In my defense, I would wait for a Sandy Koufax autograph. But since no Koufax lines exist, my exception remains unproven. My family is kind enough to remind me of my failure to produce empirical evidence.
I am also known for keeping up with legislative tax proposals. To tax professionals who need a source, this is a positive. To normal people, I concede this may be a negative.
Whatever you think, both the U.S. House and the Senate have floated some proposals. House Ways and Means Chairman Richard Neal presented the most detailed proposals.
The Neal proposals would raise the top tax rate to 39.6% (it is currently 37%). He would also raise the top capital gains rate to 25%. This is far better than the president’s proposal to tax capital gains at the same rate as ordinary income.
Because President Joe Biden crossed his heart and hoped to die if he raised taxes for those making less than $400,000, Neal has set the bar for the higher rates at $400,000 (single) or $450,000 (married).
It doesn’t just end there. The 3.8% surtax on investment income of high-income people continues. This provision was enacted in 2013 and raises so much money that it’s become sacrosanct.
The 3.8% can apply to capital gain income. It does not apply to all capital gains. For affected gains, the top rate could become 28.8%.
Just like an old Ronco commercial, wait, there’s more! Raise your hand if you make more than $5 million per year. There could be a new 3% surtax on your (very high) income.
For you $5 million folks, capital gains might be taxed at 31.8% and ordinary income at 42.6%. The actual rate will be known only to a computer. After chopping, grating, and pureeing the various tax provisions, it will spit out an answer that pleases only a clown in a sewer or a Halloween character in a hockey mask.
Neal also proposes a top corporate rate of 26.5%. He would keep the 20% deduction for qualified business income, with a cut to those high-income people.
Senate Finance Committee Chair Ron Wyden has partnerships in his sights. There are 4 million of them with 27.5 million partners.
The IRS has a new audit tool for partnerships. They have also added probing new questions on the partnership return. This all suggests a coming increase in partnership audit activity.
Chairman Wyden is concerned with some rather esoteric partnership issues. So much so that I cannot completely explain them in the length of this column (or the attention span of you, the reader).
Partnerships can currently allocate items of income and deduction by agreement. Regulations finalized in 1985 prescribe procedures for respecting these allocation as valid.
More recently a new form of allocation has cropped up, called “target” allocations. Partnership tax experts agree there are three possible outcomes of using target allocations. Some think they work. Some think they do not work. Some think they may work.
No group has the upper hand in this debate. So tax experts have asked the Treasury Department to sanction some target allocations and explain what others they may have concerns with. Treasury’s answer has been, cricket, cricket.
Sen. Wyden proposes to upend the whole apple cart. Mixing my metaphors, because some ants have infiltrated the honey jar, Sen. Wyden advocates turning on the gas stove and tossing a match to create a scene out of a trailer for a Bruce Willis movie.
Wyden’s partnership allocations will be based on a blendericious processing of four or five factors. No two people will agree on the answer.
Partnerships must allocate “built-in” gains to the partner who contributed the property. There are three ways to do this calculation.
Tax preparers pick the easiest (the “traditional” method). Wyden proposes requiring the hardest (the “remedial” method). Most preparers think the remedial method was that summer between third and fourth grade when they had to go to school each day.
Both chairmen will continue to allow a basis adjustment for inherited property. Let’s end on that happy note.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.