Taxing Tuesday: Following the Efforts to Dodge Federal Taxes
by meep
Hey, y’all. Did you have fun at the tax teach-ins this three-day weekend? (No clue if they actually happened, or if anybody other than politicians, staffers, other-paid-attendees, and camerapeople showed up).
I got my kids’ hair cut, went to the library, watched some opera, did some cleaning, played Angry Birds, you know, the usual stuff.
And thought it would be a good idea to designate Tuesdays as the day I spit out my accumulated items on federal tax ha-ha-brewing. I figure this is going to be able to bubble along for at least a few weeks.
DEMOCRATS WORRY ABOUT TAXES BEING UNDERPAID
Democrats raise concerns about IRS withholding tables
The ranking Democrats on the tax-writing House Ways and Means Committee and Senate Finance Committee are worried the Internal Revenue Service might succumb to political pressure by releasing withholding tables this year that cause employers to withhold too little in federal taxes from their employees’ paychecks to make it appear the tax cuts are larger than they really are, with the result that taxpayers will end up owing more money on their taxes next year.
Boo hoo.
In prior years, I recommended people figure out how little to have withheld from their taxes (to avoid paying the Obamacare penalty, but not so little they would pay for underwithholding for the rest of their income taxes.)
Senate Finance Committee ranking member Ron Wyden, D-Ore., and House Ways and Means Committee ranking member Richard Neal, D-Mass., sent a letter Monday to Acting IRS Commissioner and Assistant Secretary for Tax Policy David Kautter. Wyden and Neal asked Kautter about any interactions between Trump officials and the IRS about development of the withholding tables, which are expected to be released soon. If a large amount of taxes is underwithheld by employers this year, they pointed out, millions of people will owe taxes next year instead of receiving a tax refund.
I’m kind of curious what underpaying would be occurring. Because the changes seem to make things simpler:
They pointed to the large number of changes to the tax code in the Tax Cuts and Jobs Act. For example, the law repeals the personal and dependent exemptions, repeals most itemized deductions, and caps the deduction for state and local taxes at $10,000.
Yes, simpler.
Ideally, people would get very small tax refunds or owe a little to the feds. Ideally, things would be close to 0.
I have the issue with regards to two states I pay income taxes to and federal taxes — my game has been trying to get the three items to net out. I have gotten a 5-digit tax refund before (from the feds) and I was majorly pissed. I could have used that money earlier. Last year, the net was close to 0 — winning!
If you get a huge tax refund, you’re a sucker. No two ways about it.
Review your W-4
Politics aside, reviewing your W-4 is a good practice in any tax year. If not enough is withheld, you’ll owe money come tax time. Pay too much, and you end up with a large refund.
“You may have different circumstances now compared to when you started working at your employer,” said Labant.
Major life changes, including having a child or getting married, may warrant an update to your withholding.
For instance: In the past, it may have made sense for people who itemize deductions to claim more allowances on their W-4 and have less tax withheld.
This may no longer be the case now that the standard deduction has nearly doubled to $12,000 for singles and $24,000 for married couples who file jointly.
I see the issue people have if there’s a married-filing-jointly and both make substantial income, but that’s not the situation I’m in, that’s for sure.
I will probably have to adjust my W-4, though. I probably have way too many withholding allowances from my old W-4, what with the cap on SALT deductions.
THE NEW WITHHOLDING TABLES
The Treasury Department on Thursday [Jan 11] released the withholding tables for the new tax law.
The tables lay out how much tax to withhold or not withhold from paychecks. With these new guidelines, companies can start adjusting employee paychecks.
While employers can begin doing this voluntarily, they will have to comply with the new guidance by Feb. 15.
Treasury Secretary Steven Mnuchin said he expects about 90 percent of workers to see their paychecks increase.
The Treasury also said that employers should withhold taxes at a 22 percent rate from the special bonuses distributed following the passage of tax overhaul. That rate is lower than the amount that had been previously withheld.
Okay, I was just about to check what withholding I had on my bonus last year.
Net paid – 57.7% of the gross
So let’s see where the bits went:
FICA: 7.65%
Federal Income Tax Withholding: 25%
CT tax: 7%
NY tax: 2.6%
That’s not even looking at my usual paychecks, where I have loads of other deductions, like retirement saving, contributions to an HSA, and paying my portion of various employee benefits.
