Expansion of Iowa 10-and-10 gain exclusion advances. The bill to expand the availability of Iowa’s super-long-term capital gain break cleared its first legislative hurdle this week, as a House Ways and Means subcommittee approved H.F. 2129.
Iowa allows an exclusion from state taxable income of certain capital gains when the taxpayer meets both a 10-year material participation test and a ten-year holding period test. This exclusion is available for liquidating asset sales and the individual tax on corporate liquidations, but is not available if the taxpayer is selling partnership assets or corporation stock to a third party, or for sales of less than “substantially all” of a business.
H.F. 2129 expands the exclusion “to include the sale of all or substantially all of a stock or equity interest in the business, whether the business is held as a sole proprietorship, corporation, partnership, joint venture, trust, limited liability company, or other business entity.”
This would be a big change for Iowa entrepreneurs. Consider how the current law affects a business started by two partners, with one older than the other. The older partner retires more than ten years and pays full Iowa capital gain tax when he is redeemed out. A few years later, the younger partner sells the business and retires himself. The younger guy gets out with no Iowa capital gain tax under current law. Under H.F. 2129, in contrast the 10-and-10 exemption would be available in both cases.
A “Fiscal Note” prepared by the Legislative Services Agency on the bill provides some statewide numbers:
Using State and federal tax returns of Iowa taxpayers, the Department of Revenue identified 369 tax returns reporting a capital gain for tax year 2012 where the taxpayer had participated in the business for a minimum of 10 years.
The total capital gain identified on those 369 returns that would be eligible under the capital gains exclusion expansion proposed in HF 2129 is $28.0 million.
Is this a good thing? I think all capital gains should be tax-free, because they represent either a double-tax on the capital invested in them or, worse, a tax on inflation. Anything that relieves this is arguably a good thing. Still, it’s a complex carve-out for a limited class of taxpayers, one that creates a lot of errors by taxpayers who take the deduction erroneously or fail to use it when they are eligible; that sort of thing is almost a definition of bad tax policy. The Tax Update’s Quick and Dirty Iowa Tax Reform Plan would provide a much better approach.
O. Kay Henderson, Two tax cuts passed in 2013 showing up in February’s state tax report (Radio Iowa). The increase in the Iowa Earned Income Tax Credit is properly understood as an increase in a welfare program and a poverty trap, not a tax cut.
William Perez, Need to File a 2010 Tax Return? Deadlines and Resources. Why 2010? The statute of limitations for 2010 refunds expires April 15, 2014.
TaxGrrrl, Taxes From A To Z (2014): C Is For Clothing And Costumes. Good stuff. Related: Dress for success, but don’t look to the IRS for any fashion help.
Russ Fox, Your Check Might Not be in the Mail:
I used to live in Orange County, California. Earlier this week a US Postal Service caught fire as it was heading toward an airport after leaving the Santa Ana mail sorting center. So if you mailed something on Monday, March 3rd from ZIP Codes starting with 926, 927, 928, 906, 917 and 918, it might have been burnt to a crisp. All the mail the truck was carrying was destroyed (an estimated 120,000 pieces).
Another argument for electronic filing and payment.
Kay Bell, IRS criminal investigators are putting more tax crooks in jail. If you are cheating on taxes big-time, you are a lot more likely to get caught than you might think.
That means it must be a weekday. More Arrogance and Secrecy From the IRS (Christopher Bergin, Tax Analysts Blog):
I don’t know if these apparent political decisions were made by Lerner or others either inside or outside the IRS, because trying to get information out of that agency is like trying to get sweat out of a rock. Over the years, it has fought the silliest things. I’m only half kidding when I say that if you asked the IRS to see the kind of staplers it’s using, it would tell you it doesn’t have staplers.
The IRS will go to great lengths not to be scrutinized. And that breeds an atmosphere of no accountability — which leads to arrogance. We have seen that arrogance consistently throughout the congressional investigations of several IRS officials. And where will it lead us? Not to a good place, especially for those of us getting ready to file our yearly income tax returns. A tax collector that treats its “customers” as guilty until proven innocent is a tax collector out of control. That is precisely what the national taxpayer advocate has been warning about. If IRS officials don’t believe they are accountable to Congress, the rest of us don’t stand a chance.
This is part of an excellent and thoughtful post, written more in sorrow than anger by a long-time observer of the agency; you really should read the whole thing. I’ll add that all of these seemingly endemic problems in IRS should warn us off the Taxpayer Advocate’s awful idea of giving IRS more control over the tax preparers who help taxpayers deal with the out-of-control agency.
Jack Townsend, Fifth Amendment and Immunity in Congressional Hearings. Good discussion of the law, in spite of his calling the Issa investigations a “witch hunt.” It’s the job of Congress to oversee federal agencies, especially an agency that has already admitted gross misbehavior here.
TaxProf, The IRS Scandal, Day 302
William McBride, Camp and Obama Gang up on Savers
Kyle Pomerleau, Are Capital Gains and Dividend Income Tax Rates Really Lower Under the Camp Tax Reform Plan? “If you take into account all the phase-outs of deductions and benefits in the Camp plan, marginal tax rates on capital gains and dividends are higher than current law at certain income levels.”
Roberton Williams, A Web Tool to Calculate ACA Tax Penalties (TaxVox). “It is often said the tax is $95, but for many people it will be much more.”
News from the Profession. Some CPA Exam Candidates Skeptical the Illinois Board of Examiners Can Tell Time (Going Concern)
Peter Reilly, Could You Make Tax Protester Theories Work For You?:
If you are willing to entirely discount the quite remote chance of criminal prosecution, it may well be a decent percentage play particularly if you are just about maximizing your current lifestyle rather than accumulating net worth and entirely amoral when it comes to meeting tax obligations…
I still think it is a really terrible idea to enact Hendrickson’s strategy, but that’s just me.
No, it’s not just you, Peter. And unless your income is generally not subject to third-party reporting like W-2s or 1099s, you will be caught, and then clobbered by back taxes, penalties and interest.
Tags: iowa tax policy, tax reform, TaxProf, William Perez, O Kay Henderson, Christopher Bergin, Taxpayer Advocate, TaxGrrrl, Going Concern, Jack Townsend, ten-and-ten exclusion, Quick and Dirty Tax Reform Plan, Peter Reilly, ten-and-ten deduction, Jason Dinesen, Tax Justice Blog, News from the Profession, Steven Landsberg