Q:

Subject: Stephen Moore’s Tax Plan

Mr. Kerstetter,

First let me say thanks to both answering my question about DoD Social Security contributions for military members and then for posting the letter “In the Same Boat” on 2/2 on the socialsecuritychoice.com blog.

Secondly, I went over to your personal blog site and saw three posts about Stephen Moore’s postcard tax plan. The original one on 1/30 linking to his WSJ article
The second one on 2/2 by Bruce Bartlett at the Washington Times was negative
The third one on 2/4 by Terry Savage at the Chicago Sun Times was positive.

I was curious about your opinion on the matter or to any other flat tax proposals.

I know you’re busy, but would appreciate hearing from you. If you already have a published opinion on the matter, that would be fine if you could send the link.

Thanks

A:

I don’t seem to be able to find the time to discuss the various pros and cons of a flat tax in as much detail as I would like.  If you do a search on my blog, you will find several previous mentions of flat tax ideas.

As the articles you cited mention, there are plenty of pros and cons to every taxation scenario, including the various flat tax proposals. 

As should be very obvious in all of my writings, I have always been a big opponent of the graduated tax rate structure in this country that penalizes success.  I have never been shy in pointing out that such a method of wealth redistribution has its roots in the Communist Manifesto, in spite of claims by many on the left claim that it is from our Constitution.  Replacing the punitive rate structure with one single rate would be a great step towards fairness.

What I have long warned about is that it is a fallacy to think that any flat rate tax system would put the IRS out of business or reduce the workload for us tax pros.  The fun and games are with arriving at the taxable income figure.  Figuring the tax, whether with a single rate or the current sliding scale, is the easy part.  To keep everyone honest would still require the IRS to operate just as they do now.  The only way to really get rid of the IRS would be to repeal the 16th Amendment and replace the income and estate taxes with a national sales tax, as proposed under the Fair Tax plan.

Stephen Moore’s idea of allowing people to compute their taxes under two different methods and then choose the lower one is an interesting concept that could be a way to make a smoother transition to an easier method.  From my perspective as a tax preparer, I can see that such a plan would create even more work for us, since we would have to prepare two different returns for clients.

If any of the big tax reform proposal ever makes it further than just idle talk, I will probably pipe up with more commentary.

Thanks for your interest.

Kerry Kerstetter

Figuring deduction for sales tax mostly a waste of time – I haven’t actually done any 2004 1040s yet, so I’m curious as to how this will end up working out for those clients in taxable states.  It will obviously be a bonus for the several we have in the states with no income tax.  

Three Ways to Find Real-Estate Bargains – Maybe it’s just because I’ve always somewhat specialized in real estate issues; but I have seen so many more people make good money in real estate than in the stock market.

Understanding Small Business Tax Deductions

Selecting a Tax Preparer is as Important as Choosing a Doctor – An analogy I frequently use when people ask for one size fits all advice.  Diagnosing a tax problem in a general forum doesn’t work.

IRS Has $2 Billion for People Who Have Not Filed a 2001 Tax Return – One of the worst double standards in the tax system.  If you owe tax, that debt follows your forever and beyond (your heirs).  If you have a refund coming to you, it’s forfeited if you don’t file a tax returns and claim it within three years. It becomes a gift to Uncle Sam.

Bush’s Fiscal 2006 Budget Pushes Tax Cut Permanency, Budget Process Reform

White House Budget Leaves Heavy Lifting to Tax Reform Commission

IRS Enforcement Gets Budget Boost; Service, Modernization Not So Lucky

Proposed Treasury Budget for FY 2006

Statement of IRS Commissioner Mark W. Everson on the FY 2006 Budget

 Elderly Are Skeptical Of Reverse Mortgages – I have always had problems convincing elderly people that there is no sin in having a mortgage on their homes and dipping into their equity in order to enjoy the fruits of their investment.  A home with a mortgage is still a windfall to their heirs.  When I crunch the numbers, it often works out better to have them take out a large mortgage at one time rather than use a piece-meal reverse mortgage approach.  It usually works out that they can deposit half of the tax free loan proceeds into the bank and it will make the payments for their rest of their lives.  The other half can be spent on fun stuff, “I’m spending my kids’ inheritance” style. 

Many people have long wondered why ten percent of income is enough for God, yet our earthly rulers demand many times that much.

Full size image.

This is the latest installment of an ongoing discussion I have been having over the past few years with Ohio CPA Dana Stahl regarding the question of whether LLC members are required to pay the 15.3% self employment tax on their share of the LLC net income. 

 DS:

Mr Guru – I can’t remember if I asked you about this previously.  If so, I apologize for asking again.  Anyway, the new 2004 K-1 has a check box for “general partner/LLC member manager” and another for “limited partner/other LLC member”.  As you know, we’ve discussed repeatedly about the LLC member/SE tax issues, in that those who are Members of a multi-member LLC can opt out of SE tax.  Therefore, how would you recommend we handle which box to check for someone who is actively making a living in an LLC, but not paying the SE tax?  Just go ahead and check the limited partner box?  Let me know.
DS, CPA

Mr Guru – oops, had an additional thought on this.  Is this new set up on the K-1’s just an IRS trick to get LLC Members to start paying SE tax who have previously opted out?  Seems like it to me.
DS, CPA

KMK:

Dana:

Good point about the new descriptions next to the K-1 boxes.  Looking through the IRS’s instructions, they don’t specifically mention any change with LLCs and SE tax; but I think you are right that checking the General Partner box could possibly be used as an admission that the income is subject to SE tax if IRS ever decides to move beyond its current position of having it determined as such voluntarily. 

I think it’s best to stick with the descriptions that they show in the instructions:

It defines general partner as someone who is personally liable for partnership debts.

Limited partners – Members of LLC can be treated as limited partners for certain purposes.  

Since one of the big benefits of LLCs is the protection from personal liability, we can honestly check the limited partner box, which is what I will be doing for those clients who don’t want their LLC income classified as SE.

Kerry

Simplifying the code – Good summary by George Will of the pitfalls and obstacles facing any attempt to simplify the tax system.   I thought I used flowery language when discussing the insane tax mess we have.  However, I have to admit that, after 30+ years in the tax profession, Mr. Will is the first person I can recall referring to income tax as “Satan’s fingerprint.”  I guess that makes my lifelong quest to reduce everyone’s taxes a true fight of good versus evil.

Q:

Dear Sir, I was wondering for head of household if there are 2 separate families living in one house ( address ) can both claim head of household? Sincerely

A:

That is possible.  However, the burden of proving that you both qualify is on you, so keep plenty of documentation.

Here is the relevant explanation from page 1-7 of my new CCH 1040 Express Answers book:

Multiple heads of household may share the same address if they maintain separate households and can provide documentation of that fact.

Gray Area.   Persons sharing the same living quarters are subject to special scrutiny by the IRS if more than one files as Head of Household.  Documentation of separate households is required if two persons with the same address file as Head of Household.  The same qualifying individual may not be used by both.  Records must clearly show which person made all rent, mortgage, utility, and other relevant payments to substantiate the claims.

You didn’t say what state you are in, but my experience has been that some state tax agencies (i.e. California) are actually much tougher in regard to verifying eligibility of taxpayers to claim the HoH filing status.

I hope this helps.  Your personal tax advisor can better evaluate your particular circumstances.

Kerry Kerstetter