Bush Aides Rethink Politics of Tax Cuts

More Tax Cut Options

As always, everyone wants to come up with their own great ideas for reducing the tax burden, such as these ideas on income taxes.

As much as it pains me to publicly agree with a liberal phony like John F. Kerry, who couldn’t care less about real working people, he is correct that many people pay more in payroll taxes than they do in income taxes. An exclusion of the payroll taxes on the first $10,000 of income actually sounds like a good idea. However, it would only be truly fair if the employers were also allowed the same exemption and not required to pay any payroll taxes on the first $10,000 of wages per employee per year. The result of this just may be raises for the existing employees or the hiring of additional workers.

While JFK thinks he will be buying the loyalty of the working poor through what he calls a “tax holiday,” he will paint himself into a corner with such a plan. If he tries to call off the “holiday” and force those same people to reduce their take home pay by $765 a year, he and his fellow DemonRats will create a lot of enemies from those same folks.

For those who claim such a break on payroll taxes will exacerbate the financial instability of the Social Security system, you need to acknowledge that, contrary to Al Gore’s propaganda, there is no such thing as a lock box for Social Security funds. They have been commingled with the general revenues since Lyndon Johnson’s days in the White House. Treating them as two separate tax systems in just plain dishonest. Looking at the overall tax burden of income and payroll taxes is the most realistic way to approach it, which is what I have always done when working with clients. Some of the strategies we use to reduce or eliminate their payroll taxes save them much more in those taxes than in income taxes.

KMK

Selling Off

If a real world person or company were in serious financial peril, one of the first options to be explored would be getting rid of unnecessary things in order to generate cash as well as cut back on operating expenses. Is it possible that the rulers of the PRC may also be seriously considering selling off some of the real estate they own? I’m sure the local counties where the properties are located will be happy if the State unloads the properties to private buyers because they can then start earning property taxes from them.

The next step is for our rulers in DC to do the same thing. Our founding fathers never intended for the Federal Government to own as much property as it does. Selling off unused federally owned property would be a very wise move, especially for a President with an MBA.

KMK

Social Insecurity

Taxation by the numbers

The country’s best economics professor, Walter Williams, does a great job explaining how taxes affect the real world.

White House Aides Push for 50% Cut in Dividend Taxes

This would be an excellent long overdue Christmas present.

Residence Sale Rules

In May 1997, over five and a half years ago, the rules for tax free sales of primary residences were changed dramatically. There are still many people, including quite a few real estate and tax professionals, who believe we still have the old rules requiring that a new more expensive replacement residence be purchased.

As with most tax laws, our rulers in DC like to use a lot of vague terminology and expect the geniuses at the IRS to fill in all of the details as to how the law should be implemented in real life. In typical government fashion, IRS is rarely in any hurry to work on these matters, especially in cases such as this, where people are legally allowed to avoid paying taxes.

As I outlined in my explanation of the current residence sale rule, there were some cases where the seller didn’t have to actually live in the home for a full two years in order to exclude part or all of his/her gain. The reasons were very vague: employment, health or other unforeseen circumstances. What exactly qualified as meeting those conditions was left up to IRS to define. In the meantime, we in the real world had to decide how to handle tax returns for real people.

This is one of many areas in taxation where there is a big difference between the attitude of tax professionals. Unfortunately, you would think that most tax advisors actually work for IRS in how they deal with this. I occasionally check out online tax Q & A discussion boards and am amazed at how willing supposedly independent tax advisors are to side with IRS.

IRS has the benefit of being able to take its sweet time interpreting the tax laws. In the meantime, those of us living in the real world have to conduct our lives. We can’t put everything on hold waiting for IRS to decide.

This state can be dealt with in two ways. We can refrain from our own interpretations of the tax laws until IRS issues its formal pronouncements or we can do our best to interpret the law. Unfortunately for most taxpayers, the majority of tax professionals choose the former approach.

My approach to this situation has always been the complete opposite. My interpretation is that if IRS has not come out and definitively stated how something should or shouldn’t be treated for tax purposes, they have no right to dispute our reasonable interpretation of the fuzzy gray areas in tax law. They can’t come in after the fact and claim that we did it wrong if they refused to tell us ahead of time how to do it right. I have been doing this for almost 27 years, and continue to take this approach, and I have yet to have any of my interpretations overturned by IRS. There are occasionally IRS personnel who may try to use a proposed IRS regulation to bolster their argument. When I point out to them what the word “proposed” means, they always back down.

For those tax advisors whose loyalties lie on the side of the IRS, the IRS goal of avoiding tax saving steps is achieved just by their delays. For those of us who believe in doing everything we can to help clients, the delays help our case.

Back to home sales. IRS has finally released their official safe harbors for defining the terms of the 1997 law in regard to such matters as proper occupancy, mixed use (business and personal) property, land sold separately from the main home, as well as how to qualify for the pro-rated exclusion under the employment, health and unforeseen circumstances tests. Again, while many tax practitioners will use these IRS examples as the definitive list of what are acceptable reasons, that is not the case. They are merely safe harbors. This means that IRS will not disallow the tax free exclusion of gain by anyone meeting their examples. It does not mean that other reasons not included in their examples won’t qualify under the normal facts and circumstances test.

In the IRS pronouncement, they mention that anyone who paid tax on a gain that now falls under one of the tax free safe harbors can amend his/her 1040. However, because the statute of limitations for modifying tax returns is only three years, only 1999, 2000, and 2001 1040s can legally be amended. Anyone who erroneously reported taxable gain on their 1997 or 1998 1040 is out of luck.

For those who want more details, here are some handy links:

IRS announcement of new rules

IRS three page pdf summary of safe harbors

IRS 22 page pdf of temporary regulations re: pro-rated exclusion

IRS 48 page pdf of final regulations re: tax free residence sales

My summary of the IRS summary in easier format.

KMK

A Scary Place

Not Looking Good For the PRC

Supply-Siders At Odds Over Best Tax Cut Strategy