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Tax Roundup, 1/16/2013: Iowa legislators to push Alternative Maximum Tax? Also: new home office deduction option.

Wednesday, January 16th, 2013 by Joe Kristan
20130116-1

Kraig Paulsen

It looks like the Republican leadership in the Iowa House of Representatives will be pushing income tax changes this year.  Unfortunately, it looks like they are pushing the plan I call an “alternative maximum tax” like the one floated by Governor Branstad last year and quietly dropped after the election.  O. Kay Henderson reports:

House Republicans are calling for a “flat” state income tax. If their idea becomes law, Iowans would have the option of filing their personal income taxes under the current system — which has a top rate of nearly nine percent — or opting to pay a four-and-a-half percent rate, with no deductions.

 The governor has made it clear property tax reform is his top priority,
but House Speaker Kraig Paulsen of Hiawatha, the top Republican in the
legislature, says Branstad hasn’t said no to cutting income taxes.

20130116-2Any tax practitioner will point out that this will in practice just be one more complication in computing Iowa taxes.  Taxpayers will compute their taxes under both the current system and the flat system and choose the one that results in the lower tax.  I assume the legislative leaders are resorting to this awkward plan to get around the implacable opposition of the powerful Muscatine-based Iowans for Tax Relief to any tax reform that would repeal the deduction for federal taxes on Iowa returns.  Their plan is likely based on that proposed by Iowans for Discounted Taxes.

Far better to just clean up Iowa’s tax law.  Repeal the special interest loopholes and corporate welfare tax credits, get rid of all non-federal deductions, get rid of the deduction for federal taxes, tie the tax law to the federal code, drastically lower the rates, and eliminate the corporation income tax entirely.  In short, enact The Quick and Dirty Iowa Tax Reform Plan.

 

Flickr image courtesy e53 under Creative Commons license

Flickr image courtesy e53 under Creative Commons license

Whether or not Governor Branstad wants to deal with income taxes, he may have to.  His neighbor in Nebraska may be forcing his hand.  1011Now.com reports:

Gov. Dave Heineman is calling for an overhaul of Nebraska’s tax system, saying the state needs to get rid of its individual and corporate income taxes and make up the lost revenue by shutting off as much as $2.4 billion in tax breaks for businesses.

The Republican governor unveiled his tax plan Tuesday during his annual State of the State address to lawmakers.

Heineman says his plan would keep the state competitive with two neighboring states, Wyoming and South Dakota. Both have no individual income tax.

It sounds much like the plan proposed by Louisiana Governor Jindal this week.   If the other states massively improve their income tax systems and Iowa doesn’t, all of the fertilizer tax credits in the world won’t help Iowa’s business climate.

 

 

IRS unveils simplified home office deduction for 2013.  The IRS yesterday unveiled a new optional way to compute home office deductions.  From IR-2013-5:

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

This will be handy.  When you depreciate part of your home for a home office deduction, you lose the ability to exclude that much gain on a later home sale.  Home office deductions are also complicated and a magnet for IRS examiners.  This looks like it will be useful for the growing ranks of people who run businesses out of their home.  Taxpayers will still be allowed to opt out of this new method and compute their home office deductions the old way.  Full details are found in Revenue Procedure 2013-13.

Other coverage:

TaxProf,  IRS Announces Optional $1,500 Home Office Deduction in Lieu of Depreciation

Russ Fox, Is A Simplified Home Office Deduction Better?  “The reality is that $5 per square foot understates the cost of most home offices, especially when factoring in depreciation.”

 

Paul Neiffer,  Senator Grassley Wants Extension of March 1 Filing Deadline:

Due to the passage of the new tax law, the ability of the IRS to accept most farmers tax returns by March 1 is very uncertain.  Senator Grassley’s letter indicates that the IRS has granted an extension in the  past, most recently last year when the MF Global mess occurred.  In that case, the IRS did not actually extend the filing date, but granted  waivers of the penalty for any estimated tax penalty caused by MF Global  untimely mailing of form 1099.

Farmers don’t have to make estimated tax payments if they file by March 1.  If they can’t do that, the IRS can impose estimated tax penalties on the whole balance due.  The late enactment of new tax laws for 2012 may make it impossible for the IRS to process returns by then.

 

January: the month to start your 2013 year-end tax planning!  My new post at IowaBiz.com, the Des Moines Business Record’s blog for entrepreneurs.

Jason Dinesen, Rental Properties and Basis Allocation

TaxGrrrl,  IRS Announces 2013 Tax Rates, Standard Deduction Amounts and More

Mary Ellen Goode,  A Stark Reminder of the Excessive Cost of Complying with the Tax Code

Rush Nigut,  Iowa Business Specialty Court Pilot Project.  I hope it leads to a specialized Iowa Court for tax cases.  Taxpayers are at a huge disadvantage arguing before District Court judges with no tax expertise.

Kay Bell, The 1040 is ready! The 1040 is ready!

Anthony Nitti,  Dear America: Your Higher Payroll Taxes Are Not The Result Of A Tax Increase.  Only if the multi-year payroll tax break didn’t count as a tax cut.

Janet Novack,  11 Ways To Tap Retirement Cash Early, Without A 10% Penalty

David Brunori, Virginia’s Gas Tax Reform (Tax.com)

Howard Gleckman,  A Budget Deal is Staring Them in the Face, But Here’s Why Lawmakers Won’t Compromise in 2013 (TaxVox)

Robert D. Flach has a new Buzz!  He responds to my take on his take on CPAs.

Jim Maule,  Still More Joys of IRC Section 86.

 

Kyle Pomerleau, New Paper on Estate Tax Misses the Mark.  (Tax Policy Bl0g). It’s about…

Caron & Repetti: Occupy the Tax Code: Using the Estate Tax to Reduce Inequality (TaxProf)

My experience in tax practice convinces me that the estate tax is unnecessary to break up and dissipate large estates.  Beneficiaries take care of that just fine.

 

Hey!  I said I was sorry!  Defendant Screws Up His Acceptance of Responsibility (Jack Townsend):

Although the defendant claimed remorse, his actions after the time of the guilty plea continued the obstructive conduct.  Hence, this defendant got no benefit from pleading guilty, and saving the Government and the court the time and expense of trial.  Not only that, his obstructive conduct convinced the judge to sentence him at the top of the unreduced Guideline range.

If you want the judge on your side, it might be a good idea to stop committing the crime for awhile.

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