As of writing this, I see the IRS withholding calculator isn’t updated yet.
Wall Street Journal article on the release:
Most Americans have too much money withheld from their paychecks, and many count on sizable refunds as one of their most significant financial events of the year. Last year, about 75% of U.S. income tax filers received refunds averaging nearly $2,800. The number of households who have too much in taxes withheld throughout the year will decline by about 3 percentage points, and the average refund isn’t expected to change much.
The tax refund is, in effect, a no-interest loan from taxpayers to the government. But for many workers, over-withholding and annual refunds can serve as a forced savings program, often providing money for major purchases or debt repayments, and policy makers are often wary of disrupting that dynamic.
The new law presents some complications for the paycheck withholding system.
Current withholding had been based largely on the personal exemption, a deduction for each person in the household. But the new law repeals that exemption in favor of a larger standard deduction.
…..
Treasury’s changes work with the existing forms—the W-4—that employees have filed, which means workers shouldn’t have to do anything now. The government is designing a withholding calculator that should be available next month and is planning more extensive changes to the withholding system, including new W-4s that many employees will need to file for 2019.
$2800?! Really?
Unfortunately, everybody has already died, so not sure there’s anybody around to get a tax cut, but whatever.
THE IDEA TO ACTUALLY DODGE TAXES
I’m not sure how serious this jaw-boning is.
Can you imagine if all of us who are outraged by this savage regime take all of out tax dollars and put them in a special escrow account, not to be released until such time as rule of law is reestablished and racism is ONCE AGAIN expunged from our daily lives.
— Ron Perlman (@perlmutations) January 12, 2018
Yes, you go with that. I would so love to see this type of “protest”.
I’m sure the IRS will be gentle on y’all. Just like they were gentle on these celeb tax scofflaws. Let me remind you of the very notorious case of Wesley Snipes:
From 1999 through 2001, Wesley Snipes avoided $7 million in taxes. He surely would have paid it willingly had he known that the government would go after him in a full court press. The government was able to nab a high-earning celebrity and teach a lesson to tax protesters at the same time. Sadly, Mr. Snipes followed an accountant and an anti-tax advocate down a dangerous and costly path.
The advisers claimed that they did not legally have to pay taxes. Sounds alluring, doesn’t it?
……
In 2008, Mr. Snipes was convicted of three misdemeanor counts of failing to file tax returns. He was sentenced to three years, and reported to the McKean Federal Correctional Institution, a medium-security prison in Pennsylvania, on December 9, 2010. He finished in 2013 at the adjacent prison camp, a minimum security Club Fed as inmate number 43355-018.
I mean, I have heard Hollywood is having a hard time of it lately, what with all sorts of #MeToo allegations flying about. Perhaps a few years in federal prison would be a comfy hideout until that all shakes out.
Or, more to the point, the IRS will just grab the money and add a fine on top of it.
I don’t need to comment on this as Brian Anderson already has:
I’m not quite sure what law Perlman thinks has been “un-established” by Trump, but one law that is definitely still in effect concerns tax evasion. I think it would be great if liberal chumps like him stopped paying their taxes and end up going to jail.
…..
These bitchy Hollywood leftists like to talk a big game, but they are all completely full of shit and never follow through. Half of them said they would leave the US if Trump won and they are all still here. Cher said she was going to let illegal aliens live in her house to protect them from Trump’s immigration policies and there’s no way that ever happened.
Just for fun though, let’s pretend that Perlman and his Celebrity Outrage Brigade do stop paying their taxes. The difference will be unnoticeable and won’t really affect the government in any way, other than the added cost of prosecuting tax evaders.
I agree with Anderson that Perlman isn’t going to do anything this stupid. (Tweeting is cheap, duh.) Besides, I’m sure he has people who makes sure his taxes get paid — people have learned the lesson of Snipes, I think.
THE STATES STARTING TO PUT UP BILLS
Consider the situation in New York, where Governor Andrew Cuomo has introduced a tax reform plan that’s already being billed as an “end run around the Trump tax bill.” Though many of the details are still being ironed out, the root of the plan is to reduce the state’s reliance on income taxes that employees pay by starting a new, statewide payroll tax that employers would pay. It is an effort to diminish the negative tax hit many New Yorkers are expected to face from the Federal tax plan’s lower caps on mortgage interest and property tax deductions.
