partners worked over 500 hours in the partnership, assuming it was just one activity, they are material participants so the income is non-passive (active) and not subject to the NIIT (Reg. 1.469-5(f)). If on appeal, these partners win and are not subject to SE tax, they still won't owe the NIIT.

The FY2025 Treasury Greenbook under President Biden includes a proposal (also suggested by others), that basically would find that income above the Section 1411 and 1401 thresholds ($200K if Single, $250K if MFJ) will be subject to either the additional Medicare tax (total rate of 3.8%) or the NIIT (also at 3.8%). See page 73 of the Greenbook.

Will we see any clarification or change to Section 1402(a)(13) to perhaps not only address what "limited partner" means but also how Congress thinks this applies to LLC members (the IRS and Tax Court apply a functional analysis to LLC members as well as to limited partners as such). This can't happen in the upcoming tax bill which will be handled via the budget reconciliation process because one of several limitations on this approach which allows only 51 votes in the Senate rather than 60, it that it can't address Social Security.

I don't think we'll see separate legislation on this topic but we should see more rulings including from courts of appeals.

What do you think?

Minnesota Proposes Social Media Tax

2025-04-15T23:48:00.000-07:00

Minnesota SF 3197 would impose a gross receipts tax on social media platforms that collect data from over 100,000 Minnesota consumers in a month. The rate depends on how many consumers data is collected from starting at 10 cents/customer/month if over 100,000 customers but not over 500,000, to 50 cents/month/customer if over 1 million customers. A consumer is only counted once per month. [also see bill summary from Senate Counsel]

Analysis from the MN Dept. of Revenue is that 14 social media platforms would be subject to this tax and it would generate $45.5 million for the General Fund for FY 2026 increasing to $99.9 million for FY 2029.

What is the rationale for this new tax? Likely it is revenue generation and to reflect the fact that the social media companies are making money from Minnesota consumers by getting their data and generating ad revenue from their use of the platforms. At a hearing on the bill on 4/9/25, the sponsor also noted concerns of some adverse effects of social media on children, "micro-targeting" (seemed to be a reference to cookies), great wealth of a few founders (Zuckerberg and Musk), efforts by some social media companies to reduce income taxes owed. Note that the hearing was available on YouTube.

The projection that this only applies to 14 social media platforms seems low until I looked up the definition of social media platform at MN 325M.31(j) and what is excluded such as an Internet search provider, Interview service provider, email service, broadband service, cloud computing service and others. So I guess the tax would apply to Meta, TikTok, X, LinkedIn, YouTube, and others.

Observations:

It appears that the social media companies would not have to track down names or other identifying information of customers to count how many users but could just have some recordkeeping to show the number of unique users per month. If more data than this is needed, a privacy concern exists.

Does the MN income tax sourcing rules generate revenue from these companies? If not, can that be changed to generate tax under and existing tax rather than creating a new tax.

Is this fair to other companies that generate revenue from Minnesota consumers such as radio and television, email providers who run ads, any vendor who places "cookies" on user computers for continued advertising, "apps" that run ads, and more.

Would this tax violate the Internet Tax Freedom Act where there can't be a tax on an internet company if there isn't a similar tax on similar vendors (see my comment above).

One of the reasons offered for the bill is to address harms of social media implying that there are negative externalities. But are tax dollars from the social media companies (and others with negatives (such as advertising unhealthy products on all media for example)) sufficient to cover the costs of these negative externalities? Where is any data on this consideration? Are there non-tax laws that might address some of these negative externalities (although it is difficult to regulate content online). The excise tax funds go to the General Fund, while I'm not a fan of earmarking tax dollars, seems that some of these funds should go to address some of the negative externalities such as providing alternative activities for children and helping parents with ideas on how to protect children.

What do you think?

Property Taxes Pay For Services; No Relation to Your Mortgage

2025-03-23T23:19:00.000-07:00

In his State of the State address on March 4, 2025, Florida Governor DeSantis made this statement:

"While Florida property values have surged in recent years, this has come at a cost to taxpayer squeezed by increasing local government property taxes. ... Taxpayers need relief. You buy a home, pay off a mortgage - and yet you still have to write a check to the government every year just to live in your own property?"

Perhaps he was more focused on increasing tax collections leading to more government spending rather than making an adjustment to reduce tax collections to match government spending needs.

