Alternative Maximum Tax introduced in Iowa House. The Republican leadership of the Iowa House of Representatives has introduced a new way to compute Iowa personal income tax. HF 3 would create an optional “alternative base income tax”at a 4.5% flat rate. The bill would allow taxpayers to elect to be taxed on their federal Adjusted Gross Income before net operating losses, less a $6,200 standard deduction ($12,400 for joint filers and heads of households). The only credits allowed would be for estimated taxes and withholding. Taxpayers could instead continue to follow the existing tax law.
There is an obvious flaw in the statute as drafted: federal AGI includes interest on federal debt, which states aren’t allowed to tax. Maybe that’s just assumed, but the existing Iowa income tax law specifically excludes U.S. interest. This tax is different from that proposed by Iowans for Discounted Taxes, which would exempt all investment income from the tax base.
The bill would be a huge step forward for Iowa tax policy if it were enacted as a replacement for Iowa’s current tax, rather than an option. Eliminating all of the tax credits and special state deductions would greatly simplify everyone’s tax life, and lowering the rate would make Iowa much more attractive to businesses and newcomers. In this form, though, it’s just another computation, an alternative maximum tax. It’s like the alternative minimum tax, except you pay the lower tax computed, rather than the higher one. It was probably drafted this way to avoid a fight over eliminating the current deduction for federal income taxes on Iowa returns.
I will run some numbers to see how the HF 3 tax would compare with taxes computed the current way. The bill is co-sponsored by 54 representatives, including House Speaker Paulsen, so it’s a given that it will pass the House in some form. It will be interesting to see whether the Senate, controlled by Democrats, will bring this to a vote. The Governor has made clear income tax reform isn’t his priority this year.
This plan might be half-cocked. From William McBride at the Tax Policy Blog:
This week Rep. Rosa DeLauro (D-CT) proposed an assault weapon buy-back program that would operate through the tax code:
“The SAFER Streets Act creates a $2,000 refundable tax credit ($1,000 for two consecutive years) for an assault weapon owner who turns in their firearm to the state police.”
This assumes the gun manufacturers cannot produce additional guns as
fast as the old ones are destroyed, and that they cannot be produced, at
this rate of production, cheaper than the buy-back price.
Cash for Clunkers, firearms edition.
Kay Bell, Guns, ammo, violence and taxes
TaxProf, TIGTA: IRS Has 60% Error Rate in Policing Noncash Charitable Contribution Deduction. I’m sure they’ll do lots better implementing the Affordable Care Act.
Patrick Temple-West, New Yorkers face higher real estate taxes, and more
Peter Reilly, Are Tax Protesters Actually Winning ?:
Ms. Curtis lost as badly as it is possible to lose in Tax Court. There is the 75% fraud penalty and the maximum sanction, $25,000, for frivolous arguments. She still might appeal, though. Presumably the Circuit will make relatively quick work of that and maybe pile on some more sanctions. Fine. Now the IRS has to start trying to collect from her.
Tax protester arguments can slow down the tax collector, but the tax man wins in the end.
Robert D. Flach, THE RETURN OF A HOME OFFICE STANDARD DEDUCTION
Kerry Kerstetter, New option for Home Office deduction
Jason Dinesen, How the Fiscal Cliff Deal Affects Teachers
Trish McIntire, Red Forms
Cara Griffith, Should States Just Enforce Use Tax Collection? (Tax.com)
Joseph Henchman, The Al Bundy Tax Rule: New Hampshire Governor Pledges to Veto Beer Tax (Tax.com)
If it’s your identity, pretty bad. IDENTITY THEFT AND TAX FRAUD – HOW BAD IS IT? (TaxTV.com)
Brian Mahany, Steelers’ Plaxico Burress Pays Off $98,000 IRS Tax Lien
Christopher Bergin, Everybody’s Gone Surfing (Tax.com)
Tags: TaxProf, Kay Bell, Russ Fox, Robert D Flach, Christopher Bergin, Going Concern, Trish McIntire, Joseph Henchman, Branstad tax policy, Peter Reilly, William McBride, Jason Dinesen, TaxTV, Patrick Temple-West, Cara Griffith, Brian Mahany, alternative maximum tax, Kerry Kerstetter