Can You Prepay 2018 Property Tax in 2017?

By Victor Thuronyi

This question gets more complex by the day. On Dec. 27, the IRS issued Announcement 2017-210, which can be found on their website. https://www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017 My first reaction to this was, good for the IRS for doing their job to provide guidance to taxpayers. But there is a caveat. The job of the IRS is not easy because it is subject to political constraints (the acting IRS Commissioner, David Kautter, also serves as Assistant Treasury Secretary for Tax Policy). It is unusual for the Assistant Secretary to also serve as acting IRS Commissioner – indeed this has never happened before, at least in recent memory – and it raises questions precisely about issues like the one about the state and local deduction – does the IRS announcement reflect a nonpolitical view or is it designed to serve the political purposes of the Trump administration?).

Those who are not aficionados of IRS documents may not focus on the fact that the IRS Announcement is not a Revenue Ruling, which would carry some legal status. An Announcement generally does not break new legal ground. The Accouncement states: “ A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.” (this is also ungrammatical, by the way). One would expect an Announcement that states a legal conclusion to provide a citation with legal authority, but the Announcement does not do so.

Continue reading “Can You Prepay 2018 Property Tax in 2017?” →

The Law With No Name or the “2017 Budget Reconciliation Act”

Victor Thuronyi

Legislative drafting conventions are conservative, and it is traditional for a bill to have a long title which describes the purposes of the bill in technical detail, and then to include in the first section a short title which provides a more user friendly name. The short titles of Acts used to be fairly straightforward (e.g., the “Revenue Act of 1939”) but by the late 70s or early 80s, they tended to get cute and political, so now we have names like the “PATRIOT Act” and the “Affordable Care Act.”

The tax bill just passed by both houses of Congress introduces a new and somewhat unprecedented variation. There is no short title. There used to be: the “Tax Cuts and Jobs Act” (TCJA). However, at the last minute, it was stripped out of the bill because the Senate Parliamentarian ruled that it was extraneous to the bill’s purpose of affecting revenues, which is what a reconciliation bill is limited to. Hard to argue with that – the name of the law does not have an effect on revenues.

As a result, it would not be accurate to refer to this piece of legislation as the TCJA. Opponents have been referring to it as the Trump Tax Scam, and likely will continue to do so. It is probably too much to ask the media and tax advisors to refer to it that way, since that does seem overtly political. The “2017 Budget Reconciliation Act” perhaps would work (BRA for short). Several pieces of legislation enacted through reconciliation procedure have been called “Omnibus Budget Reconciliation Act of 19xx” so there is precedent. So calling it a Budget Reconciliation Act is a correct generic description in the absence of an official short title. I believe that calling it a tax reform act would also be political, since it falls far short of reform. Budget reconciliation is perhaps as neutral as one can get. An additional argument for this is that the bill contains not only tax provisions but also provisions on Alaska drilling, which are not tax related, but are related to budget reconciliation.

Upcoming Corrections May be More than Technical

Victor Thuronyi

In 1981, Congress passed a tax cut which, among other things, greatly accelerated deductions for investment in equipment. It soon became apparent that the 1981 Act was going to lose too much revenue. Republicans were in charge of the Senate and the White House. At that time, Republicans were by and large responsible, reasonable legislators. Bob Dole was chair of the Senate Finance Committee. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) was enacted, undoing many of the provisions of the 1981 legislation.

While it would be unrealistic to expect Republicans today to propose something similar to TEFRA, there is no reason Democrats should not do so. Democrats might start as soon as the tax bill passes (if it does) putting together legislation to repeal many of its problematic provisions, and perhaps include other reform measures that would raise revenue and improve the equity of the tax system. Such a piece of legislation should also include technical corrections to the Tax Cuts and Jobs Act (TCJA). Continue reading “Upcoming Corrections May be More than Technical” →

The Marriage Penalty and Head of Household Filing under the Senate Tax Bill [Updated]

Victor Thuronyi

One of the issues that has received little attention is the repeal of the marriage penalty in the Senate bill. There were no hearings on this, and nothing in the Joint Committee explanation of the Senate bill to indicate why the change is being made.

The tax bill as passed by the Senate would make a significant change to the taxation of married persons vs. single persons. In headline terms, single people will pay more than married people as a group. This issue involves several policy goals, not all of which can be fully accommodated (the goals include neutrality on getting married, and all married couples with the same combined income pay the same tax). Under current law, these have been accommodated by a compromise. When individuals get married, there might be a marriage penalty or a marriage bonus, but the rate schedules have been adjusted to make these relatively small. Nevertheless, they are there.

The Senate bill would change this by removing the marriage penalty completely. When a couple is married, the tax consequences might be neutral (where the members of the couple have equal incomes), but there would be a marriage bonus in all other cases. The largest bonus occurs in the “traditional” marriage where there is a stay-at-home parent.

If the marriage penalty is eliminated, one implication is that the share of the overall tax burden borne by married persons as opposed to single persons will decline. In other words, singe persons will pay more tax. This is relative. Many single persons will experience a tax decrease, which will occur primarily for those who do not itemize deductions, since their standard deduction will increase. The point is that the decrease would be even greater if the marriage penalty were not being eliminated, because in effect the elimination of the marriage bonus has to be made up for by single people. As an example, two single nonitemizers with gross income of $75,000 would pay $11,889 in tax currently, or $23,778 for both, if unmarried, but 24,790 if married, so there is a marriage penalty of $1,012, or in percentage terms the unmarried individuals pay 96% of what the married couple with identical incomes pays. Under the Senate bill, this ratio is 100% for this couple.

In addition to there not being any marriage penalty, the tax disincentives for labor force participation of the second-earner spouse would not be improved by the Senate bill. In other words, there is a high marginal tax rate on the second earner. Continue reading “The Marriage Penalty and Head of Household Filing under the Senate Tax Bill [Updated]” →