Maybe this is a good year to use itemized deductions after all. Consider this story in the Des Moines Register, Iowa GOP delegation may break anti-tax pledge:
Grassley said Republicans are willing to ignore the pledge and tap more tax money “from the same wealthy people (President Barack Obama) wants to get it from.”
Where they differ is that Obama would bump the marginal tax rate to 39.6 percent, Grassley said, while “we would suggest raising the same amount of revenue the president wants to raise by capping deductions for wealthy people.”
If Iowa Senator Grassley and the other tax increase lemmings get their way, it will be a big backdoor tax increase on owners of pass-through businesses that have their income taxed on their 1040s. While corporations get to deduct their state income taxes on their businesses in full, individuals have to take their state income taxes on business activities “below the line” as itemized deductions. Treasury Regulation 1.62-1T(d) explains:
To be deductible for the purposes of determining adjusted gross income, expenses must be those directly, and not those merely remotely, connected with the conduct of a trade or business. For example, taxes are deductible in arriving at adjusted gross income only if they constitute expenditures directly attributable to a trade or business or to property from which rents or royalties are derived. Thus, property taxes paid or incurred on real property used in a trade or business are deductible, but state taxes on net income are not deductible even though the taxpayer’s income is derived from the conduct of a trade or business.
This would be bad news for business owners in high-tax states or whose businesses operate in multiple states — one of their bigger business expenses would become non-deductible if itemized deductions are capped at, say, $50,000. Somebody should mention to Senator Grassley that Iowa has a high state tax rate.
The push for deduction caps adds another wrinkle to year-end planning. With rates going up, you would normally defer deductions to next year to get a greater benefit from them. The cap changes that for taxpayers with high itemized deductions. If a deduction cap is enacted, it is likely to be effective for 2013. Better a lower-rate benefit this year than no benefit at all next year under a deduction cap.
The saddest thing about this is the whole game of “taxing the rich” is a stupid distraction. The $80 billion or so it would raise annually is rounding error in a $1.2 trillion deficit. Even taxing 100% of the income of “millionaires and billionaires” won’t cover the budget deficit. The rich guy isn’t buying.
TaxProf, Two-Thirds of Millionaires Left Britain to Avoid 50% Tax Rate. I doubt many of them headed to France.
Don’t worry, they’ll make it up in free health care. Iowa’s part-time workers face cut in hours (Des Moines Register):
More than 50 uninsured part-time workers for the city of Cedar Falls will see their hours cut this week so the city can avoid paying for their health insurance under President Barack Obama’s signature health care law.
The move comes as a 12-month “look back” period begins under the new Patient Protection and Affordable Care Act. During the 12 months leading up to 2014, employees working more than an average of 30 hours a week must be offered health care insurance in January 2014.
Nothing is free.
Only time for a very quick roundup today.
Roberton Williams, TPC’s New Tax Calculator Examines Fiscal Cliff Options (TaxVox)
Christopher Bergin, The Other Cliff; Hint: It’s in Your Tax Return (Tax.com):
Just think of the insanity. Millions and millions of taxpayers, who every year plan on their refunds (the wisdom of which is an issue for another day) won’t get them on time. They get screwed (a technical tax term).
Paul Neiffer, Don’t Forget Your Form 1099 Responsibilities!
Anthony Nitti, Predicting The Future: What Will Your 2013 Tax Liability Be?
The Eagle has landed. IRS deal means museum home for ‘Canyon,’ no tax bill for former owners (Kay Bell)
Scott Hodge, Buffett’s Case for Minimum Tax on the Rich Fails on All Accounts (Tax Policy Blog)
Your beatings will continue until their morale improves. Warren Buffett: Tax Hikes on Rich Would ‘Raise Morale of the Middle Class’ (TaxProf)
Tags: Anthony Nitti, Christopher Bergin, Fiscal Cliff, Going Concern, itemized deduction cap, Kay Bell, Paul Neiffer, Roberton Williams, Scott Hodge, Senator Grassley, TaxGrrrl, TaxProf, the rich guy's not buying