But questioning why a homeowner should continue to pay taxes to the government after paying off their mortgage is odd and certainly doesn't help improve tax literacy. Note that he didn't say that people who can afford to buy a home without a need for a mortgage should always be exempt from property taxes, which would seem to be the logical statement if property taxes are only paid by mortgagees.

Property taxes are paid, like other taxes, to fund government services and homeowners use a lot of them - streets, road maintenance, a judicial system, a school system, police and fire protection, sanitation services and likely even more.

Florida does not impose an income tax so it needs to rely on its property tax to cover more government services than states that have more tax bases.

The Wall Street Journal (3/20/25) and other papers reported that Florida is considering eliminating the property tax because home prices have increased. I'm quoted in a Newsweek article (3/7/25 by Claire Dickey) on this topic (right next to a quote from Governor DeSantis). I was asked if local governments should have some control over their property taxes. I said yes! There may be situations where a homeowner has lost a job or can't work due to illness and risks losing their home because they can't temporarily pay their property taxes. A local government should be allowed to have a system to help these homeowners.

And like many states did following the passage of Prop 13 in California in the 1970s, a state can modify the property tax base to have a cap on how much it can appreciate each year so if there is significant market increase, property taxes don't rise to the point where many homeowners can't afford to pay them (and along with that also could not afford to buy their home at today's value).

Given the close connection between the property tax which is usually a local tax and the numerous local government benefits taxpayers get, the property tax should stay. And it is one of the simpler taxes. But relief should be considered if property values are leading to tax increases (generally property tax is based on the current FMV) that many cannot afford. And, my suggestion for any Prop 13 relief measure is to modify it so that people with the highest value homes and most recent acquisitions get a higher annual revaluation because otherwise, Prop 13 provides a much larger tax break to the higher wealth/higher income homeowners.

What do you think?

Unusual Proposed Exclusion for Crypto Gains

2025-03-02T22:42:00.000-08:00

HB 453 introduced in the Montana Legislature on February 11, 2025 calls for the Department of Revenue to create a program to allow state income taxes to be paid with cryptocurrency through arrangements with one ore more third party payment processors. That isn't unusual as at least one other state already does this - Colorado.

What is unusual is that HB 453 would also make the payment of Montana income taxes with crypto tax free! That is, if a taxpayer used bitcoin with a basis of $10 to pay state income taxes of $2,500, the realized gain of $2,490 ($2,500 liability satisfied with an asset with a basis of $10), would be tax free.

There is no tax policy justifying this treatment. The appreciation in the crypto used to pay state income taxes is a realized gain. It is the same result if the holder sold the $10 basis bitcoin for $2,500 and used that money to pay their income taxes - a taxable gain. If someone had to sell stock to pay their taxes, any gain would be taxable.

Of course, if a state wants to exclude such a gain, it can certainly change its income tax to do so. The gain would still be taxable for federal purposes and likely a reason why few would take advantage of this state offer should HB 453 be enacted.

If enacted, I wonder if people would reduce their withholding, such as from paychecks and increase their estimated tax payments made with crypto to maximize their exclusion (but still taxable for federal purposes). Would others in Montana ask if they can pay their taxes with appreciated assets such as stock or gold, and also get an income exclusion? After all, what is so special about crypto, particularly if a third party is going to do the conversion of that asset to cash and get the cash to the Department of Revenue?

The revenue estimate for HB 453 is about $70,000 per year which minor. I suppose people with little gain in their crypto might take advantage as the federal tax consequences would be small. But individuals with large gains would most likely not be interested as they can also avoid the federal income tax gain if they die holding the appreciated crypto (which is a much greater tax policy flaw in our tax system - excluding gains at date of death).

What do you think about providing a special state rule for paying your taxes in crypto and avoiding state tax on that gain?

What's So Special About Tips to Make This Income Non-taxable?

2025-02-23T21:41:00.000-08:00

Both presidential candidates offered a tax law change to make tips non-taxable. A few days after the inauguration, President Trump was in Las Vegas at a rally for "No Tax on Tips." What is so special about tips to justify a law change to make then non-taxable? I can't think of any, but offer these observations to remind us that tips are income just like wages and business income and there is little reason to provide a tax break to these workers - why not provide a tax break to all workers?