The Cuomo administration says the plan is designed to be revenue neutral for the state, employees, and employers. But implementing a revenue-neutral change to the tax code by shifting taxes from income to payroll isn’t that simple. Plans currently being discussed include everything from lowering workers’ salaries to decrease their income tax exposure to giving companies state tax credits to cover the cost of higher payroll taxes.
As I don’t work in New York, I guess I get to avoid those New York payroll taxes. Yippee.
I bet they’ll still be hitting me with the state income tax, though.
The point is to “help” me avoid federal taxes, not to “help” me avoid state taxes.
Here’s Missouri:
Missouri Governor Eric Greitens just promised to introduce “the boldest state tax reform in America,” in response to forecasts that the federal tax reform will cost the state upwards of $58 million in lost revenue. His plan is still short on specifics, but he has made it clear that he plans to lower taxes for businesses and individuals.
Now, why would Missouri state taxes be affected by federal tax changes?
Oh right, Missouri is one of the many lazy-ass states that uses federal definitions of AGI, etc.:
If the federal reform with higher standard deduction reduces AGI a lot, I can see how that would affect Missouri.
And Connecticut?
Connecticut is in the mix, too. Kevin B. Sullivan, the state tax commissioner, explained that legislators are currently looking at replacing at least part of the state income tax with an employer tax or a scheme to turn the income tax into “voluntary contributions” from residents to the state.
I’m not a resident of CT. So… I can’t make “voluntary contributions” to CT? As it is, I’ve been donating to Hartford charities…
Great. So I go from a federal tax change that, on net, would have had close to no impact on me, to getting deliberately screwed by CT and NY.
To be sure, I’m in an odd situation, but I have no doubt that both NY and CT will screw this up majorly and make it worse for the people they’re supposedly trying to make it better for.
REPUBLICANS DON’T RESPOND TO NOTHING
Take some time to parse that one.
Republicans Seem Oblivious To States Undercutting Their New Tax Law
WASHINGTON ― Republicans in the U.S. Senate don’t seem to be paying close attention to what could happen to their new tax law as states begin to respond to it.
Democrats in states such as California and New York are considering legislation that would subvert a new limit on the amount individuals can deduct from their federal tax liability for what they’ve paid in state and local taxes.
If the state legislation works as intended, it could cost the federal government hundreds of billions of dollars that Republicans had counted on to offset the revenue loss from the corporate and individual tax cuts in the bill they passed last month. But Republicans don’t seem to be sweating it, or even thinking about it.
“I don’t know much about what their conditions are, so I hesitate to comment,” Sen. Orrin Hatch (R-Utah), chairman of the Senate Finance Committee and the Senate’s lead author of the new tax law, told HuffPost on Tuesday [January 9].
Other senators who’d been closely involved in writing the tax bill, including Tim Scott (R-S.C.) and Susan Collins (R-Maine), were similarly unprepared to comment on developments in the coastal states, which have been the subject of national news stories since last week.
“I’m not really familiar with what they’re doing,” Collins said.
They haven’t actually done anything yet, which is why it would be stupid for any of these people to comment on the non-stuff state legislatures are not doing.
Clear?
But Zelenak said de Leon’s plan would not necessarily succeed. Though the Internal Revenue Service has previously said it’s OK for states to trade tax credits for donations to state funds, Zelenak said there’s nothing to stop the IRS from reversing that decision if states start exploiting it.
“It’s just an administrative interpretation, and a new administration is entitled to try a new interpretation,” Zelenak said. “I am not at all sure it would win in the end.”
Oh look, somebody notices something.
Several Republicans told HuffPost the same thing.
“If there is an intent to get around it in that respect, I think they’re going to find it more difficult than they might imagine,” Sen. Mike Rounds (R-S.D.) said.
Again, until various states actually pass something, Congress (and the IRS) don’t have to do squat.
De Leon, for his part, isn’t exactly going out on a limb with his proposal. His office pointed out that California already provides tax credits for donations to state education funds and that 17 other states have similar schemes essentially creating government subsidies for private education. He scoffed at the suggestion, which several Republicans have offered, that states should simply lower taxes in response to the federal change.
Okay, are you going to have all these rich people’s money funnel through private school voucher programs?
Is that the argument you’re making?
Because I think you actually need their money going to your general fund. That’s not exactly a donation.