1. Tips are income: Income is defined by the US Supreme Court as "an undeniable accession to wealth, clearly realized, and over which the taxpayer has complete dominion" (Glenshaw Glass, 348 US 426 (1955)). Some people suggest tips are gifts so are not taxable. A gift is defined by the US Supreme Court as something given with "detached and disinterested generosity" where the donor expected or expects nothing in return (Duberstein, 363 US 278 (1960)). Someone who receives services at a restaurant, hotel, hair salon, or similar establishment, might offer a tip because they appreciated the service and the amount likely varies by how much they liked the service. It is not a gift. If the giver wants to make a gift to someone they should go up to a stranger and give them money with no expectation of anything in return - that is a gift.

2. More than tipped workers need tax relief: H.R. 8785, Tax Free Tips Act (118th Congress) would have changed the law to say that wages do not include tips and make them not subject to income or payroll taxes. The sponsors offered as a rationale that many people getting tips might be "working a second job to make ends meet" so should be able to keep their money. That sounds reasonable if we are talking about raising the standard deduction for ALL low-income workers, but why single out or assume that only tipped workers are in need of tax relief.

3. Challenges of defining tipped workers: It looks like the key proposal in the 119th Congress based on the number of sponsors is No Tax on Tips Act. It would exempt cash tips from income tax (not payroll tax) and has "guardrails to ensure only traditionally tipped employees will benefit from" the proposal (see 1/16/25 sponsor press release). Do note that it says employees. Thus, contractors, such as your Uber driver and owner of a business, would not benefit from the tip deduction. The deduction is limited to $25,000 for the year and would not apply if the worker's income exceeds $160,000 (this is the amount per the reference to §414(q) in the bill). "Qualified tips" for the deduction are defined as "any cash tip received by an individual in the course of such individual's employment in an occupation which traditionally and customarily received tips on or before December 31, 2023, as provided by the Secretary." Thus, the Treasury and IRS would have to define this employee group. I think that means that there isn't already a list of traditionally tipped industries.

4. Tip versus Service Charges: Some restaurants including ones in DC, automatically add a charge to restaurant bills such as because it was for a group of 6 or more (in DC, even 1 customer gets a 20% fee added). Is that a tip or something else (the DC one appears to be a service charge)? For tax purposes today for rules relevant on tip reporting, a service charge is not a tip (Rev. Rul. 2012-18). The fee is wages if distributed to employees. Will any legislative proposal address whether "forced" tips or service charges are the traditional and customary tips to be non-taxable? Arguably, I think yes, but to me it just doesn't seem like a tip when the business adds the amount to your bill automatically. But this should be addressed in any legislative change (in defining "tip").

5. Challenge of excluding tips from Social Security/Medicare taxes and state income taxes: Any tax big tax bill this year will likely be accomplished via the Budget Reconciliation process so that only 51 votes are needed in the Senate. This process does not allow for changes to Social Security so any tip exclusion in the bill can only remove income taxes (as proposed with No Tax on Tips Act (see 3 above)). Also, I think most states will opt not to conform to a federal exclusion or deduction if enacted due to the loss of revenue and the inequity of providing a tax cut to only a small number of employees. The Budget Lab at Yale estimates that 2.5% of workers earn tip income. At the 1/25/25 rally in Las Vegas, President Trump said over 4 million workers receive tip income and that about 25% of a typical restaurant worker's pay is from tips. Will a state enact a tax change to let about 3% of employees exclude 25% of their pay from taxes with no break to other employees who are at the same pay levels? I don't think so.

6. Permanent or temporary: Will any exclusion or deduction for tip income be a permanent change or temporary? I think if the extension of TCJA expiring tax cuts is temporary, the change for tip income will also be temporary, but who knows.

So, there is a lot to consider on this topic that affects a relatively small number of employees. Given the tax cut for a small number, will other employees, particularly those making minimum wage or a bit more also ask for an equivalent tax cut? I think they should to improve the equity of the proposal - that is, similarly situated taxpayers based on income should be treated similarly. If a tipped employee making $70,000 including tips gets a tax cut, a non-tipped employee also making $70,000 should also get the same tax cut.

What do you think?

Improving Tax Systems

2025-02-02T19:11:00.000-08:00

Over the years, we see numerous federal and state tax law changes such as adding or modifying a credit, deduction or exclusion. We sometimes see rate cuts and increased deductions, such as most individuals experienced for 2018 through 2025 with the Tax Cuts and Jobs Act of 2017 changes that lowered the individual rates, almost doubled the standard deduction (which 70% of individuals used prior to 2018; today about 90% claim it), and the child tax credit was doubled from $1,000 to $2,000. But there were numerous other TCJA changes many of which only affect the top 10% of taxpayers or even the top fraction of the top 1% of individual taxpayers (such as an almost $14 million estate tax exemption per person for 2025).