The comments on the piece are fun to read, too. I’m not going to copy them over, but some really had me laughing so hard my chronic winter cough came roaring back. Thanks, Trump!
TIME IS RUNNING OUT FOR SOME SOLUTIONS
If the payroll tax idea is to work for 2018 tax year, the various state legislatures are going to have to pass this stuff quick…. which will guarantee screw ups.
But there are some nasty kinks to trying to make this work… and even the payroll tax ploy may not work, according to the Tax Foundation:Legal Hurdles for a Payroll Tax Swap
Legally, this proposal—or at least a simplified variant of it—might be on somewhat firmer footing than contributions in lieu of taxes. Certainly there is nothing to prevent states from shifting to employer-side payroll taxes, and it is undeniably true that such tax payments are deductible. The credit, however, poses potential legal issues. The IRS might well conclude that this is little more than a shell game, with the employer effectively remitting the employee’s income tax payments on his or her behalf. A progressive payroll tax, a concept that does not currently exist and is inconsistent with present notions of what a payroll tax is, would be particularly likely to draw IRS scrutiny.
And New York has a progressive state income tax, not a flat tax.
Because the payroll tax only applies to wage income, moreover, leaving nonwage income like interest, dividends, and capital gains ineligible for the benefit, it may run afoul of the constitutions of states like Illinois, Massachusetts, and Pennsylvania, where courts have strictly interpreted uniformity clauses.
Illinois has already run into this problem in trying to go for a progressive state income tax… nope, it’s unconstitutional according to their state constitution. They’d have to amend the state constitution to do this… and I can think of some other things for them to amend while they’re there….
It is a little-known fact that it is legal (if rare) for a company to pay an employee’s income taxes. But if the payments were determined to be for income rather than employer-side payroll taxes, no one would get the benefit of a deduction. In fact, the arrangement could substantially increase the taxpayer’s liability. In Old Colony Trust Co. v. Commissioner, the Supreme Court ruled that any amount that a third party spends paying someone’s tax liability is itself taxable income.25 If that amount is paid by the third party, it too is taxable, ad infinitum. The problem can be solved using a geometric progression formula, but under the proposal, after employer and employee were theoretically made whole, the employee would in fact face a new tax bill.26
Oooh, that sounds like something I’d like to play around with. But… not today.
This is the part that makes me start to guffaw:
Practical Challenges to a Payroll Tax Swap
Even if legal concerns are dispensed with, for the proposal to work, employers must either reduce salaries or accept a substantial increase in employment costs. While Hemel imagines companies cutting salaries in correspondence with the amount of their newly acquired payroll tax liability, in practice wages tend to be sticky.
Hemel — that guy sure has an imagination. Too bad none of the things he keeps imagining seems to come to fruition…. let me know when New York releases Trump’s tax returns, dude.
Many employees, either unaware that the swap may work to their benefit or sensing an opportunity for a salary increase, may resist a pay reduction. A large percentage, moreover, may be under contract or have their compensation tied to the prevailing wage, the minimum wage, labor agreements, or other conditions which make a salary reduction—even an ostensibly beneficial one—difficult or impossible.
And this is where I start to laugh.
Where are the states with high minimum wages, with union shop employment & union contract work all over the place? Where those union members may even be making large enough incomes that they may be worried about needing to itemize deductions?
Oh yes, all those states with high state income taxes and property taxes to begin with.
In offering his proposal, Hemel tries to answer why states have not pursued this strategy in the past, given that it would have conferred certain advantages (lower FICA taxes, avoidance of the AMT and Pease limitation, and—quite significantly—the exclusion of state taxes for filers who take the standard deduction), concluding that “[w]hile it’s a bit of a mystery, the best explanation is probably that the benefits aren’t yet enough to motivate states to rearrange their tax system.”27 A better explanation would be that states prefer income taxes because they raise more revenue, capture nonwage income, enable progressive rate structures, and properly handle filers with multiple sources of income.
As the Tax Foundation folks put it, it’s probably not a big mystery at all.
The mess New York is about to unleash just to protect its highest income earners so that New York can milk them as much as they want will likely prove why states haven’t tried this before.
I toast the tax professionals who will be trying to crunch the numbers and trying to determine if whatever legislation makes things worse and for who.
I really see the payroll tax idea flopping big time. That’s going to be an extremely hard sell… and again, either Congress or the IRS could pull the rug out from underneath the state at any time on the matter.