What was the purpose of these changes? Mainly it was to improve the international competitiveness of the U.S. corporate tax system. So, why any individual tax changes? Well, people tend to favor individual tax cuts rather than corporate tax cuts (see this Pew Research poll among others). At the state level, what is the purpose of yet one more sales tax exemption or a new exclusion from income tax?

What about review and reform of the entire tax system? Well, it is a big project, but not an impossible one. It requires a good look at how much revenue is needed (where does the government need to spend money and what are public goods and services that warrant use of tax revenues), what should the mix of taxes be, and should certain spending be done through the tax law like we have today via special deductions, exclusions, credits and rates, or done directly and more transparently?

In a January 2025 Tax Notes State article, I suggest the need to look at four areas that tend to be overlooked in discussions of tax law changes, but that would improve tax systems if considered:

1. Articulate and use the jurisdiction's economic, societal and environmental goals.

2. Identify what tax revenues should pay for and how (directly via payments and grants or by the government paying for them directly or by reductions in recipient's tax bills via special deductions, exclusions, credits and rates?

3. Find missing voices and data. For example, while a sales tax exemption for infant diapers might sound like something to help low income taxpayers, if higher income people spend more on diapers, they get the bulk of this tax break or subsidy? Why do we have a $1 million limit on the debt to produce deductible mortgage interest for itemizers (since 1987 although only $750K for 2018 through 2025) when the median home sales price in December 2024 in the U.S. today is only $427,000 (Census Bureau data)? Most likely because the drafters of this tax rule have far more expensive homes with large mortgages.

4. Provide tax transparency and tax literacy. Provide the detailed reasons for tax changes, as well as who is affected including breaking it down by income groups including breaking it down for the wide range of income levels comprising the top 1% of individuals. Find ways to help individuals understand their own taxes (such as covering it in high school civics classes) and understand how spending occurs through our tax system and how it compares to the direct spending you can see in looking at budgets of government agencies.

I encourage you to read the article - Overlooking Considerations That Could Improve Tax Systems.

What do you think?

Federal Tax Treatment of Proposed NY Inflation Refunds

2025-01-03T22:05:00.000-08:00

12/9/24 news release

Per a December 9, 2024 story at the New York State website, Governor Hochul has proposed "sending 8.6 million New Yorkers an Inflation Refund Check as first proposal of 2025 State of the State."

The rationale is that inflation increased the price of taxable goods and services on which sales tax was charged. So, the state collected more sales tax than it would have without inflation's affect on prices. Governor Hochul proposes giving "everyday New Yorkers":

$500 for families making under $300,000

$300 for individuals making under $150,000

Big question ... Will these "tax refunds" be subject to federal income taxes (must the recipients include them in their federal income tax)?

I think the answer is yes.

Income is broadly defined at IRC §61 and case law as being derived from any source and something that is an accession to wealth. In Notice 2023-56 suggested how the tax law applies to various payments received from a state and sought public comments for the IRS's final guidance (which has not yet been issued).

In Notice 2023-56, the IRS noted that the name given to a payment is not controlling but instead, the substance of the payment arrangement controls. If a tax "refund" is limited to how much tax the individual actually paid, the payment is likely to be a non-taxable tax refund (taxable though if the taxpayer claimed a deduction (tax benefit) for the tax later refunded).

The NY proposal is the same for everyone at a specified income level or marital status. It appears to have no relation to how much sales tax the recipient actually paid.

Notice 2023-56 also explains the general welfare exclusion where payments are made based on need. This also won't apply to the NY "refunds" as the income levels at which they can be issued is well beyond "needs" and the median income level.

Is there anyway to avoid the federal tax hit so that 100% of the refunds can stay in New York? Well, they could be changed to be, for example, 10% of the actual sales tax paid. But people won't have these records. It could be achieved by temporarily lowering the sales tax rate to give buyers back some portion of sales tax by paying less today than they otherwise would. They could use the additional sales tax collected to provide funding for services available to low-income individuals.

I think they could significantly lower the income level for these payments, so that they are truly only provided to those in need making them excludable under the general welfare exclusion.

What do you think?